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Can you short-sell an ETF?​​

Yes, you can short-sell an ETF. Just like individual stocks, ETFs can be borrowed and sold on margin, with the goal of buying them back later at a lower price. When short-selling an ETF, you’re essentially betting that the ETF’s price will decline, allowing you to repurchase it at a lower cost and return the shares to the lender, keeping the difference as profit.

How Short-Selling an ETF Works

  1. Borrowing Shares: You borrow shares of the ETF from a broker and sell them on the open market.
  2. Repurchasing Shares: If the ETF’s price declines as expected, you repurchase the shares at a lower price.
  3. Returning Shares: You then return the repurchased shares to the broker, pocketing the difference between the selling and buying prices (minus any fees or interest on the margin loan).

Considerations for Short-Selling ETFs

  • Interest on Borrowed Shares: Shorting incurs interest on the borrowed ETF shares, and fees may apply, especially if the ETF is less liquid.
  • Dividends: If the ETF pays dividends while you’re short, you’re responsible for paying these dividends to the lender, which adds to your cost.
  • Risk of Unlimited Losses: If the ETF’s price rises instead of falling, your potential losses are unlimited, as there’s no cap on how high an ETF can climb.

When to Use Short-Selling with ETFs

  • Bearish Market Sentiment: If you expect the market or a specific sector to decline, shorting ETFs (such as sector-specific ETFs) can be a targeted way to capitalize on the downturn.
  • Hedging: Shorting an ETF can hedge exposure to a particular sector or index without selling long-term holdings.

Alternative to Short-Selling: Inverse ETFs

Instead of shorting an ETF, some investors use inverse ETFs, which aim to produce returns opposite to their underlying index. This can provide short exposure without the need for margin accounts or borrowing, though they come with daily rebalancing and compounding risks when held for more than a day.

Summary

​Short-selling an ETF is feasible and can be used for speculative or hedging purposes, but it carries risks such as interest costs, dividend payments, and potential for significant losses if prices rise. Inverse ETFs are often simpler alternatives for investors looking for short exposure.
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