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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


3 comments:

  1. SDS paid a hefty dividend sometime toward the end of the calendar year. Did you adjust for that in your comparison? I'm not sure that you did - it is likely that once you account for the dividend, SDS will look much better.

    ReplyDelete
  2. One of the reasons I used Yahoo!'s charts is they are supposed to adjust for dividends.

    A quick look at the chart data including the dividend and the chart I posted, shows they do indeed plot the adjusted price.

    Here is a good article with another warning about how the large dividends can trigger your stop losses.

    Shocked by the Huge Drops in the UltraShort ETFs? Don't Panic!

    The ProShares ETFs are not unique with their dividend distributions, as hundreds of various types of ETFs also pay dividends on a regular basis. However, because of the complex nature of the composition of the inversely correlated Short and UltraShort ETFs, short and long-term capital gain distributions can be shockingly large. Although the $11.48 per share distribution of SDS was humongous, consider that UltraShort Semiconductors ProShares (SSG), as well as a few others, had a short-term capital gain distribution of more than 40 points! To prevent having these ETFs unintentionally trigger your stop prices due to quarterly dividend distributions, we suggest being aware of the anticipated "ex-dividend" dates, then adjusting your protective stop prices accordingly. A complete list of past distribution dates for all the ProShares ETFs can be found at proshares.com/funds/distributions .

    40% dividend?!!! I'd be pissed if I bought an ETF to trade for a few points then learned I had to pay taxes on a 40% distribution!

    ReplyDelete
  3. Wondering if anyone knows where I can find daily AUMs for SDS?

    ReplyDelete

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