Theoretically, you could short TSLA in the same amount that you own it within the ETF. This would be functionally equivalent to owning a custom market cap ETF minus TSLA.
Direct indexing allows you to go long ~approximately some stock index like SPY, but you can easily exclude specific stocks (like TSLA) without dealing with options or shorts. Would I do this? No. But it's probably one of the better ways to achieve this goal.
In theory, yes. But when you include hedging costs and taxes, the link becomes less direct. The cleanest way to get long volatility is by purchasing ATM straddles.
With a put, you primarily pay for directionality with hedged upside risk: you don't lose your house if the stock moons. While it's true volatility is a component, that's a side effect of the hedging since your counter party takes on volatility risk.
But you won't - you "own" an equal number of shares of TSLA indirectly through the index fund. If TSLA goes up, that part of your ETF has gone up. You're just being simultaneously long and short the same stock. The only difference between that and "not owning TSLA" is that you're paying a bit to borrow the shares -- about 0.41% annually, right now.
You'd want to have cash on hand to cover your short position or you risk having to sell (potentially a lot of) your ETF to cover, which loses out on future whole-market upside. Still seems risky to me.
I definitely don't know much about finance, but a short is essentially being obliged to sell a position at a future date, right? You match your short position against the fraction of your ETF which is in TSLA, such that you are obliged to sell in the future exactly as many TSLA shares as you indirectly own through the ETF. This way you do not need cash on hand, because you can sell a portion of your ETF to pay off the short.
Theoretically it's not risky because in the scenario that the short becomes expensive, TSLA has gone up the and in turn TSLA has made your ETF appreciate the same amount that you owe due to the short, and vice versa if it goes down.
> TSLA has made your ETF appreciate the same amount
That's no guarantee. I mean, yes, the ETF price reflects its proportion of Tesla stock, but the market as a whole might have declined - even in bear markets some individual stocks appreciate.
Investing in ETFs is a long-term, counter-cyclical strategy. Dips are when you want to buy ETFs, not when you want to be forced to sell them because you took a short that failed to pay off. If you have to do that then you're not only selling the Tesla within your ETF, but also the future upside of all the other stocks in the fund. Isn't that hugely inefficient?
But, I'm not a particularly sophisticated investor, either (thus: ETFs for me), so my intuition may be wrong. Does anyone have some maths to bring to bear on this?
OK. Other people (probably not you) in this thread were talking about this strategy like it was basically risk-free. Compared to a naked short it's, um, obviously a better idea, but I still think others were over-selling it by not mentioning all of the downside risk.
Oh yeah, I don't think I would suggest actually implementing this because it's just a lot of costs and fees to emulate what otherwise would be an index without the stock
Well, the people advocating it are bearish on Tesla and trying to win a bet on that, while "hedging" it with their ETF portfolio. I mean, on the fundamentals I'm bearish on Tesla, too, but there's a not-inconsiderable chance that any day now Musk announces an eleventy-billion dollar contract with the US government, so no way I'm taking that bet. Anyway, I'm not a gambler, so all my investments are super boring.
