Exchange Trade Funds (ETFs) that claim to allow investors to make leveraged shorts have proliferated. ProShares is the leader, offering many “UltraShort” funds that are supposed to go up twice as much as the market goes down. I see that they are now introducing “triple leverage” funds.
Buyer beware. Because these are not true short sales but rather created by ProShares by buying and selling futures on a daily basis, they DO NOT track the inverse of the averages. Indeed, if you were prescient back at the beginning of August, 2008 about the market meltdown and bought ProShares UltraShort S&P 500, you should have made a killing. On Aug 1, the S&P 500 was 1260. On June 25, 2009, it was 919. This is a decline of 27%. At twice leverage, you should have made 54% on you investment. Great!
Well, not really. In this time, the UltraShort S&P ETF declined in value, going from $68.20 to $55.24, a loss of 19%! Here’s a graph showing this outcome:
This feature of leveraged ETFs has been commented upon by others, who have shown how fluctuations (which are inevitable) work against the value of such funds. I haven’t traced this through myself. The performance of the funds is plenty of proof for me, plus an unfortunate experience I had with one such fund myself last year, is enough to put them on my list of “stocks” to be avoided.
If you really want to short the market, open a futures account. There, at least, you get a fair investment (well, mostly).
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