Shorting Inverse Exchange Traded Funds

Mar 01, 2011 1 Replies
A

Is there any advantage of shorting Inverse Exchange Traded Funds if you are betting on an up market or does it just make sense on going long on the Bull cousin that most of these exchange traded funds have.



I am thinking like tax implications.



It does sound kind of strange to short a fund that short stocks instead of just going for a fund that positively tracks the market but when I was thinking about that I was wondering if indeed that's a strategy one can use if they think the index will go up.



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T

This post would make for a good email to the SEC...there is almost universal misunderstanding about how the products work.

An inverse fund held for one year during which the stock market gained a total of +10% will have a return different from -10%, and by extension, someone shorting it will have a return different from +10%. This is for structural reasons that are described in the ETF prospectus. For a description of just one of the issues, google [ETF variance drain]. That same issue exists with leveraged ETFs, where the problem is even worse.

Securities regulators have been looking at these and at least one broker stopped selling them entirely. Reading through the prospectus should help you understand the differences between shorting an inverse fund, and holding a long position in the underlying index.

-Tad

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