Welcome new reader!

Financial news I consider important, with my opinion, which is worth as much as you paid for it.
Please click HERE to read a synopsis of my view of the financial situation.

Wednesday, September 24, 2008

Double inverse funds Broken?

In a previous blog entry, I mentioned double inverse funds as a way to "profit" from market instability. In the previous blog entry I mentioned that the ETF's where OK to hold for a day, a week, months, but not greater.
If you trade the double inverse funds (SKF, SRS, QID, TWM, etc) I wanted to point out how these funds are flawed. In my example. SKF, double inverse of the financial markets (IYG), hit a high of $210 in July 2008, while at the same time IYG hit a low of about $56. Only two months later, IYG hit a low of about $62, while SKF hit a high of $150. While IYG was about 10% from it's low, SKF needed 40% more value to hit $210. Also SKF traded for "3days" around 200, while $150 was a brief spike.
SKF's price issues occurred before SEC created new rules for short selling. Post 9/19/08, SKF is further impeded and has changed it's operation model (click here).
To recap, double inverse funds do typically move dramatically on a daily basis, but over time they do not come close to matching the underlying fund. Further, the government has shown they will "change the rules" and adversely affect these funds at will. The combination of both shows these funds cannot be held for beyond a day or two. And even then, probably better off shorting the "double long funds", since the pricing problems over time will work in your favor. Lastly ProShares could default on a fund (theoretically) at any time, while shorting index funds, this isn't possible. (such as IYG)

No comments:

Post a Comment