How to Short an ETF

Sell ETF shares short to profit if they decline in value.

Short selling, or just shorting, is the trading technique of selling stock you do not own and buying the shares back after they fall in value. Short selling is a way to profit from declining stock prices. Many exchange traded funds, or ETFs, are also eligible for shorting. Selling an ETF short allows the trader to profit if the index the ETF follows declines in value.

Instructions

1. Open a margin account with an online stock broker. A margin account allows investors to borrow part of the purchase price of securities, leveraging their investment power. Short selling can only be done through a margin account.

2. Check the ETF you want to short to make sure it is eligible for short selling. Not all ETFs can be shorted. If the fund is not eligible, pick a similar ETF that is.

3. Use the stock trading screen in your online brokerage account to short sell the number of shares of the ETF you want to short. The trade will be designated "sell to open" to indicate a short sale.

4. Check your account activity to determine if the short sale order was filled. To complete a short sale, you must first borrow the ETF shares from your broker. The broker will obtain the shares from its own inventory or another customer's margin account that holds the shares. If the broker has no shares eligible for borrowing, your short order will not be filled.

5. Place a "buy to close" order after the ETF has fallen in value to buy the shares back and realize the profit in the short ETF trade. The funds from short selling the ETF shares will be frozen in your account until you place the order to buy back the sold short shares.

Tips & Warnings

• For a thinly traded ETF, you should call the brokerage firm first to see if any shares of the fund are available for shorting.

• There are inverse ETFs available for many indexes that accomplish the same results as short selling, but you can buy the shares in a regular trade in a cash account.

• If the owner of the borrowed ETF shares decides to sell the shares, your short position will be closed by the broker to return the shares to the owner's account.

• Short selling subjects the trader to unlimited losses if the ETF sold short goes up in value rather than down.

References

• Investopedia: Shorting ETFs, Profit or Peril?
• Random Roger: Shorting ETFs