With nearly 30 million shares and $300 million dollars traded daily, ProShares UltraShort S&P 500(SDS) is one of the most heavily traded exchange-traded funds. But as a leveraged and inverse fund, it does not have the same benefits as plain-vanilla ETFs. It's best left to the short-term hedgers or speculators.
The fund attempts to provide twice the daily inverse return of the S&P 500. Leveraged funds are expensive and extremely risky, so they are best left to speculative traders or hedgers who have the desire to monitor and trade their positions daily. While it may be tempting to use a leveraged or inverse exchange-traded fund to capitalize on an investing idea or as a hedge, investors would probably be better served by using unleveraged products or adjusting their asset allocation. The mathematics of compound interest makes volatility a hidden cost to this fund beyond the already high 0.89% expense ratio. The SEC is examining the need for additional investor protections for leveraged and inverse exchange-traded funds and has put a temporary halt to the issuance of new derivatives-based ETFs. In addition, FINRA has cautioned its broker members on the sale of leveraged ETFs.
On the positive side, the 0.89% fee this fund charges is less than the borrowing cost, so it can be a less expensive way to short the market. Another advantage to placing a bearish bet with this ETF as opposed to shorting individual stocks or bullish ETFs is that you cannot lose more than your original investment, although if you hold it long enough without rebalancing, you may lose your entire investment... read more.
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