One of the major selling points for exchange-traded funds is that they can be sold short. Given the recent tenor of the stock market, that should be a big plus -- after all, it's much easier to bet on a decline in a portfolio of stocks than to make separate bets against each individual holding.
But the truth is, it's not as easy to sell an ETF short as the industry would have you believe.
Unlike mutual funds, which are issued and redeemed once a day by their sponsors, ETFs are bought and sold on an exchange, like stocks. In theory, that means you can short them as easily as stocks, borrowing the shares and selling them in the hopes of buying them back at a cheaper price when its time to repay the loan.
Say, for example, you borrow and resell 100 shares at $30 for a total of $3,000 and they subsequently fall in price to $20; you can then buy them back for $2,000, repay the loan and pocket the $1,000 difference, minus transaction fees. (By the same token, if the stock subsequently rises to $40 a share, you'll be out the additional $1,000 needed to repay the loan.)Of course, some stocks are easier to borrow than others. Investors typically rely on brokerages to lend them shares held by other clients, such as mutual funds or other big institutions. If a stock has a small market capitalization or is already heavily shorted, it can be hard to find someone willing to lend it.