The “Ultra ETF” CAPS experiment starts Tuesday
I have commented on this blog for sometime about how ultra ETF’s both short and long are horrible vehicles for periods even over 2-3 weeks.
Talking with a friend last week about what we would do with unlimited capital, I said I would short all of the ultra ETF’s both short and long and be guaranteed return.
The classic example is SKF (double short financials). I sold it back in early July for $153 a share. The index it was supposed to “short” is XLF (financial index). At the time XLF was trading at $20.32.
Today, just 6 months later financial sector (XLF) has lost more than half of its value and is trading at $9.68. Where would you expect the “double short financials” ETF to be trading??
Well since the XLF lost 52% and the SKF is “double short” you should expect SKF to be well over $300 by now (+104%). You would be wrong because it is actually trading at $154. It is up $1 or less than 1%. (For the more sophisticated readers out there SKF did NOT pay a distribution in December like some of the others.)
I understand that Proshares and the other guys who make these ETF’s warn people that they will underperform over the longer term, but I do not think people understand how drastic the underperformance really is.
To show people this I created a new account in CAPS called “UltraSuck”. Here is the link:
What I did here is I found every “Double” ETF out there long and short. To make the account completely “market neutral” I only added an ETF if there was a corresponding ETF on the long side.
Because I had to find a matching ETF on the other side of the market (long or short) there are some ETF’s I had to leave out… Trust me, I was tempted to just put red thumbs on all of them but I feel it would have put a bullish bias on this account and ruin the validity of the experiment.
ETF’s intentionally left out for that reason:
UltraShort 7-10 Year Treasury PST
UltraShort 20+ Year Treasury TBT
UltraShort MSCI EAFE EFU
UltraShort MSCI Emerging Markets EEV
UltraShort MSCI Japan EWV
UltraShort FTSE/Xinhua China 25 FXP
I plan on never closing a pick in this account and only adding new Ultra ETF’s if more are created and they have a both a long and a short version.. For instance if a double long China ETF is created both that new fund and FXP (the double short) would be added to this account.
This should be an interesting experiment because for the first few weeks and months I expect this account will just be a middle of the road performer with 50% accuracy and a decent score. For example, if the market were to go up the red thumbs on the ultrashorts will do well but the red thumbs on the ultralongs will do poorly. In this example though, over time I suspect that even the ultralongs will underperform the market and over a great deal of time (multiple years) I believe ALL of these ETF’s will underpeform the S&P. The only exception I can see is something like DXO (double long oil) which is down 90% and trading in the 2’s.. if oil were to make a big bounce it will take quite some time for that one to be to underperform the S&P. Still at some point they are all going to lag the market and this account will be a measure of that underperformance.
Add “UltraSuck” as a friend in CAPS to follow and track the slow demise of these ill advised leveraged ETF’s.