Wednesday, October 19, 2011

"Are ETFs responsible for short-covering rallies?" (SPY; XRT)

When the folks who toil in Alphaville chomp down on a topic they don't let up.
From FT Alphaville:

In a Ponzi scheme, investors get duped into thinking their money has been invested in a profit-generating investment, when in reality their investment doesn’t actually exist.

Rather than being invested, the money paid in usually goes towards managing short-term liquidity needs.
The scheme lasts as long as there’s enough new capital to cover redemption requests and/or pay out fabricated returns.

The truth usually comes out, however, when there is a flood of redemption requests yet not enough capital to cover the liabilities.

Investors essentially realise there are more claims than underlying investments.
With that in mind, we would like to point out that there are some very strange practices going on in ETFs which echo a few of those concerns. For example, a number of ETFs currently boast many more registered owners than existing shares (and via that underlying assets).
Take the SPDR Retail ETF,  known as the XRT.

If you take the names of the top 20 holders of the ETF, using the most recent SEC filings — all issued on June 30, 2011 — their total holdings equal over 750 per cent of the shares outstanding of the fund.
On the surface of it, that means up to seven different parties believe they have a claim on any one existing ETF share.

To put that in perspective, the top 20 holders of the SPDR S&P 500 ETF, known as SPY, represent only 65 per cent of the float.

What’s more, we can’t think of a single example of a regular (non ETF) stock for which the top 20 registered holders make up more than 100 per cent of the float. (Please do let us know if you can come up with any.)...MUCH MORE
FTA has links to some of their prior posts.
Here's a related, non-Alphaville post:
Doug Kass on ETF's Driving Late Day Volatility (and a response)