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Nov 9, 2016

S3 BLACKLIGHT: Record Short Interest for EWW ETF Trump Hedge Trade

With Donald Trump’s economic and immigration policies a threat to the Mexican economy, short interest in the iShares MSCI Mexico Capped ETF (EWW US) has been ebbing and flowing along with his poll numbers for most of 2016. Short sellers have been using the EWW as a portfolio hedge or an outright Alpha trade against the chance that Donald Trump would win the presidency over Hillary Clinton. Today the Trump Hedge proved to be a worthwhile investment with the EWW ETF down 9% after President elect Donald Trump’s victory.

Short interest in the EWW ETF began to increase in earnest in the 2nd half of 2016, coinciding with Donald Trump’s rise in the presidential polls. Short interest ended the 3rd quarter at $605 million, up $241 million or 66% for the year. EWW short interest hit its historical high on election day, November 8th, at $833 million up 129% for the year. With the ETF down 9%, short sellers made $75 million of unrealized gains on Donald Trump’s successful election bid.

EWW short interest will not increase significantly from these levels as over 90% of the available stock loan inventory has already been lent out. Unless more inventory is created and ends up in stock lending programs there will be no borrows in size available to short sellers. We saw less than 200,000 shares of new borrow activity today, with most transactions less than 10,000 shares – the leftover scraps from broker inventories.

Stock loan rates are rising as available supply decreases and borrow demand continues to be strong. Borrow rates were between 0.75% to 1.00% fee for all of October and rose to 1.50% early this week. Today’s trading saw rates spiking, with some trades hitting the 6% fee level. We expect rates to continue to rise until more lendable inventory becomes available. Existing borrows that were at 1% fee will begin to get rate changed this week and the Trump Hedge will start to get more expensive. We should see most borrows rate changed to 2%-3% fee by the end of the week and if borrow demand stays strong, 5% fee by the end of next week.

For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC     Ihor.Dusaniwsky@S3Partners.net

The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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