Exchange-traded funds (ETFs) are baskets of securities that have a few more perks than traditional mutual funds. They can be traded throughout the day on the open market, much like stocks, and they can be sold short. When you sell short, you're betting against a rise in the market. Most people choose to short ETFs as a way to protect their portfolios. The investment also has some additional attractive benefits. However, short-selling ETFs also has its disadvantages, and for those investors who want to skip those downsides, a comforting alternative is available.
Shorting this investment requires that you borrow a number of shares of stock or an ETF - from a brokerage firm - that you want to sell. The process typically takes place within a margin account. This is an account in which the firm lends you money to purchase the securities. The broker may borrow the securities from another client or from another firm, and the ETF is sold on the market. During this time, the seller is charged interest on the loan and will need to pay any dividends to the lender. The hope is that the market will fall. The decline will cause the price to drop, allowing for the securities to be repurchased at a lower price, the proceeds deposited into the account for the loan to be repaid and a profit to occur from the difference in the amount for which it was sold versus the amount for which it was repurchased.
ETFs have several features that make them attractive for selling short. They are an aggregation of thousands of companies, which means they contain dozens of stocks, as opposed to a single stock. They are also designed to track the index. Some ETFs follow the U.S. stock in its entirety, foreign markets and individual industries. Varieties of ETFs exist and are categorized by an investment theme.
Sophisticated traders, hedge fund managers and other professional money managers short ETFs, as well as conservative and aggressive investors.
Shorting ETFs isn't always the best move. The process can be difficult to execute, and can lead to even greater risks if the move is not timed right, however, they are easy to trade and can lead to poor decisions from those who aren't savvy. It can also be hard to determine who's placing bets with an ETF. ETFs have the potential to be exposed to unlimited loses. Not all ETFs can be shorted, and some are hard to short, as it is difficult to do so in small quantities.
Short selling ETFs can be done. In fact, they can be shorted much like stocks. ETFs offer the additional benefit of having a batch of securities which makes them more diverse and less risky. However, selling short is not advised for the inexperienced.
With ETFs, shorting is a strategy that many investors have access to, but it's not without its risks. Make sure you have all of the information and experience needed to make it an profitable play.