A Reminder on Why I Shouldn't Buy Ultrashort ETFs

Ultrashort ETF Losses Go to "Money Heaven" is a reminder of why I should not buy 2X inverse ETFs to hedge against a market decline. As the article's analysis shows once again, the returns of 2X inverse ETFs do not directly correlate with a long term 2X inverse return of the corresponding index. The reason is that 2X inverse ETFs are reconciled on a daily basis, and thus correlate to index changes on a daily basis. As a result, one can be right about the downward long term direction of an index and still lose money on a 2X inverse index.

I learned about this phenomenon the first (and last) time I purchased 2X inverse ETFs. Fortunately, the abrupt market decline in February, 2009 allowed me to exit these positions profitably. While owning them, I decided to not invest any further in 2X inverse EFTs, with the exception of the Ultrashort Proshares Financial ETF (SKF), if there were a V-shaped rebound in financials.

Since March 10, 2009, financial stocks have had V-shaped recovery and the Ultrashort Proshares Financial ETF has fallen from a closing high on of $250.07 on March 6, 2009 to a closing low of $64.88 on April 9, 2009. (Luckily, I didn't buy at $100 as I had originally planned :-) Despite the good news of the past two weeks, I still think that there are issues in financial stocks that will come to the surface in the next couple months.

If the Ultrashort Proshares Financial ETF falls below $50, I will be tempted, perhaps against better judgement, to make a 20 share purchase as a short term hedge against the financial stock decline. Then again, I may read the above article again, and decide against a purchase, since it is way too much like gambling instead of investing :-)

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

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