Selling short Exchange-Traded Funds involves borrowing shares from a brokerage house and selling them, which results in an investor having cash proceeds from the sale of borrowed ETF shares, while holding a liability for returning the shares at a later time. What that investor is hoping for is that the price of borrowed shares will decline. Then, the shares can be bought at a lower price and returned to a brokerage house, while the investor gets to keep the profit.
Here's an example of how a short sale may work:
Investor sells 100 borrowed shares at $10 for proceeds of $1,000. After transaction costs of, let's say, $10, the investor gets $990.
A week later the investor buys back 100 shares at $9 for $900 plus $10 transaction costs, making it a total of $910.
Since the investor initially received $990 and then paid $910 to return the shares, the profit from the trade is $80.
Short selling can also be done with a variety of asset classes. The point is that investors can profit from falling asset classes. On the other hand, if shares sold short rise, investors lose. With ETFs, there’s no uptick rule, so investors and traders can sell them short even if market keeps on declining.
There’s another way to benefit from declines in prices with ETFs. It involves buying Inverse ETFs. These vehicles don't expose investors to unlimited risk as with typical short selling. With inverse ETFs, losses are limited to investment amount. We discuss it next.
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As with stocks, investors can sell short ETFs. This involves betting on fall in ETF's underlying assets by borrowing ETF shares with expectations of returning them at a lower value, and so profiting on the difference.
It is possible to profit from falling asset prices. One way is to short-sell ETFs.