Many ProShares UltraShort ETFs Are A Disaster

January 23, 2009 at 12:32 pm  ·  Category: The Investment Advice Business

Over the last month, a number of commentators have begun to vocipherously denounce levered ETFs pointing out that, over periods of time longer than a day, many of these ETFs don’t deliver what you’d expect them to.

The first that I am aware of was Eric Oberg at who argued against ProShares Short ETFs in two pieces: “Why Short Sector ETFs Aren’t So Smart”,, December 23, 2008 and “The Perils of the ProShares UltraShorts”, January 13, 2009.

In those pieces, Oberg detailed how the ProShares UltraShort Real Estate ETF (SRS) actually fell 48.2% from Jan 2, 2008 through Dec 17, 2008 even though the index it is supposed to deliver double the inverse return of fell 39.2%!  In other words, if you shorted real estate via this ETF last year you would have lost 50% of your money!  Disgusting.

The same thing happened with the ProShares UltraShort Financial ETF (SKF) which returned 1.4% over the above period when the underlying index fell 49.3%.  So much for double short!  Terrible.

Ditto for the ProShares UltraShort FTSE/Xinhua China 25 ETF (FXP) which Dr. Doom Marc Faber recommended in Barron’s in 2008 as a way to short China.  The long China ETF, iShares FTSE/Xinhua 25 Index (FXI), was down 46.7% in 2008 and the UltraShort ETF was down 57.2%!  Brutal.

Yesterday, in a comprehensive piece “Warning: Leveraged and Inverse ETFs Kill Portfolios”, Paul Justice of Morningstar hammered home the point.

The ProShares UltraShort MSCI Emerging Market ETF (EEV) actually fell 25% last year even though the underlying index was down 52%!

The ProShares UltraShort Oil & Gas ETF (DUG) lost 19% last year when the Dow Jones Oil & Gas index was down around 40%.

Obviously, many of these ProShares UltraShort ETFs don’t work over periods of time longer than a day making them unsuitable to implement a longer term investment thesis.

One question is whether it’s just the ProShares UltraShort ETFs that are disasters.  Looking at Oberg and Justices’s examples, the ProShares double levered long ETFs seem to have done a pretty good job: URE (Ultra Real Estate), UYG (Ultra Financials) and DIG (Ultra Oil & Gas) delivered about twice the return of their respective indexes in 2008.  SSO (Ultra S&P 500) also appears to have done a good job. 

One of the main reasons these ETFs fail is that they are designed to deliver double the return of the underlying index on a daily basis.  This daily compounding leads to distortions over longer periods of time, especially when the underlying indexes are especially volatile.  Oberg points out that the ProShares Ultra and UltraShort S&P 500 ETFs have done a pretty good job because volatility in the S&P 500 isn’t that great compared to some of the sectors like emerging markets, real estate and financials.

As someone who does some trades using these ETFs, this is a big worry for me.  I’ve been studying the charts and the ETFs I’ve been trading lately (SSO, DIG, TBT) seem to have done a good job of delivering what I was hoping they would.  But it’s raised some real doubts for me about the suitability of these investments.  It’s worth realizing that these ETFs do what they do by owning derivatives and so it’s not a perfectly transparent implementation.  I’m still thinking about whether or not I want to be involved with these vehicles.  I’ll be watching them closely.

Disclosure: Top Gun owns SSO, DIG and TBT.

Posted by Greg Feirman  ·  Trackback URL  ·  Link
No Responses to “Many ProShares UltraShort ETFs Are A Disaster”
  • I’ve been using these Ultra ETFs and I have had some success with them. With the better understanding of how they work, and my own experience, I expect better success in the future.

    The Ultra Short ETFs are obviously tougher to use. For someone to have success using these vehicles, the market or sector has to have a strong move in a relatively short amount of time. When I’ve won or lost, it has been because of a strong move in one direction. Thus, if you expect the market to go down and want to use an Ultra Short or Direxion ETF, it’s best to wait for a market rally of some sort before you buy one; it can really reduce the risk. In addition, because the math works so brutally against you on the downside, I would use the Ultras on the downside and the Direxions on the upside. The primary advantage of betting the downside is that down markets move much faster.

    What I would suggest is that you monitor the unleveraged ETFs in the market or sector that you are interested in and when you get a solid buy or sell signal from technical analysis done on the unleveraged ETF, then use that signal to buy or sell the leveraged ETF of your choosing. It will greatly increase you chances of success while reducing your risk.

    Rob M  ·  Feb 18, 2009 at 9:41 am  ·  Permalink
  • Well, Like playing Puts and Calls on Stocks when Shorting or going Long
    Shorting them? Got to just buy in reverse motion..
    Buy when Markets are Up and Sell when they hit bottoms or at the Target range price you have ( guessed) and Hoped for
    Myself? I just Play them for insurance on my Regular Long Portfolio of Equites..

    Going into 08′?
    > Reduced my % allocations in my equities
    > Moved to COH
    > Bought Inverse realted ETF’s when markets rose
    > Sell when they hit expected ( or guessed) bottoms.

    Bought UXPIX in early 08′
    Why? Based mostly upon which sector did the worse in my Index Funds in the Last Bear? > Int’l
    When? Thru out April and May
    Total Amt tobe invested = $30k
    $15k 1st and then $5k Icrements thereafter on the Dips of the S&P of 800 or less. or Per “my Market sentiment”..= Guessing
    When to sell? Oct/Nov in 50% Increments
    Took $ and ran..LOL

    Reits> SRS
    Bought- Sept..
    Sold Nov. same as My UXPIX
    Was going to Rebuy again in Dec. but wasn’t going to press my luck..

    Bought UAPIX in Nov and again Just this Past Monday.. 3/02/09
    Why? Small caps have been the leaders in Recovery markets past 3 Bears..
    Betting they will either Be again or come in 2nd..
    I have another $20k to put in it.. and will do so in $10k increments as either the market goes lower or Starts to recover
    Plan to Hold till Russel 2000 Hits a Certain Level in a recovery period..

    And Sorry, I don’t use “Tehcnical Analysis” tools.. Just common sense to me and “market sentiment”… such as ? IF certain people on CNBC and Cramer Stay gloom and Doom? Hold my Short positons and buy my Longs, when they get Hyper Positive and things look good? Sell my Bull funds when they either Double or PE’s and Prices get to high..Bubble if you will..

    And mind you? This $ allocated is just 10% of my Total Portfolio and is just gambling $.. I have stop Sells in place..just in case at -33% drops in my Purchse Price Per Share for My Inverse Funds and -50% for my Long Bull Funds.. Since those are being bought for the longer Holding Term basis..

    It’s all a guessing game as far as I’m concerned.. And I only have to win 50% of the time to break even..! Just like playing the Horse races back in the 70’s!

    Called making Calculated Risks.. to the best of your abilities and Having Irish Luck helps! Erin -Go-Bre

    Limoman  ·  Mar 3, 2009 at 2:43 pm  ·  Permalink

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