I don’t understand why, but I keep seeing portfolios strewn with Ultra-Short inverse funds. These are the ETFs that bet 2X and even 3X that major indices will go down. 20, 30 even 40% of some accounts are laden with these.

Please stop.

Eventually, the downside bet will be a moneymaker. Eventually. But if you make that Macro call even a few Qs early with a leveraged bet, the negative consequences could be severe. As I have frequently suggested, waiting for a technical signal prior to shorting is a much better approach than guessing.

Note that I have no problem with the concept or the use of these – but you must understand the risks and issues of using these very short term instruments. There is lots of slippage relative to the indices they seek to short, meaning lots of tracking error. But that is the technical reason for why these should be used sparingly, or as a hedge, and only for days and weeks — not years.

The more basic question is the foolishness of shorting strong indices running straight up — without any technical or timing signal, it is suicidal to guess when this all comes to an end.

It is one thing to miss opportunity sitting in Treasuries or cash; it is something else entirely to fight the tape, let the trend run you over, and argue with the market.

Unless you have a red “S” on your chest and wear a cape, do not step in front of a speeding locomotives . . .

Category: Really, really bad calls, Short Selling, 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.

19 Responses to “UltraShort Indices”

  1. Barry,

    You got it right. Leveraged ETFs is that they are designed for DAY traders.
    Investors who hold are going to lose extra money.
    Money managers who buy these funds are advertising that they are morons.

    Never buy a leveraged ETF – long or short. Just buy extra shares of the ‘regular’ ETFs and eat the extra commission.


  2. bmusic says:


    I got burnt by these after Jackson Hole. It was a harsh lesson to learn.

  3. SteveC says:

    If you KNOW what you are doing, I have no problem with these leveraged inverse index ETF’s. The problem is most market timers don’t know what they are doing, and should stay away. Now the leveraged commodity or futures ETF’s are another matter. I’d hate to find out what people have lost investing in things like VXX or USO. These can do a very poor job of tracking, probably due to time decay, and should be used for short trading periods only.

  4. Pantmaker says:

    Oh man…sounds like a good bottom call for some QID. Gonna get me a bit today….there goes. $9.98


    BR: Sold to you.

  5. FrankInTheFalls says:

    I wish someone would spell out the dangers in practical terms. I understand the
    slippage & the daily re-pricing and all that. However, in the end, they are still all
    slaves to their respective indices, are they not?

    I went long TNA in the 20′s in 2009 & wish I’d held. I picked almost the exact
    bottom on BGU in 2009 (all luck I admit) and sold after a triple. Wish I’d held there
    as well. What am I missing? These were very small positions.

  6. gcomp says:

    I agree with not stepping in front of this market right now, but I actually do have a problem with these leveraged ETFs. The banks that created them say that they are designed for day traders, yet I’m surprised at how many grey-haired analysts on CNBC recommend them as long-term hedges or bets.

    The fundamental question is: how are these funds achieving leverage? You don’t get leverage for free. In a 2x fund, they are conceivably buying or shorting the underlying stocks on margin, in which case your P/L would be 2x the move minus margin interest & administrative fees. But what happens with a large adverse move that results in a margin call? Is the fund dissolved?

    More likely (and the only way to achieve 3x+ leverage), the funds buy and/or write options (and/or go long/short futures) to achieve leverage–which of course, would be inaccurate in achieving exactly 2-3x the move in the underlying. Look at the SDS (Ultrashort S&P ETF) vs the S&P in 2008. You would have only made ~31% on the SDS in a year that the S&P was down ~38% (not 2x the downside move as the investors who buy these funds would expect). If you chart it against the VIX, it matches pretty well (that year, the VIX skyrocketed then came back down by the end of the year). This means the fund just bought puts, when implied volatility went up, the fund increased in value, when I-vol came back in, the fund fell.

    I imagine the banks that created these leveraged ETFs are giddy, they invented products that they could take nice administrative fees from, and targeted uninformed retail investors. Instead portfolio managers jumped on the bandwagon and the market for these funds took off.

    You just can’t get leverage for free. I can’t believe how many otherwise intelligent people don’t bother to find out what is in these leveraged ETFs before buying them (although to be fair, I don’t think they are very transparent about the exact components anyway). If you don’t know what you’re buying or selling, then don’t. If you want a leveraged hedge or bet, you need to use options or futures (& if you do, you won’t be paying administrative fees). If you work at Barclay’s in the iShares unit or any of the other ETF divisions in another bank, congratulations (and if you need another employee to think up leveraged ETF ideas, I’ll make myself available, looks like a great job).

  7. Cdale_dog says:

    Barry, great advice! I did very well with SDS and QID during the meltdown in 2008, sold out 12/31/08 and proceeded to watch another 30% or so decline until March ’09 that I didn’t capture. Got greedy and bet on a decline from the May – Dec. ’09 period with SDS and got hit pretty hard. Slippage was brutal. Down days on the S&P would only net me a small percentage of appreciation (even though they are 3x). On days the S&P rose, I would get crucified.

    Best advice ever is don’t hold these things for more than a week (or two at the absolute most) if they are going against you. Lesson learned the hard way.

    Speaking of QID, is Steve Barry still posting these days or did he jump off a ledge somewhere?

  8. Krugger says:

    Here’s what you are missing, they are not slaves to their indices over the long term.
    From Proshares.com: Each Short or Ultra ProShares ETF seeks a return that is either 300%, 200%,
    -100%, -200% or -300% of the return of an index or other benchmark (target) for a single day. Due to the compounding of daily returns, ProShares’ returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period. Investors should monitor their ProShares holdings consistent with their strategies, as frequently as daily.

    If the below doesn’t work, just graph the S&P 500 and SDS over various time periods. 9/2008 – 7/2009 the S&p500 was down 22%. SDS (the 2x inverse S&P 500) should be up 44%. But it wasn’t, it was DOWN 29%.


  9. drey says:

    Yeah, very tough to make money in these etfs even with good macro vision unless you’re a very savvy trader. My wake up call (after getting crushed a few times) was comparing the charts of a well known leveraged CRE fund with its bearish counterpart over a one year period – lets just say that BOTH were down significantly.

  10. SteveC says:

    FrankInTheFalls: Those are leveraged bull etf’s. Big difference vs. leveraged bear etf’s.

  11. Krugger says:

    Leveraged bull etf’s are different, but the same situation applies. Take a rolling 1 yr look at SSO vs S&P 500 and you’ll find times where they vary wildly. Feb-2007 to Feb-2008, S&P 500 is down 2%, SSO is down 25%.

  12. Sunny129 says:


    Has any one compared the ‘stellar’ performance of these inverse ETFS during 2007 and 2008 compared to March ’09 and on wards? It is like day and night! Why?

    My reasons:

    1. Shorts were banned

    2. Suspension of M to M marketing

    3. Value discovery postponed in FIRE stocks

    I used them plenty and was able to escape from carnage of 2008 but later using them became poison to one’s portfolio. Besides the slippage and tracking error, I think we are in an SURREAL environment where value discovery is suppressed especially in FIRE Economy. Once the realty ( M to M accounting) comes then we will get the true picture.

    Does any one has other experiences with these inverse ETFs during 2008 and now (recent 2 years)? I do use 1:1 inverse ETFs as hedge.

  13. Max Jackson says:

    I’d like to add that while leveraged bears may cause severe losses, leveraged bull plays can cause heart failure and stroke.

    I learned that last May ’10 when I was introduced to my first confrontation with volatility, and that is was. Panic (often) never reveals good results. Had I not given myself so much exposure to leveraged instrumentation, my portfolio wouldn’t have seemed so 1000 feet high and falling.

    Funny, all of it was temporary. Barry Rithholtz uses the image of Superman and a locomotive. I like the image of Raiders of the Lost Ark finale. I should’ve just kept my eyes shut.

  14. taz8 says:

    3/6/09 Buy FAS – sell over 1 year later 4/5/10 and you have a 10 bagger with long term capital gains.
    Best trading vehicle offered…. long term

  15. VennData says:

    The economy is kicking ass. The embedded capital gains in the stock market have more than paid for the stimulus.

    Why did we need to extend the Bush tax cuts for the rich?

  16. Greg0658 says:

    VeDa – capital gains paid for stimulas ? 1st mom & pops must sell for that to happen – I think the light volume shows that is not happening – 2nd financial industry & corporate churn is a cost of doing business – 3rd losses from a couple years back with the scare out can be carried forward some – 4th unless your a bank and can track payments to the IRS, that is an early call

    and if I’m off base – correct me please

  17. [...] A message for those still putzing around with ultrashort ETFs.  (TBP) [...]

  18. DL says:

    Those ultrashort funds are like kryptonite.

    Stay the hell away.