How to short European equities?

By Bruce Sellery on September 5, 2012
Estimated reading time: 3 minutes

Amid the market turmoil overseas some might see this as an opportunity to short the Eurozone, but Bruce Sellery warns it's a bold bet that may not pan out.

Question

Which Canadian ETFs can short European equities?

Answer

I have some good news and some bad news for you. First, the bad news: No Canadian company currently offers an ETF that shorts Europe. The good news is that there are no Canadian companies that offer an ETF that shorts Europe. Personally, I don’t like the idea. Admittedly, I’m a conservative guy by nature, but this strategy still makes me very nervous.

First, for the uninitiated, the term shorting a stock refers to the practice of selling a borrowed security on the belief that it is going to decline in value. The investor makes money by buying back the security at a lower price to return it to the lender and pocketing the difference. It can be very profitable if things turn out as you planned, but it can be very costly if they don’t.

Questions to ponder

Taking a short position on Europe is a bold strategy and one that requires answering some key questions about the outlook for the region and your own risk tolerance. For example:

What is the outlook for the Eurozone in terms politics, economy and currency?
How does that outlook affect the future performance of European stocks?
How much negativity is already priced into the European indices and therefore how much further do you believe they have to fall?
What are the downside risks to this shorting strategy and can you afford them?
Where does this strategy fit within your overall investment strategy and goals?

Canadian Inverse ETFs

As you may or may not know, there are ETFs that short the market in Canada. They are called inverse ETF. These products allow investors to short indices very simply. For example, Horizons Exchange Traded Funds offers an inverse ETF for the TSX 60 and S&P 500, among others. The TSX 60 product, ticker symbol HIX, is designed to deliver results that “correspond to one times (100%) the inverse (opposite) of the daily performance of the S&P/TSX 60 Index.”

While none of the major players in Canada offer an ETF that shorts Europe, you can find the product you’re looking for on the New York Stock Exchange.

European ETFs from Proshares

There is a product called the ProShares UltraShort MSCI Europe, ticker EPV on the NYSE. Its performance “corresponds to twice (200%) the inverse (opposite) of the daily performance of the MSCI Europe Index.” It goes short, but to the power of two. Think of it as shorting on steroids.

But a warning, the performance of this ETF hasn’t been great. Despite the deluge of bad economic and credit news from Greece, Spain, Italy and Portugal, this ETF is down more than 35% in the past 12 months and down almost 80% since mid-2009.

So, while there isn’t a Canadian ETF that shorts European stocks. There is a U.S. one. But I you’ll have to have a very strong stomach to add it to your portfolio, and be 100% sure that the product is for you.