Ultra Long and Short ETFs, long or short?

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1

Ultra Long and Short ETFs, long or short?

I used to position trade in the mutual funds UUPIX and DXELX, but the transaction fees and end of day executions makes it less flexible than ETFs-I am looking to switch to the new ProShares ETFs ( last Friday was a good lesson , I got out at an end of the day price that was absolute rock bottom )

Iam looking to have leveraged exposure to Emerging markets through ETFs- profunds has announced ultra short MSCI emerging markets and FXI Sinhua ETFs ( looks like they do not have ultra long ones ) .
http://seekingalpha.com/article/50800-new-proshares-short-foreign-etfs-arriving-just-in-time

I have never shorted ETFs before, are there any issues to consider?
Does anybody have experience in going short ultrashort , effectively going 2x long ?
What would be the difference between going long ultralong and short Ultrashort when the market tanks?

Thanks,

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Sankar, DXELX is NTF at Schwab IRA.

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Thanks for the information. I think ETFs are better for these type of products.

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Leveraged ETFs and funds must be rebalanced daily to maintain constant leverage. Rebalance raises management costs, slippage and commissions. These products don’t behave like regular ETFs and they can’t provide exactly 200% active returns compared to their index benchmark. From the ProShares prospectus: [quote]
The Funds do not seek to achieve their stated investment objective over a period of time greater than one day because mathematical compounding prevents the Funds from achieving such results.
[/quote]

If you buy 1 2x Short ETF quoted $100 on day 1and the market rises 10%, on day 2 the value of the ETF is $80 (-10% x2).
On day 3 the market goes down 5%. The ETF is now quoted $88 (5% x2). Total loss = ($88-$100)/$100 = -12%.

Had you shorted $200 of a regular ETF in a $100 account:

day 1 Short $200 out of $100 account
day 2 $200 - 10% = $180.
day 3 $180 + 5% = $189.
Total loss = $200 - $189 = $11
Total loss %on $100 account = -11%

You can take advantage of ProShares ETFs to increase your leverage in a 401k or IRA account, or short in a retirement account.
Another interesting strategy I haven’t explored yet is to buy 50% leveraged ETF long and 50% bonds, or a money market fund. You can basically add up a money market rate to a 100% stock exposure:
http://www.thefinancialwhiz.com/2007/03/03/update-on-the-utilizing-leveraged-etfs-to-lower-the-risk-in-your-portfolio/

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Thanks - this is a question I was wondering about. You cannot simply have something that is “2x” it hast to be “2x over a period of y”.

The main problem, is that even in a bull market, a 2x long could underperform if the market was sufficiently volatile, its akin to overbetting.

I think these products have been designed with day traders in mind, give them a bit of a boost, but longer term, I am not sure. “Volatility gremlins” could quickly eat away returns.

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It is very true that we cannot expect a 2x return from leveraged ETFs ; the chart below shows what happened in Aug 07, however with some amount of market timing and hard stops on percentage draw downs, one might hope to reduce the losses.

http://finance.yahoo.com/q/bc?t=2y&s=DXELX&l=on&z=m&q=l&c=EEM

If there was a software that comes anywhere close to P123 for European and Asian markets, I would have never considered these products, but right now I am not aware of any alternatives, does anybody knows of decent back testing software for international stocks meant for retail investors?

There is a new emerging market e-mini, but seems to be illiquid at this time.

http://www.cme.com/trading/prd/equity/emini_MSCI_EAFE_.html