Aggresive Investors Should Ante Up with ProShares Ultra Financial ETF

If you agree with me that the battered U.S. financial market is at or near the bottom, the ProShares Ultra Financial ETF (AMEX: UYG) offers the dual advantages of one-stop shopping and leverage. It's not an investment for the faint-of-heart, but there is potential for a big capital gain for those who can deal with risk.

The objective of this ETF is to earn returns before expenses and fees that correspond to twice the daily performance of the Dow Jones U.S. Financials Index. As you might expect, this fund has been absolutely hammered as a result of the subprime crisis, the credit crunch, the U.S. housing slump, and now bank failures. The price tumbled from a high of $72.13 in February 2007 to a low of $14.75 earlier this month. (Figures in U.S. dollars.) That's a gut-wrenching drop of almost 80%! But we may have seen the bottom. The shares started to rally last week, finishing on Friday at $20.40.

The components of the Dow U.S. Financials Index read like a Who's Who of Big Finance. They include JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C), Wells Fargo (WFC) (which came out with decent results last week), and Goldman Sachs (GS).

The fund has an MER of 0.95%. Investors receive quarterly distributions which vary dramatically. For example, in June 2007 the units paid out 70.4c per unit. This June, the distribution was only 9.8c.

Of course, there is risk here. It appears all the bad subprime news still hasn't come out and more bank failures are possible, as Federal Reserve chairman Ben Bernanke warned Congress last week. The fact the portfolio is leveraged heightens the risk. But the leveraging also increases the upside potential if, as I expect, we begin to see a recovery in the financials sector in the coming months.

Action: The ProShares Ultra Financials ETF is a buy for aggressive investors.

Disclosure: Long

 

 

Comments

[Alpha Seeker:]

With oil heading back to $150, aggresive investors will be better off staying in cash, since the world runs on oil. This bear market has 1-2 more years to play out.

2008 Jul 21 08:17 AM

[ETF STER:]

Beware of false rallys

2008 Jul 21 08:17 AM

[andyn:]

It's a good idea since markets are looking ahead. THough it wont go back up too soon, it would start a slow grind.
A more profitable trade might be to buy puts on SKF (which is the double inverse of financials). It has dropped from over 200 to 133 in 4 trading days and it could go back to double digits by year end. 33% profits!!!

2008 Jul 21 08:42 AM

[buyitcheap:]

This is a bounce ina bear trend, if you do buy,keepthe stops tight around 19.50

2008 Jul 21 09:10 AM

[Emerald:]

False bottom with major loan resets coming thrugh 2009. Banks not lending. Regional bank failures will accelerate through 2008.

2008 Jul 21 10:04 AM

[Mark S.:]

I agree that UYG would be a big gamble right now. The financial rally is leveling off on the charts and we'll start to see the drop here soon.

2008 Jul 21 11:02 AM

[pshah:]

If you really want to bet on a revival in financials with lower risk, then LEAPS in GS or JPM might be better. They are not expected to bleed as much as the others and might pick up more market share.

2008 Jul 21 01:23 PM

[g miller:]

You're nuts! This is a suckers' rally and will dive soon enough. I'll make my money shorting you and your followers.

2008 Jul 22 12:13 AM

[Calvin C.:]

I'd rather short UYG

2008 Jul 22 12:39 AM

[amit:]

Just a test

2008 Jul 22 07:31 AM