Banning Short ETFs
Very interesting piece from ETFguide.com that asks the bold question, “Should short ETFs really be banned from the market?”
Their answer is a straightforward “no”.
The debate really sparked recently as Jim Cramer has made it his personal goal to have short ETFs removed from the market. The argument is that these ETFs are illegal and their daily flood of shorting will only continue to propel the market downwards with no remorse.
From today’s Yahoo Finance:
With global stock markets in full-blown bear mode, money has been flowing into both leveraged and unleveraged short ETFs. At the end of January, there was $24.05 billion in leveraged and short ETFs managed by ProShares and DirexionShares. Between the two firms, they raked in almost $5 billion in assets in January alone. While these asset numbers may seem large, they’re still a drop in the bucket compared to mutual funds and hedge funds, which together control some $10.6 trillion.
The first major argument is that these short ETFs have made it around SEC law and are illegal altogether. This is rubbish though as the SEC had to approve them before they could come to the market in the first place.
The second argument revolves around an abundance of daily short pressure on stocks in general from these inverse funds constantly shorting. This is nonsense as well as the article goes onto explain,
Before you believe the propaganda of agenda pushers who argue that short ETFs are harmful to the stock market, look at the facts. Fund providers like ProShares, DirexionShares, and Rydex Investments each offer ETFs that play both bull and bear markets, not just bear.
Critics who complain that the UltraShort Financial ProShares (SKF) is exerting downward pressure on financial stocks fail to mention the Ultra Financials Fund (UYG), a long leveraged financial ETF, has an asset base more than double SKF! Currently, this pair of ProShares financial ETFs is overwhelming net long financial stocks.
O’Neill observes a similar trend at his Boston-based firm, whose ETFs were launched late last year. ‘Each of the Direxion Shares long and short ETF pairs is, and has been, for the majority of their brief existence, net long.’ He adds, ‘Although we believe it would be perfectly fine and consistent with healthy markets if the pairs were net short, the fact is that they are net long, meaning they’re adding to market demand.’
In the end it looks to be that bulls are looking for any excuse possible to blame their extensive losses on some outside force they had no control over.
Our justification for this thought is the realization that if the market was up 50% over the last 14 months would they be complaining that there is too much automatic buying driving prices up? I think we all know the answer is no.
Source:
Should Short ETFs be Banned?
Ron DeLegge, Editor ETFguide.com
Yahoo Finance, March 3rd, 2009, 9:34 am EST
