Old Turk

Distressing Details of the UltraShorts

I suspect that the intrinsic weaknesses of the Ultrashort ETFs and ETNs can provide oversized gains as well as losses over the medium to long term. For instance, you could have bought SKFs (Proshares Ultrashort Financials) in the 70s and 80s in Aug-Oct 2007, and if you had had a sell order in at 204 on Oct 10, 2008, you would have cleared about 170% profit, and it would have been long term capital gains as well.

If an ultrashort ETF is truly operating on a daily basis, whenever there is a gap down from one day's closing to the next day's opening, you are "robbed" because you "miss" the overnight drop. Gapping is much more likely in high volatility markets. But remember, the opposite can also occur, especially in a falling but tranquil market: The next day's opening can be higher than the previous day's close, so that you "double up" on that part of the previous day's drop that is retraced before the tumble continues.

If the ETF does not increase the shares available as demand increases, then there is a premium included in the price, which is caused by demand in excess of supply. And vice-versa for a discount to price.

I still love the ultra ETFs and ETNs, because, unlike options, there is no premium paid for time (rather, some of them actually pay a dividend), and if you hold for over a year you get LTCG rather than STCG tax treatment. It's very important to know the underlying structure of the ETF. For example, for DIG it is simply oil and gas and drilling and refining companies (go to marketwatch.com, search for DIG, then hit profile and you see the exact list), so DIG is going to track its index very well.. For DXO and DAG, it is all futures contracts, where contango and backwardation have huge influences. These ETFs are about as alike as apples and cats.