The Nasdaq has been one of the best-performing indexes over the last decade, but this year its performance has been disappointing. With the Nasdaq losing nearly 20% of its value just in the first 6 months of the year, several investors are looking for ways to profit from the decline. So, how to short Nasdaq in 2022? What is the best way to short it?
In this guide, we’ll go over 5 different ways that you can short the Nasdaq.
Can you short sell Nasdaq?
The Nasdaq just like any index can be shorted, so that you can profit from the decline of the stocks within the index. However, there are a few different ways that you can do this, and it depends mainly on the capital you have available, as well as your risk tolerance.
Why short the Nasdaq?
Currently, the Nasdaq is one of the major indexes that has one of the highest valuations, with an average price-to-earnings of ~25. The Nasdaq has also been performing very poorly over the last 6 months, and although it has consolidated around, it seems like there is an irreversible downward trend that will continue.
The main reason has to do with the current FED stance on inflation, and how the market is pricing in additional interest rate increases. Since most of the companies in the Nasdaq have benefited from a decade of low-interest rates, the market is simply readjusting the valuations of these companies.
While only time will tell exactly what happens to the Nasdaq and other major indexes in the short term, there are a few reasons why you could consider shorting the Nasdaq:
- Profit from the decline
Clearly one of the main reasons to short the Nasdaq is to profit from the index decline. Although making predictions in the stock market does not always pay off, multiples across companies, especially in the tech sector seem to be declining.
- Hedge your portfolio
You could also short the Nasdaq to hedge your portfolio against an impending stock market crash, which some analysts are predicting. This allows you to get short exposure, that could protect your portfolio, in case of a crash.
How to short Nasdaq: 5 Ways
There are a few ways you can short the Nasdaq:
- Short ETFs
- Buy inverse ETFs
- Short index futures
- Shorting individual stocks
1. Short ETFs
One of the simplest ways to short the Nasdaq is to short sell an ETF that tracks the performance of the index. There are plenty of Nasdaq ETFs that either track the index performance or offer you the ability to get exposure to specific sectors. You can sell these ETFs short and all you really need is a margin account.
Here are some of the main Nasdaq ETFs you can consider shorting:
- Fidelity Nasdaq Composite Index Fund (FNCMX)
- Fidelity Nasdaq Composite Index ETF (ONEQ)
- Invesco QQQ (QQQ)
If you really want to have an even higher short exposure, you can short sell leveraged Nasdaq ETFs. These ETFs track the performance of the NASDAQ but are leveraged, and some of them move 2 to 3 times as much as the Nasdaq. This means that if the index moves 1%, a 2x leveraged ETF is expected to move 2%, and the 3x is expected to move by 3%.
By shorting these ETFs, you are essentially leveraging your short position. Leveraged ETFs come with a lot more risk, and as an investor, you should be aware of the high volatility of these instruments.
2x Leveraged Nasdaq ETF
- ProShares Ultra QQQ (QLD)
3x Leveraged Nasdaq ETF
- ProShares UltraPro QQQ (TQQQ)
2. Buy inverse ETFs
Another option you have to short the Nasdaq is to buy an inverse ETF. An inverse ETF simply tracks the Nasdaq composite, but its performance is the opposite of the index. So for example, if the Nasdaq goes down by 1%, the inverse ETF will go up by 1%.
Some of these inverse ETFs are also leveraged, and they do carry a lot more volatility.
Here are some of the inverse Nasdaq ETFs you can consider:
- ProShares Short QQQ (PSQ)
2x Leveraged Inverse Nasdaq ETF
- ProShares UltraShort QQQ (QID)
3x Leveraged Inverse Nasdaq ETF
- ProShares UltraPro Short QQQ (SQQQ)
Options are another way to short the Nasdaq, and here are the options you have:
- Buy puts on ETFs tracking the Nasdaq
- Sell calls on ETFs tracking the Nasdaq
- Buy calls on inverse ETFs tracking the Nasdaq
- Sell puts on inverse ETFs tracking the Nasdaq
It should be noted that selling calls involves a lot more risk than buying puts because your potential losses are higher. Additionally, you can also buy puts and calls and sell them on the leveraged ETFs that track the Nasdaq composite performance.
This involves even more risk, but there is also the potential for a large reward. You should also be aware that you will need a margin account to sell calls.
4. Short Nasdaq futures
Another option that requires a margin account is to short Nasdaq futures. This requires a margin account and you can either choose to short using regular Nasdaq futures contracts, or you can use the E-mini Nasdaq or micro-E-mini Nasdaq which do not require as much capital.
It is important to note that trading futures might be more costly depending on the broker you are using. So keep that in mind if you are planning on shorting Nasdaq futures.
5. Individual stocks
The last option is to short individual stocks on the Nasdaq composite. The Nasdaq is made up of the largest 100 tech companies that are listed on the exchange, and by choosing individual stocks you can filter them based on certain criteria, like valuation, debt, or even short the stocks that are unprofitable.
This approach has several advantages because it allows you to choose and pick the stocks that you really want to bet against. The weight of certain stocks on the Nasdaq has a great influence on how the index moves, especially the larger stocks that have a sizeable weight on the index.
We can see this by analyzing the stocks that make up the index. For example, just Apple (AAPL), and Microsoft (MSFT) represent over 23% of the Nasdaq. That means that when you short $100 of the Nasdaq you are essentially shorting $23 of these two mega-caps that are unlikely to drop by a lot.
To have a better idea of how the largest companies have such an influence on how the Nasdaq moves here are 9 stocks that represent ~50% of the weight of the Nasdaq:
- Apple Inc (AAPL)
- Microsoft Corp (MSFT)
- Amazon.com Inc (AMZN)
- Tesla Inc (TSLA)
- Alphabet Inc (GOOG)
- Alphabet Inc (GOOGL)
- Meta Platforms Inc (META)
- NVIDIA Corp (NVDA)
- PepsiCo Inc (PEP)
While shorting the Nasdaq may seem simple, you really need to consider what is the best approach for you. If you are well versed in fundamental analysis and you like to research stocks, the best approach is to pick individual companies that you think will underperform the index. Given the considerable weight of the large caps on the index, it can be difficult to generate meaningful returns without shorting individual stocks.
If you do not want to research each stock individually, and perhaps you are looking for ways to hedge your portfolio, buying an inverse ETF or shorting a Nasdaq index ETF is the option you should consider.
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