ETF Issuer Solutions Inc., a white-label exchange traded fund provider, is moving closer to launching the first so-called short squeeze ETF to help investors capitalize on a potentially quick turnaround in a heavily shorted market.
According to a recent Securities and Exchange Commission filing, the actively managed ActiveAlts Short Squeeze Fund (NYSEArca: SQZZ) has an updated prospectus slated for June 2015, but no specific date has been finalized. SQZZ shows a 1.85% expense ratio.
The sub-advisor’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.
Specifically, the sub-advisor will pick out short squeeze opportunities through both fundamental factors, like quality of earnings and fundamental stability of business, along with technical factors, such as price and volume characteristics and relative strength. Additionally, the manager will identify securities where short interest is significant, rising or expected to increase.
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 a sudden 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.