Overview
This research examines the short-selling of exchange-traded funds (ETFs), which creates “phantom” ETF shares that trade at market prices with cash flow rights but no voting rights. Unlike regular ETF shares backed by underlying securities and voted as directed by the ETF sponsor, phantom ETF shares are typically hedged through the underlying basket as part of market-making activity, resulting in a significant number of sidelined votes in the underlying securities. We find that increases in phantom ETF shares linked to underlying securities are associated with decreases in proxy votes cast and increases in broker non-votes.
Project researchers
Richard B. Evans
Darden School of Business
Oğuzhan Karakaş
Cambridge Judge Business School – Finance Subject Group; European Corporate Governance Institute (ECGI)
Rabih Moussawi
Wharton Research Data Services
Michael Young
Robert J. Trulaske, Sr. College of Business at the University of Missouri
Research summary: Phantom of the opera – ETF shorting and shareholder voting
This paper examines how short selling of exchange-traded funds (ETFs) affects shareholder voting at the underlying companies. The authors show that ETF short-selling creates “phantom” ETF shares, which trade at market prices and carry cash flow rights, but are not associated with voting rights.
Unlike regular ETF shares held by investors, phantom ETF shares arise when authorised participants (APs) or market makers short-sell ETF shares and hedge this position by holding the underlying stocks. These underlying shares are held as part of a hedge, not as an investment, and are therefore often sidelined from the voting process. As a result, a significant number of underlying shares are not voted at shareholder meetings.
Using ETF portfolio holdings and short interest data, linked to 6,556 U.S. public companies and their voting records from 2004–2018, the paper constructs a measure of phantom ETF shares and translates this into “phantom shares” of the underlying securities. On average, phantom shares account for 14% of total ETF ownership of underlying shares, and more than a third of Russell 3000 firms have phantom shares greater than 1% of shares outstanding.
The authors find that increases in phantom shares around voting record dates are associated with fewer votes cast and more broker nonvotes for the underlying securities. Further analysis shows that these sidelined votes can change the probability that important shareholder or governance proposals pass, especially in close contests.
Overall, the paper highlights that ETF short-selling and related hedging activities can reduce effective shareholder voting, creating inefficiencies in corporate governance.
Related paper
Evans RB, Karakaş O, Moussawi R and Young M, ‘ETF Shorting and Shareholder Voting’ (published online 19 May 2025) Management Science https://doi.org/10.1287/mnsc.2023.01567
