How Short Sellers Take Advantage of ETF Trading

Usually the stock market always run from overbought to oversold condition, then from oversold to overbought territory. Most investors take buy-and-hold strategy. This strategy works very well when the stock market or a security keeps moving up. For example, this existing bull market which bottomed out in March 2009, just made historical records not long ago. However, if the market plunged like the infamous financial crisis 2007-08, those long-term investors who adopted the buy-and-hold strategy could have huge loss.

Some experienced traders adopted the short selling strategy when they believe the market or a security is going to fall from the top. Practically, these traders borrow shares of securities from brokerage houses, and sell them first. For example they sold Google stock at $900/share. After a while (depends on the market situation and traders’ profit expectation), the share price of Google stock dropped to $850/share, these traders can buy back shares and make profit at $50/share. It sounds pretty good. However, these short-sell traders have to pay the interest on the deb (the securities short sellers borrow from brokerage houses). On the other hand, if the share price of Google keeps moving up, the short sellers might take loss and cover the short at higher price (for example $950/share). Since the stock market goes higher most of time, people tend to have bullish sentiment. This phenomenon might have negative impact on short sellers. Usually they are nervous and uneasy. Moreover they have to pay interest on debt. They can’t afford to lose money.

ETFs have gained popularity since it was launched. One of the reasons is that ETFs allow traders to profit from both directions of the stock market. The Bear ETFs provide this kind of function. Many companies offer Bear ETFs products.

For example, the ETF company ProShares provides exposure to different securities based on risk level (1X, 2X and 3X) and moving direction (Bull and Bear). You can filter ETFs by choosing fund group (global fixed income, hedge strategies, geared, and inflation and volatility), and asset category. The geared choice allows trades to choose Bear ETFs (-1x,-2x, and -3x), Bull ETFs (2x,3x). If you want to short the market, you can trade on Bear ETFs, and do not need to pay interest on debt. You can follow this link to find out more information: http://www.proshares.com/funds/.

However, please keep in mind the short selling is risky trading behavior. If you are not experienced enough, you might want to avoid this kind of traction.