Ultrashort ETF: Good if Feeling Bearish?

[john voight]

Arright, I know things are much more complicated than I make them, and there is no clear yes or no answer, but here are my thaughts on the subject. I'll be using myself as the example, but this isn't a "what should I do thread".

I'm 21, and have very little money (I guess a lot compared to most 21 year olds). About 8 months ago I began following the stock market, but was hesitant to invest b/c it was reaching new highs every week. Now, this was just a gut feeling, not based on anything.

Anyway, a few weeks ago, I decided to put my money into 2 funds (diversification is not an issue right now IMO). One was a proshares ultrashort http://www.proshares.com/funds?produ...&fundType= and the other was a mutual fund that does not hedge or short. I would classify both as fairly high risk. Ultra short is (inverse of index)X(2) I believe.

The reason I have 33% of my portfolio in the proshares ETF is b/c I feel it's letting me invest regardless of which way I feel (bullish/bearish). I guess my option (as a not very educated invetsor) was to either try to ride the wave and put some money into a hot stock like RIM or APPL, put it into a random mutual fund and hope the economy continues to rise, or put it into a cd and get like 4% return.

Now let me clear things up, before I get pownded here:

Losing 100% of my portfolio would not really hurt me financially, it makes up less than 10% of my liquid net worth. This is why I have not diversified at all.

I am slowly constructing my portfolio, so as I add investments, my position in each investment will go down as a % of my entire portfolio.

I invested it the way I did, b/c It was money that was not being used, and I felt I needed to make the leap of faith. Losing it would not mean much to me.

Anyway, my ultimate question, (now that you guys may understand the way I am thinking) is:

Are Short and Ultrashort funds a reasonable alternative to not investing (because the market is overvalued, or in a recession)?

If you are feeling bearish, is there an alternative to hedge funds or short ETFs?

Any other ideas/discussion you may have? I am sure there are many things I have overlooked, so hopefully after this thread I may get a clearer sense of what I am dealing with.

[kyleb]

I don't have anything to add, but these sound pretty interesting. Thanks for bringing them up!

[adios]

Yeah short the ETFs that are long but it depends on the size of your account sort of and the type of account. In an IRA I think you have to use the short ETFs. Better customers can get better deals with money tied up in shorts and you can use leverage to your benefit, the same leverage you get from ultra short ETFs.

Here's a linky explaining the "short rebate."

Making Sense of the Short Stock Rebate

Done for awhile. Later.

[kimchi]

It sounds like you have money in shorts and longs in a similar market. I'm not sure what the regular mutual fund is, but it seems to me that your 2 investments are cancelling each other out.

Also, I'm wondering what specifically made you decide to take a leveraged short position and at what point will you sell at a profit/loss? Remember that even an experienced investor/trader can find it very difficult to extract profits out of a short stock fund.

[john voight]

fwiw the ultrashort I hold is SKF:

http://finance.google.com/finance?q=AMEX%3ASKF

a financial sector short. I think these stocks keep getting punded,and the outlook on the sector looks negative in the shortrun (at the very minimum). However I also feel which every week these stocks plunge, they are a good value buy (possibly b/c media/ wall street overreacts to everything?), so I reckon I will have to let go of SKF (which is shorting the sector) sooner or later, and possibly buy some Citigroup or wamu, etc...

[PRE]

Just short everything. No long.

Thank me later

[maxtower]

I could be wrong but I think you are paying for that 2x short somehow. I think its supposed to closely match the daily movements of the index by -2x, however, I think holding this longish term is a guaranteed loser even if the market continues to go down over that time. I'm just guessing, but I think it would be similar to 1.95x the downswings, and -2.05x the upswings. Eventually the rake kills you.

[DcifrThs]

[ QUOTE ]
I could be wrong but I think you are paying for that 2x short somehow. I think its supposed to closely match the daily movements of the index by -2x, however, I think holding this longish term is a guaranteed loser even if the market continues to go down over that time. I'm just guessing, but I think it would be similar to 1.95x the downswings, and -2.05x the upswings. Eventually the rake kills you.

[/ QUOTE ]

yea there was some post that linked a good analysis of leveraged funds and why they suck. i just did a simulation though and the returns of hitting the double value every day does result in the average long run daily value being about double the daily value...but i obviously didn't take many things into account.

Barron

[gull]

I would stay very far away from these investments.

First, stocks have a positive expectation (derived from the risk premium). Shorting an asset with a positive expectation is -EV.

Second, these leveraged ETFs are only trading instruments. Do not hold them for long periods of time. They only capture twice the daily returns, but capture much less over the long run.

[DcifrThs]

[ QUOTE ]
I would stay very far away from these investments.

First, stocks have a positive expectation (derived from the risk premium). Shorting an asset with a positive expectation is -EV.

[/ QUOTE ]

this is very poor reasoning.

[ QUOTE ]


Second, these leveraged ETFs are only trading instruments. Do not hold them for long periods of time. They only capture twice the daily returns, but capture much less over the long run.

[/ QUOTE ]

yup. i failed to capture that in my rudimentary simulation but that is definitely the case.

Barron