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.
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, along with the short-interest ratio – the total number of shares sold short divided by average daily volume.
Moreover, 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]
However, due to its frequent portfolio transactions, investors should be prepared for higher portfolio turnover and the potential tax consequences. The high turnover, which may involve commissions and other transaction fees, would also help explain the higher expense ratio for the fund.
Brad Lamensdorf, founder and owner of Active Alts Inc., will manage the proposed short squeeze fund. Lamensdorf is no stranger to ETFs as he also helps manage the AdvisorShares Ranger Equity Bear ETF (NYSEArca: HDGE), which targets weak companies to short.
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