Why Does ETF Short Selling Provide a Different Signal?

Abstract

Short selling is of great interest to investors because it has predictive value for future stock returns. We investigate whether this extends to foreign stock ETFs. In contrast to regular stocks, ETFs with high short interest experience positive abnormal returns. Our analysis suggests that the creation and redemption of ETF shares influences the level of short selling. Foreign stock ETFs, with low short interest, also have positive abnormal returns. These abnormal returns are typically caused by higher prices in foreign stock markets and not exchange rate changes.

TOPICS: Exchange-traded funds and applications, style investing, statistical methods