Short selling ETFs

• Main Authors: LI, Frank Weikai, ZHU, Qifei
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2022
• Subjects: ETFs; Short Selling; Equity Lending; Limits to Arbitrage; Finance; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/5315; https://ink.library.smu.edu.sg/context/lkcsb_research/article/6314/viewcontent/SSRN_id2836518.pdf
• Institution: Singapore Management University

We provide novel evidence that arbitrageurs use exchange-traded funds (ETFs) as an avenue to circumvent short-sale constraints at the stock level. Using a large sample of U.S. equity ETF holdings, we document that shorting activity on ETFs rises with the difficulty of shorting underlying stocks. Stocks heavily shorted via their holding ETFs underperform those that are lightly shorted. The return predictability of ETF shorting is distinct from stock-level shorting measures and is concentrated among stocks that face severe arbitrage constraints. These findings suggest that ETFs allow arbitrageurs to target overpriced stocks that are otherwise difficult to short.