Are short ETFs safe?
Because of how they are constructed, inverse ETFs carry unique risks that investors should be aware of before participating in them. The principal risks associated with investing in inverse ETFs include compounding risk, derivative securities risk, correlation risk, and short sale exposure risk.
Inverse or short ETFs are risky and may not be the best strategy to hold in the long term. This is because inverse ETFs track the daily performance of financial securities and investing in these with a long-term view is likely not to yield similar results as in the short term.
Inverse or leveraged ETFs typically try to track the daily performance of their target asset. So, holding this kind of asset over a long period of time could compound losses. And the higher the leverage of an inverse ETF, the greater the potential decay of value due to its structure.
Short selling ETFs aims to provide returns that move in the opposite direction of a specific underlying index or asset class. This strategy is suitable for investors seeking to hedge against market downturns or capitalize on bearish market trends.
| Ticker | ETF Name | 1 month return |
|---|---|---|
| TSLQ | AXS TSLA Bear Daily ETF | 13.95% |
| TSLS | Direxion Daily TSLA Bear 1X Shares | 13.93% |
| LABD | Direxion Daily S&P Biotech Bear 3x Shares | 13.47% |
| KOLD | ProShares UltraShort Bloomberg Natural Gas | 11.99% |
Investors who wish to hold inverse ETFs for periods exceeding one day must actively manage and rebalance their positions to mitigate compounding risk.
A trader who has shorted stock can lose much more than 100% of their original investment. The risk comes because there is no ceiling for a stock's price. Also, while the stocks were held, the trader had to fund the margin account.
This shows that the potential for both profit and loss can be magnified with leveraged inverse ETFs. It is also important to note that leverage also means it is possible that a leveraged inverse ETF can go to zero or near zero with a large enough daily move in the price of the underlying asset or index.
Leveraged ETF prices tend to decay over time, and triple leverage will tend to decay at a faster rate than 2x leverage. As a result, they can tend toward zero.
Yes, an inverse ETF can reach zero, particularly over long periods. Market volatility, compounding effects, and fund management concerns can exacerbate losses. To successfully manage possible risks, investors should be aware of the short-term nature of these securities and carefully monitor their holdings.
How does a short ETF work?
Investing in inverse ETFs is similar to holding various short positions, which involve borrowing securities and selling them with the hope of repurchasing them at a lower price. An inverse ETF is also known as a "Short ETF" or "Bear ETF."
How long should you hold inverse ETFs? Inverse ETFs are intended for intraday trading — not longer.
Investors can short an S&P 500 ETF, short S&P 500 futures, or buy an inverse S&P 500 mutual fund from Rydex or ProFunds. They can also buy puts on S&P 500 ETFs or S&P futures.
The largest Aggressive ETF is the iShares Core Aggressive Allocation ETF AOA with $1.86B in assets. In the last trailing year, the best-performing Aggressive ETF was AOA at 17.32%. The most recent ETF launched in the Aggressive space was the iShares ESG Aware Aggressive Allocation ETF EAOA on 06/12/20.
In short, the 3-day rule dictates that following a substantial drop in a stock's share price — typically high single digits or more in terms of percent change — investors should wait 3 days to buy.
About Vanguard Short-Term Treasury ETF
This index includes fixed income securities issued by the U.S. Treasury (not including inflation-protected securities, floating rate securities and certain other security types), all with maturities between 1 and 3 years.
If you buy substantially identical security within 30 days before or after a sale at a loss, you are subject to the wash sale rule. This prevents you from claiming the loss at this time.
Leveraged 3X Inverse/Short ETFs seek to provide three times the opposite return of an index for a single day. These funds can be invested in stocks, various market sectors, bonds or futures contracts.
While the Fund has a daily investment objective, you may hold Fund shares for longer than one day if you believe it is consistent with your goals and risk tolerance. For any holding period other than a day, your return may be higher or lower than the Daily Target. These differences may be significant.
If the shares you shorted become worthless, you don't need to buy them back and will have made a 100% profit. Congratulations!
Can you lose infinite money on shorting?
When you sell a stock short, there's theoretically the potential for unlimited losses. That's because the stock can continue rising over time, wiping out other gains.
Put simply, a short sale involves the sale of a stock an investor does not own. When an investor engages in short selling, two things can happen. If the price of the stock drops, the short seller can buy the stock at the lower price and make a profit. If the price of the stock rises, the short seller will lose money.
ETFs are subject to market fluctuation and the risks of their underlying investments. ETFs are subject to management fees and other expenses. Unlike mutual funds, ETF shares are bought and sold at market price, which may be higher or lower than their NAV, and are not individually redeemed from the fund.
Mythical risk: losing your entire investment
If you diversify across all sectors and countries through an ETF like IWDA, it's very, very unlikely your investment will become worthless. Because it would mean that all major companies in the world have gone bankrupt.
Low Liquidity
If an ETF is thinly traded, there can be problems getting out of the investment, depending on the size of your position relative to the average trading volume. The biggest sign of an illiquid investment is large spreads between the bid and the ask.
