Short ETFs are those exchange traded funds that are designed to perform in an inverse direction to theirunderlying index. That is why they are also known as inverse ETFs. Investing in short exchange traded funds is quite similar to using a combination of advanced investment strategies for making profits from falling prices.
Short ETFs: Examples
Listed below are some examples of short ETFs:
Following is a list of ultra short ETFs:
- UltraShort QQQ (Nasdaq-100)
- UltraShort Dow 30 (DJIA)
- UltraShort S&P 500 (S&P 500)
- UltraShort MidCap 400 (S&P MidCap 400)
- UltraShort SmallCap 600 (S&P SmallCap 600)
- UltraShort Russell 2000 (Russell 2000)
How is a Short ETF Traded?
Trading of short ETFs takes place on public stock markets. Also known as bear funds, the working of these funds involves the use of short selling, trading derivatives and other leveraged investment techniques. These funds yield the exact results that would be obtained by short selling stocks in an index.
For example, an inverse S&P 500 ETF seeks a daily percentage movement that would be opposite to that of the S&P. A 1% rise in the S&P 500 would result in a fall of 1% in the inverse S&P and vice versa. Since the value of a short ETF rises in a decliningmarket, these investments are popular in bear markets.
Benefits of Short ETF
- In a short exchange traded fund, an investor does not require to hold a margin account.
- With a short ETF, it is possible to focus on a specific sector such as energy, finance or consumer staples.
- Short ETFs are often used by investors for hedging their portfolios against falling prices.
However, there are some disadvantages associated with this investment option. Short ETFs have higher expense ratios than the standard index ETFs. Since the ETFs are actively managed, the costs incurred can minimize the profit generated.