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June 23, 2006

New index ETF's for short sellers: why? Fri., June 23, 2006, 5:50 AM

If you happen to be a small retail account that wants to trade the major indexes short on an intra-day basis and pay the Fund sponsor the incredibly high fee of 0.95 pct, just to get 4x leverage, I say go for the new ProShares Inverse ETF's, sucker. [Please see UPDATE before reading this article]

PSQ is the ticker for the new Short QQQ, SH for the Short S&P500, MYY for the Short MidCap 400, and DOG for the Short Dow 30.

DOG as in bow-wow? I'll say!

DOG is definitely no pony. Here is the AMEX/ProShares description of the Fund Details:

"Short Dow30 ProShares seeks daily investment results, before fees and expenses, that correspond to the inverse (opposite) of the daily performance of the Dow Jones Industrial Average (DJIA). The Fund employs leveraged investment techniques to achieve its investment objective, which may expose the Fund to potentially dramatic changes (losses) in the value of its portfolio holdings and imperfect correlation to the index underlying the Fund's benchmark."

The ProShares expense ratio is 0.95 pct across the board. On the other hand, the expense ratio for the corresponding QQQQ is 0.20 pct, for SPY is 0.10 pct, MDY is 0.25 pct and DIA is 0.18 pct.

Somebody try to sell me, please. I don't see the merit of these particular ETF's.

As far as I see it, this ProShares Inverse ETF deal is just another way Wall Street wants their hands into your pockets.

Maybe you need to have zippers and a lock on those pockets? Or common sense maybe?

UPDATE:

Upon further consideration, my readers have convinced me that Inverse ETF's do have a legitimate role to play for some traders, i.e., those holding investment plans that do not permit short trading.

Posted by Posted by Bill Cara on June 23, 2006 05:50:47 AM | Category: ETF

Discourse

The merit of these ETF's is that I can now short through my retirement plan during market hours instead of through inverse funds at end of day prices.
Is that worth 1%? To me it is. I would never use these in my taxable account where I have other options, but my guess is that they will become a valuable tool in many tax deferred accounts that are not permitted to short or sell puts. At certain times, it is much more attractive than simply sitting in cash.

Posted by: BigHube [TypeKey Profile Page] at June 23, 2006 9:14 AM [link]

I have to agree with BigHube. As a US resident the majority of whose assets are in IRAs, I cannot short the market. The only option open to me has been some of Profunds' and Rydex's inverse funds. However, one of my IRA fiduciaries charges me a 1% penalty if my holding period is less than six months. So, I'm no worse off paying the .95%. In addition, I have greater control of my entry and exit points.

Posted by: ellwoodl [TypeKey Profile Page] at June 23, 2006 9:43 AM [link]

I have to disagree with the notion of 4X leverage, as the bearish Proshares are shown as 1X inverse to the specified index. Where is the 4X leverage there?

How can you call the expense ratios high? The average expense ratio for a mutual fund purporting to do a similar function (1X inverse-correlation to the Dow) (Rydex and Direxion) is 1.86% and 1.30%. So to me the new indexed ETFs look like a bargain.

I agree with the previous two writers.

Posted by: Keepitstraight [TypeKey Profile Page] at June 26, 2006 4:35 PM [link]