ProShares UltraPro Short S&P500 (NYSEARCA: SPXU) and ProShares Short S&P500 (NYSEARCA: SH) might look like perfect substitutes for each other. If we want to go short the S&P 500 then does it matter which one we use? In fact, why not used the leveraged one as that will triple our profit!
Well, yes, except. Different instruments always have different characteristics and we need to be careful to make sure we use the right one for the specific purpose we have in mind. So, an ETF is a share we can trade in and out of easily. An ETF based on an index gives is diversification in one sense - we are not exposed to the one company, but to that whole sector of the market in the index. The S&P 500 gives us explores to the top 500 capitalization shares - the vast majority of the market cap of the market as a whole. A bull ETF is a bet on the market rising, a bear on it falling.
So, we think the market in general is going to fall, yes, why not a bear ETF on the S&P 500?
Ah, but which one?
ProShares Short S&P500 stock price from NASDAQ
ProShares UltraPro Short S&P500 stock price from NASDAQThe market's been going up this past year therefore both bear ETFs are down on the year. But one of those, the Ultra, is 3x leveraged, the other is flat. So, the loss (recall, these are bear in a rising market) on the Ultra should be 3x the straight one. But it isn't. The one year performance of SH is a 14% loss. The one year on the Ultra, the leveraged, is 47%. Three times 14% is 42%, That difference, that extra 5% loss, is the loss we make over a year by gaining access to that leverage.
That is, holding leveraged ETFs over time exposes us to a loss simply be fact of the leverage itself. This doesn't change bull and bear, nor with which index we are talking about. It's a function of how that leverage is achieved.
This is what gives us the general trading rule. Leveraged ETFs are for intraday or possibly overnight trades. Non-leveraged are for the same bet but one that we want to hold over longer periods of time. That's just basic market knowledge and something that we all need to grasp. Leveraged ETFs are for short term positions.
