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Beware of 2X Inverse ETFs: SKF, SRS, FXP

December 10th, 2008 firstadopter Leave a comment Go to comments

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.


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  • http://bobbrill.net Bob Brill

    Please let me know if you perceive any advantage to shorting the 2x Ultra Real Estate ETF (URE) rather than the 1X ETF IYR. All comments and explanations are appreciated. I see from your description the URE would be subject to the “random day-to-day sequential price movements” but I’m interested whether being on the short/opposite/house side of the multiplier ETF would work to my advantage.

  • http://www.firstadopter.com firstadopter

    If you want more exposure than 1x ETFs give you, just buy more of them. The 2x funds are generally more illiquid, so you also lose on the bid/ask slippage. If you don’t have enough money to get the exposure you want from 1x fund, you shouldn’t be in 2x funds in the first place (IE: you don’t have enough capital to trade them with this crazy volatility). By doing the 2X fund, you are basically betting the index will go down day after day after day sequentially, I just don’t think that is a smart unless you have a crystal ball. It’s hard enough to get the fundamentals right, not the direction of the market for many days in a row.

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