ETF Talk: Going Short Goes Mainstream

Going short in the stock market once was something that only sophisticated investors felt comfortable doing. However, the advent of exchange-traded funds (ETFs) now lets mainstream investors take short positions with relative ease.

Of course, you only want to invest a limited portion of your overall portfolio in short positions. You also need to pick your spots carefully. Having said that, what a short position allows you to do is take advantage of the decline in the overall market or in specific market sectors.

In my ETF Trader service, I captured some nice gains in the past month by taking short positions. I also gave back some of those gains when I tried the strategy a second time. Overall, I’m ahead from those recent trades but I want you to be aware that short positions can go either way and you need to be cautious when making such investments.

I actually think that the current market volatility is conducive to shorting this market. If you want to profit from the current fluctuation of stock prices, and you also have a strong tolerance for volatility, then check out my ETF Trader service. To do so, click here.

One of the ETF fund family leaders on the short side is ProShares Advisors. Another is Rydex Securities. Both investment firms offer short ETFs for domestic and foreign markets. Rather than buying a basket of stocks as an ETF taking a long position typically would do, short ETFs use derivatives. Those derivatives include index futures contracts and so-called swap agreements.

I realize that derivatives, index futures contracts and swap agreements are sophisticated investment instruments. The beauty of buying a short position through an ETF is that investment professionals handle those transactions for you. You simply buy the short ETF when you expect the sector or market that it tracks to fall. Ideally, you then sell at a profit and exit before that sector or market rebounds. Of course, it helps to have a good financial advisor helping you determine when to buy and when to sell.

If you have any questions about shorting ETFs, feel free to let me know. In addition, you are encouraged to e-mail me any questions that you have about ETFs in general. To do so, click here. I’ll try to answer any questions that you have in a future ETF Talk.