Shorting Inverse/Bearish ETFs Long Term (Risk)

Discussion in 'ETFs' started by nravo, Feb 24, 2009.

  1. nravo


    Okay, we all know that shorting a lot of these 2X 3X and even just plain old inverse ETFs, gives you an upper hand because of the negative compounding. Sure you can have a bad couple of days, but eventually you are probably going to win (and buyers of the inverse ETFS will likely lose, or see a reduced gain compared to the underling).

    But long term I am curious: Let's say some one shorts a inverse 2X S&P 500 index ETF; you are long, essentially -- but your down side is reduced by the amount you will gain in negative compounding over time. And eventually, maybe tomorrow, maybe years from now this will turn around and you will, probably, be in the black. Why? As the market rises, you will have a double positive return on the short, as the ETF falls in value.

    But what about dividend risk usually associated with shorts?

    If I buying a short fund I would be paying a dividend somehow, right?. But if I am short the ETF that is short an index, do I 'get' a dividend? Is this a long term risk or benefit of holding a short ETF short?

    Secondly, if I buy a short ETF by risk is unlimited I assume because the underlying could go the moon, theoretically, of course. But how could that be, give the price of the short ETF has a floor of $0.

    And if I short the short ETF, again theoretically I should have unlimited risk because this instrument could rise an unlimited amount. But wait, this particular instrument can't because of the underlying has a floor of $0, if that makes sense.

    So I don't have that unlimited risk shorting a short ETF that I would shorting the underlying or a stock.

    Is this simply because I am synthetically long, with a little edge from the negative compunding. Is that the bottom line?

    Lastly, what about expense risk? Am I paying an ETF expense when I short one?
  2. jnorty


    This has been discussed and i think the conclusion is you can't short these very long without getting the short called the question is do you feel lucky? will you get the short called in the middle if a huge run against you and be forced to cover causing huge loses? believe me i and millions of others have tought this out.
  3. nravo


    Gotcha. Thanks. Still might be worth a small allotment as a finance experiment.