u/Turdfurg23

As many of you know by this stage, the XRT ETF has been heavily involved in the GameStop saga. In the research I’ve done over the years, this specific ETF appears to be heavily abused, with high stock turnover and abundant cash and liquidity — until, well, it isn’t.
Most recently, we’ve observed XRT shares outstanding and overall assets under management (AUM) near all-time lows, back to levels seen during the early days of the fund and the Great Financial Crisis. In addition, borrow rates have increased while shares available to short have dropped to zero.
One of the most interesting aspects of the bid for eBay, which differs from Cohen’s other investments or the stocks/baskets that have historically tracked with GME, is that eBay is also included in XRT. Since Cohen’s announcement and CNBC interview, eBay has become XRT’s top holding.
What I think may have inadvertently happened is that GME is becoming untangled from the basket or pairs trading associated with many of the other well-known retail stocks that developed their own investor communities.
XRT has acted as the honey pot for hedge funds to gain synthetic short exposure to Gamestop. Now there are two beehives in the same tree: GME and EBAY
Understanding the role of cash, authorized participants (APs), and ETF creation/redemption mechanics helps explain why ETFs like XRT can become central to institutional trading strategies. In a traditional “in-kind” ETF creation:
The AP buys the basket of underlying stocks.
The AP delivers that basket to the ETF issuer.
The issuer provides newly created ETF shares.
The AP can then sell those ETF shares in the open market.
The reverse occurs during redemption.
However, ETFs can also use cash creations and redemptions instead of purely in-kind transfers. This distinction matters significantly.

Why Cash Matters

Cash-based ETF creations provide flexibility.
Instead of delivering every underlying stock directly, an AP can deliver cash to the ETF issuer, which then acquires the securities internally.
For highly liquid ETFs, this may seem insignificant. But for ETFs containing:
hard-to-borrow stocks,
volatile meme stocks,
heavily shorted equities,
or thinly traded components,
cash creation mechanisms can become strategically valuable. A hedge fund may want to short a particular stock inside XRT — especially a stock with limited share availability.
Instead of directly borrowing shares of that stock, traders can:
short the ETF,
hedge out unwanted components,
and isolate exposure to the target company.
This strategy is sometimes referred to as “ETF arbitrage” or “component stripping.”
For example, if a hedge fund is bearish on GameStop Corp. but neutral on the broader retail sector, it may:
short XRT,
go long the other retail stocks inside XRT,
and effectively create a synthetic short on GameStop.
This can reduce borrowing costs or bypass scarcity in directly borrowable shares.

Liquidity Transformation

ETFs can transform illiquid exposure into more liquid instruments.
A stock may have:
low float,
high borrow fees,
or limited share availability,
while the ETF itself trades with significantly more liquidity.
APs and market makers help bridge this gap by continuously creating and redeeming ETF shares.
This is one reason ETFs can sometimes exhibit short interest levels exceeding 100% of shares outstanding. Because ETF shares can be continuously created and redeemed, the supply is more elastic than ordinary corporate shares.

Settlement Flexibility

Cash creations may also help institutions manage settlement and inventory constraints.
In stressed market environments:
locating underlying shares may be difficult,
borrowing costs can spike,
and settlement obligations become more complex.
Cash-based creation/redemption processes can provide operational flexibility for APs and hedge funds navigating these conditions.
Critics argue this flexibility can obscure true supply-demand dynamics in underlying stocks. Defenders argue it improves market liquidity and efficiency. With XRT we know the goal isn’t market efficiency but rather skirting direct borrow rates to obtain synthetic short exposure.

https://www.sciencedirect.com/science/article/pii/S2214845021000880
 
 
https://papers.ssrn.com/sol3/papers.cfm?abstract\_id=5038584  
 
https://www.youtube.com/watch?v=6VJH-hRlXN0 

As many of you know by this stage, the XRT ETF has been heavily involved in the GameStop saga. In the research I’ve done over the years, this specific ETF appears to be heavily abused, with high stock turnover and abundant cash and liquidity — until, well, it isn’t.
Most recently, we’ve observed XRT shares outstanding and overall assets under management (AUM) near all-time lows, back to levels seen during the early days of the fund and the Great Financial Crisis. In addition, borrow rates have increased while shares available to short have dropped to zero.
One of the most interesting aspects of the bid for eBay, which differs from Cohen’s other investments or the stocks/baskets that have historically tracked with GME, is that eBay is also included in XRT. Since Cohen’s announcement and CNBC interview, eBay has become XRT’s top holding.
What I think may have inadvertently happened is that GME is becoming untangled from the basket or pairs trading associated with many of the other well-known retail stocks that developed their own investor communities.
XRT has acted as the honey pot for hedge funds to gain synthetic short exposure to Gamestop. Now there are two beehives in the same tree: GME and EBAY
Understanding the role of cash, authorized participants (APs), and ETF creation/redemption mechanics helps explain why ETFs like XRT can become central to institutional trading strategies. In a traditional “in-kind” ETF creation:
The AP buys the basket of underlying stocks.
The AP delivers that basket to the ETF issuer.
The issuer provides newly created ETF shares.
The AP can then sell those ETF shares in the open market.
The reverse occurs during redemption.
However, ETFs can also use cash creations and redemptions instead of purely in-kind transfers. This distinction matters significantly.

Why Cash Matters

Cash-based ETF creations provide flexibility.
Instead of delivering every underlying stock directly, an AP can deliver cash to the ETF issuer, which then acquires the securities internally.
For highly liquid ETFs, this may seem insignificant. But for ETFs containing:
hard-to-borrow stocks,
volatile meme stocks,
heavily shorted equities,
or thinly traded components,
cash creation mechanisms can become strategically valuable. A hedge fund may want to short a particular stock inside XRT — especially a stock with limited share availability.
Instead of directly borrowing shares of that stock, traders can:
short the ETF,
hedge out unwanted components,
and isolate exposure to the target company.
This strategy is sometimes referred to as “ETF arbitrage” or “component stripping.”
For example, if a hedge fund is bearish on GameStop Corp. but neutral on the broader retail sector, it may:
short XRT,
go long the other retail stocks inside XRT,
and effectively create a synthetic short on GameStop.
This can reduce borrowing costs or bypass scarcity in directly borrowable shares.

Liquidity Transformation

ETFs can transform illiquid exposure into more liquid instruments.
A stock may have:
low float,
high borrow fees,
or limited share availability,
while the ETF itself trades with significantly more liquidity.
APs and market makers help bridge this gap by continuously creating and redeeming ETF shares.
This is one reason ETFs can sometimes exhibit short interest levels exceeding 100% of shares outstanding. Because ETF shares can be continuously created and redeemed, the supply is more elastic than ordinary corporate shares.

Settlement Flexibility

Cash creations may also help institutions manage settlement and inventory constraints.
In stressed market environments:
locating underlying shares may be difficult,
borrowing costs can spike,
and settlement obligations become more complex.
Cash-based creation/redemption processes can provide operational flexibility for APs and hedge funds navigating these conditions.
Critics argue this flexibility can obscure true supply-demand dynamics in underlying stocks. Defenders argue it improves market liquidity and efficiency. With XRT we know the goal isn’t market efficiency but rather skirting direct borrow rates to obtain synthetic short exposure.

Edit 1:

The effective number of shares exchanged or economically referenced through the Portfolio Composition File (PCF) process appears larger or more dynamic than what is reflected in the ETF’s publicly published portfolio allocation at a given moment. However, there are important distinctions between:
the published ETF holdings,
the creation/redemption basket in the PCF,
securities lending activity,
derivatives exposure,
and secondary-market trading volume.
For an ETF like SPDR S&P Retail ETF, the PCF distributed daily to authorized participants (APs) can differ from the simple public-facing “fund allocation” list in several ways.

What the PCF Actually Represents

The PCF is essentially the operational creation/redemption basket used by APs to:
create ETF shares,
redeem ETF shares,
and facilitate arbitrage.
It may include:
exact share quantities,
cash substitution amounts,
balancing cash,
custom baskets,
pending settlements,
or temporary deviations from pro rata holdings.
The publicly published allocation, meanwhile, is usually:
delayed,
rounded,
simplified,
or presented as percentage weights.
So the PCF is often more granular and operationally precise than what retail investors see.

The PCF Can Reflect More Shares Than the Published Allocation

Creation/Redemption Activity Is Dynamic
APs may be creating and redeeming ETF shares throughout the day.
That means:
securities may be moving in and out continuously,
inventory may temporarily exceed displayed holdings,
and the operational basket may not perfectly match the last published portfolio snapshot.
Especially during volatile periods, ETF inventory management becomes fluid.

Custom Baskets and Cash Substitutions

Modern ETF rules allow for custom baskets.
An AP may:
substitute cash for certain securities,
omit difficult-to-borrow names,
or exchange alternative baskets approved by the issuer.
This means the actual transfer mechanics can diverge from the simple proportional allocation shown publicly.

Securities Lending

ETFs frequently lend underlying shares.
So an ETF may:
economically “own” shares,
while simultaneously lending them out,
while APs and market makers create additional ETF shares against borrowed inventory.
This can create layers of exposure that exceed what a casual reading of the holdings report suggests

Synthetic Exposure and Hedging

Market makers and hedge funds may hedge ETF exposure using:
swaps,
options,
futures,
or correlated baskets.
So while the published allocation shows one level of ownership, the market’s synthetic exposure tied to the ETF may be far larger.

https://www.sciencedirect.com/science/article/pii/S2214845021000880
 
 
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5038584  
 
https://www.youtube.com/watch?v=6VJH-hRlXN0