The SEC issued an emergency rule to limit some types of short selling in major banks and financial firms, which will last from July 21 through July 29, although it could be extended upto 30 days. The rule requires a short seller to borrow the securities before executing the sale and to deliver the securities on the settlement date. But this move may give a boost to a few exchange-traded funds (ETFs) like the USD 2.1 bn UltraShort Financials Proshares, as well as the recently launched USD 11.8 mn Short Financials Proshares and USD 9.5 mn 2x S&P Select Sector Financials of Rydex Investments that are shorting the financial sector and producing sizzling returns.

Unlike some HFs and other investors who short stocks, these funds take short positions through derivatives such as swaps and options. With the regulators' move set to hamper investors' ability to freely short financial stocks; these funds may see more demand. “Just because the SEC has made this ruling, that doesn't change the underlying thesis the investor had on why they want to short the financial sector,” said Paul Justice, ETF strategist at Morningstar. “So whenever you have your first choice taken away, the next logical move is to search for alternatives,’” he said.

 

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