Geoffrey Lordi

The 'Reflation' Top Ten Portfolio

Hello, Rayno,

My point re: ProShares etfs is that they are designed for very short term applications and do not definitively track 2:1 or 1:2 over the long term, even after accounting for fees. For example, I'm currently comparing SSO:SPY. At 11.41AM, SSO is down just shy of 100% more than SPY, which makes sense since SSO is an S&P Ultra etf...However, because of the options-strategy based manner which motivates SSO, if the S&P is up 2.1% this month, I cannot expect that SSO will be up 4.2%; similarly, if the S&P is up 6.2% at year end, I cannot expect 12.4% gains (even without considering fees) from SSO. Sometimes this works out for the better (overshot gain performance), sometimes not (vastly undershot performance). A prime case to support the former situation is SDS' one month performance: +5.69% vs the S&P's +5.05%.

Here are some examples that led folks astray over the last *year*:

FXI (China) down 47%, but its double-inverse FXP short down 58%;
EEM (emerging mkts) down 47%, its double-inv EEV down 38%;
IJR (Russell 2000) down 28.3%, TWM down 22.4%.

But...
SPY down 35.1% and SDS up 16.4%;
XLU down 30.5% and SDP up 15%...

There are other examples - some where the ProShares funds have overperformed: some where the opposite is true.* And while some folks would gladly take unexpected overperformance, we should be wise to realize that it *isn't* unexpected. After all, ProShares said it best on their website:

"ProShares are designed to meet daily objectives; results over longer periods may differ."

* These comparisons valid between 11AM and 12PM on Jan 7.

Don't get me wrong - I enjoyed your article. I just ask that you don't expect 2:1 *for sure* on your TBT strategy.

Take care,
Geoff L

The 'Reflation' Top Ten Portfolio

Considering that the ProShares double inverse vehicles yield that double inverse *only per day* (and not per week, month, or year), should we assume that you are only holding TBT on certain days? After all, there've been countless examples of what happens to these vehicles when they're not held as intended: for the extremely short term. (Disclosure: we've held SSO, DXD, FXP, and EEV.)