Short ETFs: Time to Buy - Not Sell

How interesting that Jim Cramer chose the end of last week to wage war against short ETFs just a day before investors filed a class action against the financial short fund SKF.

You just know this has to be a signal to buy the offending asset class. It is a neat contrarian moment backed up by some hugely obvious market information that is not a secret to anybody: stocks are massively overvalued in a historically far too long rally, and the traditional month for crashes is October, and we are almost there.

Going short

Now I can understand the anti-short ETF case. They can point to the poor tracking record of these ETFs at certain points, their very raison d’etre. And holding these instruments for too long is not recommended because leverage costs money.

However, if I look back at the past three months most of them seem to have done a very fair job of delivering a leveraged performance to their respective index movements.

So my guess would be that if the stock market takes a big lurch down in October then these instruments are going to be among the top performers, even if a few days out or not by exactly the right percentage. It is a no-brainer that shorting stocks is the best way to make a fortune in a crash.

That makes the timing of Cramer’s outburst remarkable, and probably more a matter of linking to the court action pending than the market outlook. It is a bit like arguing over small change with a 10-ton concrete block about to drop on your head.

Contrarian view

Perhaps too a little contrarian thinking might consider the third party arranging these ETFs. With all that negative karma in the investment universe, will they not grab with both hands a clear opportunity to prove that yes, they do track market movements, and can do so fairly well and enough to deliver massive profits.

What a way to demonstrate that their product not only has legs but can run, and that it is the investors that have misunderstood them? Case dismissed!

Of course I am not a financial advisor and do not know the financial circumstances of any reader. But would it not be at least a fair point to argue that long ETFs are the ones to sell now, not the short ETFs?

Comments

[Baboon:]

Why not to add the word 'daily' to those etfs names? Like short 'financial short daily fund'. That might definitely be helpful in eliminating possible misunderstandings about their long-term performance.

Sep 27 11:01 AM

[jbde:]

all they have to do is show the math
for an ultra short starting with underlying nav/index and eft both starting at 100:
underlying goes down 2% to 98, eft goes up to 104
underlying goes back to 100 the next day, for a 2.0408 move
the eft goes down by 4.0816% to 99.7551
thus eft does not recover full value
assumes perfect tracking - but the buyer should know this risk
it's just the math of percentages.
leverage etfs are best on streaks not saw-tooth action
duh!

Sep 27 12:21 PM

[Jeff Diercks:]

Nice piece! However, buying short funds as a contrarian play can be detrimental to your portfolio returns when the trend is still up.

The past three days of market weakness have generally been on weak volume. We have not put in a lower high yet and so (my opinion) getting short could be an expensive lesson at this point!

Sep 27 09:06 PM

[rawhamburger:]

The bull has had its run. Now is time to short and make it on the down side. Trends are just trends until they change direction and they ALWAYS do. Looks like the bull trend is just now broken to me. Get ready and positioned for a very big ride down to DJI 400..

Sep 27 10:45 PM

[ArtfulDodger:]

How can you short a market when the Fed has interest rates stuck at zero to 1/4%?

I simply don't see it, and have not for the last nine months.

Sep 28 05:24 AM

[rrtzmd:]

...and let's not forget the sage advice in this post:

seekingalpha.com/artic...

...by the way, how's the sales of all those Dubai condos going, Petey?

Sep 28 09:26 AM

[BioBoy:]

There is absolutely NO reason to buy leveraged ETFs (especially short leveraged ETFs) unless you have a non-margin account and cannot short. Assuming you have a margin account, it makes far more sense just to short the non-leveraged underlying and avoid the tracking error altogether.

Sep 28 12:00 PM

[BioBoy:]

This is just plain bad advice. For short-term trading (a few days), yes, these short leveraged ETFs do the job. But for long-term plays, the tracking error can really add up. Why do you think there are lawsuits? All the "contrarian thinking" in the world is not going to change the math that causes these instruments to perform poorly in the long run. You article makes no sense, and this type of shoddy advice is truly dangerous for inexperienced investors. I agree that now might be the time to short, but there are FAR better ways to do it... like actually shorting.

Sep 28 12:04 PM

[DonFurio:]

What happened to the great crash of September 2009? Haha, you guys will never make any decent returns long-term until you learn that pull backs should be bought and the long term direction is up.

Sep 29 09:00 AM

[Peter Cooper:]

Short ETFs had a good week.

Oct 03 02:40 AM