Can you short sell ETFs?
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:
- 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.
- 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
Another option would be to buy an ETF that shorts an index, such as the S&P or the NASDAQ. However, these are not long-term instruments and should only be used to hedge your current portfolio and you should have a clear entry and exit strategy using these type of products.
Let me know if you have additional questions, as we do use these type of products when necessary in our strategies.
Very Truly Yours,
John A. Eiduk, CPA, CFP™
You can look up the short sale rules with your brokerage account custodian. In general, the answer is "yes".
Another option to consider is that there are several "short" ETF's, they track the inverse returns of a variety of indexes. Most amplify the inverse results, the performance is based on 2x or 3x the inverse daily returns of the index. I use ProShares Sort S&P 500 (SH) which is not leveraged as a hedge for client portfolios when our signals suggest the market my be heading down.
Yes, you can if you have a margin account with the ability to short sell. You cannot do it in an IRA or retirement account though. However, there are short selling ETFs that specialize in short selling for you. They can be broad indexed shorts, sector short ETFs, and even leveraged (-2x or -3x) short ETFs, which can even be done in IRAs or retirement accounts. I would caution using leveraged short selling ETFs unless you are a seasoned trader/investor.
Hope this helps, Dan Stewart CFA®
Yes, you can short ETFs. Depending on the size of the position you're looking to take, you may also consider the option chain on the given ETF - or see if an investment company has already crafted an inverse ETF- to see if there are comparative ways to express your investing notion; some may be cheaper or more transparent than others.
With this said, buying "portfolio insurance" in the short-sale or derivatives market is one thing, but attempting to be the next Michael Burry (The Big Short) and profit from a major decline is another one. In any event, I would make sure you fully understand the risks, costs, and potential outcomes from both a return and tax perspective prior to making any significant move.
Of course, if I can provide any clarification or further insight, please feel free to reach out.
Adam C. Harding, CFP