New GameStop ETF IGME Raises Eyebrows Amid Surge In Borrow Fees, Settlement Failures: Are ETFs Being Weaponized Against Retail Traders?

As a new GameStop Corp. GME ETF has made its debut, retail traders and investors have raised alarms about market distortion and potential misuse by institutional players.

What Happened: Platforms such as Reddit and X are abuzz with concerns regarding a new ETF being created to track GameStop, which is set to make its debut on the bourses on Tuesday.

The fund, created by the Bitwise Funds Trust, will trade under the ticker $IGME, and according to SEC filings, it will not track GameStop through direct share ownership, but rather via derivatives.

This raises concerns of potential misuse, as it deals with a “meme” stock that has been at the center of the infamous tussle between retail traders and Wall Street bigwigs. According to the fund's prospectus, the strategy involves options-based exposure via covered calls, rather than holding GME shares outright.

“Because such exposure is synthetic, it is possible that the Fund's participation in the price return of GME may not be as precise as if the Fund were directly holding shares,” Bitwise mentions in its summary prospectus filed with the SEC.

Retail traders on social media have questioned whether such ETFs are tools for circumventing share-based accountability, especially as borrow fees for GME spike and failures-to-deliver (FTDs) remain elevated.

*Borrow Fees – This refers to the fee that short-sellers pay when borrowing securities, which they then sell to take a position against a particular stock. The fee for this varies depending on the short interest in a stock, and in the case of GameStop, it is now at 0.3506% on Interactive Brokers Group Inc. IBKR, having reached as high as 110% in May 2022.

*Failures-To-Deliver – This occurs when someone buys or sells a stock, but the actual shares don't show up on time to complete the trade. FTDs commonly occur due to “naked short-selling,” a practice in which short-sellers don’t actually borrow shares before selling them, thus flooding the market with synthetic supply.

This comes just months following the debut of T-Rex 2X Long GME Daily Target ETF GMEU, another fund that began with 10,000 shares of Gamestop, before swapping to a derivatives-based approach, likely a Total Return Swap.

Retail traders and investors, however, believe that these instruments are made to serve Wall Street more than Main Street. “I can't help but wonder if the real reason that this instrument was made was for creation and redemption misuse by Authorized Participants,” said @sboho on X.

According to a paper by Richard B. Evans of the University of Virginia, these concerns by retail investors aren’t entirely unfounded, since ETFs are responsible for nearly 78% of FTDs in U.S. equities.

The paper also identifies how Authorized Participants routinely engage in “operational shorting,” which refers to intentionally delaying ETF share creation or delivery, which, while used for certain arbitrage strategies, is ripe for misuse.

Bitwise has responded to Benzinga’s request for a comment, stating that “asset managers are prohibited from commenting on prospective ETF launches in the time between filing and launch,” and hence, they have no comment to add regarding this.

Why It Matters: Several leading analysts and market experts have since echoed similar views, with investment manager James Chanos of Kynikos Associates sarcastically referring to single-stock ETFs, calling their “high fees and reset risks” as “financial innovation at its best.”

A few years back, Dave Lauer of Urvin Finance said, “add leveraged and inverse single-stock ETFs (!) to the steaming pile of trash,” arguing that “investor protection seems to be an afterthought” with the Securities and Exchange Commission approving such products.

GameStop is set to release its first quarter earnings on Tuesday, with analysts expecting $0.04 per share in earnings, compared to a loss of $0.12 in the prior quarter. Revenues are forecasted at $754.23 million, down from $881.8 million in the previous quarter.

Price Action: GameStop shares were down nearly 13% in pre-market trading on Thursday, trading at $24.90.