Short ETFs for Dummies

[XL-entLady]

I'm just beginning to learn about Short ETFs. If others are in the same boat, maybe you'd like to learn along with me.

Here's a thumbnail sketch of SH, SKF and SRS:


ETFs For Momentum Investors

"As Wall Street continues to try to get a proper footing, stocks and exchange traded funds (ETFs) keep on riding the prevailing trends of weakness, but there are some investment tools that are gaining some momentum. Short ETFs are gaining some positive ground in the early part of 2009 and they may complement a portfolio strategy if properly used, writes Ron DeLegge for ETF Guide (http://www.etfguide.com/commentary/490/3-ETFs-for-Momentum-Investors/).

But it is noted that a potential investor needs to fully comprehend how the products work. Because of expense ratios, tracking error market forces, and the product structure, the performance of short ETFs would almost never mirror the percise opposite returns of their corresponding indexes.

Momentum investors (http://www.investopedia.com/terms/m/momentum_investing.asp) aim to capitalize on the continuance of existing trends in the market, and believe that large increases in the price of a security will be followed by more gains.
If this is your style, DeLegge notes the following ETFs: ...."

http://www.dailymarkets.com/stocks/2009/02/02/etfs-for-momentum-investors/

Lady

[XL-entLady]

Here is a 2/3/2009 article that explains more about shorts, with some pluses and minuses:

Bad Is Good with Short ETFs


"We’re nearly a month into the New Year, the U.S. has a new president, and many investors are looking forward with more than a little trepidation, wondering if it’s at all possible to eke out a few gains in the coming months. It’s a safe bet most investors didn’t do well last year. A quick look at how the major indexes have down in the last 13 months sums it up fairly well: the DOW (http://finance.google.com/finance?q=INDEXDJX%3A.DJI)’s down 39%, the S&P (http://finance.google.com/finance?q=INDEXSP%3A.INX) fell 43%, and the Nasdaq (http://finance.google.com/finance?q=INDEXNASDAQ%3A.IXIC) slid nearly 44% since the beginning of 2008.


Recent market sentiment isn’t exactly painting a great picture looking forward, either. Markets slid negative in four out of the last five trading sessions. Adding to the sense of impending doom are record home foreclosures, soaring job losses, consumer confidence waning at a 15 year low, and bank failures on the rise. With all this bad news, how can the average investor make any money?


The answer to that depends on whether you believe this financial morass will end any time soon. Even with massive amounts of monetary stimulus, it will take some time to turn the global economic ship around. When that happens, there will be certainly be opportunities on the long end of the equation.


But in the short term, many companies will continue to report lower and lower earnings and guidance, and their share prices will continue to drift down as a result. After all, stock prices ultimately reflect the earnings power of a business. With that trend in place, all one has to do is embrace the doom: bad is ultimately good. This line of thinking is what’s behind many ETF’s that bet on falling companies, and even entire sectors.


For instance, if you had invested in Deutsche Bank’s Banks Short (http://www.dbxtrackers.co.uk/EN/showpage.asp?pageid=143&inrnr=151&pkpnr=300) Exchange Traded Fund at the beginning of 2008, you’d be sitting on a tidy 184% profit. Trading primarily on European stock exchanges, the fund closed last September after Britain’s Financial Services Authority (http://www.fsa.gov.uk/) instituted a ban on short selling of financial stocks. It has since reopened to new investors.


Other financial short funds – available to investors here in the states -- haven’t done bad either: Proshares UltraShort Financials (SKF (http://seekingalpha.com/symbol/skf)) is up over 4% since the beginning of this year and nearly 25% since the start of 2008. ProShares has no less that 46 short ETF’s covering just about every major sector as well U.S. Treasuries, and most of the world’s major currencies.


Rydex, the creator of the first short equity and fixed-income mutual funds, has a number of offerings as well. Its Inverse 2x S&P Select Sector Financial ETF (RFN (http://seekingalpha.com/symbol/rfn)) seeks to provide a return that matches 200% of the inverse performance of the Financial Select Sector index. So far this year, it’s up almost 67%.


Juicy returns to be sure. But a word of caution: many of these ETF’s are small, thinly traded and can be very, very volatile. A market rally of 200-300 points – not that uncommon these days – can send them dropping like a rock. But as part of a short-term trading strategy based on the performance – or lack thereof – in the financial or other targeted sectors, they may be worth a look."

http://seekingalpha.com/article/118155-bad-is-good-with-short-etfs

Lady

[teknobucks]

SKF SRS should roar...fundamentally
it's the darn ib's fooling with um chasing daily navs while the govt spooks the price down that kills ya. (banning financial shorts etc)

long SRS and FAZ myself fwiw

[Gumby]

S&P @861

Bought more SDS, SRS, and SKF today. Sold CAT @ $32.60

We will see what happens. I find it hard to believe the market can rally on 7.6% un-employment.:nuts:

[etftalk]

Good luck gumby. I like the positions.

I suppose the S&P can hit 877 (50 dma) or 900 (top of the wedge), but I would hate being long at those points.

[teknobucks]

FAZ may be a buy here at 39...prolly see 35 now that i have entirely 2 much

[Gumby]

Good luck gumby. I like the positions.

I suppose the S&P can hit 877 (50 dma) or 900 (top of the wedge), but I would hate being long at those points.

I agree. Pretty good paper loss on SKF on Friday and SDS as well.....but I am holding. Closed out the last shares of UYG on Thursday @$3.10.....definitely a day early. My TBT has held up well and I am considering buying more. I put in a limit order for FAZ for $39.40 near the close Friday but it didn't fill. The "spending" bill may make FAZ and SKF move big.....I just can't predict which way. I believe all the big banks are bankrupt and are living a lie with the FED footing the bill. Eventually, I think this scam will implode upon itself unless the FED figures out how to price worthless assets at full par value.

The government has manipulated this market for many months now. I see no end to the gamesmanship until the economy and dollar is totally destoyed.:eek:

[XL-entLady]

Another good reminder that shorts are not always mirroring the longs.
Beware Short and Ultrashort ETFs

by: Dr. Kris February 11, 2009

"What's the difference between a long ETF and its short counterpart? Theoretically, the price chart of one should inversely mirror that of the other, but as you can see from the charts below that is definitely not the case here.
The first chart is of the USO (http://seekingalpha.com/symbol/uso), the US Oil Fund. (The chart of the US Gas Fund, the UNG (http://seekingalpha.com/symbol/ung), is similar.)
http://static.seekingalpha.com/uploads/2009/2/11/saupload_uso_chart_2_10_09_1.jpg (http://static.seekingalpha.com/uploads/2009/2/11/saupload_uso_chart_2_10_09.jpg)
The fund peaked July 11, 2008 and has fallen more than 70% since. Wouldn't it have been nice to have had a crystal ball so that you could have seen this coming and then done the opposite like, say, buy the ultrashort oil and gas ETF?
Let's examine this scenario and see what would have happened. Here's a chart of the DUG (http://seekingalpha.com/symbol/dug), the double-short oil and gas ETF.
http://static.seekingalpha.com/uploads/2009/2/11/saupload_dug_chart_2_10_09_1.jpg (http://static.seekingalpha.com/uploads/2009/2/11/saupload_dug_chart_2_10_09.jpg)
The DUG did rise after oil began to implode. It returned more than 140% from July 11 to its peak price reached on October 10, 2008 where it formed a one-day island reversal (an evening doji star in candlesticking). No matter how you look at it, this is a bearish sign. The price turned around and fell 68% since then, but so did the USO. In fact, the USO has only fallen 60% since that date!
So what gives? Shouldn't the DUG be trading through the roof instead of scraping the basement floor right now? That's what one would expect. To clear up this mystery I went to the Proshares website (http://www.proshares.com/funds/performance/UnderstandingProSharesLongTermPerformance.html)whe re they explained why their short and ultrashort funds don't always perform the way they should.
There are two reasons for this.
The first, they say, is that their funds are designed to return their stated returns on a daily basis only. Here's their explanation

Leveraged and short funds can be valuable tools for investors who want to manage their exposure to various markets and market segments. But investors considering these funds should understand that they’re typically designed to provide a positive or negative multiple of an index on a daily basis and not for greater periods of time. As a result, fund returns will not likely be a simple multiple (e.g., 2x, -2x) of an index's return for time periods longer than one day.
No kidding!
The second reason they claim is due to market volatility

Additionally, investors should recognize that the degree of volatility of the underlying index can have a dramatic effect on the longer-term performance. The greater the volatility, the greater the deviation will be of a fund’s longer-term performance from a simple multiple (e.g., 2x, -2x) of its index's longer-term return.
In fact, it's this second reason that explains much of the discrepancy between the two charts. Let's look at the market volatility index, the VIX.
http://static.seekingalpha.com/uploads/2009/2/11/saupload_vix_chart_2_10_09_1.jpg (http://static.seekingalpha.com/uploads/2009/2/11/saupload_vix_chart_2_10_09.jpg)
You can see that the VIX has had quite a profound influence on the behavior of the DUG—much more than even the oil and gas index that it's supposed to track! Actually, you could almost use the DUG as a proxy for the VIX—who would have thought?
Lessons learned
There's a couple things that I've learned from this exercise. The first, and most obvious, is not to blindly assume that just because a fund says that it tracks the inverse or double the inverse of an index means that over the long haul it actually will. Because of this, one should be very careful of using these instruments as hedges, especially in highly volatile markets.
You learn something new every day. Class dismissed."

http://seekingalpha.com/article/119901-beware-short-and-ultrashort-etfs

Lady

[XL-entLady]

And here's an interesting statement:


"...These levered and short sided ETFs are an endless series of paradoxes. They are set up to benefit from market moves, but the more volatility, the less accurate they are in achieving that objective. They market themselves as an easy way to provide sophisticated trading strategies (http://www.thestreet.com/story/10454678/5/why-short-sector-etfs-arent-so-smart.html#), yet the true sophisticated investor can implement more effective trading strategies themselves. They do their job following daily moves, yet they make for a lousy long term hedge or trade. They offer the layman investor a chance to protect against volatility, yet they help contribute to and exacerbate that volatility because of their construct.

....I realize some may say, "I hear you on that, but these just make it so easy for me to implement my strategy." OK, maybe so. But if you would have just been short the two-times long Ultra Real Estate instead of long the two-times-short UltraShort Real Estate since the beginning of the year, you'd have three times as much capital in your account right now. That's some price to pay for ease of use! At least the offering documents state, "There is no guarantee [these products] will achieve their investment objective." You can say that again. " [emphasis added]
http://www.thestreet.com/story/10454678/5/why-short-sector-etfs-arent-so-smart.html


Lady

[XL-entLady]

Here's another warning that some ETFs are just for day trading!

Even Cramer Agrees: UltraShort Financial ETF Is Nothing but a Poor Trading Vehicle

by: Don Fishback, February 24, 2009

"There’s a lot of ranting going on. And in this instance, it’s entirely deserved. Especially when the ire is aimed at the inverse Ultra ETFs (Exchange Traded Funds). I took my shot (https://www.donfishback.com/blog/2008/08/07/why-i-dont-like-ultra-shorts/) at them months ago, when I noted that, unless your timing is perfect, you’ll get hammered.
Here’s a perfect illustration. Let’s say that you were bearish on financial stocks at the close on options expiration on November 20, 2008. Your forecast was that financials would be sharply lower three months later. Well, here it is three months later and your forecast was almost perfect. The stock market recovered for a short period; then it fell off a cliff. The XLF (http://seekingalpha.com/symbol/xlf), which is the S&P 500 Financial ETF, is down a staggering 20% since that third Friday in November.

The marketers of the ProShares UltraShort Financial ETF (SKF (http://seekingalpha.com/symbol/skf)) tell us that the fund earns double the amount that the financials fall. For instance, if the financials fall 1%, the fund should gain 2%. They also tell us that the relationship is highly correlated, but only over a very short time frame. Math geeks know that the relationship is only short term because of the logarithmic nature of the markets.

No matter what the reason, here’s the bottom line: had you invested in the SKF on November 20 expecting the financials to fall, you probably would be blowing your brains out now. That’s because, even though you were right about the direction of financials, and you correctly forecast that the financials would fall 20% in three months, the fund you chose to profit from such a forecast is actually DOWN … -20%. That’s right, had you made a bet expecting financials to fall utilizing this vehicle, you would have nailed the forecast and lost 20% of your money.
http://static.seekingalpha.com/uploads/2009/2/24/saupload_xlfvskf_thumb1.jpg (http://static.seekingalpha.com/uploads/2009/2/24/saupload_xlfvskf.jpg)
The index (in red) is down 20%, and the leveraged, bearish UltraShort fund (in blue) is down the same amount. You wonder how these things are allowed to continue to exist if the relationship they are supposed to have doesn’t last more than a few hours. By that definition, their only purpose is to be a trading vehicle. By the marketing company’s own admission, through its marketing and compliance materials, the 2:1 relationship is only for the day. That means it has no purpose other than to be a trading vehicle. If you utilize this for any time frame other than a day or two, the advertised relationship breaks down, as this chart proves. Because the 2:1 relationship doesn’t last more than a day, SKF cannot be used for investment purposes, or for a hedge that lasts more than a couple of days. Which brings us to this next topic.

Monday, Adam Warner of the Daily Options Report (http://adamsoptions.blogspot.com/2009/02/skf-eats-world.html), who has blasted the leveraged “ultra” funds before, pointed out that trading volume in these things has gone berserk to the point of overwhelming the financial system. He noted that 40 million shares of SKF traded on Friday. He also speculated that there may be some “arbing” going on. That is, if SKF gets to a certain premium or discount to a basket of constituent stocks, there is an arbitrage opportunity. At the same time, there has been an explosion in SKF volume. Doing a little back of the envelope math, Adam found that ”the Travelers (TRV (http://seekingalpha.com/symbol/trv)) volume accounted for by SKF actually exceeded the volume that actually traded in TRV.” SKF volume was comprised of a bunch of flippers who have gotten so large that the tail they’re creating is wagging the stock market dog.

A few hours later, Cramer, with whom I don’t always see eye-to-eye, blasted the leveraged financial ETFs (http://www.cnbc.com/id/15840232?video=1043661880&play=1), and noted that they are a threat to the system. He doesn’t go nuts like he has in the past. This time, he’s completely rational and he’s also dead spot on. He essentially makes similar points that Adam does: These products have become gigantic trading vehicles that allow people to exceed the Federal Reserve margin/leverage limits. And he notes that no one fully thought through the full ramifications, including the unintended use of these trading vehicles when they were approved."


Okay, so this is Lady again. I've been bitten by the exact thing they're talking about here. Trying to hold a leveraged ETF for too long. I'm not sure what the answer is to this problem over the long run. I'm working on different types of strategies to keep from having commissions eat all my profits on these suckers. But I haven't had any scathingly brilliant ideas yet.

Does anyone else have a suggestion?? :confused:

Lady

[etftalk]

Perhaps you can short the XLF instead for intermediate-term positions. It won't be the 2 X short you had intended, but it's something. Then you can play the SKF for short-term plays at optimal buy / sell points.

I don't know if this is true of all leveraged ETF's, but there is always the option of shorting the long inverse of the short ETF. :wacko:

[XL-entLady]

Perhaps you can short the XLF instead for intermediate-term positions. It won't be the 2 X short you had intended, but it's something. Then you can play the SKF for short-term plays at optimal buy / sell points.

I don't know if this is true of all leveraged ETF's, but there is always the option of shorting the long inverse of the short ETF. :wacko:
I think you have something there! :) Except that I'll have to diagram it out to follow it! :toung:

Lady

[alevin]

I'm learning in my practice account at OptX-very very slowly. I had a limit buy order in on USO, just cuz. It filled today and I gained a whole whopping $4 today :rolleyes:. So tonight, thanks to other thread somewhere here I read about SCO being USO inverse, so I put in an order there, with a stop on it.

And THEN, I put in a trailing stop on a limit sell order for the USO. Does that make any sense at all or does that sound like I'm a total novice that has no clue what I'm doing re conditioning my sell orders? :wacko: I get to watch how it plays out in the dummy account, but suspect I will yelp for help interpreting what happens with the sell order, and what happens with the stop order on SCO buy order too when/if they fill. That's it for me tonight.

[etftalk]

I'm not totally following:

It sounds like you own USO and have a trailing stop on it.

You also have an open limit order in to buy SCO and an open stop order in it as well. Just no fills here yet.

Is that right?

[alevin]

I'm not being very clear, am I? Shows how new I am at this. Haven't even learned how to talk about it very well yet.

Ok, yes, I bought USO today on a limit order at 24.40 (practice account using real-time market prices). Day ended up at 24.44, so I gained a whole whopping $4.00 so far on that buy in my first day. However, I really think it's going down much further, so I put a sell order in with a stop-loss limit (I think).

Since I think USO is going down, I put in an order for SCO also to hedge. I didn't want to pay tooo much for it tho, so I put a stop order on that on the upside (I think that's what I did anyway). OptX has a dummy account I can practice with real-time to get used to their trading platform so that's what I'm doing with these orders. Learning by doing-without risking any real $ yet.

[XL-entLady]

I'm not being very clear, am I? Shows how new I am at this. Haven't even learned how to talk about it very well yet.

Ok, yes, I bought USO today on a limit order at 24.40 (practice account using real-time market prices). Day ended up at 24.44, so I gained a whole whopping $4.00 so far on that buy in my first day. However, I really think it's going down much further, so I put a sell order in with a stop-loss limit (I think).

Since I think USO is going down, I put in an order for SCO also to hedge. I didn't want to pay tooo much for it tho, so I put a stop order on that on the upside (I think that's what I did anyway). OptX has a dummy account I can practice with real-time to get used to their trading platform so that's what I'm doing with these orders. Learning by doing-without risking any real $ yet.

Makes total sense to me. But then I've decided that you and I think a lot alike, Allie! :toung:

Does your practice account allow you to enter a commission fee into the equation? If so, that would be handy. I'm learning that I have to take larger positions that I really might want to. That's because even when I'm right, sometimes I'm not right enough to cover the trading fees in a small position. :(

Lady

[alevin]

I can't enter commission fees directly, but the virtual account allows me to see what my available balance is after I set up my positions, the filled and unfilled together, and it warns me if I don't have enough $ left to let me enter a position I'm trying to put an order in on.

For instance I tried to put an order in for 200 shares SCO, but virtual account program told me that would put me $1000 deficit in my account and wouldn't let me do it, so I changed the order to 100 shares.

The other thing about OptX is I can call a live person to help me figure out how to do what I'm trying to do, I haven't called yet tho.

And lastly, they have flat trade fees, big, small, makes no difference. I'm working w/100 share blocks for each order. With only $6K (Roth 09 funds) to work with, can't trundle my lil red wagon very far any one day yet.