Ultra ETF's

I just thought I would share something that I have just found out about Ultra ETF's, which attempt to double daily moves of various indexes. The way they are calculated actually makes them unsuited for long term postitions due to a large degree of slippage.

The chart show the ultra short ETF for the S&P 500. As you are probably aware the S&P made a new low yesterday, at about the same low as November 21st. Now look at SDS for the same dates. SDS made a high around 115 in November, but only about 99 yesterday. While you would have expected to have broken even if you bought SDS in November, you would acutally be down over 15%.

This results from it being calculated on a daily basis. If the beginning price is 100 and the market goes up 10% on the day the closing price of SDS will be 2x10% or 120. On the next day the market falls 10%. The market is now at 99. (Day one 100 + 100 x 10% = 110, Day 2 110 - 110 X 10% = 99). But SDS will will be at 96. (120 - 120 x 10% X 2 = 96).

This does not apply to all ETFs, but to those that calculate changes on a daily basis such as Proshares and Rydex. This makes these products unsuitable for long term holdings, however they may be useful for day or swing trading.

▶ Reply to This

Replies to This Discussion

Permalink Reply by Mike on February 28, 2009 at 12:41pm: Yep - They use futures to try to double up performance so for short term trades you can have a better chance of a gain but long term they are inconsistent. An article I read on one Ultrashort, can't recall the ticker offhand, mentioned it traded 23 million shares on a 2 million float. So average hold time was less than 34 minutes.; ▶ Reply to This

Permalink Reply by Frazie on March 1, 2009 at 8:41pm: They offer leveraging ops to those who can't / don't want to use derivatives. Not for everyone I suppose.; ▶ Reply to This

Permalink Reply by ccwells on July 2, 2009 at 10:41am: The financial media have been shoving higher gold, oil, and Chinese stock market down our throats for some time now. Being a contrarian investor, I have been waiting for the right time to bet against the crowd. Today may be that signal I have been waiting for. FXP signaled a buy on the open this morning and SCO confirmed a buy signal from yesterday. I have been long ZSL with a 7.63 entry price and a target price of 10.00.

Happy Trading; ▶ Reply to This

Permalink Reply by ccwells on July 7, 2009 at 8:42pm: I closed my position in ZSL today at a price of 9.98. Maybe I ought to have stayed in it for another day or two, but it hit my target and took my profits. I can buy it back on a pull back later. SCO has rocketed higher. It is rubbing up against its 50 day EMA on the daily chart and against its 200 EMA on the 120-minute chart. I look to buy on a pull back to support around the 19.00 level. FXP had a good day today and I expect it to move higher over the next couple of days. I will really get excited if it could break above the 14.50 level. The daily chart is overbought and I will be looking to buy on a pull back to support around the 12.50 level.; ▶ Reply to This