What is a short ETF and how can you go short on ETFs?

What does shorting an ETF mean?

Shorting an ETF means taking a position that will profit if the price of that ETF falls in value. Short-selling is a strategy you'll use if you have a negative view on the ETF you're shorting.

ETFs, like shares, are traded on an exchange. There are a couple of ways to short ETFs:

1. Short-selling a traditional ETF using a derivative

With us, you can short-sell standard ETFs by using CFDs, which are leveraged derivatives. You’ll short an ETF when you believe the price movement of the market it’s tracking will fall. You’ll profit if the market works in your favour and make a loss if it turns against you.

Leverage enables you to trade ETFs at a fraction of the full value of the underlying assets. Note that while leverage amplifies your profits when the market moves in your favour, it will magnify your losses. Carefully manage your risk and ensure you trade within your financial means.

2. Trading or investing in a short or inverse ETF

Inverse ETFs are funds traded on a public exchange that are designed to work in the opposite direction as the underlying assets they track. You’d trade inverse ETFs if you expect the market to take the move against the underlying assets you’re targeting.

This means when the price of the inverse ETF rises, that of the target asset it’s tracking will fall, and vice versa.¹ Remember that when trading inverse ETFs, you’ll do this using leverage. Alternatively, you can invest in inverse ETFs – we don’t offer this.

Inverse or short ETFs are risky and may not be the best strategy to hold in the long term. This is because inverse ETFs track the daily performance of financial securities and investing in these with a long-term view is likely not to yield similar results as in the short term.²

With us, you can trade inverse ETFs like the JPX-Nikkei 400 Bear -2x Double Inverse ETF and Lyxor Bund Daily -2x Inverse UCITS ETF (Ger).

Why would you short an ETF?

You’d short an ETF if you want to:³

• Take a position on an ETF declining – this could be to back your judgement on an index or sector that you think will go on a downward trend
• Hedge or offset losses against your long position or exposure to a particular sector and industry. For example, you might short an oil ETF to offset losses to BP shares
• Reduce your risk by increasing your exposure using the basket of assets within your portfolio instead of shorting individual stocks
• Trade on a declining market so you can close your position at a relatively lower price than when you short it – this is true for inverse ETFs

How to short an ETF

1. Decide how you want to go short on an ETF – selling an ETF, or buying a short ETF
2. Research which ETF you want to short (or buy, in the case of short ETFs)
3. Open an account or practise on a demo
4. Open a position to ‘sell’ the ETF you want to short (or ‘buy’ in the case of short or inverse ETFs)
5. Choose your position size and manage your risk
6. Place your deal and monitor your trade

1. Shorting ETFs using CFDs

You can short several types of ETFs using CFDs when trading with us. CFDs enable you to speculate on the rise and fall of price movement of the market. You’ll go long if you think the markets will rise and short if they fall.

CFDs are leveraged products that will amplify your market exposure at a fraction of the full value of your trade and you’ll exchange the price difference between the opening and closing positions.

Leverage will amplify your profits if the markets move in your favour and magnify your losses if they move against you. With leverage, losses can occur rapidly and exceed your initial deposit. Use our risk management tools before trading.

2. Buying or trading short or inverse ETFs

Inverse ETFs provide another avenue to make profits when markets are on a downward trend. This means when the target ETF depreciates in value, the inverse one appreciates. With us, you can trade inverse ETFs.

Shorting ETFs vs. short or inverse ETFs

When shorting traditional ETFs, you’ll sell it with the hopes that the price will fall before you buy it back. Inverse ETFs were created to rise when the value of the target asset falls, and vice versa. But their value depreciates over time, which is over a daily timeline. You can go long on inverse ETFs with the hopes of making a profit if the market price rises and moves in your favour.

Differences between short selling ETFs and buying inverse ETFs:¹

If, for example, you’d opened a position on inverse ETFs in anticipation that the market would continue on a downward trend, but the price doesn’t fall, you’ll have to close your position at a loss. An online broker, like us, might charge you a penalty fee for not covering your trade by the time day trading ends.

If you have an account with an online broker but it doesn’t enable you to short traditional ETFs, then buying inverse ETFs will provide you with a similar position for your trade.

Shorting ETFs summed up

• Shorting ETFs is a strategy used by day traders with the aim to make profits from depreciating or falling market shares
• With us, you can short-sell standard ETFs by using CFDs
• You can trade short or inverse ETFs, which move in the direction opposite to your chosen underlying asset
• Inverse ETFs provide another avenue to make profits when markets are on a downward trend

Footnotes
¹ Bankrate, 2022
² Seeking Alpha, 2022
³ the balance, 2022