Changing places
S3 Blacklight’s Ihor Dusaniwsky explains how US and UK REIT ETFs did an about-turn after the UK’s referendum on its EU membership

S3 Blacklight recently did a study into the mirror effect in the short interest of the US and UK’s real estate market following the Brexit vote. What was the starting point for this case study?

S3 Blacklight is a global, independent financial analytics, technology and services firm. We work with asset managers and provide research on all markets and products to see what’s happened in the past week or even the past day.

Brexit is obviously the topic of the moment so I took a look at how it was affecting the US Vanguard REIT ETF and the iShares UK Property UCITS ETF, and found some interesting trends.

The two exchange-traded funds (ETFs) were actually running in opposite directions, with short interest draining away from the US but going through the roof in the UK straight after the UK’s EU referendum on 23 July. The trend started just before the vote and then accelerating immediately after ‘Brexit’ was confirmed.

What were your key findings from the study?

There was a huge jump in short interest around the vote, but that quickly settled back down. Short interest rose by 110 percent from $78 million on 23 June to $164 million by 1 July. The UK ETF’s value dropped by 14 percent by 12 July with a market cap of $880 million.

Short interest in the Vanguard ETF was almost $950 million, as of 23 June, and quickly dropped 15 percent to $790 million by 1 July.

Short interest in both ETFs reversed course later in July. Short interest in Vanguard rose 44 percent to $1.14 billion as the stock hit $90.09 on 12 July. Meanwhile, short interest in the UK ETF fell 55 percent, down to $73 million, as its stock price also fell 27 percent to $6.66, $2.57 of its recent high.

What made you choose the real estate market?

When I began looking at the Brexit situation I knew there would be some important interest rate effects on it, with all the currency exposure and currency fluctuations. When looking at what securities would be most affected by this I settled on the real estate market as a proxy for the long-term effect on interest rates because it’s more interesting than just looking at a bank stock.

I was also interested in seeing if the Brexit vote would create a change in the regulatory environment around foreign ownership of real estate and if that would contribute to the trend of demand moving from the UK to the US.

What are your data sources for this study?

Our data comes from three sources: our electronic contributory data, where we have more than $1.7 trillion of assets under advisement from hedge funds and long-only managers, which allows us to see all their long and short positions on a daily basis.

We also get broker and bank feeds, along with other third-party sources.

Finally, we have our own stock loan desk at S3 made up of six stock loan traders. Our team is essentially calling the street to see what’s happening and verifying the data we’re seeing from our other sources.

As an analyst it’s important to be able to independently check your data because sometimes it can be a little startling and it’s reassuring to have lenders and brokers on hand to confirm or dispute our information.

We also have a lot of mutual funds on our platform so we are able to see their loans out to the street. All this means we’re able to have view made up from both sides of the transaction. We get to see both ends and the middle.

Your report was published in early July. Has the trend held true since then?

Looking at our data today, we see the Vanguard REIT ETF continued to trend downward with short interest now below $700 million. After hitting its year to date low on 27 June, the iShares UK Property ETF price rallied 17 percent and shorts began covering their positions. Short interest is now below $50 million.
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