Short Financial ETF

By: EconomyWatch   Date: 3 August 2009

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EconomyWatch

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A short financial ETF is designed by using various financial instruments to generate profit during times of a market downturn. These ETFs hold various short positions or utilize other investment strategies to profit even from a falling market. They are also known as ‘Inverse ETFs’ or ‘Bear ETFs.’

 

How Do Short Financial ETFs Work?

 

Short financial ETFs cover the entire financial sector, which includes banks, asset managers, brokers and insurance companies. Short financial ETFs sell shares when they witness a downward trend in the prices of their stock and make purchases when the prices decline further. For example, a stock of $100 is sold immediately when the fund manager expects the price to slide. Once the price declines to $80, the fund manager buys the same stock, making a profit of $20. Fund managers repeat this procedure for as long as possible and compound the profits.

There are ultra short ETFs as well, which provide leverage to investments, thus offering multiplied profits.

Advantages of Short Financial ETFs
 

The advantages of short financial ETFs are:

  • Short financial ETFs do not require margin accounts for trading. Investors can trade without any margin account. In contrast to this, trades seeking short positions in the stock market are required to hold a margin account.

  • Short financial ETFs provide safe diversification and hedging against a decelerating market. Huge investments are effectively protected by marginal investments in short financial ETFs.

Disadvantages of Short Financial ETFs
 

Short financial ETFs have the following disadvantages:

  • Being managed, these ETFs are expensive. This eats into a trader’s profits.

  • They are not good investments for traders with a buy and hold strategy, as most markets rise in the longer run.

Popular Short Financial ETFs  

Based on their performance, here are some of the most popular short financial ETFs:

  • Financial Bear 3X - Triple-Leveraged ETF (FAZ)

  • ProShares Short Financials ETF (SEF)

  • ProShares UltraShort Financials (SKF)

  • Rydex Inverse 2x S&P Select Sector Financial ETF (RFN)

To be successful in trading short financial ETFs, a trader must research the history and performance of various ETFs.


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Most Popular in Exchange Traded Funds

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