Visual Guide to ETFs

ETF Borrow Rates Are a Function of the Underlying Basket

 

KEY POINT:

The hedge fund community frequently uses ETFs as short hedges against their positions. To facilitate the stock borrows, the large trading desks typically borrow the baskets, add a fee for the use of balance sheet and their services, and then lend the ETFs to the hedge funds. Since shorting is such a large part of the ETF marketplace, there is a large amount of revenue being made for the simple process of lending the ETF wrapper to provide a one trade short solution.

A closer inspection of the underlying basket of an ETF with high short interest sheds some light on this process. Let’s look at an analysis of the underlying basket stocks in the required weights to create shares ...