Welcome back and it feels good to be writing up posts again. I was asked to write up the recent relation between ETF's and the GME dip's we've been witnessing in the last several trading days. I have included a TLDR for the crayon eating apes with an attention span of a 2-month-old dog. Also due to wsb guidelines, i am unable to mention these etf tickers due to their market cap. Please bear with me (not the 🐻🌈)
Anyone questions? Feel free to DM and I'll respond in 10-15 working days (jk)
Hedge Funds covering up $GME shorts through ETF cloaking
I would like to present a few common terminologies before starting this post which may aid in helping you apes comprehend this more clearly.
Exchange-Traded Funds (ETF)- An exchange-traded fund (ETF) is a type of security that tracks an index, sector, commodity, or another asset, but which can be purchased or sold on a stock exchange the same as a regular stock. An ETF can be structured to track anything from the price of an individual commodity to a large and diverse collection of securities. ETFs can even be structured to track specific investment strategies. You can consider them as a hybrid of mutual funds.
Short Selling- Short selling is the process of selling shares that you don't own, but have instead borrowed, likely from a brokerage. Most people short sell shares for two reasons:
- They expect the share price to decline. Short-sellers hope to sell shares at a high price today and use the proceeds to buy back the borrowed shares at a lower price sometime in the future in a bid to profit.
- They want to hedge or offset a position held in another security. For example, if you have sold a put option, an offsetting position would be to short sell the underlying security.
Authorized Participants - An authorized participant is an organization that has the right to create and redeem shares of an exchange-traded fund (ETF). They provide a large portion of the liquidity in the ETF market by obtaining the underlying assets required to create the shares of an ETF. When there is a shortage of ETF shares in the market, authorized participants create more. Likewise, as ETF borrow costs increase, APs are less likely to borrow shares to hedge their position, and more likely to fail-to-deliver.
In a typical transaction, the borrower of a stock posts collateral of 102% to 105% of the shares' value in cash, government securities or a bank letter of credit. If the ETF needs to sell the stock, it can recall it from the borrower. But if the borrower for any reason isn't able to deliver the shares, the ETF is repaid through the collateral instead, although that can have adverse tax consequences for the ETF.
$GME relationship: Let's look at the past trend of an ETF with GME
Now I'm not claiming today's red day was entirely due to etf's being shorted or their shares being lent out, but there is significant evidence that leads me to believe this may be one of the key factors.
​
Notice how the assets plummet suddenly after the first short squeeze?
​
By law, a fund can have no more than one-third of its total assets in securities on loan. Few ETFs or other funds ever reach that ceiling, and ETFs are considered to be more conservative lenders than other funds. Market makers are continually creating new ETF shares (by presenting the fund with a basket of securities represented in the ETF) and redeeming others (and getting the underlying securities in return), so the number of ETF shares outstanding fluctuates. Because the supply isn't fixed, there really is no impact on performance when an ETF is net short, industry participants say. The prices of ETF shares typically stay very close to the value of the underlying holdings.
***ETF shares borrowed today saw signific