Why spread bet on an ETF?

Exchange traded funds are well known to many investors. They are shares that passively track an underlying index, sector or asset (say the price of gold). They benefit from being simple, cheap and usually very liquid. So why make life more complicated by combining an etf with a spread bet? The answer is to more accurately short sell (bet on falling prices).

ETFs that simply go long that is track say the FTSE 100 directly are very useful and do pretty much what it says on the tin. So for example, assuming there are no foreign currency considerations, a 1% movement in the underlying index will result in roughly a 1% movement in the ETF.

But this falls down when it comes to inverse ETFs. Marketed as a way to short the market, you might think they'd say rise 1% for every 1% fall in the underlying index or sector. But you'd be wrong - and the reason is daily repricing. So for example an index might be at 100 and then rises 10% (to 110) before falling 20%. So now it is at 88. Say you had bought an inverse ETF at a price of £100 to track it. On day one the ETF falls 10% to £90, as you'd expect. But then on day two it rises 20% to £108. So the index is down 12%. Yet the ETF is up just 8%, not 12%. That's not the exact inverse relationship many investors will be expecting.

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