By: Larry MacDonald
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.
2 Responses to “ Short selling leveraged ETFs ”
Avner Mandelman wrote about this in the Globe and Mail a month or two ago. He says that shorting both is an isolated volatility bet, not a bet on the underyling fund or index. But shorting both has become difficult in terms of finding securities to short.
http://www.theglobeandmail.com/globe-investor/investment-ideas/features/the-buy-side/let-clueless-investors-be-your-signal-for-opportunity/article1284576/
By Daniel on Oct 27, 2009
Dan
I saw that piece. Preet Bannerjee has been blogging about this idea too. Yes, that is right — it’s a bet on volatility and the availability of securities may be a constraint. I did call one broker back in the summer when I was blogging on the topic (and when I submitted an article to the GlobeInvestorGOLD) and, as I recall, the broker did have some available. But I can understand how this could vary over time, place and ETF pair — and get worse as the trade becomes more crowded. I wonder, though, if smaller investors might be able to find a few hundred shares now and then and still work the strategy. It would be interesting to explore further — maybe when I get the time (or some reader beats me to it).
By Larry MacDonald on Oct 27, 2009