Opinions on Short ETFs

I don't know when the liquidity crisis will be over, but I don't think anyone else does either.

I think it's too late to short, but when the market goes back up, it might pay to buy some of the short ETFs if you are buying individual companies in that category.

-- Ron

It would be if you know how.

It's not sensible, rather it makes no sense! Owning both sides of an investment (long & short) should always lose you money on that portion of your portfolio. You'd end up with more money if you instead left that portion of your portfolio in interest-bearing cash.

Example - if you hold $15k of the long XYZ index fund, $3k of the short XYZ index fund, you have $12 invested in the XYZ index and $6k earning a negative return. Putting that $6k instead in some type of investment that earns interest, and just $12k in the long index XYZ fund, accomplishes the goal of reducing your exposure to market drops, while earning more money than the long/short combination.

The reason the $6k loses money is that both your long & short funds bear investment costs, and miss their goal of tracking the index return. The best you could do is if these costs/tracking errors were zero - you would break even, earning a 0% return on your $6k (which would still lose the horse race against the alternative of just leaving the money in an interest-bearing investment). But they're not zero, of course, so it's a formula for losing money.

-Tad

No, no, no :-) These etfs are not really short, they are inverse. Owning both becomes sort of a "long straddle", whose net value goes up whether the market goes up or down! But it goes down if the market is choppy, like now. The principle is simple - if you have a relatively straight line rise or fall of the market, your "winner" of the pair snowballs (compounds) ever larger... while your loser shrinks to a lesser degree (same % but on an ever smaller base).

I did this on the last crash about 7 years ago. Gains are modest, expenses are high, and it only works on the down or upward swing - choppiness kills. Also this can be a way of moving tax burdens to the next year. Sell your losing one just before the end of the year, and the winner on the new year, for example.

Mostly a dumb and dangerous practice, but can have its place. Better to skew the pair to something you expect to win. I have been shorting oil while longing agriculture, which should have been working but I bought at bad starting points. Hard to use inverses because rallies (esp bear rallies) can be so steep.

I'm sorry if I wasn't clear. I meant trading an index fund like SPY for its short, SH in order to recover some of the losses. Never holding both at the same time.

TIA

working but I bought at bad starting points.

The overwhelming majority of investors "buy at bad starting points". It's one of the primary reasons so many individuals and money managers fail to outperform their indices. It's also why most of the "regulars" on this group support buying and holding index funds while ignoring short-term market movements.

How is this different than any other type of market timing? Your strategy suggest that you believe the market will continue to fall. How much farther do you think it is going to go? When will it turn around? Perhaps most worrisome: why didn't you jump on this idea when the the S&P was at 1565?

As I've already stated, I think passive index investing is the way to go. But even if I supported active trading, I wouldn't recommend shorting the market after it has already fallen 46%. There is a good chance you've already missed all the profit opportunity in this strategy. Historically (which is not indicative of future results of course), bear markets have lasted for less than 1.5 years on average with the longest being 3 years. The average drop has been about 33%. So it seems we're already pushing the envelope in regards to the historical averages. I'm also leary of holding positions opposite that of Mr. Buffett. It's typically an okay rule to live by.

Then again... what do I know. I'm no fortune teller. I just play the odds, that's all.

The fund's prospectus and Statement of Additional Information indicate otherwise. E.g. the SAI chart "Estimated Fund Return Over One Year When the Fund Objective is to Seek Daily Investment Results, Before Fees and Expenses, that Correspond to the Inverse of the Daily Performance of an Index." Before fees and expenses, and assuming no tracking errors, it's a money pump out of your pocket in a wide range of index returns and volatilities. In high volatility it's especially dramatic as variance drain is amplified. Add the chart (inverse) returns to the index returns and you'll see many, quite routine, scenarios with combined losses.

But really it's worse...add in costs, plus tracking error, plus all the flakiness that is likely to result if these kinds of things are traded intraday with a lot of creation/redemption activity, and that chart will have more red in reality.

Point being long-ETF plus inverse-ETF might at times have a net value that rises over time, but that's an uncommon outcome (even a long straddle is a money pump out unless you peg the strike prices right). The stated goal is the inverse of today's return, not longer-term. I think many investors who don't read the prospectuses are assuming that an inverse fund will return +10% when the market drops -10%, over a longer period - like a year. But in a high volatility market you might instead be down say -7% (or more)...both your long and inverse are in the hole and the inverse is -17% from where a casual buyer might think it should be. It will be interesting to see the end of year numbers because I can't imagine how to run this kind of strategy in a 70-VIX kind of market.

-Tad

I would hope any investor sanity checks both what they read and their assumptions with a graph, like

This DOW case is well behaved (dia vs dog), but emerging markets are more saggy (eem vs eum) and ultra oil/gas is quite a disaster (dig vs dug). Not sure if the greater sags come from being on less volume indices, more volatile ones, or from 2x leverage types. In the previous crash I think broad 2x inverse funds were pretty well behaved during the long slump.

I hardly hedged with inverses at all in this crash, unlike the last one. A little EUM, and just when I enjoyed that enormous spike in DUG (doubling in a few days mid Oct) I got greedy and bought more which looks to be a disaster instead the selling signal it was. Due to being in IRA, I won't even benefit from any tax loss, but note how you can (with risk) use these in pairs to relocate losses and gains between this year and next.

Not advocating using these inverses, but to discuss how they can actually work... you can make money holding both on nearly straight line moves, minus the waste. It's rare when you can expect this, but can work in an early pause in a melt down where I expect either a melt up or further melt down (slope down or V recovery rather than U) as I did mid plummet in the tech crash. At that time I posted the good resulting combined share values to a sceptical forum audience. I intuited that scenario more recently when China had about half crashed, but didn't think about straddling it - bet it would have worked fine.

There should be little need for a nanny response about not doing what I describe except in extreme circumstances - I just meant to think about some consequences of the techniques brought up here rather than to advocate...

That's my original point - you'd expect, at best, that the line sags a couple-few percent per year - that a long/inverse pair, by design, loses money on average "most of the time". Not after a day, but over longer periods. I got the sense the OP would buy & hold for awhile, until the market settled down - if so the cash/money-market alternative should do better.

-Tad