That’s possible even without ETFs. If someone borrows a stock and then sells it, the buyer can’t tell whether the stock was borrowed or not and that buyer can lend the ‘same’ stock again. Theoretically, even to the same short seller. The possibility of more stocks being shorted than total free float may indeed be concerning for a particular company. E.g. hedge funds excessively shorting a single company. I don’t expect this to be an issue in practice for an ETF.
Investors do profit from funds lending stocks. It effectively reduces the ongoing charges. You can see the profits from stock lending in the annual report of each fund.
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