Leveraged Short ETFs... something wrong?

let me give you another interesting scenario for a 2x inverse etf

suppose both A and B start from 100, and A goes down 10 days in a row, 10 percent each day, B will be up 20% for each day, at the end of 10 days you will have A approximately at 34.5, B approximately at 622, from long term point A is down 65.5% but B is up 6 fold

now from here suppose A went up 25% 3 days in a row, B will bedown 50% for each of those days, we will have A approximately 67.5 and B at 78

during the first 25% up day a small 8.5 point up in A will cause 311 point drop in B

so from the starting of our scenario A is down 32.5, and B is DOWN as well, 22%, still fully having given you inverse double performance of A


i haven't double checked the numbers, here is the calculation

100 100

-10 +20
90 120

-10 +20
81 144

-10 +20
72.9 172.8

-10 +20
65.61 207.36

-10 +20
58.5 249

-10 +20
52.65 300

-10 +20
47.4 360

-10 + 20
42.66 432

-10 +20
38.4 518

-10 +20
34.5 621.6

+ 25 - 50
43 311

+ 25 - 50
54 155.5

+25 -50
67.5 78
 
Quote from Landis82:

Why should the DUG be trading higher?
Have you looked at the major integrated oil stock charts lately?

Seen what XOM and CVX have done since the October lows in the DJIA, even as oil collapsed another 50% from $72 to $36?

The DUG tracks the inverse of the Dow Jones U.S. Oil and Gas Index, of which the top four holdings:

XOM (27.9%), CVX (11.7%), COP (7.1%) and SLB (6.4%) make up 53% of the index.

I'm not sure why people are so surprised at where some of these ETF's are trading at, especially when all one has to do is check out a chart or two of the top holdings in the index.

The moral of the story:

Always know what the components ( and their weightings are ) of an ETF index before trading it.

http://www.djindexes.com/mdsidx/downloads/fact_info/Dow_Jones_US_Oil_and_Gas_Index_Fact_Sheet.pdf
More...

Just making the observation... that when oil was $147 in July, DUG was at 20. Now with oil at $45, DUG is 22.

OIH dropped from 230 to 60.

So, (1) price of oil dropped like a rock, (2) price of oil service companies dropped like a rock, and (3) a "200% SHORT oil ETF ALSO dropped like a rock"?


Some guys must have lost a bundle on that one...
 
Let me take this a step further. Double short ETFs are very counterintuitive. I'd noticed that 1X and 2X ETFs are much more highly correlated than the 1X and -2X ETFs and I knew the simple math behind how they're supposed to track. But it wasn't until I actually calculated "synthetic" URE (2X) and "synthetic" SRS (-2X) prices from actual IYR (1X) prices that I fully appreciated how they behave.

I started with actual IYR prices from Aug 19 -- Dec 19 and URE's actual price on Aug 19, then calculated synthetic URE prices from Aug 20 on by doubling the daily % change in IYR and increasing each day's synthetic URE price by that amount. I did the same for SRS but decreased instead. For example, if IYR was up 2% URE was up 4% and SRS was down 4% and the opposite if IYR was down.

Then I made scatterplots of IYR vs synthetic and actual URE and SRS prices.

<img src=http://www.elitetrader.com/vb/attachment.php?s=&postid=2246511>
 

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Quote from gnome:

Just making the observation... that when oil was $147 in July, DUG was at 20. Now with oil at $45, DUG is 22.

OIH dropped from 230 to 60.

So, (1) price of oil dropped like a rock, (2) price of oil service companies dropped like a rock, and (3) a "200% SHORT oil ETF ALSO dropped like a rock"?


Some guys must have lost a bundle on that one...
More...

Again, if people fully understand what the components of an index are, and how portfolio managers react to putting money to work quickly in large cap stocks that trade tons of volume with pristine balance sheets . . . it's really not that difficult to see why the DUG is where it is.

You can't just simply trade an inverse ETF like the DUG "blindly" and AS A PROXY TO THE PRICE OF OIL without paying attention to how its highest weighted components ( like XOM, CVX, and COP ) are trading.

To do so is simply asking for trouble.
 
each etf share represents an underlying basket of stocks, DIG and DUG both have the same underlying basket - right from google:
ProShares UltraShort Oil & Gas (the Fund) seeks daily investment results that correspond to twice the inverse daily performance of the Dow Jones U.S. Oil & Gas Index. The Dow Jones U.S. Oil & Gas Index measures the performance of the oil and gas industry of the United States equity market. Component companies include oil drilling equipment and services, oil companies (major and secondary), pipelines, liquid, solid or gaseous fossil fuel producers and service companies. The Fund takes positions in securities and/or financial instruments that, in combination, should have similar daily return characteristics as –200% of the daily return of the index

I have no idea what the tickers are for proshares but I know that the 3x etf tickers all end in .iv - so for example BGU is large cap bull, BGU.IV will give you the value of the underlying basket of stocks

this may not make much sense here the way I typed it out. as others have said, you are not buying oil, you are buying the DJ US Oil & Gas Index, which is then (sometimes) optimized down to fewer names than the entire index as a whole. The oil & gas related companies don't always track the price of oil.
 
The simple mathematics of how 2X and -2X ETFs seek to double the daily % fluctuations of the indexes underlying their associated 1X ETFs (but in different directions), compounded over time, explains almost all of how they trade as I posted above with IYG, URE, SRS and the synthetic prices.
 
I don't want to get into an argument my first day here but daily compounding and investment objectives are two TOTALLY different things.

Quote from Trader666:

...seek to double the daily % fluctuations of their associated 1X ETFs
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^^^ this is flat out wrong. Most ETFs are index based and the ETF seeks to acheive a multiple return (between 1-3) of the index the etf is benchmarked to - the index, not the 3x etf is a multiplier of the 1x etf.

I'll be happy to answer any questions about ETFs - there are no secrets, no synthetics, no snake oil, etc. etc.
 
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