Is it Lower Cost to Short SPY vs SH ETF?

Is there any possible savings avoiding the old fashion shorting method vs using the inverse ETF?

Any potential downfalls?

 

Bear,
Look at your objectives. It depends on what size you are going to short. If small, then your transaction fees may be more than the ETF's management fees. If you would go long a leveraged short ETF then again, same rules apply, management fees (usually 95bps) may be higher than your cost of transaction fees.

Also, to short directly may be a better way since going long a short instrument may not always seek the direct investment objective you are after.

 

Thanks bud. Reason being, some days I'm having trouble shorting stuff - it's just not available. Those inverse things are always 'there' - but I do find tracking errors when I compare them.

Is it possible the credit problems in the market have filtered down to the broker level - where the amount of lending is being cut?

 

"Direct objective investment you are after" --- are you the guy who writes the prospectuses for ETFS? LOL.

 

Actually lawyers write most of the prospectus out there but I have contributed here and there

NY0B – ETFs should be considered proxies in most situations, not direct investments. Perfect example is the commodity and energy sectors – Most ETFs will invest in “commodity related companies” rather than outright buying commodity futures (for tax purposes, I can explain if you would like). Most energy/oil ETFs invest in “energy & oil related companies” rather than buying crude outright. This compounds to an investors misunderstanding as well as incorrectly perceived tracking errors, often the funds track and do what they are supposed to do – except the investor has no clue what the fund is supposed to do – might want to read that prospectus now

Bear - My experience is only with these 3x ETFs but they are pretty standard across the board. You will find that the major broad indices are liquid and easy to short (S&P, Russell, NDX, etc.) The ETFs that will be harder to short are those with less liquid underlying securities – sectors, etc.

With the 3x products there simply isn’t enough volume yet to have shares available to short, take that a step further and add in the less liquid underlying securities and you make it harder to short larger blocks because larger institutions can’t properly hedge so they won’t borrow on your behalf.

Bear – as I said to NYC are you looking to short something specific and the inverse ETF is just a proxy which does not 100% correlate to your exposure objective? If that’s the case I’d outright short your target. What ETFs/sectors are you looking at?

Hope this helps a bit, if I didn’t explain correctly I’ll be happy to take another shot at it.

 

Actually winston can you explain to me how dividends work with the ETFs? When I short SPY sometimes I pay dividends if holding over the dates. What happens with the 100% Inverse S&P500 ETF if you bought an equal amount of shares of this instead?

 

Bear – checking with the portfolio managers before I put my answer out.

I’m 90% sure that on the short side it’s all gains (either capital gains or income distributions) but I’ll put more up tomorrow when they get back to me.