Why You Can't Squeeze an ETF
Berkshire Hathaway has a reported SI of 400% on Fintel, why can't it squeeze?
A lot of us like trading SPY, SPX, QQQ, IWM, etc but don't really know how ETF's work, so I wrote something up to help us better understand.
XBI S&P 500 Healthcare ETF has 40% short interest
BRK.B Berkshire Hathaway ETF has 400% short interest
But both of these names will never squeeze and here's why not:
First we need to understand how a short squeeze usually happens. To put it simply, when a stock like $BBBY has 50% of the float short. It means that out of the 61 million shares available, ~30.5 million have been sold short. That's where the 50% number comes from. Usually this number does not change.
Here's where it gets interesting on ETF's though. The way an ETF works is that when there's a deviation between the value of the underlying (like $AAPL and $AMZN when looking at $SPY), more shares are either created or destroyed.
If you have a basket of stocks in an ETF, and there is a divergence, large institutions will exchange this basket of stocks in exchange for a share of the ETF, or the opposite. This is what's causing the fluctuation in float.
Let's take a look at how this works:
The value of $AAPL + $TSLA + the other 501 holdings (fun fact, there's 503 holdings in $SPY not 500) in $SPY is worth $1100. $SPY is trading at $1000. An institution will buy this basket of stocks and sell it to the market as a share of $SPY keeping $100 profit.
See how this adds a share onto the market, fluctuating the float of the ETF? This is why it would be difficult to squeeze an entire ETF as these funds are keeping the ETF as close to the price of the basket of stocks as possible.
So when we look at $BBBY or $APRN or any other recent squeeze, the reason they move freely is because there's no market participant trying to pin it down to fair value.
TLDR: Large financial institutions exploit the difference between the underlying assets and the ETF to keep the difference, changing the free float size, and pinning it down to its true value, preventing a squeeze.
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Thanks for reading,
-Adit Dayal