# Best ETF to short the TSX?



## Value (Jul 31, 2015)

Sorry to be such a downer you guys... But I feel it would be time (would of been in April really) to short our friend the TSX.

Any good founds you could recommand for this particular action?

HIX seems decent, but your suggestions are welcomed.


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## jargey3000 (Jan 25, 2011)

cold someone please explain, in plain English, exactly what it means to "short" something? I see this all the time & have never really known what it means.


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## none (Jan 15, 2013)

For every seller there is a buyer. I for one think now is a great time to buy into the TSX.


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## 0xCC (Jan 5, 2012)

"Shorting" something is basically selling it. If you don't already have units/shares of whatever you have sold you have a "short" position (as opposed to a "long" position if you hold units/shares). In the holdings summary of your account you will probably see that you hold a negative number of units/shares.

The reason for shorting something is you think the price will go down in the future and you would like to take advantage of that. Shorting is more risky than buying because in theory your downside is unlimited. The main idea with shorting is that your are borrowing someone else's shares and selling them. You have to replace those shares at some point. If you short something at $10 and you say shorted 10 shares, you have $100 in pocket today. If those shares go up to $100 you still "owe" 10 shares and it will cost you $1000 on the market to replace them.


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## BoringInvestor (Sep 12, 2013)

jargey3000 said:


> cold someone please explain, in plain English, exactly what it means to "short" something? I see this all the time & have never really known what it means.


Here's an example ignoring the cost to carry an asset and transactions costs:

In most real-life instances, if you're looking to buy an asset to invest in (e.g., a house, art, gold, etc.) you buy it first, then after a period of time you sell it. 
During the time you hold the asset you hope the price has gone up so you can sell it at a profit.

With the markets, things are different.
If you expect an asset to rise in value, you can buy it first (e.g., a stock or ETF), then sell it after a period of time.
But, if you expect the asset to fall in value (i.e., it's worth $100 today, and you expect it to be worth $90 tomorrow), you can sell it first, then buy it back after a period of time.
The act of selling it first is called 'shorting', as in your account owes back the shares you've already sold.

The major risk of shorting is there is no theoretically upper price for the shares you sold, and you are obligated to buy back the shares. 
Potentially if you 'shorted' at $100, and the stock opens up the next day at $150, that's a $50 loss/share cost that you may have to bare.


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## 0xCC (Jan 5, 2012)

And to actually answer Value's question, you might want to take a look at Horizon's products http://www.horizonsetfs.com/pub/en/Default.aspx.

There are a couple inverse ETFs in their BetaPro series of funds. The thing to be aware of with those is they typically are leveraged so they do 2x (or more) what the actual index they are tracking does. So if the TSX falls 1%, the 2x BetaPro inverse fund will rise 2%. And they do that on a daily basis which can do some weird things over a time period of more than a week or two.

Edit: It looks like maybe only the Horizon's BetaPro Bear+ funds are leveraged. They have a couple of inverse funds (one for the S&P 500 - HIU and one for the TSX 60 - HIX) that might not be leveraged.


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## james4beach (Nov 15, 2012)

These inverse and leveraged 2x or 3x ETFs are all meant to track the *daily return* in the index. That means a single day return.

They should not be used for other purposes. If you hold them for a long period, you're guaranteed to lose money -- they do not track the index properly over long periods, especially not during high volatility.


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## larry81 (Nov 22, 2010)

Just use XIU


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## godblsmnymkr (Jul 15, 2015)

why do you "feel" it is time to start shorting it now?


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## james4beach (Nov 15, 2012)

BoringInvestor said:


> The major risk of shorting is there is no theoretically upper price for the shares you sold, and you are obligated to buy back the shares. Potentially if you 'shorted' at $100, and the stock opens up the next day at $150, that's a $50 loss/share cost that you may have to bare.


This is not a risk when short selling the index, so there is nothing to worry about here.

I don't see any fundamental problem with short selling the TSX index, as long as you realize it's speculation. What is your exit plan? How long will you hold the position? What is the maximum loss you will tolerate?

As far as I'm concerned, "go short XIU for the next 6 months" is just as legitimate a trade as "buy XIU for the next 6 months". Neither is intrinsically riskier... it's just a gamble. Short-term speculation is not a great way to make money, in my experience.


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## Rhaegar (Feb 21, 2014)

Either use one of horizons inverse ETF's or just buy Put options on XIU


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## Value (Jul 31, 2015)

godblsmnymkr said:


> why do you "feel" it is time to start shorting it now?


I just feel like the tides are shifting and the long bull is chaging to a bear... In 2015, our market seems to be going nowhere... With the fed about to hike the rates and our economy at the brink of a recession, I think there is money to be made in shorting the market for the next little bit... 

Anyways, thanks for all the answer everyone!


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## none (Jan 15, 2013)

Keep in mind this 'feeling' feeling of yours has no concrete basis. Unless you talk to god you don't know this - ignore your gut, your gut is an idiot.

For the VAST majority of investors the efficient market hypothesis is an adequate approximation of how the market behaves.


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## uptoolate (Oct 9, 2011)

And sorry but the 'long bull'? On the TSX? What charts are you looking at? The TSX is below where it was July 2007 and where it was in March 2011. It is one of the worst performing indexes in recent years. I just stay the course but if I were going on gut feeling it would be to sell the SP500 and buy the TSX! Good luck with whatever you decide.


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## james4beach (Nov 15, 2012)

I think it's OK to make trades based on speculative beliefs. Just realize they are nearly total gambles because markets are very random in the short term. The converse, "long term investing" in reality only works on time spans of 20+ or more years.

Here's my view on it: any stock position you take (even if it's just "buy TSX index") is speculative if your horizon is less than 10 years. Really I'd say if less than 20 years.

I really think that much of what people talk about on this forum is market speculation. But people seem offended when I say that; since people are exposing their hard-earned (or retirement) money to risk they want to believe they are taking some kind of tried & true method. But it's not.

If you read these forums, people are constantly engaged in speculative bullish bets. Usually it's something like 1-5 years and they believe the TSX will go up. This is not a safe bet either, by any means. Research by Shiller has shown that the stock market is far from "efficient" as far as pricing. Stock indices are highly volatile, and historically speaking, price fluctuations wildly diverge from fair value. There are often very long periods ... as long as 20 years actually ... where the stock index does its own thing independent of intrinsic value.

If you told me you want to short the TSX for 10 or 15 years, I'd say you're crazy -- that's probably a bad idea.

If you say you want to short the TSX for 1 to 5 years, I'd say that's a legitimate trade with 50/50 odds of being profitable. It's no worse than buying the TSX for the same duration.


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## james4beach (Nov 15, 2012)

Let me phrase it another way. I think the probability of success is about equal on the following:

1. I'm buying & holding the TSX for the next 5 years because my advisor told me to
2. I'm buying the TSX for 5 years because God told me to
3. I'm buying the TSX for 5 years because I feel it's going up
4. I'm shorting the TSX for 5 years because I feel it's going down
5. I'm shorting the TSX for 5 years because Gold told me to

The only difference with short selling is that your advisor and TV personalities never tell you to  And that makes a big difference in people's opinions and confidence regarding short bets versus long bets.

P.S. regarding *execution* - it's much harder to short the TSX in a proper way. The inverse ETFs are flawed. Put options have decaying premiums. And outright short selling involves borrowing shares which isn't always possible. Outright short selling is the best way, though. You just short XIU ... as many hedge funds do.


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## Moneytoo (Mar 26, 2014)

james4beach said:


> 5. I'm shorting the TSX for 5 years because Gold told me to


But what if my Gold keeps telling me to buy more gold? lol


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## james4beach (Nov 15, 2012)

That was a pretty good slip on my part


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## uptoolate (Oct 9, 2011)

james4beach said:


> If you say you want to short the TSX for 1 to 5 years, I'd say that's a legitimate trade with 50/50 odds of being profitable. It's no worse than buying the TSX for the same duration.


While I agree with you in terms of long term investing v shorter term 'speculation', the above statement is not strictly speaking true, at least historically. Shorting the TSX in the short term, say 1 year, might be close to a 50/50 bet but in the 5 year range it would not really be even money. As you point out, the longer the time horizon, the more certainty there is that the TSX will be positive, even after inflation adjustment. As you say though, true long term is 20+ years.


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## james4beach (Nov 15, 2012)

uptoolate said:


> While I agree with you in terms of long term investing v shorter term 'speculation', the above statement is not strictly speaking true, at least historically. Shorting the TSX in the short term, say 1 year, might be close to a 50/50 bet but in the 5 year range it would not really be even money. As you point out, the longer the time horizon, the more certainty there is that the TSX will be positive, even after inflation adjustment. As you say though, true long term is 20+ years.


Perhaps you're right that 5 years it's not even money.

So let me try an experiment with TSX data back to 1990. I'll use a random date generator to generate dates between 1990 and 2010 (now keep in mind this actually includes one of the strongest bull runs in history, the 1990s decade ... _so it is skewed more bullish than total history_). Sampling TSX and also adding in dividends; pretending we've tried short selling 5 year periods. Let's see what happens, with the following start dates generated randomly from this site. And the resulting XIU 5 year performance.

Yes you're right. Short selling the TSX for a 5 year stretch is a really bad idea: from 20 random samples, average outcome: +38%
While I'm at it, I'll try the same experiment with 1 year stretches (25 samples). Average outcome is: +10% ... now that's interesting.

Hmm. That's interesting. Looks like a bad idea to short the TSX randomly whether it's 1 year or 5 years. I'm kind of surprised that even the 1 year period is enough to pick up that long term upward bias, but it is apparently.

How about 3 months, 30 samples from the last twenty years? Yes, _now that looks random_:

 mean outcome: +0.5%
 median outcome: -3%
 16 negative outcomes, 14 positive outcomes

That's really even odds, it's pretty much a coin toss if you go long or short the TSX for 3 months.


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## none (Jan 15, 2013)

I use (heuristically) a random walk with drift model to approximate stock movements. There is an average drift component of x% per year so you're always less than 50-50 based on expectation regardless of time duration beyond one day. Of course, it's rather minuscule in the short term but I certainly wouldn't say it's 50-50 over a 5 year period. That's just a poor approximation of risk.


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## uptoolate (Oct 9, 2011)

Thanks j4b. That is commitment to finding an answer. I find it surprising that there weren't more downs given that your stretch included two nasty bears in 2000 and 2007. It shows just how quickly things can recover and the seemingly irresistible upward trend. Perhaps if you had looked at 1960 to 1980 things might have been a bit less rosy but at the end of the day it isn't wise to bet against equities. Maybe we should write a book. We could call it 'Stocks for the Long Run'.


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## james4beach (Nov 15, 2012)

Time periods make a big difference of course! Generally, 1980 until today has been a great time for stock markets.


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## humble_pie (Jun 7, 2009)

i agree with uptoolate. Even a dumb crumb like myself can see the DJI & DJT charts for more than a century, they do go up, duh.

but i think the backtesting james4 reports in message # 20 is fascinating. You're saying that shorting doesn't pay in times frames longer than 3 months? the probability of success is even-steven at 3 months?

james if it's not too much bother, what happens if you test for 1 month? one week? i'm asking just out of curiosity. Don't actually go there myself.

what your message # 20 suggests to me is that the downward crashes such as 1998, 2008/09 etc don't show in the 1-year & longer studies because they were fully compensated for within those time frames, whereas the 3-month study is able to pick these up. I'd expect a study with an even shorter time frame to pick up a few more downward corrections.

there's a message here for all investors, Don't sweat the short-term downward corrections. Followed by another message that goes, Most corrections are short-term.

me i mostly carry long stock positions that i rarely sell. These are covered with short calls & short strangles, which offer the possibility of a future short position although this doesn't have to become reality. It's a possibility only, not an actual short, therefore less risky.

instead of mark-to-market, the future short can be endlessly adjusted by tweaking the options, as time passes & as one's prediction of the future turns out to be more accurate or less accurate.

but the stocks themselves are ultra long-term. A few i've owned since childhood. Perhaps this means the option trader has the best of both worlds. Long-term long but toe-in-the-water short-term short.


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## james4beach (Nov 15, 2012)

I would love to do a more thorough back testing. The reason I used random samples is because I didn't have the ability to methodically sweep over all time intervals. So I'm just sampling the set of numbers, which should be OK to do as long as there are enough samples. It's possible 20 samples isn't nearly enough, could just be too coarse.

Unfortunately I can't run it easily, but I'd love to try doing this more thoroughly if I find the time.

I think my 'average' numbers miss a really important part of this, which is the *deviation* -- the measure of variability in the individual readings. We already knew that the average return of the stock market is positive... that's what all the long term studies show. So on average ... if you did this over a life time ... you would of course see a positive return for 1 year period..

But what will * I * encounter on this specific trial? i.e. I'm a speculator, I come in with a feeling the market will go up so I buy XIU for 1 year. How much volatility can I expect between * my * one year sample and the historic average (the +10% return)? The average return could be +10% but if there's a huge deviation on the 1 year trials, that's big volatility and it means I'm very unsure what my outcome will be on a single trial.

I suspect that on the longer trials like 5 or 10 year stretches, the deviation is probably much less which means you can _more reliably_ get the expected market return. And I still suspect that in the short 1 year stretch, deviation is very high which means it's not a reliable way to get the expected average market return.


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## none (Jan 15, 2013)

I've thought about doing this. Simply take 4-5 time series with different allocations and determine future probability distributions. I get a bit tired of reading posts saying that if you need money in 3 years you should put it in a 2.5% TFSA. Depends what the money is for of course but more often than not it's to buy something that would be nice to buy but not critical. I would expect 95% prediction intervals in three year times on 10K to be something like 8000-13000 (or something) - rather than a certain 10800 (or whatever).


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## james4beach (Nov 15, 2012)

none, I think that's the right question, though you might want to use the T distribution or Cauchy. They are better fit for the stock market and have heavier tails. But yeah, if you could plot these distributions, it would give you a way to model expected returns without oversimplifying it into an "average" return as I did earlier.


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## none (Jan 15, 2013)

I doubt I'd use a t. I'd likely just use nonparametric bootstrapping to estimate bounds. Anyway, not the top of my list of things to do. That's the annoying thing about modelling things with high levels of uncertainty, you're never wrong but you're also rarely right


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## james4beach (Nov 15, 2012)

Look at us, financial engineering like it's 2007... it's important to remember these are all probabilities in the end.


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## none (Jan 15, 2013)

As apposed to? what else are you going to do?


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## Moneytoo (Mar 26, 2014)

An interesting piece (I think): http://www.theglobeandmail.com/glob...ortant-for-investing-success/article25995005/

"Despite the higher potential return of the second option, the majority of subjects chose the guaranteed option, contrary to what theorists had previously predicted."

(@none, please give me one of your motivational speeches (that usually make me chuckle) to buy XEF at current market price and not wait till it dips under $27 )


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## Value (Jul 31, 2015)

Hey all,

Any of you gonna join in now this week?

Seems like down signs are here now... 

As I write, Shangai is down another 7%, do you think it will affect North America? And back and forth and back and forth? The selling is feeding off in both market feeding from each other.


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## cashinstinct (Apr 4, 2009)

Shanghai was so much in a bubble, they are probably still higher than last year for the shares that were mostly available locally.


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## Value (Jul 31, 2015)

I'm still shorting the TSX... And loving it right now.


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## humble_pie (Jun 7, 2009)

Value said:


> I'm still shorting the TSX... And loving it right now.



lol

with what do you short it dear Liza dear Liza


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## Value (Jul 31, 2015)

humble_pie said:


> lol
> 
> with what do you short it dear Liza dear Liza


HIX... Got in at 8.33 in august... Friday before August's black Monday... Should have sold it when it opened then and bought it back afterwards... But I was thinking there would have been more panic and selling in the Fall... Just had to wait for the winter.


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## humble_pie (Jun 7, 2009)

except that isn't quite "shorting the TSX."

HIX is one of many horizons betaPro ETFs that hold nothing but futures & derivatives. The fund relies on a counterparty to pay it an amount equal to shrinkage in the TSX 60, however the fund is not shorting any shares on any organized exchange.

http://www.horizonsetfs.com/horizons/media/pdfs/prospectus/BetaPro1_Prospectus.pdf


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## Value (Jul 31, 2015)

humble_pie said:


> except that isn't quite "shorting the TSX."
> 
> HIX is one of many horizons betaPro ETFs that hold nothing but futures & derivatives. The fund relies on a counterparty to pay it an amount equal to shrinkage in the TSX 60, however the fund is not shorting any shares on any organized exchange.
> 
> http://www.horizonsetfs.com/horizons/media/pdfs/prospectus/BetaPro1_Prospectus.pdf


Hmmm... What would you suggest? So far it's doing a great job of replicating the inverse of the TSX x1


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