Exchange traded funds (ETFs) are touted for their tax efficiency, liquidity, low costs and lately there is more talk of another attribute: short selling. This tactic is designed to make money from falling stock prices and certain short selling can give your portfolio protection, too.
Rob Wherry of SmartMoney.com makes a point by saying you’re bullish on Microsoft, awaiting the Vista operating system, but bearish about tech in general. You can buy Microsoft shares and then hedge that bet by shorting a technology sector offering. You win if Microsoft increases or limit your losses if the software release drags down the entire industry.
Pulling that example off is complicated and not for the faint of heart. The trades can go sour when the market increases instead of falls. Short selling ETFs works in the same way but the funds don’t have the extreme price swings that single stocks experience. The risk factor is lowered since ETFs contain a lot of stocks. Rob Wherry adds that you could just avoid a sector you think is overheated instead of placing a bet against it.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.