Many traders have started to use the short ETF as a way to diversify their portfolios. Trading short ETFs is quite a different strategy compared to what you are used to with regular ETFs. With this type of investment, you will actually profit from a decline in the market or index that the ETF tracks. These types of investments are also referred to as inverse ETFs by some investors. This type of investment strategy has to be used carefully in order to profit from it. Here are a few things that you will want to consider before you get involved with a short ETF.

Timing is Everything

If you plan to use a short ETF as an investment strategy, you will have to rely on timing to get you the returns that you want. You have to get in at the very top of the market and get out at the bottom. This requires some insight on your part to know exactly when the market is about to tank.

This is not really a long-term investment strategy. Historically, the market as a whole always goes up over the long term. Therefore, while you can profit in the short-term from a down market, this is not a long-term investment strategy. You will eventually lose your investment. Therefore, you have to rely on timing to get you through this strategy successfully. 

There are a number of factors that you can look at to make your decision. Depending on the index that you are tracking, it may be closely correlated to some other type of asset. Therefore, you may be able to find some indicators to tip you off when the economy is about to slide.

Hedging Your Portfolio

Another popular use of short ETFs is to hedge your portfolio. With this method, you can protect your overall portfolio from disaster. By buying some shares in a short ETF, you know that you will at least be able to make a return if the market suddenly goes south. It will at least make the losses on your other investments a little easier to take. 

You will not want to buy an equal share of short ETFs as compared to how many regular shares you buy. We already established that putting money consistently into a short ETF is not a good long-term investment strategy. Therefore, you will still ultimately want to bet the majority of your money on the market going up. However, if you put a little bit of money here and there into an inverse ETF, it can help to give you a hedge against bad times in your portfolio. 

Easier Than Alternative

When you use a short ETF as an investment strategy, it is much easier than other means of going short on the market. If you sell stocks short, for example, you will have to get a margin account to do so with your broker. Buying and selling short ETFs is a much simpler alternative to work with. 

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