limited downside of shorts
I think we may have talked about this, but I can’t find the post. Does anyone know how the ETFs that short indices work? A short technically has unlimited downside risk, but buying an ETF that shorts has a floor ($0). Am I missing something?
I don’t know for sure, but my guess is that the floor is maintained by the fact that it’s highly unlikely an index will go up by 100% in one day. So after a big up move in an index, the ETF just scales back its short exposure. The ETF can then go up, say, 90% each day but you would never hit the zero wealth boundary.
Well with the ETF structure, it’s the fund (and not you, the investor) that bears this unlimited downside. Needless to say, the ETF is compensated for managing/absorbing this risk for you, in the form of higher fees and, perhaps, larger spreads.