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May 8, 2017

S3 Research: XRT Retail ETF as the Short Side to an Amazon Pairs Trade

Spider S&P Retail ETF (XRT US) short interest peaked in early February of this year, hitting its yearly high of $1.67 billion on February 2nd. Since then, shorts covered nearly half their positions to realize their profits as the ETF’s price hit its year-to-date low of $40.82 on April 5th. With the ETF’s stock price up slightly recently, shorts have started increasing their positions. With today’s trading, we see XRT’s short interest at $975 million, up $83 million, or 9%, since the end of the 1st quarter but down $463 million, or 32%, year-to-date.

XRT short sellers had a modicum of success in 2016, earning a $12 million mark to market profit, or 1.2%, on an average short position of $1.02 billion. They are doing slightly better this year, up $28 million, or 2.5%, on an average short position of $1.11 billion.

XRT’s stock borrows are paying an average fee of 1% and 1.5% as there is not a huge float of stock to lend. XRT’s market cap is only $262 million and there were only $32 million of inflows in 2017. If short selling continues at this recent pace, stock borrow cost will quickly rise to 2.5% fee and if short balances ever get over $1.2 billion, it might be more difficult for short sellers to secure stock borrows to execute additional short sales.

Traders shorting XRT are effectively shorting stocks that are in Amazon’s (AMZN US) crosshairs.  Many of XRT’s top ten holdings are in sectors into which Amazon is hoping to dominate. Wayfair (W US) is XRT’s top holding, and Amazon is looking to expand its furniture and home goods business. Sprouts Farmers Market (SFM US) and Whole Foods Market (WFM US) are two of the top targets in Amazon’s entry into the natural and organic food retail sector. And the last of XRT’s top ten holdings, Best Buy (BBY US) is Amazon’s arch nemesis in the electronics retail sector. When we add in Netflix (NFLX US), number 15 in XRT’s holdings and Amazon’s main competitor in the streaming media sector we see that the XRT ETF can be the diversified short side of an Amazon Long/Short pairs play.

Want deeper insight into the above analysis? Contact: 
Head of Research, S3 Partners
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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