Johnson says a recent example of how outstanding shares can swell because of short selling occurred a few years ago during elevated tensions between Russian and Ukraine. He says the VanEck Vectors Russia ETF (RSX) saw a big jump in inflows not because people were trying to go long Russian stocks, but rather new supply was created to accommodate investors who wanted to short the ETF.
Unless an advisor has access to propriety market data, such as a Bloomberg terminal, it can be difficult to tell if an ETF he or she is holding has a lot of short interest, Collins says. The New York Stock Exchange and the Nasdaq have lists of their most heavily shorted ETFs, Johnson says, but it can be hard to quantify the prevalence of ETF short selling.
Retail investors generally can’t lend their holdings, but they can borrow ETFs to sell short, Johnson says. It’s only at that time would they experience this part of the market’s activity and see the cost to participate.
“There’s really no negative impact [from short-selling] at a macro level,” he says. “For the more popular ETFs that are sold short, it might be difficult for a seller to find inventory to borrow and might be costly to borrow them.”