1. Your Questions About Etfs That Short The Market
Sandy asks…
How to remain invested in a bear market?
As we know that in NSE, we cannot short sell stocks on a delivery basis. It has to be squared
up within the same day.
Another better option to play the downside is by buying put options.Here it can be done on a
delivery basis.
I am new to trading and I want to know any other way(s) of how to remain invested for many
days in a falling market?
1.Are there any (1)short ETFs , (2)bear funds ,(3) mutual funds?
2.Are there any other trading vehicles that can allow us to remain invested in the falling market
on a delivery basis?
Steve Winston answers:
Purchase shares in cash
and sell them in forward.
Squir up your sale anytime .
Shares will be in your hand.
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2. Susan asks…
Can someone tell me the name of an etf that will go up when the
market goes up,?
and also UP when the market goes DOWN?
Thanks. I'm tired of working for a living. Note: I need ONE etf that will do this, not two. I'm aware
of etfs that will short an index. QID for example.
Steve Winston answers:
If there were such an ETF it would be very popular indeed. SHY might be the one you are
looking for. At least that has been its relatively short history.
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3. Robert asks…
Would you rather be in a Vanguard index fund or an
exchange-traded fund (ETF) duirng a major market sell-off?
If many investors redeem/sell their shares at the same time, Vanguard will be forced to sell the
stocks quickly, which can be detrimental to the fund itself. Fortunately, people are not allowed to
short a open-ended mutual fund.
The concern on ETFs is different. No one is forced to sell the underlying stocks. However,
people may short the ETF hoping that it go down further to grab a quick huge profit. Worse,
the SEC hasn't established an "up-tick rule" for ETFs. Therefore, people can short an ETF
even on a down tick, which can tremendously accelerate a collapse of the market. How can the
arbitrage keeps the price in line with the NAV during a major sell-off given that a big in-kind
exchange is a slow complicated process?
If you work with the Security Exchange Commission (SEC), what are you doing about it in terms
of improving the regulations on ETFs to lower the chance of the next major market crash?
Steve Winston answers:
I don't work with the SEC. I would rather be in the ETF myself. At least if the market is
collapsing al la 89 fashion I can unload with the click of a mouse, assuming my on line
brokerage web site is not over whelmed at the time. With the mutual fund, can not do C R A P.
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4. Just sit and watch it fall.
Maria asks…
Why is international diversification so important?
In reviewing several international etfs, VGK, VPL, ILF, MES etc., all of which followed the S&P
down during the meltdown, why is exposure to international stocks considered so important?
Wouldn't it be better to just buy a few stocks from around the world like PBR, AMX, NSRGY,
IBN, CHL or TM and hedge the portfolio with a market short etf? I'm not saying buy them all or
anything like that in fact I already own a few, it just bugs me that when all heck broke loose,
everything fell, even the international stocks so can someone please tell me what I am missing
about diversification? Paul?
Steve Winston answers:
Remember that old economic adage;
"When the US gets the sniffles, the rest of the world gets a cold."
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5. It seems to me that over the last 30 months or so, the US got pneumonia, and the rest of the
world got .....well....pneumonia too!
I'm not a "trader". I don't claim to be one, and those that are good at it have my respect, but they
are few and far between. I have the license that allows me to act as a broker and trade for
others, but I'm much better at structuring a buy and hold investment portfolio for a given risk
tolerance, as opposed to trying to be a stock picker. One thing I've learned about ETF's and
other new investment vehicles is that the introduction of many of them is demand driven. If there
is an interest in a specific area or procedure or market trick or developing technology, some firm
will issue a new ETF or UIT or CEF or Mutual Fund to serve that demand. Too many of these
new issue securities are devised by guys with PHD's in mathematics who wouldn't know a
weather related downturn in a commodity (as a random example) from a turned down bed.
Much of modern portfolio theory got thrown out the window during 2008 and early 2009
because it seemed as if there was no safe asset class at all. But that was a once in a lifetime
event. If every recession and market correction was as severe as what we all just went through
(and are still going through, to be sure) it wouldn't really matter where you put your money.
But luckily, most recessions and market corrections aren't like that.
I still think MPT ( http://en.wikipedia.org/wiki/Modern_portfolio_theory ) and diversification has
merit and I am a firm believer in trying to mitigate risk whenever possible. But the world is a very
different place from the days when that theory was devised. Hell, when that theory was first
formulated, the primary transport for the overwhelming majority of Chinese was the bicycle. I
think you're aware of how much things have changed.
I don't really have an answer for you, Douglas. I don't think you are missing anything, to be
honest.
Want to know what the absolute perfect play would have been from Oct. Of '07 when the Dow
peaked at over 14,000 to the end of 2008? It's easy to see in retrospect, but damned few people
did this, I'll bet and it is the antithesis to being diversified;
If you had sold every single equity position you had in early October of 2007 and bought new or
recent issue, 30 year Treasury bonds the same day, you could have bought those bonds for
between 90 and 95% of par. Those bonds were paying a 4.5% coupon at the time. If you had
held those bonds for just 14 months - from Oct. 07 to December of 08 and sold them, you would
have seen the bonds increase in value from $950 a piece to around $1400 a piece AND been
paid $45.00 per bond in interest payments. In December of 2008 the yield on the 30 year fell all
the way to 3% AND BELOW! It bottomed out at 2.53% on December 18, 2008. That was the
perfect play. No tricks, no options, no shorting, just simply exchanging equities for long
treasuries. And you would have seen a +45% return on your money for the year while every
long equity portfolio on the planet was DOWN about the same.
Almost every conservative portfolio model I have dealt with, and by that I mean ones with a
Beta of less than 1, had the international sleeve as less than 25%, usually WAY less. The more
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6. aggressive the mix, the higher the international percentage. That has or will likely change over
time as the BRIC's of the world get past the stage of being "emerging" and become more
established. There are two billion people between India and China that now have access to
information on an unprecedented scale and they will all want what people in the west take for
granted; Cars, Air conditioning, refrigerators and other appliances, modern sanitation systems,
highways, etc. Etc. Etc. So counting them out in the coming decades would be a mistake.
All is not lost for the USA though. In spite of many opinions I have read on the internet regarding
the failures of the American system, in the past, many people and countries have
underestimated the ingenuity and capability of the American people to bounce back.
They will do so again at their own peril.
There is another old adage;
Buy on panic, Sell on euphoria,
I'll add one more thing. Where is the absolute last place you would consider investing? What
geographical area or asset class would you currently consider as something to be avoided at all
costs?
THAT is the one to start taking a hard look at now.
Laura asks…
When the stock market crashes, what assets increase in value?
When the stock market would drop in a couple of days say 25% to 35% in value or more (a real
crash), what assets would increase in value (get a higher price) during that crash or
immediately after wards?
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7. I know that Short Index ETFs (like the "SH" Short S&P 500 ETF) would go up, but I like to
know what else would increase substantially in value. If you answer "bonds", please link to
some evidence for this.
Please be as specific as possible. Thanks.
Steve Winston answers:
Well, if the market dropped 25 -35% in two days, you have to have the inverse ETF's in your
portfolio before it drops, most people wait till after it happens because there is no warning.
When things like this happen no matter what the reason, everything is in turmoil, and everyone
is scrabbling. There isn't an easy answer. Gold and Silver and cash have basically been the
hedge against such events. That is why there is a huge amount of money sitting on the
sidelines. Many people do not believe this rally is for real.
Donna asks…
Help me understand shorting of stocks/ultrashort ETFs!!?
7 / 11

8. I'm taking APecon and we recently got into a stock simulation.
I understand the principle behind shorting stocks (borrow shares when share price high, short
shares immediately, then when price plummets, cover the short). However, when it comes to
ultrashort ETF's I get a bit confused.
I read up on ultrashort ETF's and found that they are the inverse trend x2 of NASDAQ, DOW,
NYSE, etc. This is quite confusing. How can these be rising when the rest of the stockmarket is
falling?
So, one of my friends who knows quite a bit on stocks told me that I should invest in an
ultrashort ETF like SKF, but I should short it when the price is 100-130 (when its low)..
But if i wanted to short an ultrashort ETF like SKF, wouldn't I short it when the price is high
(180+), not when its low (100-130)?
Wouldn't I BUY it (regular) when the share price is 100-130 and sell it when it hits 180+ for the
long term investment,
then immediately SHORT the stock when its high and cover my short when it drops down to
100-130 again.
That way you get profit regardless of the market trend?
I think i'm either confused with some of the terminology or there's something about ultrashort
ETF's i'm not getting.
my understanding of terms:
Short: act of selling shares of a stock that you've borrowed
covering a short: paying for the share that you borrowed at the new price (preferably after a
decline of the share price after shorting)
Trend of ultrashort ETF/ My uh.. idea?
Sell -> ___ <- Short
/
/
Buy ->/ <- Cover short
sorry about the last diagram. this is what i meant:
....Sell ->. ___ <- Short
.............../......
............./..........
Buy ->/ ............... <- Cover short
ignore ".....'s"
by long-biased and short-biased you mean tendency for gradual market changes and drastic
changes right?
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9. Steve Winston answers:
1) ETF's can be unleveraged or leveraged (ultras).
2) ETF's can be long-biased or short-biased.
3) You can establish a "long" position by buying a long-biased ETF or by short-selling a
short-biased ETF.
4) You can establish a "short" position by short-selling a long-biased ETF or buying a
short-biased ETF.
5) Take time to "visualize" (3) and (4).
6) If it's still too confusing, only trade the long-biased ETF's.
7) It may be better to initiate "long" positions only because your broker may not have any shares
to short-sell into the market.
Carol asks…
Question about make money in market downturns?
Is there any ways to make money when stocks are going down without shorting stocks? I know
there are ETFs such as SP and SDS but they work with the concept of compounding and when
it moves from say 50 to 60 in day one and back down to 50 in day two you don't break even you
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10. actually lose money because of compounding. Is there a inverse ETF that doesn't compound
and if it moves back to your purchase price you break even? I need to prepare in case there is
another downturn in the stock market. Thanks in advance.
Steve Winston answers:
Buy Puts (options) to protect your investment. Consult a financial adviser or your trading firm.
Options are not suitable for all investors.
Nancy asks…
Stocks: Securities and ETFs?
hi. i'm in grade 11 and im doing an economics assignment on the stock market. we picked a
bunch of stocks and tracked them. i bought some such as ProShares UltraShort MSCI
Emerging Mkts (EEV) and iPath S&P 500 VIX Short-Term Futures ETN (VXX), but i don't really
understand just what they are, everything is in fancy technical terms that leave me very
confused. Please help explain what these company's or what these types of stocks are. Also,
what characteristics are best to use when determining which stocks to buy??? thank you!
10 / 11

11. Steve Winston answers:
Technically, you didn't buy a stock or an ETF...you bought ETN's.
Exchange Traded Notes. They are actually rather complicated technical things.
The EEV uses technical financial securities to bet AGAINST the Emerging Markets Stock Index.
On average, it should do two times the opposite of what the ETF with the symbol EEM does on
a particular day.
So, If EEM does +1 on a particular day EEV should do -2.
If EEM does -1. EEV should do +2.
---------------------------------
VXX is even more complex, but I'll give it a shot.
The Short Term S&P 500 VIX is a measure of how "crazy" the stock market is "right now." The
crazier it is the higher the VIX will be. By buying the ETN VXX, you are betting that they stock
market is going to crazier and crazier.
(For the last week or so the market has been getting less crazy)
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