Bearish investors jump into short ETFs – that may not be a good idea
There are still plenty of bears out there, as shown by a recent uptick in buys for ETFs that give invest…
5th May 2020 10:28
by Tom Bailey from interactive investor
There are still plenty of bears out there, as shown by a recent uptick in buys for ETFs that give investors ‘short’ positions.
After their sharp plunges in March, markets around the world spent much of April in recovery mode. To the surprise of many, the FTSE 100 index recently broke the 6000-point mark. That put the index 22% up from the bottom it reached at the end of March, technically entering bull market territory. It was a similar story for the S&P 500 index.
With markets regaining ground so quickly, clearly many investors believe the worst of coronavirus news is behind us. But there are still plenty of bears out there, as shown by a recent uptick in buys for ETFs that give investors 'short' positions.
For instance, ProShares Short S&P 500 ETF, a fund that aims to provide the opposite performance of the S&P 500, has seen record monthly inflows in the US, according to data from Bloomberg. Other inverse ETFs include ProShares UltraPro Short S&P 500 ETF and Direxion Daily S&P 500 Bear 3X Shares ETF.
Such inverse ETFs use derivative instruments to try to gain from a decline in the underlying market index, giving investors 'short' exposure. Similarly, among UK investors there has been an uptick in buys for the L&G FTSE 100 Super Short. This is a double leveraged inverse ETF, meaning it attempts to provide the opposite return times by two. So for example, if the FTSE 100 fell by 2% it would provide a return of 4%.
Teodor Dilov, a fund analyst at interactive investor, however, argues that investors should be hesitant about investment in these products, even if they are bearish about the recovery. He says: “These strategies are extremely high risk and could lead to large and quick losses if investors get the market direction wrong.”
Such products are only really suitable to professional investors, and “may burn the fingers of individual investors who lack the technical knowledge and experience required to utilise such strategies in a portfolio,” says Dilov.
Dilov also points out that these products are generally more expensive than most ETFs. He notes: “Their expense ratios are way higher that the those of standard trackers and are not suitable option for investors with long-term horizon.”
In the May 2020 issue of Money Observer we have a feature that highlights the risks of leveraged products. To become a subscriber, check out our two new deals.
This article was originally published in our sister magazine Money Observer, which ceased publication in August 2020.
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