Why don't Inverse ETFs Evaporate?

[Spaghetti Code]

For funds like SDS and SQQQ, which track the inverse of an asset that usually goes up, it would appear that they would eventually:

- Go towards a share price of $0, in which case the fund would shut down
- Do enough reverse splits that liquidity would eventually run out due to so few tradeable shares.

Also, where did the money come from that originally funded these to begin with? I vaguely recall that the managers of the fund don't take on any risk themselves or for their firms, at least for the colossal long term losses these inverse ETFs have. Does it some how come back over from the equivalent leveraged long ETFs or what?

 

[userque]

For funds like SDS and SQQQ, which track the inverse of an asset that usually goes up, it would appear that they would eventually:

- Go towards a share price of $0, in which case the fund would shut down
- Do enough reverse splits that liquidity would eventually run out due to so few tradeable shares.

Also, where did the money come from that originally funded these to begin with? I vaguely recall that the managers of the fund don't take on any risk themselves or for their firms, at least for the colossal long term losses these inverse ETFs have. Does it some how come back over from the equivalent leveraged long ETFs or what?

They're not like a stock.

https://seekingalpha.com/article/738491-why-low-volume-etfs-should-not-be-avoided

 

[Sig]

For funds like SDS and SQQQ, which track the inverse of an asset that usually goes up, it would appear that they would eventually:

- Go towards a share price of $0, in which case the fund would shut down
- Do enough reverse splits that liquidity would eventually run out due to so few tradeable shares.

Also, where did the money come from that originally funded these to begin with? I vaguely recall that the managers of the fund don't take on any risk themselves or for their firms, at least for the colossal long term losses these inverse ETFs have. Does it some how come back over from the equivalent leveraged long ETFs or what?

They do occasionally shut down. Some key concepts to get your head around on these are the fact that they track the inverse of the daily return, not the inverse of the index, and the concept of creation units. There is a document called a prospectus which is required to be published for every ETF. Although long and in many places boring, I highly recommend going through one from start to finish, as once you understand it many of your questions will be answered.

 

[SunTrader]

Read!! You want them to read to up on it, rather than ask someone else?

 

[Sig]

Read!! You want them to read to up on it, rather than ask someone else?

In his defense, from his other posts I can see he's new and eager to learn and might not have known what a prospectus was. Hopefully he doesn't become old and jaded like us after slogging through his first one

 

[narafa]

If they continue receiving fund flows (And thus keep creating more units), they will manage to stay around reverse-split after another. Once the fund flows disappear, they will eventually hit their shut-down limits & conditions, liquidate & get out.

 

[Spaghetti Code]

Read!! You want them to read to up on it, rather than ask someone else?

In his defense, from his other posts I can see he's new and eager to learn and might not have known what a prospectus was. Hopefully he doesn't become old and jaded like us after slogging through his first one

Alas, I do know about prospectuses, but they don't make reading them exciting. I did look through the SQQQ prospectus, but the whole doc is like 750 pages, so it's hard to see why the fund doesn't dissolve. Hazarding a guess: APs eventually create too many shares (creation units?) of SQQQ which means that a reverse split needs to happen. However, I can't easily tell if this is what is actually happening, hence asking here.

If they continue receiving fund flows (And thus keep creating more units), they will manage to stay around reverse-split after another. Once the fund flows disappear, they will eventually hit their shut-down limits & conditions, liquidate & get out.

Is there a way to see the number of outstanding shares over time? The sites I checked don't seem to list something akin to outstanding shares at close.

 

[narafa]

Is there a way to see the number of outstanding shares over time? The sites I checked don't seem to list something akin to outstanding shares at close.

Yes, but which number of outstanding shares? The raw (un-adjusted) or the adjusted for reverse-splits one?

Check this:

https://www.sharesoutstandinghistory.com/sqqq/

I believe this one provides the adjusted number of shares/units historical data.

There is also the market cap history, which you can check here:

https://www.marketcaphistory.com/sqqq/

PS: I didn't evaluate the accuracy of those 2 websites. You can do that if you want.

 

[murray t turtle]

They do occasionally shut down. Some key concepts to get your head around on these are the fact that they track the inverse of the daily return, not the inverse of the index, and the concept of creation units. There is a document called a prospectus which is required to be published for every ETF. Although long and in many places boring, I highly recommend going through one from start to finish, as once you understand it many of your questions will be answered.

%%
Exactly/good read + good charts.
One of the main + many reasons they dont go---to zero;
they reverse spllt them.
[ And a 3 year bear market did wonders/LOL]