Which Funds Short the Dow?

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Shorting the Dow
Shorting the Dow (Image: Comstock/Comstock/Getty Images)

The Dow is a way of referring to the Dow Jones Industrial Average (DJIA). The Dow is composed of 30 of the largest company stocks traded on the New York Stock Exchange and the NASDAQ. Stocks in the Dow represent the overall market; they are changed periodically to better reflect the market. Investors who short a stock believe that the stock is overvalued and its price will fall. Some mutual funds and exchange-traded funds allow investors to short all 30 Dow stocks at one time.

Short Selling Stocks

Investors who short sell stocks do not ever actually own the stocks they short; the shares are "borrowed" from investors who do own the stocks. Investors wishing to short stocks must open stock trading margin accounts. Trading done via margin accounts can be lucrative; it is also risky and can result in substantial losses. Non-professional stock traders may find that investing in funds that short the Dow is both less complicated and less risky than shorting individual stocks.

Index Funds

Index funds are mutual funds that track a specific stock index. DJIA index funds attempt to emulate the overall return on the Dow. There are DJIA index funds which short the Dow. Mutual funds are often criticized because their managerial fees can reduce an investor's return. Index funds, whether long or short, require less management; therefore, the fees charged on them may be lower. Mutual funds, however, are not traded on the exchanges which causes them to be less liquid than individual stocks.

Exchange-traded Funds

Exchange-traded funds are similar to index funds. They hold a basket of stocks that generally mirror a particular index. Also, like index funds, exchange-traded funds are not actively managed so they may have lower fees. ETFs, however, are traded like stocks. They can be bought and sold throughout the trading day. The ability to trade ETFs in response to moves in the stock markets may make them a more suitable vehicle for shorting the Dow.

Disadvantages

All funds that short the Dow have an inherent disadvantage: the Dow is price weighted. Price weighting means that stocks with higher prices affect the Dow more than lower priced stocks. In addition, the small number of stocks in the DJIA means the index may not be truly representative of the market as a whole. It may be wise to hold several funds that short the Dow, each of which shorts a different Dow sector.

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