Phantom of the Opera: ETF Shorting and Shareholder Voting

Abstract

The short-selling of exchange-traded funds (ETFs) creates “phantom” ETF shares, trading at market prices, with cash flows rights but no associated voting rights. Unlike regular ETF shares backed by underlying securities that are voted as directed by the ETF sponsor, phantom ETF shares hedged by the underlying basket as part of market-making activities result in a significant number of sidelined votes of the underlying securities. We find increases in phantom shares for the corresponding underlying securities are associated with decreases in the number of proxy votes cast (for and against), and increases in broker non-votes, voting premia, and value-reducing acquisitions.

Keywords: Exchange-Traded Funds, Proxy Voting, Broker Non-Vote, Voting Premium, Short Interest, Operational Shorting, Authorized Participants, ETF Market Making, Voting of Hedged Positions, Empty Voting

JEL Classification: G11, G12, G14, G23, G34