"Second Largest Increase On Record": Goldman Shocked By Yesterday's ETF Shorting, Pushing Market To The Limit

Last week we pointed out that "Crazy Things Are Happening With ETFs" highlighting, among other things, the absolutely insane flows and volumes already passing through US listed ETFs in the year through February, and thus before the Iran war. 

This is what Goldman had to say: Over the past 5 years, ETFs, on average, have accounted for 28% of daily notional trading volume. However, in 2026, this value has risen to 32%. The two drivers to this increased share are 1) broader institutional and retail adoption has raised the floor for ETF volumes and 2) the expansion of “macro widgets” that are utilized to manage risk/exposure in response to outsized price action (i.e., gold/silver volatility in January, software’s February meltdown, investors managing oil risk via USO today, etc). The use case for ETF trading is on full display today in response to vol stemmed from this past weekend’s headlines -- today, as hinted above, ETFs accounted for a near record 40% of the tape!

Put simply, Goldman said that as VIX moves, ETFs become an attractive solution to quickly manage risk and tactically express views especially in a tape where single stocks have become increasingly illiquid: "With nearly 5,000 available products and increasing volumes, there more flavors of exposure and liquidity than ever before."

Not surprisingly, with increasingly more investors using ETFs as a broad-based market hedge for existing and positions, US-listed ETFs now represent a record $14.3 trillion in assets, rising nearly $900 billion since the end of 2025. With over half of ETF AUM housed within domestic equity exposures, top-line AUM growth has far outpaced US equity market performanc , further underscoring the impact of this year’s inflows. For some context, at the end of last year, Goldman forecasted that ETF AUM would likely surpass that of mutual funds by 2030. The bank now anticipates this occurring likely sooner, potentially by 2029.

With that background in mind, today Goldman's Prime Brokerage writes that "amid increased market volatility and continued geopolitical tensions, US-listed ETF shorts on the Prime book increased +10% yesterday: the 2nd largest 1-day increase on Goldman's record (since 2016)."

In percentage terms, yesterday's US ETF shorting was second only to the +16% increase seen on April 2, 2025 aka Liberation Day.  After a +8% increase last week, US-listed ETF shorts rose another +12% this week (now up +23% month/month).  

For context of how much shorting is taking place in ETFs, as percentage of total US gross market value on the Prime book, short exposure in Macro Products (Index + ETF combined) now stands at the highest level since Sep '22 and is approaching 5-year highs in the 97th percentile.

And one final striking observation: The past nine sessions have had an ETF value greater than 35% of the tape, the second longest streak in Goldman's dataset. Yet vol has remained notably low relative to the outsized ETF activity: the last time we saw 9 straight sessions of this kind of ETF activity, the VIX was north of 70.

Why does this matter? Recall earlier this week we quoted Goldman's head US trader John Flood, who SAID that right tail (squeeze) risk at the index level is primed to be the most extreme as HF gross leverage (which measures the total value of long and short positions) is currently near an all-time high at 307%, driven by the relentless shorting (hedging) via ETFs.

“If we were to get a headline declaring the conflict over, you could see a sharp move higher at the index level,” Flood said in an interview with Bloomberg. “It could be 2% to 3% in a straight line, and most of that would be that macro product covering.”

Markets got a taste of that type of action on Monday, when Trump said the war with Iran would resolve “very soon.” The S&P 500 closed 0.8% higher after an earlier 1.5% drop, with traders attributing much of the move to market participants covering the same securities they had shorted, most of them ETFs. And while the index remains some 4% off its highs, losses in many individual stocks are far larger. 

Of course, there is risk that the growing short overhang overpowers the recurring dip buying, especially among retail investors who remain an important source of demand for stocks. But to Flood, this retail support could fade if the labor market weakens materially:

“If we start to see multiple negative job prints, that would be a cause for concern that the retail bid could walk away and that the market could sell off,” Flood said. However, he added that “we do not think that’s happening right now on one negative jobs print,” he said referring to last week’s payrolls report.

While it may not have been happening last week, according to JPMorgan it is starting to happen. 

As we discussed last night, the latest JPMorgan Retail Radar note showed that retail investors are expressing "persistent signs of weakness" following the start of the Iran conflict with weekly purchases decelerating by ~30% after defying seasonal patterns and making February their 3rd largest month on record. Perhaps it is the lack of a liquidation selling flush - the kind we saw in April 2025 when the S&P tumbled into a correction in just days - that is keeping everyone on their toes.

Indeed, amid the growing uncertainty around the war, retail investors have chosen to reduce their weekly ETF inflows by 22%, breaking a 3 months streak of steady support.

Retail also pared back single stocks purchases, further deflating the already moderate flows observed over the past 2-3 weeks. In fact, Monday marked the largest net-selling day in single stocks in a month, before purchases resumed at a positive, yet below YTD average pace on Tuesday and Wednesday.

All that would take for what little retail dip buying activity remains is for another major shock: one could come as soon as Sunday, when many strategists have warned that if there is no Iran/Straits of Hormuz resolution by the time futures open at 6pm ET, then all bets may finally be off. And it won't be just retail.

As we warned earlier this week, the market has become extremely illiquid, approaching levels last seen during the Liberation Day crash, as Emini top of book depth has collapsed to just a few million (meaning it takes just a few milions in Emini orders to move the Emini S&P by one tick).  Most recently, Goldman estimated top-of-book depth at around $4 million, far below the historical average of roughly $14 million. Levels below $7 million typically signal stress in the market.

“That means every time an institution tries to buy or sell something in size, they’re having a much larger impact on the price,” Flood said.
Which way that impact goes could depend in part on how the geopolitical backdrop is resolved. For now, investors are still counting on the broad uncertainty sparked by the conflict to dissipate soon, Flood said. 

The Flood, the bottom line is that while good news on the Iran war could send stocks soaring, the longer the market goes without a resolution, the worse it will get until finally the tipping point is breached: “The market is counting on some signal of a resolution within the next two weeks." But "if this carries on for longer with no positive progress we will have a problem from an equities perspective at the index level.”

More in the Goldman and JPMorgan notes available to pro subscribers.