Although the spreads aren’t always a penny or two on some of the leveraged sector ETFs, they are going to track the underlying sector whether it goes up or down so I’ve never been “trapped” in one where I could get a decent fill. That might be more of an issue if day trading one of the more obscure sector leveraged ETFs & if I noticed that to be the case (thinly traded with large spreads), I’d just use my margin buying power & trade the 1x non-leveraged with more liquidity.

By early sale, do you mean the shares being called in from my broker because they no longer have the inventory of shares to lend for shorting? Yes, over the years I’ve had that happen, occasionally with ETFs but more often individual stocks. Even then, it is fairly rare. Plus, with my primary broker (Interactive Brokers), they have a field on their trading platform that is color-coded so you know in advance if a stock or ETF you are shorting has plenty of shares available (light green bar), limited shares (dark green) or currently no shares available to short (red bar).

Using those tools helps to manage a short position. E.g- If I were to short a 3x ETF and while holding the position, I notice that the color changes to dark green, I might be on the lookout to cover my position at the near support/target level vs. staying short & risking a forced buy-in. Sometimes I’m short a position that goes to a red bar & I’ve often received notification of a possible impending buy-in if they can’t located the shares. However, more often than not, IB comes thru and finds the shares somewhere else, allowing me to remain in the position. While they certainly have their short-comings, one plus with IB is that they consistently have the best availability of HTB (hard-to-borrow) shares.

Thank you. Makes sense. One question on shorting leveraged ETF’s to make decay work for you. Have you ever had an issue with low liquidity or early sale? If most traders use these on a short term basis I would imagine that these is greater chance of early sale. Appreciate your insight.

@txutrader Excellent point on using IWF vs. IWM in order to weed out the value stocks & higher dividend payers. As far as using inverse ETFs to position as a multi-month+ swing short trade for a primary downtrend/bear market, I take the opposite side. I like to short the 3x leverage long sector or index ETFs which let’s the decay work for me, not against me as it would be if holding the 3x short ETF as a long position. That strategy works exceptionally well for very volatile sectors such as with this the official LABU short trade that was closed out for an 85% gain in just under 6 months: http://rightsideofthechart.com/closing-labu-short-trade-for-85-gain/

LABU was added a an official trade idea on Aug 7th following my “Biotech Wreck Pending Video” from July 30th in which the case was made for an imminent bear market & drop of at least 30% in the biotech sector: http://rightsideofthechart.com/biotech-wreck-pending-video/ As the case was made that the biotechs would likely drop for months, an LABU (3x long biotech etf) short was chosen over an LABD (3x short biotech etf) in order to take advantage of the decay in addition to the price drop in the biotech sector.

Although the decay on a leveraged sector ETF, such as TNA (which is my current proxy for a short on the Russell 2000) isn’t as bad as with a volatile sector like the biotechs, it is still better than going long TZA (3x short $RUT) and even if the market just trades sideways for a few months with the $RUT ending flat, chances are I will have still profited from my TNA short due to the decay, which is most pronounced during periods of choppy price action (day to day swings more so than intraday swings).

I’m thinking of shorting IWF (Russell 1000 Growth), the technical story appears to be similar, the growth names haven’t pulled back as much as IWM and the dividend payment is slightly less.

I would appreciate your perspective on using inverse ETF’s to execute on thesis that we’re in a long-term bear market. My understanding is that these are great for day trade but much less effective on long-term basis.