Abstract
Exchange-traded funds (ETFs) have become extremely popular with both investors and short sellers. Asymmetric structural issues occur when an ETF is sold short because the underlying shares in the ETF portfolio are not also sold short. This effectively creates artificial short positions, which are further exacerbated by extensive serial short selling of ETF shares. Several ETFs have short interests greater than 100% of their shares outstanding. Large short interests in many ETFs cause them to behave like fractional reserve stock ownership systems. These practices allow some ETFs to be used to circumvent regulatory rules and create potential systemic risks.
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