The most widely traded ETFs & the leveraged ETFs:
I know a lot about leverages since I started my trading career as a forex trader - the highest leveraged market I can think of. You can use 99% margin that means if you are right, you get a lot of money for what you put up. On the other hand, imagine if you were big time wrong and heavily out-of-the-pocket. Ouch! It’s always good to make use of available tools as long as you calculate the risk portion of the risk/reward ratio. Money management is one of the most important keys to successful trading.
Due to the popularity of ETFs which topped $400 billion in November, a lot of new ETFs have come into the market with a lot of dressings of course. The more choices, the merrier but just like financial planning or going to a tailor, one style can’t be suited for all. So assess what you are looking for and look at the pros and cons. Like most things in life, the rigid guidelines of how our society labels what’s right or wrong just won’t do for all.
To invest/trade the broader markets:
You have the fairly sophisticated ETFs that have been around for the longest: SPY, DIA, QQQ, MDY, IWM perhaps "sophisticated" is the wrong word for ETFs but well suited here for description sake. They are the widely traded, less spread and most active. I like these features and trade a lot of these ETFs.
To short a particular market or sector:
you can short the ETFs directly. You need a margin account to go short because you are borrowing the ETFs from someone else within the brokerage firm.
If you were shorting the above 4 ETFs or ETFs that are widely traded:
pros I can think of for shorting the above ETFs:
- small bid & ask spread: they are the widely traded ETFs so they offer small bid & ask spreads.
- fast execution - because of high turnover & high liquidity.
- pre-market & after-market trading.
- no uptick rule - unlike individual stocks which prevent selling short a stock that is on a down tick. Also means faster execution. The no uptick rule applies to all ETFs.
Cons:
- they could run out of stock - I classify it as a "con" because I am assuming that you are going to short it with determination but the fact is: if you are with a major brokerage firm and you are faced with a out of stock, highly traded ETF. Perhaps it’s an indication that the herds are all shorting so withdraw your order could be an appropriate thinking.
- you are paying interest - because you are borrowing the underlying ETF to go short. No free lunch here. It’s probably not a significant factor for most short-term traders but for the longer term holding or trades.. it could be hefty dues.
Your alternatives are of course being well thought of by the ingenious companies that come out of all sorts of ETFs. You can buy/long the ETFs below in order to have a short exposure on a particular market.
SH, DOG, PSQ, MYY: So you can short the S&P 500, Dow, Nasdaq 100 and Midcap400 using these ETFs. Basically you can swap the pros and cons above.
pros I can think of:
- you don’t have to borrow the ETF and be confronted with missing the chance to short.
- you don’t have to pay interest going short.
- your risk is limited.. as you know or don’t know that shorting could be hairy..especially with individual stocks. For example: you are shorting a XYZ company priced at $6 it was bought out Giant Grande ABC & overnight it gapped up to $ 23.. does it happen? It does. So for me the careful gambler or trader, I don’t short anything that is not big cap. If you want to bet against something that can lose your shirt use options. That way, your risk is limited. I am not an expert in options and won’t go into details here.
Cons:
- bigger spread. Not as widely traded as yet.
- lower turnover implies slower trade execution especially for bigger orders.
- trading is mainly restricted to regular trading hours due to lower turnover & less liquidity. Sometimes they don’t start trading until 10-15 minutes after the open. It will change as volume picks up.
Leveraged ETFs:
If you want to double your exposure going long: new ETFs just came out in the summer introduced by Proshares:
SSO, DDM, QLD, MVV
SSO = 2x long the S&P 500;
DDM = 2x long the Dow;
QLD = 2x long the Nasdaq 100;
MVV = 2x long the S&P Midcap
Leveraged short ETFs:
To double your exposure on the short side using leveraged ETFs:
SDS, DXD, QID, MZZ
SDS = 2x short the S&P 500;
DXD = 2x short the Dow;
QID = 2x short the Nasdaq 100;
MZz = 2x short the S&P Midcap
The pros and cons for the leveraged funds are pretty much like the ones mentioned above for the unleveraged short ETFs: SH,DOG,PSQ,MYY
I do a regular market analysis at my website: http://www.stocktradinginsights.com
Cheers!
Henrietta does daily updates of the stock market using technical analysis at her website: http://www.stocktradinginsights.com
