Short selling is a sign investors feel more bearish.
Investors have been short selling exchange-traded funds along with stocks as the markets have experienced more volatility. ETF short interest rose around 7 percent to $176.5 billion in October, according to a report by S3 Partners, a New York-based financial technology company. S3 Partners' analysis found that short sellers were looking for more short exposure in the more crowded equities, such as in energy and health care stocks as well as international stocks and bonds. “If the market stabilizes and continues its rally, there may be $21 billion of October short sales ready to be covered and boost the rally even further,” wrote Ihor Dusaniwsky, managing director of predictive analytics of S3 Partners, in the report. These 10 ETFs were the most shorted in October.
SPDR S&P 500 (ticker: SPY)
The SPDR S&P 500 is one of the most common and popular ETFs owned by investors as it tracks companies in the S&P 500, making it one of the easiest ways to hold the most well-known companies in the world, including Apple (AAPL), Microsoft Corp. (MSFT), Amazon.com (AMZN) and Facebook (FB). While the SPY gives investors a broader exposure to companies with large market caps, this indice was not immune to short sellers. The S&P 500 dipped by 7.9 percent, and short sellers of SPY earned an 8.2 percent return, according to the S3 Partners report. The SPY has an expense ratio of 0.09 percent, or just $9 annually per $10,000 invested.
Invesco QQQ Trust (QQQ)
The Invesco QQQ Trust is another popular ETF in many investment and retirement portfolios. The index includes 100 of the largest domestic and international nonfinancial companies listed on the Nasdaq based on market capitalization. That makes the QQQ pretty top-heavy in tech stocks, 55 percent of the portfolio, with top weightings going to Apple at 11.7 percent, Microsoft at 10.5 percent and Amazon at 9.6 percent. It has an expense ratio of 0.2 percent.
iShares Russell 2000 (IWM)
The iShares Russell 2000 is an index tracking small-cap U.S. equities, and unlike the QQQ, it is decently diversified throughout several sectors, with financial services, technology, industrials and health care all representing between 14 and 17 percent of the portfolio. No individual company makes up more than 0.32 percent of the IWM, but you'll find some well-known names, including Five Below (FIVE) and Etsy Inc. (ETSY). “Surprisingly, short selling increased in the SPY and QQQ, but declined in the broader IWM,” Dusaniwsky said.
iShares iBoxx $ High Yield Corp Bd ETF (HYG)
The iShares iBoxx $ High Yield Corporate Bond tracks the investments of an index composed of U.S. dollar-denominated, high-yield corporate bonds, giving investors exposure to a broad range of bonds in search of additional income. At this writing, HYG was holding nearly 1,000 bonds, including several owned by Sprint Corp. (S). This is a more expensive ETF with an expense ratio of 0.49 percent.
iShares MSCI Emerging Markets ETF (EEM)
The iShares MSCI Emerging Markets tracks an index composed of both large and mid-cap emerging market equities. With EEM, investors gain international exposure to more than 800 emerging market stocks. Just be aware that roughly half of the EEM is made up of financial services and technology stocks, both which have taken a beating in the second half of 2018. Top holdings are China's Tencent Holdings, electronics powerhouse Samsung Electronics Co. and Taiwan Semiconductor Manufacturing Co. (TSM). The expense ratio is 0.69 percent.
Utilities Select Sector SPDR ETF (XLU)
XLU is an index representing the utilities sector of the S&P 500 index. It includes 29 companies that operate in the electric utility, gas utility, multiutility and independent power producer and energy-trader industries. Top holdings include NextEra Energy (NEE), Duke Energy Corp. (DUK) and Dominion Energy (D). Sure, utilities aren't as exciting at some companies on the market, but the XLU beat the S&P 500 by posting a year-to-date gain of 4 percent, and has a dirt-cheap expense ratio of 0.13 percent.
SPDR S&P Biotech ETF (XBI)
SPDR S&P Biotech tracks the performance of the S&P Biotechnology Select Industry Index through a modified equal weighted index of 124 companies, which means no company has more than a 2 percent weighting. That gives the XBI a nonconcentrated industry exposure across large-, mid- and small-cap stocks. This ETF gives investors an opportunity to take strategic or tactical positions compared with traditional sector-based investing. XBI has an expense ratio of 0.35 percent.
SPDR S&P Oil & Gas Explor & Prodtn ETF (XOP)
XOP gives investors exposure in the oil and gas exploration and production segment of the S&P TMI, which includes these subindustries – integrated oil and gas, oil and gas exploration and production; and oil and gas refining and marketing. This ETF tracks a modified equal weighted index across large-, mid- and small-cap stocks, so none of the 73 companies has more than a 2.5 weighting. Top holdings include Cabot Oil & Gas Corp. (COG), Southwestern Energy Co. (SWN), Chevron Corp. (CVX) and Exxon Mobil Corp. (XOM). Expenses are 0.35 percent.
iShares MSCI EAFE ETF (EFA)
The EFA is an index consisting of large and mid-cap developed market equities in Europe, Australia, Asia and the Far East, commonly referred to as EAFE. With this ETF, investors have access to more than 900 EAFE stocks, including companies, such as Nestle, HSBC Holdings (HSBC), Royal Dutch Shell (RDS.A) and Toyota Motor Corp. (TM). Expenses are 0.32 percent.
Industrial Select Sector SPDR ETF (XLI)
The Industrial Select Sector SPDR represents the industrial sector of the S&P 500 index, giving investors exposure to 72 stocks in aerospace and defense, industrial conglomerates, marine, transportation infrastructure, machinery, road and rail, air freight and logistics, commercial services and supplies, professional services, electrical equipment, construction and engineering, trading companies and distributors, airlines and building products. Investors should note that the fund is somewhat unbalanced with more than 28 percent of the fund being held in just five companies – Boeing Co. (BA), 3M Co. (MMM), Union Pacific Corp. (UNP), Honeywell International (HON) and United Technologies Corp. (UTX). The XLI has an expense ratio of 0.13 percent.