Not as Easy to Short ETFs as You May Think
08/07/07 - 12:50 PM EDT
Lawrence Carrel
ETFs shouldn't have this problem. Brokers, or in this case the specialists who make a market in ETFs, don't have to go searching for them, because they can always create new shares by assembling the component stocks. But they typically only do this in blocks of 50,000 shares or more. So if you want to short a much smaller number, say 1,000 shares, the specialist would be left holding the remaining 49,000 on its books.
David Fry, founder and publisher of ETF Digest.com, an online investment newsletter, says that's not an attractive proposition for brokers; keeping large inventories on hand ties up capital and exposes them to additional market risk. That means it's no easier to borrow shares of small, illiquid ETFs than it is to borrow shares of small, illiquid stocks. For example, Fry notes that the PowerShares Listed Private Equity Portfolio (PSP Quote - Cramer on PSP - Stock Picks) would seem like a good candidate to short, given how tough it has become for private-equity
firms to raise money for buyouts. The fund has already lost 10.5% this year. But in reality, he says, PSP is especially hard to short, because brokers are unable or unwilling to lend the shares.
He says the same is true of many other recently minted ETFs that track niche markets and have less than $100 million in assets.
"The brokers are lazy," says Fry. "They won't call around for you to find 200 shares to short. You may as well be calling the post office to help you. It's not going to get done."
Of course, the bigger the transaction, the more likely brokers are to be helpful. Gary Gastineau, managing director of ETF Consultants, a consulting firm in Summit, N.J., says securities lending is one of the least automated activities in the securities industry. "You call a broker and say you want to sell short 1,000 shares of a stock, he says you can't do it, it's too hard to borrow. If you say I want to sell short 100,000 shares, the broker will say 'consider it done.'"
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