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ETF Specialist

Short-Sale Restrictions and Inverse ETFs

How the SEC's unprecedented ban affects these ETFs.

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There's a palpable sense of fear and uncertainty in the markets today. This helped lead to a number of unprecedented government actions this week including a wide sweeping ban on short sales of 799 financial stocks, tapping into a $50 billion fund to guarantee money market assets, and discussions of creating a Resolution Trust-like vehicle to help shore up the balance sheets of struggling financial institutions. Following the announcement of the ban on short sales, two ProShares inverse funds (including the widely held  UltraShort Financials ProShares (SKF)) ceased trading for a couple hours this morning in order to give the issuer a chance to sort through the implications of these government actions. In this article, we will attempt to shed some light on the situation by addressing the major questions about what happened this morning and how the Securities and Exchange Commission's restriction on short selling financial stocks will affect exchange-traded funds in the future.

If these funds use swaps agreements to replicate inverse returns on their stated benchmarks, then why are short-selling restrictions on individual financial stocks affecting (SKF) and  Short Financials ProShares (SEF)?

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John Gabriel does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.