How to Short the FTSE Ahead of The Brexit Vote

With the UK referendum to leave the European Union (Brexit) coming up on June 23rd, investors around the world are bracing for the potential market fallout from a "yes" vote. Not only is the British pound predicted to fall, but British equity markets may also take a hit as fears of trade barriers, unemployment, and recession take hold. 

Those who believe that a Brexit is likely can position themselves to take advantage of a fall in British stocks by taking a short position in the broad market index for the UK FTSE 100 index. 

Profiting From a Fall in the FTSE 100

The FTSE 100 index is composed of the largest 100 public companies listed on the London Stock Exchange by market capitalization. The index is already down for the year by around 3.5%, and has fallen 11.25% over the past twelve months. Still, a Brexit could push British stocks down even more. 

Those looking to profit from a fall in the index will be taking a short position. The average investor does not have access to derivatives markets where one can sell short FTSE index futures, sell call options, or buy puts on the index. Instead, the average investor can utilize ETFs.  (See also: Two Things U.S. Investors Need to Know About the Brexit.)

On the London stock market (potentially available to the U.S. investors with access to foreign exchanges), the Deutsche Bank DB x-trackers ETFs offer a daily short ETF as well as a "super short" ETF that returns 2x the inverse of the index's returns. ETFS also offers a 3x leveraged inverse ETF on the FTSE 100, tradable on the London Stock Exchange. 

The U.S. investors without access to international markets can look at the iShares MSICI United Kingdom ETF (EWU) and sell it short. Likewise, U.S. investors can look to sell short large U.K. stocks in the FTSE 100 that have ADRs listed on U.S. exchanges such as HSBC (HSBC), Royal Dutch Shell (RDS.A), GlaxoSmithKline (GSK),  BP (BP), Vodafone (VOD), and Astrazeneca (AZN). (See also: How the Brexit Could Affect U.S. Investors.)

U.S. investors should take into account the currency risk when taking a position in a GBP denominated security. If they choose not to currency hedge they are exposed to fluctuations in the currency the underlying security is denominated in. For example, if a U.S. investors wants to short the FTSE with a GBP security, they are running currency risk and the potential profits from a fall in the FTSE could be diminished if the currency falls and they are not currency hedged.

The Bottom Line

Investors who believe Brexit will lead to a bear market in the British FTSE 100 have a few options to profit from a sharp decline in stock values in the U.K.  British investors, or those with access to international markets can purchase from a number of inverse and leveraged ETFs. Those in the U.S. without access to the London Stock Exchange can take a short position in the Britain ETFs, or short individual ADRs of British companies that are represented in the index.