Bearish bets on an exchange-traded fund of industrial companies have risen close to a level last seen in 2012, reflecting investor skepticism about the strength of the U.S. expansion.
Short interest for the Industrial Select Sector SPDR Fund (XLI) totaled 55.3 million shares as of June 13, almost at an April level that was the most since July 2012, according to data compiled by Bloomberg. The number of shares traders have sold and haven’t yet bought back has risen about 64 percent year-to-date, the biggest increase among the nine SPDR ETFs that track the S&P 500 Index’s components.
The persistently high short interest in industrials illustrates “a healthy level of skepticism” about the economy, said David Mazza, head of ETF research in Boston at State Street Corp.
Traders are betting this year’s winter slowdown wasn’t caused by harsh weather alone and signals a more lasting retrenchment in spending by consumers and companies, he said.
The U.S economy contracted at a 2.9 percent annualized rate in the first quarter, the most since the depths of the 18-month recession that ended in June 2009, data from the Commerce Department show.
Advance figures for the second quarter are scheduled to be released July 30.
In light of this sluggishness, “some investors are expressing a bearish macroeconomic view,” by targeting industrials because the group is economically sensitive and offers a high-beta play on growth, Mazza said.
A stock with a high beta tends to rise or fall more than the broader market.
Some equity investors who are bearish about the industrial ETF are looking to their Treasury-trading counterparts as confirmation of their outlook, said Matt Maley, an equity strategist based in Boston at Miller Tabak & Co. That’s because “the bond market is telling us that growth continues to be sluggish.” In addition, forecasts for a pick-up in economic activity after the winter slowdown are debatable, he said.
Short interest on the industrial ETF has increased this year, while the yield on 10-year Treasuries has fallen to 2.5 percent from a two-year high of almost 3.03 percent on Dec. 31.
The industrial fund — which includes Caterpillar Inc. (CAT), Union Pacific Corp. (UNP) and 62 others — has lagged behind the S&P 500 ETF by 2.2 percentage point’s year-to-date, after leading the benchmark index by 8.2 percentage points in 2013.
This ETF is the most highly correlated to the S&P 500 among the nine select SPDR funds, “so if you want to make a bet against the market, it’s a good place to short,” said Walter Todd, who oversees about $1 billion as chief investment officer of Greenwood Capital Associates LLC in Greenwood, South Carolina.
The benchmark index has rallied this year, closing at a record high June 20.
