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.
Patrick Traverse, CFP®
MoneyCoach, Charleston, NC
Yes, you can. One of the main differences between an ETF and a mutual fund is the way that it is traded. A mutual fund is purchased and redeemed directly from the fund company at the end of the trading day, while an ETF trades on the exchanges like a stock. Because of this difference, you are able to short an ETF.
There is also a growing number of ETFs that are meant to replicate the reverse movement of a certain index, in effect shorting the index. This way you do not have to deal with the issues that shorting individual securities can bring. Some of these funds are also leveraged which would amplify your bet if you hold a very bearish view.