Your ETF Will Not Collapse: A Technical Addendum
We ran this point home for a touchdown, now let's spike it in celebration.
For those of a mathematical and mildly masochistic bent, here is more rigorous detail in the form of an induction proof on why there can not be an asset crunch for an ETF so long as naked shorting does not exist. The language in this supplement is more technical and contains hazardous amounts of jargon, because it originated as an e-mail string among our research team. Still, given that this is a weak induction proof, technical language should be the least of any readability issues.
Assume there's a short interest of $a in the fund and a total of $b in other shares out on the market (held by individuals, institutions, etc.--all that matters is that those are shares that are being held and not lent out, making them eligible for sale or redemption).