Ho John Lee’s Weblog

If you’re an stock investor, you might be considering the possibility that the markets will go down (more) sometime in the near future.

The recently launched ProShares ETFs use derivatives to implement inverse and levered versions of several popular market tracking ETFs, including the Nasdaq-100 (QQQQ), S&P 500 (SPY), DJ-30 (DIA), and S&P Midcap (MDY).

The Short ProShares provide inverse performance to the underlying index, while the Ultra ProShares provide 2x the performance of the underlying index.

The performance doesn’t track perfectly. For example, today the Q’s are down by 0.88%, and the PSQ (inverse Q’s) are up 1.39% while the QLD (2x Q’s) are down by 1.66%. At the moment they also don’t appear to track intraday price movement very tightly, which might be a function of the relatively low volume. You can see the modest tracking divergence in the 5-min intraday chart above.

These aren’t the sort of instrument you’d want to hold for years, but could be handy for investors trying to hedge market risk (especially in self-directed IRAs, which don’t allow short selling). I also think a lot of people simply aren’t comfortable with short selling or derivatives, and this makes it much simpler for people to get short or lever up. If your account allows it and you’re already comfortable with short selling, it’s simpler and more efficient to just short the Q’s or other indices directly, though.

Prior to the ProShare ETFs, the Rydex mutual funds have been around for a long time, implementing inverse and levered index and sector funds. The main advantage of using ETFs here is that they trade continuously rather than once per day, making them more flexible as a hedging or trading vehicle.

Caution: If you have no idea what I’m talking about but are thinking about buying some because you think the market is going down, please don’t unless you check it out first and know what you’re getting. While the short and levered ETFs might be handy investment tools, they can just as easily provide you with a faster, easier way to lose your money if you’re not paying attention.

Disclaimer: Not investment advice. Trade at your own risk. Not affiliated with ProFunds or Rydex. You buy it, you own it.

Update Wed 07-12-2006 13:50PDT - Took a look at these today during market hours. The thin volume results in relatively wide spreads, 0.10 or more. I haven’t tried them yet, but Barry Ritholtz has written a note about his experiment with the PSQ (inverse Q’s), with mixed impressions.

Update Thu 07-13-2006 16:42PDT - Proshares introduces 2x inverse ETFs for the Q’s, S&P, DJIA, and S&P400 starting today - QID, SDS, DXD, MZZ. They picked a good day to launch.

This entry was posted on Monday, July 10th, 2006 at 8:09 pm and is filed under Finance/Investing, Front Page. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.