Saturday, March 07, 2009

Inverse (Short) ETF Portfolio Update - 3/7/09, Closed Out All Positions

The stock market is continues to be strange in early 2009. The market is volatile at unexpected times, e.g. after announcements by the Obama administration, and surprisingly calm in the face of bad news. I believe the market action indicates that it may be nearing a bottom.

To hedge against the market falling in November to December, 2008, I had purchased small positions of Ultrashort Real Estate Proshares (SRS), Ultrashort Financial Proshares (SKF) and Ultrashort Oil & Gas Proshares (DUG). These are inverse market index ETFs, meaning they rise when the market falls and vice versa.

In mid January, 2009, I was able to sell the Ultrashort Financial Proshares and one lot of the Ultrashort Real Estate Proshares at a profit. In the past week, I closed out the two remaining ETF positions, because I believe the market is near a short term bottom. Ultrashort Real Estate Proshares was closed out at a profit and Ultrashort Oil & Gas Proshares at a loss, but has a small overall net gain since a $6.08 dividend was paid in December, 2008.

Hedging in a Volatile Market
Inverse ETF [purchase date]SharesPurchase Price

Final Results

Ultrashort Oil & Gas Proshares (DUG). [11/21/08]100


sold 50 shares at $33.07 on 3/2/09

sold 50 shares at 33.94 on 3/5/09

Ultrashort Financial Proshares (SKF)[12/11/08]20


sold 10 shares at $140.33 on 1/14/09

sold 10 shares at $165.95 on 1/16/09

Ultrashort Real Estate Proshares (SRS) [12/11/08]20


sold all shares at $98.58 on 3/3/09

Ultrashort Real Estate Proshares (SRS) [12/17/08]20


sold all shares at $66.82 on 1/14/09

I purchased these ETF because I believed they would provide some protection if the market should fall. However, upon further investigation, I learned that these ETFs can fall even if the market index declines over time, due to the ETFs being based on the daily return of the index, which Proshares customer service confirmed when I asked them about my observation. The Motley Fool has a great explanation, with an example, of how these 2X inverse ETFs may not protect against a long term decline in the index.

Based on my new learnings, I will not buy any inverse ETFs based on my long term expectations of the market. . However, if there is a V-shape rally in the financials, I may consider another 20 share position in the Ultrashort Financial Proshares ETF, if it drops below $100 :-)

Lesson learned: Don't buy derivative investments when I don't fully understand how they work, as in the case of 2X inverse ETFs.

Disclosure: At the time of publication, I no longer own any shares of the ETFs mentioned.

For more on Reflections and Musings, check back every Saturday for a new segment.

This is not financial or investment advice. Please consult a professional advisor.

No comments: