I closed yesterday’s Proshares Inverse ETFs trade earlier today. Here are my impressions about them:

They are in sum better than mutual funds and their end of day closing prices; They are not nearly as useful as the Qs, Diamonds or Spyders. With the uptick rule exmption for ETFs, I am hard pressed to see why you would want to use these outside of retirement / tax deferred accounts.

First off, they are are rather illiquid; you couldn’t do a 10,000 share order easily.

Next, they trade with a fat 5 to 10 cent spread. The Qs are liquid as all hell, and if you could trade between the penny spread, I’d bet you would get executed.

3rd, there is an odd delay on the PSQs (Inverse Qs) relative to the markets. I got out within a nickel of the highs, and the market had long since reversed off the day’s lows. Thats a weirdness that will likely get corrected by some arbitrage relative to the index futures (theres some free money for someone right there). Indeed, the Nasdaq was briefly positive, and these were still up for the day.

Bottom line:  A good product for hedging in accounts that either cannot short or use options; they are also superior to mutual funds, but inferior to shorting traditional ETFs.

UPDATE 2: July 13, 2006 1:28 pm

The Ultra Short ETFs are now out:

UltraShort QQQ QID $0.00 $0.00 NASDAQ-100®
UltraShort
S&P500
SDS $0.00 $0.00 S&P 500®
UltraShort Dow30 DXD $0.00 $0.00 DJIA
UltraShort
MidCap400
MZZ $0.00 $0.00 S&P MidCap 400

Category: Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

29 Responses to “Closed the Proshares Trade”

  1. amz says:

    nice trade

  2. paul says:

    Agreed – I trade a trust account sometimes and this “short” would work where – trusts are not allowed to trade shorts.

    I tested these new leveraged accounts and found not only is the spread too large and delayed (2X the Q’s
    + or – but I think they are trading themselves to keep the board alive

    When there is no trading for awhile – they begin to shorten the spread – and if the market makes a quick reversal – there is a good deal there – if you catch it.

    It is a beginning in getting the benefits of Profunds without waiting for the end of the day to get out.

    As you relate – you can get the same leverage in a very liquid Q’s trade if you simply double the trade you would have made.

    Thanks for your site

    paul

  3. David Silb says:

    Make’s me wanna sing

    In the neighborhood of “G”…..

    “1″ “2″ “3″ “4″

    http://www.turoks.net/Cabana/PlasticJesus.htm

  4. David Silb says:

    Oh hell Barry!!!!

    Sorry folks I ment to post my comment above in the “The Bull Case” for some reason it wasn’t open earlier today for posting and I wasn’t paying close attention so I put it here accidentally.

    If you was confused you should be. Sorry.

  5. trader75 says:

    The double leverage stuff peaked my interest more than anything else, because they potentially offer a way to do interesting things and work around margin restrictions.

    Hypothetical example: put two thirds of your equity (for this particular strategy) into high quality, high dividend stocks and the other third into a double-leverage inverse S&P or Dow ETF.

    The double leverage on one-third bearish nets out with the two-thirds of long stocks bullish. What you get, very roughly, is an exposure level close to zero with a dividend kicker.

    Obviously there are adjustments and caveats required, but that’s the basic idea. That was off the top of my head, there are probably more intriguing combos out there too. Just an example of interesting possibilities. And if strategies like this are built for the longer haul–i.e. rebalance once a quarter or what have you–bid / ask spreads on the wide side don’t matter as much.

  6. Bynocerus says:

    I don’t get it David, but the song makes me laugh. Something else I don’t get, but laugh even harder at:

    http://youtube.com/watch?v=eQENCnAhEXk&search=big%20buckin%20chicken

    If I could get this as a ring tone, my wife would kill me because I’d call myself just to laugh at the ringing. You are big… Does the old man bobbing his head creep anyone else out? It’s almost like he’s making an exceptionally vulgar pantomime.

  7. royce says:

    Barry, can you explain why they’re superior to the equivalent profunds mutual funds? What’s the advantage that makes up for the big spreads from a trade when redemptions would presumably be cost free?

  8. trader75 says:

    p.s. Now that I think about it, you could just put the two thirds of long equity into a dividend paying ETF. Maybe one of those Wisdom Tree deals Jeremy Siegel is so excited about.

    The portfolio of the future could be a set and forget setup with two or three vehicles in it. Now there’s a trippy thought.

  9. Whammer says:

    I’m actually glad that it is Big Buckin Chicken, because I couldn’t understand what they were saying originally.

    In the Plastic Jesus department, this is just not right:

    http://www.youtube.com/watch?v=jv4KqsJcbdk&search=plastic%20jesus

  10. smf says:

    hearing Cody got stopped out on his QQQQ’s ………………… Buy !!!

  11. Amadeus57 says:

    Did’nt Charles Nenner say that July 10th was going to be a top??? Or is he now saying he meant a bottom?

  12. BDG123 says:

    I’m curious about your comments on this trade. Did you try to get out near the low of the day and yet the delay means you ended up liquidating near the high of the day? Is that what you meant? I’m curious because the new levered ETFs are interesting from a retirement account standpoint. Yet on a double inverse product, that’s a 4% problem.

  13. Playing the ProShares

    Barry from The Big Picture did a little experimental trading of the ProShares Inverse Qs ETF, and heres his takeaway:
    They are in sum better than mutual funds and their end of day closing prices; They are not nearly as useful as the Qs, Diamonds…

  14. whipsaw says:

    trader75-

    Interesting ideas, but I wonder about the leveraged short etf because:

    a) to me, leverage = borrowed money. Somewhere along the line, somebody is borrowing money and is paying something for it (unless they are actually using puts). I wonder what the overhead of that and impact on performance would be even at prime?
    b) assuming true shorts rather than puts, the short fund would also eat dividends which could be substantial if the target was something other than QQQQ.
    c) then there is the tax side of it about which I don’t claim any knowledge except that this can get awkward if you enter into a short sale in one tax year but don’t cover until the next. If the short fund has recognize sales this year that may not be covered until 2007, it would most likely hurt performance I think.

    I am sure that I could chase down answers to these concerns, but I am inherently lazy and you seem to interested, so I thought I’d just raise the flags and see if you had already considered them?

  15. Kevin says:

    “Barry, can you explain why they’re superior to the equivalent profunds mutual funds? What’s the advantage that makes up for the big spreads from a trade when redemptions would presumably be cost free?”

    I’m in URPIX with my IRA and there would be a fee if I sold after holding only a short time. Also, I can only sell at the end of the day, so there is no way for intra-day timing.

  16. jkw says:

    trader75,

    Is there really an advantage to your proposed ideas over selling index futures for an appropriate amount? Or buying deep in the money puts? I would think you could do at least one of those with most accounts.

    I suspect that the bid/ask spread will tighten fairly quickly. I could write an arbitrage trading program to fix that and make money in the process. Somebody will do it fairly soon.

    I’ve often wondered how etf costs affect the arbitrage trades. In principle, qqqq should consitently underperform NDX. It seems that there should be some way of buying NDX futures and staying short qqqq where you basically collect the fees from qqqq. I doubt it is worth it for the large etfs with small fees, but there might be some kind of fee-arbitrage available for an etf that charges almost 1% on NDX. Something along the lines of shorting the etf and selling NDX futures. If you can collect interest on the short-sale cash then you theoretically have a no risk way of getting paid double interest (once by the futures and once by the etf cash) plus an extra 1% for the etf fee. Tracking errors will affect the returns. If I had $50k for speculative investments, I would definitely try this out.

    I think there is a better argument to go short the short funds than to go long. I would expect a short investment in this fund to outperform qqqq when the market goes up. I’m not sure about when the market goes down. But it’s listed as hard to borrow. Total volume so far has barely broken 1 million. Perhaps it will be easier to borrow when it has matured a bit.

  17. whipsaw says:

    per jkw:

    “Is there really an advantage to your proposed ideas over selling index futures for an appropriate amount? Or buying deep in the money puts? I would think you could do at least one of those with most accounts.”

    I was thinking along the same lines when I posted in reply earlier, but didn’t want things to get too complicated.

    btw, does anyone have any suggestions about where to set up a futures account and how much to commit to get anywhere? I understand the risk factors and have just never gotten into futures because I could get where I needed to be with normal options, but I smell opportunity in the wind. From what I discern, $5k is the minimum which probably means that $20k is the practical? Thanks.

  18. vshah says:

    Trader75, the problem with your strategy is that you would have to pay back the dividends from the short fund anyway. How would you get around that?

  19. trader75 says:

    I haven’t given it deep or serious thought, that was just an initial observation–there may well be plenty of validity to the objections.

    Clearly index futures would be a superior hedging vehicle for those with access to them, I was thinking more along the lines of something that could work for the average joe who doesn’t want to mess with futures / something that could work smoothly in an IRA account etc… buying an ETF with no expiration date or rollover cost might also be easier than messing about with spoos or eminis etc, and since you are technically “long” the inverse ETF there aren’t short-side hassles… again its a question of how much active management one wants to pursue, of course for the truly active manager with a big toolbox many of these ETFs are redundant in the first place.

    Re dividend cost on the short side I don’t know, that would be a details question regarding the Proshares ETF, but I’m assuming they would use futures in a similar way that DBC does to get their desired leverage.

    And of course there are all kinds of funky combinations you could come up with, like picking a handful of stocks on the long side with much higher dividends than the S&P on average, or rotating out the dividend paying stocks, or adjusting the size of the inverse position, or what have you. Plenty of possibilities.

    At the end of the day there’s still no free lunch, products like this just make it easier to make intelligent moves in my opinion.

    For those looking for universal access to equities, futures and options in a single account, I haven’t found anyone better or cheaper than Interactive Brokers (www.interactivebrokers.com). You have to be extremely self-directed and comfortable with automated software though, those guys do no hand-holding whatsoever.

  20. ndk says:

    whipsaw,

    you can trade futures with a very small amount of collateral. unfortunately — or fortunately — you’ll have extreme leverage to go with it. just know that you’re essentially betting red or black if you buy futures without adequate capital backing to ride out any market instability en route to the destination.

  21. vshah says:

    Trader75: It’s a clever idea but I think all of it is moot considering the current interest rates… would make much more sense when rates are low, but then again I think at that time it would make more sense just to be long. But I guess (almost) risk free is the operating word here…

  22. trader75 says:

    Vshah: Sure, and just to clarify, my intention was not at all to suggest an out-of-the-box strategy that someone could just go and implement. It was more a raw example of thinking creatively, and the dividend thing was just an off the cuff example. You could also create a strategy with deep value stocks, or undervalued vs overvalued sectors, or what have you. Point is, thanks to these new instruments, folks have more options to generate personal alpha than before. But there’s no cut and dry instruction manual.

  23. trader75 says:

    What the heck? I just responded to a comment that somehow no longer exists.

    There was another comment from Vshah there before, just so you know I’m not insane…

  24. vshah says:

    Haha, yeah, it’s gone now somehow?

  25. vshah says:

    And yes, you are correct, merely wanted to point those things out. For small investors/traders (like me) these instrments have the potential to be very useful.

  26. yo-yo-brah says:

    you’re swinging 10,000 blocks just to “test” this profund product and you have a CD wishlist?? lord help us, lol.

  27. TorontoBULL says:

    To David Silb
    on your free dividend lunch…

    Assume a Div yield of 3% on DOW
    $100 portfolio of which $66.66 of Dow ETF and $33.33 in 2x leverage inverse DOW ETF.

    so earn position of $100 earns $1.5 in Div and $100 is safely hedged.

    Soooo…a yield of 1.5%???? and after MER even lower and after trading cost and spreads……is there ever a free lunch

  28. robby says:

    Prices can go up to infinity but they can only go down to zero. Over the long term, how will a 2X inverse ETF deal with prices increasing over 50 percent?

    Robby

  29. My colleague and I just authored an article about the “Constant Leverage Trap”, a problem that affects leveraged ETFs like ProShares and Ryder that use constant leverage. Basically they crater in a downturn and never recover.

    http://etf.seekingalpha.com/article/31195

    Also look at this ticker: UOPIX