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Shares of Tanger Factory Outlet Centers are rocketing higher even as doubts about the future of bricks-and-mortar retailers continue to plague the company, one of the pioneers of outlet-store shopping.
But the big share move upward isn’t because investors have had a change of heart about the “retail-pocalypse”[1]. Rather, Tanger’s declining share price has led its market capitalization to fall below the threshold that keeps it in a popular exchange-traded fund and the ensuing action in the stock is driving its price higher. That’s because Tanger SKT, -4.18%[2] is one of the stocks that attracts the most interest from short sellers, who bet its price will go down.
As the deadline for removal from the fund draws closer, those investors are caught in what’s known as a “short squeeze.” They’re being forced to buy back shares to close out their positions, thus inflating the share price and, with it, market capitalization.
It’s a situation that raises bigger questions about how ETFs are constructed and what’s in the best interest of investors in the fund. For now, this situation is unprecedented, ETF[3] industry participants say, and those who spoke to MarketWatch had varying views.
“This is the first case where you see the negative effects of high passive ownership,” said Alex Pettee, president and director of research at Hoya Capital Real Estate. “It challenges the notion that it’s always a net-positive (for a stock) to be added to these indexes.”
See: Want to profit from the housing shortage? There’s a new ETF for that.[4]
Dave Nadig, an industry veteran now serving as chief investment officer and research director at ETF Flows, takes a different view. “This shows that a part of the market that everyone always has concerns about is working,” he told MarketWatch. “The plumbing of the market is doing exactly what it’s supposed to be doing.”
Here’s how that “plumbing” works: short sellers borrow shares of a stock they think is likely to decrease in value, most often from an ETF or other institution that has a large holding. If the short bet pans out, and the share price declines, the short seller can buy shares at the new, lower price and pocket the difference. But if the share price moves higher, the short seller loses out.
In this case, speculation has been building for weeks that Tanger will be kicked out of the index that underlies the SPDR S&P Dividend ETF SDY, -1.12%[5] , known as the...