Your ETF Will Not Collapse
Short interest may reveal a bad investment but will not cause an ETF to fail.
It's another autumn since the financial crisis of 2008. The air is getting brisk, children are returning to school, and financial pundits are fresh from their summer holiday and ready to identify the next innovation to destroy the global markets and economies. That can only mean one thing: a new crop of scare stories about exchange-traded funds. The most recent offender came out a little over a week ago, under the title "Can an ETF Collapse?" by investment firm Bogan Associates LLC. It quickly spread to the typically excellent FT Alphaville and even front page commentary on CNBC.com.
So, can an ETF collapse? Well, no. At least, not via the process detailed in Bogan Associates' paper. The white paper focused on ETFs with substantial short interest relative to the assets in their trust. These are almost always smaller funds focused on a corner of the market with a very negative outlook, which causes most long-only shareholders to bail out of the fund and entices short-sellers looking to benefit from the underlying shares declining in value.