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Peter Cooper is the editor and publisher of the ArabianMoney Investment Newsletter and website. He was formerly a partner in, sold in a private equity deal in 1996. His book 'Opportunity Dubai: Making a Fortune in the Middle East' was a best seller, and his latest... More
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  • Using ETFs to short the markets may prove a winner 0 comments
    Aug 18, 2009 3:30 AM

     The bear market is back. Not with a vengeance but quite a subtle slide. That is perhaps more dangerous than a sudden collapse. The governments will not respond to gradual price erosion. But the sell-offs now are across the board and global.

    So how should investors respond? The obvious thing to do is to short stocks and, or commodities. Going short is not as simple as going long, but in essence you are selling and not buying and profiting from a fall in prices.

    Short timing

    Timing is clearly important but once you have an established trend shorts are the ones who make the money in a falling stock market, and granted that falls can be quick, the profits can be as well.

    Exchange Traded Funds have developed many useful short ETFs that are well worth considering for a short term punt on a falling stock or commodity market. Some offer leverage but again there is need for even more caution as leverage will work just as strongly in reverse; on the other hand, these ETFs will produce the best gain too.

    Consider the list of best performing ETFs yesterday:

    It is clear that short ETFs were the place to be yesterday. A hedge fund can organize its own short position on the Nasdaq, and to be fair it is not that difficult for a sophisticated individual investor.

    Short ETFs

    But if you want a diversified short portfolio and have limited funds then short ETFs are a solution, and could prove highly profitable over the next couple of months.

    Naturally if you think this is just a blip and that prices will head back up then invest for a rebound. If you reckon this is the next leg down in a bear market then short ETFs are an answer. You have third party risk in an ETF and in a major market crash that may be a real issue as financial institutions can and do fail.

    Yet it is certainly true that more stock market fortunes are made quickly by shorting a stock market crash than by any other means but then past performance should not always be taken as a guide and you have to make your own decisions in investment.

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