Less-risky ETFs that include 8 hot short stocks

Posted: 29 January 2021 6:21 pm

For those interested in trending stocks but who want to tone down the risk and volatility, these ETFs still give you a little exposure.

Investors this week have made huge gains buying short stocks like GameStop, which has jumped by more than 300%. But buying shares of volatile stocks can be extremely risky. Investing in ETFs that include shorted stocks can give you a slice of these booming stocks while mitigating risk.

What are short stocks?

In essence, a shorted stock is one that investors and market analysts believe will decline – so much so that institutional investors are betting on their decline. They borrow these stocks and sell them with the hope that their price will drop. Afterward, they hope to buy them back for less than they paid and keep the profit. That’s a general overview of how short selling works.

But in recent days, Internet forums have been set ablaze with users encouraging people to buy shorted stocks in droves, thereby inflating the price and earning a handsome profit, while short-selling hedge funds lose their bets.

Despite the media hype, this is very risky. GameStop is all the rage right now, but the company has been losing the game for years. Analysts expect it to report a 2020 profit loss of more than 90%. In other words, it’s not worth what it’s selling for. However, you can still get some juice from the short squeeze of GameStop and so-called “meme stocks.”

ETFs that include short stocks

ETFs invest in a variety of stocks in a particular index. The advantage of investing in ETFs is that even if some stocks underperform, you can still benefit from the stocks that are performing well. Here are the top 10 shorted stocks and the top-performing ETFs that contain each.

CompanyStock 1-year changeTop-performing ETF with this stockETF 30-day % change
GameStop8098.40%Direxion Daily Retail Bull 3x Shares (RTL)*161.52%
National Beverage263.45%Invesco S&P SmallCap 600 Revenue ETF (RWJ)32.26%
Macerich-27.48%ALPS REIT Dividend Dogs ETF (RDOG)4.54%
Bed Bath & Beyond138.95%Invesco S&P SmallCap 600 Revenue ETF (RWJ)32.26%
Ligand Pharmaceuticals111.16%SPDR S&P Kensho New Economies Composite ETF (KOMP)15.85%
AMC Networks Inc.106.12%ProShares UltraPro Russell2000 (URTY)*14.96%
Tanger Factory Outlet Centers8.61%Invesco S&P SmallCap 600 Revenue ETF (RWJ)32.26%
Tootsie Roll Industries17.12%ProShares UltraPro Russell2000 (URTY)14.96%

*Leveraged vehicles, and especially 3x ETFs, are particularly risky because they use leverage in an effort to achieve higher returns. These funds are useful for short-term positions, but they should be used with caution. These funds are not designed for long-term investment strategies.

Risks of investing in ETFs that contain short stocks

Investing in short stocks is inherently risky. Remember, the market is betting that these stocks are in decline. Investors who short sell are typically sophisticated ones with access to the best research tools and market data money can buy. They know they are taking on significant risk, so you can bet they have reason to do it. So the short sell theory can ultimately come true and the short stocks you invested in drop as predicted.

Investing in ETFs that include these stocks mitigates these risks. But ETFs track a particular index or group of stocks in a specific sector like tech. If the sector as a whole suffers, then so would the return on your ETF investment.

Always do your due diligence and proceed with caution when doing anything related to short selling.

Image: Robinhood

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