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When I short the SPY, if it goes up, then I get a margin call based on broker's margin requirements. (Not sure if margin requirements are specified by SEC or individual broker, but that is another story).

If I buy(long) a bear ETF that shorts the SPY, and if the SPY goes up, I lose money for sure but I don't get a margin call. In this case, who gets the margin call? The entity that actually formed the ETF ?

4

There is no margin call.

Inverse ETFs use derivatives that would lose value in the case you describe though this doesn't force a margin call as you may be misunderstanding how these funds are constructed.

  • If he buys something on margin and it drops in value he's gets the call, no? – JoeTaxpayer Feb 7 '14 at 23:26
  • Yes in that case. However, I interpret the question to imply that bear funds use shorting which isn't true. – JB King Feb 7 '14 at 23:30
  • Ah. I read "If I buy(long) a bear ETF that shorts the SPY" to be meant euphemistically, the ETF is a black box and we don't care how it functions only that it delivers what it promises. – JoeTaxpayer Feb 8 '14 at 0:17
0

You buy something on margin. It goes down. You get a margin call. It's not more complex than that. The value of your account has to be X% of the asset you control. The fact that the ETF is bull, bear, triple long/short, doesn't really matter.

0

If you enter a futures contract, it costs nothing. So every time prices move against you, there is a margin call and you must put up some new money.

Inverse ETF's use a variety of similar strategies to get their returns. Many of these strategies may indeed require a margin call to the ETF issuer if prices move against you. But remember the ETF did not cost nothing. Investors contributed money in order to purchase each share of the ETF. Therefore the ETF issuer has a big pot of money available for use as margin. That's why the margin call never comes through to you.

In a sense, you posted a ton of margin up front, so you won't have to make any additional margin contributions. The money that will be used for margin calls is being kept in treasuries and money market securities by the ETF issuer until it's needed.

If prices move against you badly enough that it looks like the ETF is at risk to not be able to post margin, the ETF would liquidate and you'd get whatever pittance was left after they exit all those positions.

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