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Monday, January 12, 2009

SDS Warning: UltraShort S&P500 ProShares Not For Long Term Positions

The UltraShort S&P500 ProShares Fund (Ticker SDS) may strive for daily investment results, before fees and expenses, which correspond to twice the inverse of the daily performance of the S&P 500 index, but the expense drag to create the leverage may make the fund unsuitable for a long term "investment."

According to ETF Connect, in 2008, SDS gained 69.72% and SPY lost 37.70%. Twice the SPY losses would be 75.4%. The 5-day charts below show tight two to one inverse tracking over 5 days but over a year, it appears about 6% are lost to fund and transaction costs. 6% per year is a large fence to jump for an investment.

Chart of the S&P500 Index (^GSPC) vs SDS
Click Current Chart Courtesy of Yahoo! for more info

Click Current Chart Courtesy of Yahoo! for more info

As the historical chart below shows, the S&P500 was down a couple of percent over the three month period ending January 9, 2009 while SDS was down over 30%!

This doesn't make sense given Yahoo! charts are supposed to include the distributions. This table shows SDS paid a hefty dividend:
DateOpenHighLowCloseVolumeAdj Close*
31-Dec-0872.6572.9169.5770.9421,322,20070.94
30-Dec-0875.3376.0472.5872.7123,975,60072.71
29-Dec-0875.9178.6175.6476.1318,977,50076.13
26-Dec-0875.6977.0075.6076.119,761,70076.11
24-Dec-0877.1077.9676.3676.838,619,40076.83
23-Dec-0875.4078.2674.6077.4331,689,80077.43
23-Dec-08 $ 11.49 Dividend
22-Dec-0884.5890.5084.4387.4435,138,40075.95

I would not be happy trading SDS to scalp a few percent then learn I got a 14% dividend to pay taxes on!

As the next historical chart shows, SDS seems to work well on a daily basis for day traders who enter and exit many times during a day.

FUND OPERATIONS

SDSCategory Avg.
Total Expense Ratio0.91%N/A
Total Net Assets2.90B170.28M


Contact Info: ProShares client Services at 866-PRO-5125 or email them at info@proshares.com
Webstite with fund list: http://www.proshares.com/funds


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