A New ‘Short Squeeze’ ETF in the Works
June 5th, 2014 at 3:49pm by Max Chen
ETFis, a turnkey exchange traded fund provider, is working on a so-called short squeeze fund to help investors capitalize on a heavily shorted market that is beginning to turn around.
According to a recent Securities and Exchange Commission filing, the actively managed Short Squeeze Fund (SQZZ) will seek to outperform the Russell 2000 index and earn current income.
The filing does not reveal who will act as the sub-advisor to actively managed the fund’s investments.
The ETF’s managers will select U.S. stocks and American Depository Receipts that they believe may be subject to a “short squeeze” and lend portfolio securities that they believe may be subject to a short squeeze.
Basically, the fund managers will pick out securities that have a higher potential for capital appreciation, which could result in a short squeeze.
A short position is a sale on a borrowed security. The investor needs to eventually return the borrowed stock by purchasing it back from the open market. If the price falls, the investor buys it back for less than he or she sold it for and pockets the profit.
A short squeeze occurs when investors with heavy short positions are forced to cover, or buy back, their shorts in the event of positive reports that result in a share appreciation – short sellers are essentially being squeezed out of their short positions, typically at a loss. Consequently, the additional buying momentum from short sellers covering their options contracts help bolster share prices even further.
Investors can identify securities at risk of a short squeeze by monitoring short interest -the total number of shares sold short as a percentage of total shares outstanding – and the short-interest ratio – the total number of shares sold short divided by average daily volume.
For the fund’s secondary income objective, SQZZ can lend out securities from the fund’s underlying portfolio to short sellers and other market participants for a fee. [Making Sense of ETF Securities Lending]
For more information on new fund products, visit our new ETFs category.