On Short Selling Leveraged ETFs

An email from David K. of Toronto nudges me to post on a point I had thought to include in yesterday’s column on short selling leveraged ETFs – but left on the cutting room floor. It concerns the strategy of shorting leveraged ETFs and the distinction between historical and future volatility in markets

From the table on the Horizons BetaPro website, it looks like a strategy of shorting both bullish and bearish leveraged ETFs would be profitable most of the time. However, the past year or so has been a rather volatile period and the year ahead will likely exhibit less volatility. In that case, the shorting strategy may not turn out to be as profitable as it would appear from the Sept. 31, 2009 table.

So, if one wants to give this strategy a try, some due diligence needs to be exercised to pick one’s spots carefully. The odds of success would be higher if one were to target the sectors likely to be most volatile, one of which seems to be the S&P/TSX Global Gold Bull/Bear index.

Another caveat might be the availability of ETFs to short sell. Brokers may not be able to find any units to lend to a short seller.

Comments

[TCK:]

Indeed, pick your entry points with care.

While both long and short may lose value over time, look at the difference in price with FAS and FAZ and the and their typical average daily moves.

Perhaps not so easy to be find a balanced hedge.

Oct 25 08:13 PM

[Henri DeToi:]

When you play these ETFs, you have to know what you're doing. I have found out that you should not hold these stocks indefinitely. As soon as (and if) you make a decent profit, get the hell out and look for another good entry point. It is not for those who have a weak heart. Sometimes you must get out at a loss or risk losing your shirt and underwear with it. It can be quite a roller coaster right; but it can e fun…I call it “glorified gambling”.

Oct 30 07:34 AM

[Henri DeToi:]

I meant: It can be quite a roller coaster ride; but it can be fun…I call it “glorified gambling”.

Oct 30 07:36 AM