A:

ETFs (an acronym for exchange-traded funds) are treated like stock on exchanges; as such, they are also allowed to be sold short. Short selling is the process of selling shares that you don't own, but have instead borrowed, likely from a brokerage. Most people short sell shares for two reasons:

  1. They expect the share price to decline. Short-sellers hope to sell shares at a high price today and use the proceeds to buy back the borrowed shares at a lower price sometime in the future in a bid to profit.
  2. They want to hedge or offset a position held in another security. For example, if you have sold a put option, an offsetting position would be to short sell the underlying security.

One benefit ETFs provide to the average investor is ease of entry. These products do not have uptick rules, so investors can decide to short the shares even if the market is on a downtrend. What this means is that rather than waiting for a stock to trade above its last executed price (or an uptick), the investor can short sell the shares at the next available bid and immediately enter into the short position. This is important for investors wishing for quick entry to capitalize on the market's downward momentum. With regular stocks, the investor would not be able to enter into the position if the downward pressure was great.

To learn more about ETFs, see Introduction To Exchange-Traded Funds.

RELATED FAQS

  1. What are the advantages of investing in ETFs with high trading volume?

    Learn about the advantages of exchange-traded funds with higher volume and liquidity, and understand how covered call options ...
  2. What are some popular ETFs that track the industrial sector?

    Learn about some of the most popular ETFs that track the industrials sector. Understand what factors may lead to the increase ...
  3. What is the difference between an ETF's net asset value (NAV) and its market price?

    Learn about the difference between the market values and net asset value of an ETF, and understand how redemption mechanisms ...
  4. How can I calculate the tracking error of an ETF or indexed mutual fund?

    Understand what tracking error is and learn about the significant difference it can represent for investors who favor index ...
RELATED TERMS
  1. Crowded Short

    A trade on the short side with an overwhelmingly large number ...
  2. Gross Exposure

    The absolute level of a fund's investments.
  3. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  4. David Einhorn

    Known for his short selling strategy, activist investor David ...
  5. Lion economies

    A nickname given to Africa's growing economies.
  6. Short Call

    A type of strategy regarding a call option, which is a contract ...

You May Also Like

Related Articles
  1. Mutual Funds & ETFs

    How To Invest In The Swiss Franc

  2. Mutual Funds & ETFs

    Safest Industries To Invest In

  3. Mutual Funds & ETFs

    What are some popular ETFs that track ...

  4. Mutual Funds & ETFs

    Top 4 ETFs That Will Help Diversify ...

  5. Chart Advisor

    Long-Term Charts Suggest The Next Move ...

Trading Center