How and Why to Get Short ETFs

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When the market struggles, many investors bail on their investment strategy and call their brokers with only three things in mind, Sell, sell, sell! However, as with any sound investment, before you start shorting the market, make sure you are doing it for the right reasons.

1. Hedging Downside Portfolio Risk

If you have a substantial portfolio and want to lock in some gains or protect your downside, selling a market ETF might be the way to go. By selling a market ETF you are hedging the downside risk of your diversified assets. If the market continues to struggle, you will gain on your short ETF position to help offset some of the losses for your individual securities.

2. Hedging Downside Sector Risk

If your portfolio is more sectorized or heavily geared toward a certain industry or commodity, selling an industry ETF or a commodity ETF may be a sound strategy. Instead of shorting a market ETF, the industry or commodity ETF will give you a more focused downside hedge. For example, if youre long a lot of oil assets, selling the OIH or USO may help offset losses with a profit on the short oil ETF position.

3. Hedging Foreign Risk

The United States is not the only country with economic turmoil. If your portfolio has exposure to regional risk (war, famine, politics, etc) then shorting a country ETF might offer the protection you need against unpredictable events. A perfect example may be to short the new Colombian ETF if you have investments related to that region.

4. Hedging Derivatives

Whether you are trading ETF, Index, or even equity options. you can hedge long derivative positions with the sale of an ETF. For example, if you are long OSX (Oil Services Index) call options, then the sale of the OIH (Oil ETF that tracks the OSX) may offset some of your downside risk. Depending on the allocation of options in your portfolio, protection may be found through correlating exchange traded funds.

5. Gaining Downside Exposure

Shorting any investment is an advanced strategy due to the nature of the risk. However, in todays economic climate it should be considered. If after thorough analysis, an investor desires some downside exposure in a certain market, sector, or region, shorting an ETF might be a successful trading strategy. By selling an ETF to accomplish this goal, a short seller not only gains his desired downside exposure, but reaps the benefits of ETFs as well.

6. Closing a Position

There are two sides to every trade. And while the buy-side is a very popular topic of discussion, there are those who sell ETFs, too. As long as there is good reason and strong analysis, selling an ETF might help you round out your investment portfolio and strategy. Another weapon in your arsenal.