Beware of 2X Inverse ETFs: SKF, SRS, FXP
I see a lot of retail traders getting blown up by the 2X inverse Ultra-Short ETFs like SKF (financials), SRS (real-estate), and FXP (China). What people don’t realize is when you buy these ETFs, you are not only investing for a decline in the sector index, but also the day-to-day sequential pattern of price movement.
This is because the ETF re-jiggers their exposure to 200% every day. Consequently if you get too many consecutive up-days in the respective index, you get hurt badly due to the law of compounding. This is why SRS and SKF are basically flat on the year, while the actual real-estate index and financials index are down huge year-to-date.
The smarter thing to do if you want negative exposure to financials or real estate is to just short the 1X ETF like XLF or IYR. At least you are guaranteed exposure only to the sector’s fundamentals, not random day-to-day sequential price movements, which are tough to predict.