UltraShort ETF Losses Go to ‘Money Heaven’

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April 11, 2009 1:33pm NYSE:SKF

ultrashort1We like to think of trading as a zero-sum game — the money you lose is money someone else has made. But that is not always the case. Sometimes the money you lose simply goes away to “money heaven.”

Never has that concept been truer than when looking at the levered ultra-short ETFs. Periodically, I check in on these to see how they are “performing.” Typically, what I will do is take the vanilla ETF on an index and compare it with the 2x short sided ETF on the same index and figure out how much the levered short ETF has outperformed or underperformed.

I started this exercise back in November, when I first noticed the tremendous volatility of these levered funds. I keep a spreadsheet, use the adjusted prices to account for dividends and compare the actual performance with the implied performance over various periods of time. Take a look at the data for the U.S. Financial Sector ETFs, the unlevered iShares Dow Jones Financial Sector and the 2x short UltraShort Financials ProShares:

 

 
3-Apr
From 3/26
From 3/6
From 2/23
From 12/31
From 11/20
IYF
36
5.0%
50.8%
30.2%
-19.7% 8.0%
  36.12nav          
 
SKF 80.95 -13.1% -67.6% -59.9% -21.4% -69.2%
  80.38nav          
  implied -10.0% -101.6% -60.4% 39.4% -16.1%
  over/(under) -3.1% 34.0% 0.5% -60.8% -53.1%
 

 The table reflects Friday’s close and then looks at return from various dates. Of those dates, we have the autumn closing low for financials on Nov. 20, and we also have this spring closing low on March 6. We also have year-end, which is close to the high for the IYF over the time period (the actual high was Dec. 8).

So since the autumn low close on Nov. 20, the IYF is up 8.0% through Friday night. This implies a 2x short return of -16.1%. Yet the SKF is down 69.2% over that period, reflecting an underperformance of 53.1% vs. if one had simply shorted the IYF with two times leverage.

Given that the IYF closed below its NAV and the SKF closed above its NAV, this return discrepancy is not caused by NAV differentials (and for what it is worth, on Nov. 20 the SKF closed about 6 points below NAV). So where did the money go? The answer is in the title of this article.

Full Story: http://finance.yahoo.com/news/UltraShort-ETF-Losses-Go-to-tsmf-14891308.html



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