March 19, 2020 / 8:39 PM / 21 days ago

Costs for short-selling U.S. ETFs surge in coronavirus-ravaged market -S3

    By April Joyner
    NEW YORK, March 19 (Reuters) - The price of short-selling
U.S. exchange-traded funds has jumped dramatically since the
beginning of March as investors seek to stem heavy losses in the
wake of the coronavirus epidemic, according to data from S3
Partners.
    The average cost to borrow ETF shares for shorting rose to
105 basis points on Mar. 18 from 75 basis points on Mar. 1, a
40% increase, the market analytics firm said. The jump amounts
to an extra $1.2 million a day in borrowing costs for ETF
short-sellers as a group, or $443 million on an annual basis.
    That's "a noticeable hit to an investor's or portfolio
manager's bottom line," Ihor Dusaniwsky, S3's managing director
of predictive analytics, wrote in a research report on Thursday.
    Investors who sell securities "short" borrow shares and then
sell them in a bet that the assets will fall, so they can buy
them back at the lower price, return them to the lender and
pocket the difference. Increased demand to borrow assets can
drive up the cost of doing so.
    Short-selling can be used as a portfolio hedging strategy.
As U.S. stocks have dropped 29% from their peak, other hedging
strategies, such as options, have become expensive, making ETFs
an attractive alternative, Dusaniwsky wrote.
    The sell-off has also dried up liquidity and triggered price
dislocations in fixed-income markets. Fixed-income funds feature
heavily among S3's list of the ETFs with the largest increases
in borrowing fees in March.
    The Invesco Senior Loan ETF          had the biggest jump,
with its borrowing fee rising 9.57 percentage points. The SPDR
Bloomberg Barclays High Yield Bond ETF        , the iShares US
Treasury Bond ETF         , the JPMorgan Ultra-Short Income ETF
         and the iShares iBoxx $ High Yield Corporate Bond ETF
        were all in the top 10.
    Even as ETF borrowing fees have jumped, they still are much
lower than those for highly shorted single stocks such as
SmileDirectClub Inc        , which has a 75% borrow fee. Market
intermediaries can create ETF shares specifically for lending
purposes, which helps to maintain the supply of ETFs available
to short.
    Indeed, certain ETFs, including the SPDR S&P 500 ETF Trust
        and the Energy Sector Select SPDR Fund, have garnered
inflows as a result of investors seeking to sell them short,
said Matthew Bartolini, head of SPDR Americas research at State
Street Global Advisors.
    But the supply of ETFs available for short-selling is coming
under some pressure as long ETF investors exit their positions,
according to Dusaniwsky.
    "The cost of portfolio hedging will continue to increase and
there will be scarcity of stock borrow supply in certain ETFs,
primarily leveraged and niche ETFs, which are more difficult and
expensive to create, hedge and lend out to the street," he
wrote.

 (Reporting by April Joyner; Editing by Alden Bentley and
Cynthia Osterman)
  
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