There may be a wrinkle for anyone crazy enough to short sell a leveraged ETF depending on which broker you use: the “hard to borrow” fee. This is a fee that is levied on top of any interest charged on borrowed securities (borrowed from inventory so that you can short them). For example, while Interactive Brokers will allow you to short FAS (Direxion Daily Financial 3x Bull Shares) and charge you 1.68% in interest, it will also levy a hard-to-borrow fee which as of May 25th, 2009 stood at 23.81%!
Where does this magical fee come from? The rationale is that the prime broker has to spend a lot of time sourcing the stock to be shorted (they need to put it in their own inventory), and if it is hard to find, it becomes “hard to borrow” for you.
How do you calculate what the hard to borrow fee is? I don’t think you can. I believe each firm has their own pricing model, and all you can do is get a quote before making your short on a hard to borrow stock (your brokerage will have a list, similar to how they will have a list of short-eligible stocks in inventory).
I’m calling around to find out how ubiquitous this practice is amongst some of the other brokers, I’ll keep you posted…