5 Most Heavily Shorted ETFs So Far This Year

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After a strong comeback this year, U.S. stocks have been caught in rough trading lately on fears that the Fed will keep raising rates for longer than expected. The situation has led short sellers to take advantage of the rise in stock prices early in the year and then the decline through shorting.

Shorting is the process of borrowing a security, selling it immediately, and then buying it back at a later date -- preferably at a lower price. If done correctly, shorting is the way to profit from a decline in the price of a security.

As such, traders are betting big against some of the zones like retailers, regional banks, corporate bonds, homebuilders, and biotech through ETFs, according to ETF.com. 

ETFS like SPDR S&P Retail ETF (XRT - Free Report), iShares BBB Rated Corporate Bond ETF (LQDB - Free Report), Dimensional US Large Cap Value ETF (DFLV - Free Report), SPDR S&P Regional Banking ETF (KRE - Free Report), and SPDR S&P Homebuilders ETF (XHB - Free Report) have all seen higher short interest.

Short interest is the number of shares that have been sold short and remain outstanding. When expressed as a percentage, short interest is the number of shorted shares divided by the number of shares outstanding. An increase in short interest often signals that investors have become more bearish and expect a fall in the price of an ETF.

Most of these ETFs have logged in solid gains so far this year, but they may see huge declines in the weeks ahead with the change in market sentiment. Let's take a look at these ETFs.

SPDR S&P Retail ETF (XRT - Free Report) – Short Interest: 309.2%

This SPDR S&P Retail ETF has delivered returns of 13% so far this year on optimism over the resilient economy, and it has the largest short interest percentage of all ETFs. The SPDR S&P Retail ETF tracks the S&P Retail Select Industry Index, which provides exposure across large-, mid-, and small-cap retail stocks.

It holds 94 well-diversified stocks in its basket. This ETF is well-spread across various industries, with a double-digit allocation each in automotive retail, apparel retail, specialty stores, and Internet & direct marketing retail.

The SPDR S&P Retail ETF is the largest and most popular in the retail space, with AUM of $423.6 million and an average trading volume of 4.8 million shares. It charges 35 bps in annual fees, and it currently has Zacks ETF Rank #1 (Strong Buy).

iShares BBB Rated Corporate Bond ETF (LQDB - Free Report) – Short Interest: 71.55%

This iShares BBB Rated Corporate Bond ETF has lost most of its gains over the past month as renewed fears of longer-than-expected rates accelerated short selling. LQDB is up just 1% so far this year.

The iShares BBB Rated Corporate Bond ETF offers exposure to a diversified portfolio of BBB-rated corporate bonds and follows the iBoxx USD Liquid Investment Grade BBB 0+ Index. It holds 614 bonds in its basket, with an average maturity of 10.45 years and an effective duration of 6.77 years.

The ETF has accumulated $24.8 million in its asset base and trades in an average trading volume of under 500 shares. It charges 15 bps in annual fees, and it has a Zacks ETF Rank #3 (Hold).

Dimensional US Large Cap Value ETF (DFLV - Free Report) – Short Interest: 67.8%

Value stocks tend to hold up better in a rising rate and high inflation environment. With inflation moderating and the Fed being less aggressive than last year, these stocks have lost shine. The Dimensional US Large Cap Value ETF is an actively managed ETF that has gained about 3% so far this year. It holds 273 stocks in its basket, with key holdings in financials, healthcare, energy, and industrials.

This ETF charges 22 bps in fees per year and has gathered $326.9 million in its asset base since its inception in December. It trades in a volume of 226,000 shares a day on average.

SPDR S&P Regional Banking ETF (KRE - Free Report) – Short Interest: 61.1%

The banking sector has lost some of its sheen due to the inversion of the yield curve, which is negative for the stocks in this sector. This SPDR S&P Regional Banking ETF has gained 4.6% so far. It provides exposure to the regional banks segment by tracking the S&P Regional Banks Select Industry Index. It holds 144 stocks in its basket, with each accounting for no more than 2.3% of the assets.

The ETF has AUM of $2.4 billion and charges 35 bps in annual fees. It trades in an average daily volume of 6.6 million shares, and it has a Zacks ETF Rank #4 (Sell) with a high-risk outlook.   

SPDR S&P Homebuilders ETF (XHB - Free Report) – Short Interest: 57.2%

Though builder confidence has risen to the highest level since September 2022, and mortgage rates have been trending downward from a peak since November, housing affordability is still at multi-decade lows. U.S. existing home sales declined for a record of 12 consecutive months through January. This has made traders short sell homebuilding ETFs like the SPDR S&P Homebuilders ETF, which is up in double-digits so far this year.

This ETF provides exposure to homebuilders with a well-diversified stretch across building products, home furnishing, home improvement retail, home furnishing retail, and household appliances. The SPDR S&P Homebuilders ETF tracks the S&P Homebuilders Select Industry Index, holding 35 stocks in its basket.

The ETF is the most popular option in the homebuilding space, with AUM of $898.6 million and an average daily volume of 2.2 million shares. The product charges 35 bps in annual fees, and it has a Zacks ETF Rank #4 (Sell) with a high-risk outlook.

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