ProShares ETFs: Why Volume Trading Makes a Difference

ProShares has a diversified lineup of ETFs that allows investors to adopt various strategies based on individual sectors, market-cap, desire to be long or short, etc.

Of the 64 ETFs currently offered, it is clear that some are more popular than others. This popularity is translated into trading volume.

Why volume matters --

The greater the volume, the smaller the bid/ask spread tends to be. Higher spreads are like a hidden fee that subtracts from investor returns. This is especially of concern to short-term traders.

On a related note, an investor might ask if this is a liquidity issue. Is it related to the liquidity of the stocks that make up the ETF? According to IndexUniverse.com, research shows that it is the liquidity of the ETF, and not the liquidity of the underlying components that really matters.

Lower volume can be associated with higher expense ratios. The heavier trading volumes associated with larger funds implies that these ETFs can spread their expenses over wider ownership bases.

The greater the volume, the closer the ETF seems to track its associated index. This effect seems to especially come into play with the ultra ETFs that are supposed to generate 200% of the change in their associated index on a daily basis. The smaller the volume, the more inconsistent the ability to achieve the 200% move. For non-leveraged ETFs, this effect can manifest itself as a divergence between the price of the ETF and its net asset value [NAV].

Below we present a table listing all but two of the ProShares ETFs and their average daily volume (shares traded) as calculated over the last two years or the life of the fund, whichever is less.

Symbol	Name	Average Daily Volume
QID	UltraShort QQQ	20042421
SDS	UltraShort S&P500	10640286
TWM	UltraShort Russell2000	4337620
QLD	Ultra QQQ	4171179
SKF	UltraShort Financials	3778876
UYG	Ultra Financials	3778258
DUG	UltraShort Oil & Gas	3703700
DXD	UltraShort Dow30	2454753
SSO	Ultra S&P500	2368347
FXP	UltraShort FTSE/Xinhua China 25	2260873
SRS	UltraShort Real Estate	892856
EEV	UltraShort MSCI Emerging Markets	563881
DDM	Ultra Dow30	528774
UWM	Ultra Russell2000	475894
MZZ	UltraShort MidCap400	451919
SMN	UltraShort Basic Materials	390431
SH	Short S&P500	174924
DIG	Ultra Oil & Gas	162924
DOG	Short Dow30	157933
TBT	UltraShort Lehman 20+ Year Treasury	156322
MVV	Ultra MidCap400	123451
EFU	UltraShort MSCI EAFE	104662
PSQ	Short QQQ	100591
URE	Ultra Real Estate	81689
USD	Ultra Semiconductors	65585
MYY	Short MidCap400	64646
SDD	UltraShort SmallCap600	60777
ROM	Ultra Technology	52511
RWM	Short Russell2000	43922
PST	UltraShort Lehman 7-10 Year Treasury	40535
SJH	UltraShort Russell2000 Value	40356
SKK	UltraShort Russell2000 Growth	39434
REW	UltraShort Technology	37704
EUM	Short MSCI Emerging Markets	33837
SDP	UltraShort Utilities	28313
SCC	UltraShort Consumer Services	27736
UYM	Ultra Basic Materials	27550
EWV	UltraShort MSCI Japan	24811
SSG	UltraShort Semiconductors	24423
SIJ	UltraShort Industrials	17818
UKF	Ultra Russell1000 Growth	17312
SAA	Ultra SmallCap600	14532
SZK	UltraShort Consumer Goods	13972
EFZ	Short MSCI EAFE	12423
UKK	Ultra Russell2000 Growth	11173
UPW	Ultra Utilities	10043
SDK	UltraShort Russell MidCap Growth	9104
SFK	UltraShort Russell1000 Growth	8403
SJL	UltraShort Russell MidCap Value	7639
SBB	Short SmallCap600	7392
UVT	Ultra Russell2000 Value	7349
UKW	Ultra Russell MidCap Growth	6863
UXI	Ultra Industrials	6775
SJF	UltraShort Russell1000 Value	6667
RXL	Ultra Health Care	6507
UGE	Ultra Consumer Goods	4853
RXD	UltraShort Health Care	4822
UVG	Ultra Russell1000 Value	4665
UCC	Ultra Consumer Services	4264
UVU	Ultra Russell MidCap Value	3433
LTL	Ultra Telecommunications	1596
TLL	UltraShort Telecommunications	368

ETFS missing from table: Short Financials (SEF), Short Oil & Gas (DDG).

Stick to those ETFs in the top one third of this list and you will be able to avoid the the problems inherent in the less popular ETFs.

Comments

[johnthebear:]

I invest in ultra short FXP (China) and SRS (Dow Jones RE index) and have done very well with both. Trades have executed quickly and I chart each in Yahoo and include the FXI and IYR to compare trends as to which is moving up faster.

I am amazed that there is a way to get a 2:1 ratio against an index, and I admit to investing without knowing all the facts.

I would appreciate it if you could explain how the process works so that I will have greater confidence in the future as my profit keeps expanding my holdings.

I appreciate ProShares and the opportunity they have provided to the small investor.

2008 Jun 28 09:02 AM

[adan:]

really good info, very interesting, thanks!

2008 Jun 28 06:22 PM

[johnthebear:]

John the bear wrote on June 28:

I am amazed that there is a way to get a 2:1 ratio against an index, and I admit to investing without knowing all the facts.

I would appreciate it if you could explain how the process works so that I will have greater confidence in the future as my profit keeps expanding my holdings.

Please try to find an answer for me.

Have you asked ProShares to explain it to you?

2008 Jun 30 06:41 PM

[Ames Tiedeman:]

John, That is a great question. I do not have the answer, but I suspect they are using some kind of derivative to produce this. I have found that the Ultra's are fantastic to trade. Good luck.

2008 Jul 15 07:22 PM