Maybe you should read before you reply. This thread is about why leveraged short ETFs don't perform as some would expect and the answer is as I said... they seek to match daily % fluctuations and the cumulative effect of that over time explains how they perform over longer periods as my drill with "synthetic" URE and SRS prices calculated from IYR prices showed: http://www.elitetrader.com/vb/showthread.php?s=&postid=2246511#post2246511 You're technically correct about the ETFs following the index they're benchmarked to and that's what I was trying to say in my haste. But for practical purposes it's not "flat out wrong" and you're pole vaulting over mouse turds because the tracking error in some of the leveraged ETFs is high enough to render that distinction moot.
666 â fundamental differences. You are comparing apples to oranges. An iShares 1x ETF is TOTALLY different than a ProShares 2x ETF. Again Iâll be happy to answer questions but suggesting that I read isnât a ? You compare two different funds rather than each fund to the index it tracks. I hate saying that you are wrong because maybe your point holds water from a trading perspective but honestly â It has nothing to do with the challenges of an inverse ETF.
Aren't short ETFs CDS? You know, they work fine when the market is ok but when it drops they stop working?
You're still missing the point... maybe you'll understand better if I type slower. IYR, URE and SRS ALL track the Dow Jones U.S. Real Estate Index. And when you want to trade that index those are the ETFs you use... so that's why it makes sense to compare their relative performance. Because those are what you actually buy and sell. Get it? This is not about splitting hairs on who manages the ETFs, it's about understanding the counterintuitive relative performances of the trading vehicles. Try calculating synthetic URE and SRS from IYR (or from the Dow Jones U.S. Real Estate Index if you still want to pole vault over mouse turds) and compare those to actual URE and SRS prices and you'll understand what I'm talking about.
If a double short ETF underperforms, wouldn't a strategy of shorting x shares of the short etf and 2x shares of the "underlying" be profitable? For example, sell short 100 SDS / sell short 200 SPY. AZD
Double short ETFs seek daily results that are twice the inverse of the daily performance of their underlying index and as such they don't underperform (setting aside fees, expenses, tracking error, commissions, etc.) But over time the cumulative effect of their daily changes can be counterintuitive so they might seem to.
So are you saying that the double short ETFs not only do NOT underperform on a daily basis, but they also do NOT underperform on a long-term basis? In other words shorting 1 SDS and 2 SPY would not be a profitable venture? AZD
Arizona - don't let 666 confuse you. Your strategy is spot on, not only is it spot on but it happens all the time. One of the neat things about ETFs is that there is a built in arbitrage system within the primary market. ETFs are issued in Creation Units â blocks of shares that are essentially sold to a market maker. The block of shares (50k = CU in my experience) represent an underlying âbasketâ of stocks. Only in the primary market â a market maker can purchase Creation Units (blocks of shares) either âin kindâ by trading the basket of stocks or with cash. The ETFs I have experience with track Russell indices. If you look at BGU (R1k bull) for example you will find that the firm has âoptimizedâ the basket of stocks from 1000 down to roughly 400 stocks. A lead market maker can purchase a CU (50k shares) either by paying cash (50k x NAV) or by turning in an appropriately waited basket of 400 stocks. Every ETF has two tickers because there are two values, the ETF has a ticker BGU and the underlying basket of stocks has a value (and a ticker BGU.IV). Tomorrow, take time to watch the iNAV and the NAV of several ETFs. Youâll find that there are many arbitrage opportunities however they usually donât last for very long. Another great thing about ETFs is that they can be created or redeemed at will by the LMM to keep up with demand. Sometimes, you will find that market action will force the NAV to deviate from the iNAV â causing the shares to trade at a premium or discount from their underlying value, this is exactly what you suggested in your quote above. The Primary market for ETFs has a built in system where LMMs can create or redeem shares (long or short) in cash, or in kind so that they can arb the shares back in line with the securities they represent. For example, if an ETF was trading at a premium (NAV at $50 when the underlying basket was worth $45) the lead market makers in the Primary market would go out on the street and buy the basket of stocks (valued at $45) and trade them in to the fund for 50k shares ($45*50k=$2.25mm⦠50k shares @ $50 = $2.5M, or a $250k profit). We see many âblack boxâ or program traders constantly monitor the iNAV vs. the NAV and take an opportunity to go long/short a given ETF knowing that it will be seconds or minutes until a Lead Market Maker arbs it back into place. As a side note â you will probably find that the best time of day to take advantage of this is right at the close, hold overnight and look for the correction at the open. Hope that sheds a little light⦠EDIT: little bit of a long winded answer and I realize that I didn't really speak to "underperformance" - watch the NAV vs the iNAV for a few days and look for the correction at the following open, I have no experience with 2x, only 3x... but in my experience with leverage etfs its usually market action at the close that causes the issues