Marketwatch – Professional money managers and hedge funds have ramped up short positions in a popular exchange-traded fund tracking the financial-services sector as investors grow increasingly concerned about credit quality, interest rates and slowing corporate profits.
Those moves looked prescient last week as banks, brokers and other financial services stocks took the brunt of the market’s downturn. Investors are worrying that problems in the subprime-mortgage market, which include higher defaults and foreclosures resulting from the housing downturn, could spread to other areas of the credit markets.
Financial Select Sector SPDR, saw its short interest increase by 30% in both June and July, says Dan Dolan, director of wealth management strategies at the Select Sector SPDR ETFs, which are managed by State Street Global Advisors. The ETF family breaks the Standard & Poor’s 500 Index into nine separate sectors, including financials.
Investors who take a short position in a stock or ETF borrow the shares and sell them to other investors in the hope the market will decline so they can buy back the shares later. They pocket the price difference when the shares are returned to the lender. The strategy is employed to speculate on the market’s future direction or to hedge an existing position.
The level of short interest is typically seen as a measure of bearishness on a particular security or sector.
Short selling is dominated by hedge funds and other traders who often deal in millions of shares. Large investors who own ETF shares can earn revenue by lending them out. But individual investors, Dolan said, may experience difficulty borrowing ETF shares to sell short, especially in thinly traded funds.
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