Economics and Market Effects of ETF Short Selling
He who sells what isn’t his’n, Must buy it back or go to prison.
—Attributed to Daniel Drew
Most readers of this book will rarely, if ever, consider selling shares of an ETF short as part of their investment program. However, short selling in the ETF marketplace is a large part of ETF trading volume, and ETF short positions are often so large relative to total ETF shares outstanding that the investor who does not understand the effects of short selling on his ETF position risks (1) paying unnecessary taxes on ETF dividends, (2) misunderstanding the significance of ETF market statistics, (3) missing the best way to take some positions, and (4) missing some unusual but attractive investment opportunities. Before we address these problems and opportunities, it is useful to take a careful look at the risks associated with selling ETFs short, in order to put things in perspective.


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