Hi Everybody, Bill Poulos here and I again want to go over a frequently asked question that I get from many of my students. And this week’s deals specifically with ETFs and ETF trading. And with my ETF trading students, I often get asked any one (or all) of these questions:
Can we short ETFs?
What is an Inverse ETF?
Are Inverse ETFs good to trade?
OK, first of, a lot of this maybe be a refresher for you veteran traders out there, but it’s still good to brush up on the fundamentals, so here goes. First off, when we’re trading ETFs which are more or less a set of securities, much like a mutual fund, but can be traded like a stock, we usually go long. It’s the easier, safer, and more simple way to trade ETFs MOST of the time. There are however times when we want to sell short on an ETF, and for reasons that I won’t get into just yet it’s often not possible to short an ETF. Which is why they have Inverse ETFs.
Now an Inverse ETF is just like a normal ETF except for that it’s constructed by using various derivatives for the purpose of profiting from a decline in the value of an underlying benchmark. Getting into one of these is much like holding a short position. It’s an easy way for you to take advantage of a falling market.
Plus you don’t have to hold a margin account as you would if you were a regular investor looking to short.
Most of these inverse ETFs are based on the Russell 2000 or the Nasdaq 100, so there’s not a TON of the out there, but they are there, and they are worth taking a look at.
And wrapping up with the last question… are they worth trading? Well, they very well might be. While I still don’t recommend these for ETF traders just getting started, once you get your skills honed, or once you start using a trusted tradig system, then I say go for it. But do so with caution. You must trade only when the market or your trading methods tell you do do so. Don’t try to force it, and don’t get into inverse ETFs just to “try them out.” They’re specific investment vehicles that you need to be careful with, but if used properly can offer you a powerful “hedge” that can protect your portfolio when the prices start to fall.
Till next week, Good Trading!