Short Selling: The ETP Approach

The pandemic has introduced a new wave of investors. Some are in it for the thrills, some for the long haul, while others want to trade tactically. The latter are in luck as traders now have more tools than ever before. Hence, these market participants can express conviction not just during bull runs, but also during market downfalls – all without having to deal with a margin account.

What is short selling?

It involves:

If the price falls indeed, the trader can buy back at a lower price, return the borrowed shares to the broker, and pocket the difference as profit.

Requirements

Traditional short selling can only be done via a margin account.

This means:

Additionally, the investors must abide by the brokers’ equity requirements to maintain their short position open. Other alternatives like using options, futures, and structured products come with their fair share of risks and complexities.

Going Short Using ETPs

The advent of exchange-traded products has allowed investors to go short by being long (pun intended). By purchasing inverse ETPs, investors can get short exposures to a wide array of securities. These include single stocks, broad market ETFs, sectors, and even thematic ETFs.

How do they work?

Inverse ETPs aim to offer daily inverse exposure – hence, if a particular instrument falls by 1% on a certain day, the inverse tracker is expected to gain on that day. The exact amount will depend on the leverage factor and fees involved.

Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at

What are some key differences between inverse ETPs and short selling?

Inverse ETPs are rebalanced on a daily basis. This means the inverse exposure is provided for that particular day. Holding for longer periods may lead to compounding – something that can benefit investors in trending markets and hurt them in choppy ones.

Key Benefits

The main advantage of inverse ETPs is they allow investors to quickly and easily benefit from falling asset prices. Assuming an investor pays for the position outright (no leverage), their loss is also capped at the amount invested, since the price of the ETF can’t drop below zero.

*FINRA minimum

Key Risks

Due to daily rebalancing, holding periods longer than 1 day and higher leverage factors can lead to a divergence of ETP performance vs what an uninformed investor might expect. Please read the full risk disclosure in Leverage Shares’ Prospectus.

Inverse ETP Quirks

I. With short selling, your max profit is 100%. With inverse ETPs, continued declines in the underlying instrument can lead to inverse ETP performance of >100%.

II. During choppy markets, inverse ETPs may not perform as expected. The below scenario shows that although the underlying instrument lost 5% over a 10-day period, so did the Inverse ETP.