Short in May, Then Go Away? A new breed of ETFs that short sectors and indexes is getting plenty of play in 2008
Financial Post Business Magazine, July/August 2008

Gut-wrenching market slides, increased volatility, widespread anxiety about global financial markets: What's an investor to do? Average folks get out, but in fact current conditions are ripe for savvy investors with a knack for timing. And that's great news, in turn, for Howard Atkinson of Toronto¹s Horizons BetaPro Management Inc. Atkinson sells "inverse ETFs," a relatively new brand of investment product that caters to pessimistic investors. "Market conditions have been ideal," he says. "Investors have seen a five-year up market, and now they're worried about protecting some of the gains they've made."

Inverse ETFs (also called "short" or "bear" ETFs) bet that an index or a commodity benchmark will decline in value. They first emerged in the U.S. in 2006, where the market leader is ProShares. Last year, Atkinson¹s firm introduced similar products here that track the S&P/TSX 60 as well as financials, gold and mining indices. The concept is similar to short-selling a stock, but simpler to execute. An investor buys the ETF and its managers sell futures or short the stocks on the index each day. If the index declines, the bear ETF will rise by an equal amount (returns double in ETFs that use leverage).

What's really caught people's attention is how well some of these ETFs have done ‹ for example, ProShares's UltraShort Financials, which tracks the Dow Jones U.S. Financials Index. If you'd bought that one in February 2007 and cashed out a little less than a year later, you'd have doubled your money. Of course, other bear ETFs (ProShares's UltraShort Oil & Gas ETF, for example) have been big losers, but there¹s no reason to think the product is going away. Says Atkinson: "We've only just scratched the surface in terms of usage by Canadian investors."