Many people think only of how to buy an ETF, which is also known as "going long. In some cases, the person selling or "shorting" an ETF may be on the profitable side of the trade position. The key is in knowing when to go long on an ETF and when and how to short it. There are four general reasons to consider putting on a short ETF position. Each of these reasons comes with its own pros and cons that should be considered. This is a favorite reason to sell an ETF.
For example, if you made a nice play on a solar energy ETF, and the price has significantly increased since you acquired it, you might consider closing the position. This way, you lock in your gains. You can sell some or all of your long ETF position, depending on your investing strategy.
There are many types of risks you can hedge utilizing a short ETF position. For example, general portfolio downside risk can be hedged using a market ETF. If you have downside exposure to a certain sector, an industry ETF or commodity ETF can help alleviate some of your risk.
Do you have downside foreign exposure? Choose from a vast pool of foreign ETF options. No matter your portfolio, your options are plentiful. On the other hand, if you feel that you don't have enough downside exposure, ETFs can help. If you are bearish on a certain investment, sector, or market, putting on a short ETF position may present an opportunity to capitalize on your research.
Once you feel you have captured a profit on a short ETF trade, you can always unwind by purchasing the ETF and offsetting the risk in your portfolio, or you can lock in profits by using another ETF strategy to hedge the upside risk. For the advanced trading strategies , short ETF positions can be a way to hedge downside risk in a portfolio that contains index baskets as well as derivative assets like futures and options.
Once you are ready to put on a short ETF position in your portfolio, there are two ways to accomplish your goals. If you already own an ETF that you wish to short, the easiest and most obvious way to do so is to place a sell order with your brokerage. Like selling an individual stock, you can sell an ETF with a market order or a limit order.
Market orders will execute more quickly, but if the ETF is volatile, you might earn less from the sale than you anticipated. None of the Information can be used to determine which securities to buy or sell or when to buy or sell them. All Information is provided solely for your internal use, and may not be reproduced or redisseminated in any form without express prior written permission from MSCI. Neither MSCI ESG nor any of its affiliates or any third party involved in or related to creating any Information makes any express or implied warranties, representations or guarantees, and in no event will MSCI ESG or any such affiliate or third party have any liability for any direct, indirect, special, punitive, consequential or any other damages including lost profits relating to any Information.
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