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Minyan Mailbag: Why Is Short Interest in IBB So High?


Short interest in this biotech ETF is high, but it doesn't necessarily mean investors are bearish on the sector.

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Why is short interest in the iShares NASDAQ Biotechnology Index ETF (IBB) so high?

Could that be fuel for another extension higher in biotech?


Richie, thank you for the question.

The short answer is... maybe.

Short interest in ETFs is a complicated subject, and there is a great deal of confusion around the share creation/redemption cycle, and the resultant data collection.

The prime example of this is the SPDR S&P Retail ETF (XRT), which has 8.5 million shares outstanding, but 30.2 million shares sold short, according to Bloomberg.

How that happens, I do not know -- but it is indicative of a basic data quality issue.

But back to IBB.

According to iShares, IBB has 19.95 million shares outstanding. NASDAQ's latest short interest figure shows 10.3 million shares, or 52% short, which is extremely high.

For the sake of argument, let's assume the short data is accurate.

On the surface, this assumes an extremely high level of pessimism -- it certainly would if we were talking about an individual stock.

However, keep in mind that in addition to normal shorts betting against the biotech sector, IBB is commonly used in pairs trades against long positions in individual biotech stocks.

Plus, IBB's 10.3 million shares sold short, at current prices, accounts for just $2.8 billion in value. That's a tiny fraction of the trillions in biotech stock capitalization out there. Sector ETFs can move markets in the short-term, but in the bigger picture, this is an irrelevant amount of money.

Therefore, you won't get much of a gauge on biotech sentiment from short interest figures on a single ETF. You'd be much better off taking a look at the numbers for individual stocks.

However, if you are considering going short biotech, remember two things:

1) In recent quarters, biotech has been the best sector in terms of beating earnings and revenue expectations. Sector valuations are fairly high but the fundamental momentum is there.

2) Deal/activist activity in biotech and pharma has been rampant. FactSet just put out a note yesterday showing that major hedge funds have been aggressively adding biotech stocks as M&A has heated up.

Happy hunting!

Twitter: @MichaelComeau

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