Short Selling Alternative

In a previous post we touched on short selling as a way to make money when the market, or a particular stock, drops. An alternative to short selling is by purchasing an “inverted” ETF. Now you may ask what in the world is that? Let’s start with an ETF.

An ETF is an Exchange Trade Fund. Often an ETF will own specific kinds of companies. An oil ETF will own energy companies. A technology ETF will own, you guessed it, tech companies. Financial ETFs may own banks. And so on. Some ETFs cover the broader markets like the Dow Jones, the S&P 500 and the NASDAQ. These types of ETFs make money when the stocks they own, or the markets they mirror, rise in value. However, there are ETFs that will make money when the stocks owned, or the markets mirrored, decrease in value. Because these ETF's go up when their underlying holdings go down, they can be viewed as "inverted."

The nice thing about these types of ETFs is that you do not have to “short” a stock or an index. You simply enter a buy order for the "inverted" ETF just as you would when you want to buy something that rises. A good way to get a little protection from a market decline is to buy an inverted ETF that tracks an overall market or sector. Then if the market falls, your ETFs will rise.