QQQ is one of the largest ETFs (exchange-traded funds) on the New York Stock Exchange. QQQ is an index of 100 of the top-performing global and domestic stocks. Short selling is a trading strategy that involves borrowing and selling shares of a stock or ETF prior to its decline and then buying back the shares at a lower price to earn money.
Can you short sell a massive ETF like QQQ, though? If so, what’s the best way to short QQQ and gain quick exposure? The best way to short the QQQ ETF is to purchase a QQQ “inverse fund.” These “inverse ETFs” increase in value as the market drops, allowing you to short QQQ without the hassle of having to borrow shares on a margin account.
Although inverse fund trading is the easiest (and, in my opinion- the best) way to short QQQ, you can also do it with a traditional short selling strategy. In this article, I’m going to discuss all of the basics you need to know about short selling QQQ, how to trade with an inverse QQQ fund, and also discuss how you can short sell QQQ with a leveraged ETF fund! Class is in session…
Short Selling QQQ
Short selling is one of the oldest market strategies out there. Basically, it’s a way of gaining quick exposure (a.k.a.- making quick money) by selling a stock or an ETF right before the market is about to go down. As you should know, the market goes up and down throughout the day, depending on the world’s political and financial climate.
Skilled investors and computer algorithms can usually track or calculate the likelihood of a certain stock or ETF decreasing or increasing based on the latest information. However, you don’t necessarily need to be hyper-skilled to tell whether or not a certain stock is about to go down.
For instance, let’s say that John Doe Phone Company gets a lot of bad news because their phones are randomly exploding. Well, it doesn’t take an expert to know that the company’s stocks will also take a hit. If you were an investor, you might decide to short sell the stock to get the stock at a lower price.
Since SEC regulations dictate that you can’t buy and sell a share the same day, you’ll need to borrow the shares from your broker through your margin account. After borrowing them, you’ll sell them, wait for the market to go back down, and then buy them back at the lower price, thereby turning a small profit.
The Best Ways To Short QQQ
Just as you can short sell a traditional stock, you can also short sell large ETF indexes like QQQ. Although QQQ is made up of some of the best-performing stocks globally, even this massive index can decrease in value if one of the indexed companies underperforms or isn’t able to meet is expected profit margins. Or, perhaps, a global pandemic comes and makes the entire market crash.
Whatever the case is, short selling QQQ gives you a unique opportunity to turn a profit, even when the market is in decline. Let’s take a look at the best way to short QQQ and put some extra cash in your pockets!
The Easy Way: Buy An Inverse Fund
The easiest way to short QQQ is also one of the least traditional trading strategies. Instead of borrowing the funds from the broker, selling them, and then buying them back, the easiest way is to trade with an Inverse QQQ fund.
An inverse fund (or inverse ETF) is a fund that you can purchase on the stock market, increasing as the actual ETF decreases. When the market is up, the inverse fund will decrease in value; when the market is down, the inverse fund will increase in value. The investors who manage to turn a profit during an economic crash usually have purchased inverse funds.
Method #2: Short-Sell The QQQ ETF
The only other way to short QQQ is to use the traditional short selling method. For example, if you see that one or multiple of the companies indexed in the QQQ ETF are reporting low returns, or if you sense an upcoming market downturn, then it may be a signal to short sell.
First, you’ll need to have a margin account with a brokerage, which is different from a traditional investment account. Once you’ve been approved for a margin account, you’ll be able to borrow money and shares from the brokerage as long as you pay them a percentage of the profit on your earnings.
With your margin account, you’ll contact your broker (such as Fidelity, E-Trade, etc.) to borrow shares of QQQ. Once the trade is approved, you’ll sell the QQQ shares. Then, after the value of QQQ decreases, you’ll buy back those same shares at a reduced price, thereby making money and giving the brokerage a small percentage.
Make More Money With Leveraged ETFs
If you’re an advanced investor and you’re willing to take on a slightly higher risk, then you also might consider trading a leverage QQQ index. Leveraged funds are funds that increase (or decrease) exponentially based on the related fund’s performance.
For instance, ProShares UltraPro Short QQQ (SQQQ) is a 3x inversed QQQ ETF fund. This means that for every 1% the QQQ ETF decreases in value, the SQQQ leveraged fun increases by 3%, allowing you to triple your investment in a significant downturn!
While shorting QQQ with a leveraged inverse ETF can certainly be profitable, it also comes with significant risk. If your predictions about the QQQ fund decreasing are wrong, then you stand a chance to lose triple your investment. When dealing with these types of inverse funds, it’s always a good idea to start with small investments to practice with.