Short Sellers Are In A Pickle With Energy Stocks, ETFs

The Energy Select Sector SPDR (ETF) (NYSE:XLE), the largest equity-based exchange-traded fund tracking the energy sector, is up nearly 12 percent over the past month. XLE's exploration and production and more volatile counterpart, the SPDR S&P Oil & Gas Exploration & Prod. (ETF) (NYSE:XOP), is higher by 29.6 percent over the same period.

Not surprisingly, those gains and other impressive returns notched by rival energy ETFs in short order are making life hard for short sellers who previously attacked the energy sector with plenty of fervor. Data indicate forced short covering of energy stocks is becoming a regular occurrence, as the recent oil rally has caught many bearish traders off guard.

Related Link: Leveraged-Energy ETF Rises Again

Short Sellers And Energy

Markit data indicate 16 percent of energy sector short positions have been covered over the past month and of the remaining bearish positions, 98 percent are out of the money.

Across firms with more than $2 billion in market cap, the energy sector is now the second most shorted after retail after rallying by 15 percent in the last month, as measured by the Energy Select SPDR ETF. This has created some tricky situations in certain names especially those which have been long time short targets. As a result, short sellers have been recently rushing for the door, despite paying hefty borrowing costs, said Markit in a recent note.

Year-to-date, XLE has taken in more than $988 million in new assets, putting it in the upper echelon of the sector SPDR ETFs in terms of 2016 asset-gathering proficiency. XOP, often a heavily shorted ETF, has added nearly $73 million in new assets.

Interestingly, even while it was falling, XLE was legitimately adding new assets. Meaning the inflows to the ETF were courtesy of buyers that were betting the fund was going to rebound, not short sellers forcing the creation of new shares.

Since oil prices topped out in 2014, US-listed energy ETFs such as Energy Select Sector SPDR Fund [XLE] have gathered $4.7 billion. That is the most of any equity sector. These inflows appear to be driven by investors taking long positions in energy ETFs to position for a recovery in oil prices. Of course, this trade hasnt worked out so far with XLE down 19 percent since the peak price of oil on June 24, 2014, said State Street Vice President David Mazza in a recent note.

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