Contrarian ETFs Grow
Jen Ryan
03/13/07 - 11:08 AM EDT
The ProShares family of inverse exchange-traded funds is benefiting as investors increase their bets on declines in the prices of stocks.
One way to profit when stocks fall is to establish a short position, which entails borrowing a security and then selling it in the hope of buying it back at a lower price. You then return the shares and keep the difference.
Another option is to buy a mutual fund or exchange-traded fund that moves in the opposite direction of the market. When stocks plummeted two weeks ago, that is what a lot of investors opted to do.
On Feb. 27, the
Dow Jones Industrial Average fell 416 points, or 3.3% -- the largest one-day point loss since the market reopened after the Sept. 11, 2001, terrorist attacks. Meanwhile, the
S&P 500 and the
Nasdaq fell 3.5% and 3.9%, respectively.
"(That) was a wake-up call for many investors. ... We have had incredible interest in the products ever since," says Michael Sapir, chief executive of ProShare Advisors.
ProShares offers 52 ETFs, 29 of which are designed to move in the opposite direction of the indices they track. Some of the inverse products are "ultra short," using leverage so that when the market falls, they rise twice as much, or when the market rises, they fall twice as much. (ProShares also has "ultra" ETFs that move in the same direction as the market but use leverage to return twice as much.)
On the day the market tumbled two weeks ago, the ProShares ETFs traded almost 30 million shares, Sapir says. That's nearly three times the upper end of normal daily trading volume for these products, which range from 5 million to 11 million shares.
Sapir adds that the
UltraShort QQQ(QID Quote), which returns twice the opposite performance of the Nasdaq 100, traded roughly 20 million shares that day and remains in the top 10 of ETFs in trading volume.
Sapir says interest remained high throughout the week as the inverse ETFs continued to trade more than 20 million shares each day while generating strong inflows.
On Feb. 26, the day before the big market drop, the Ultra Short QQQ closed at $50.65, according to Yahoo! Finance. The following day, it rose 9.5% to close at $55.46.
Even though the performance of the market has been mixed since then, Sapir says there still is good demand for the Ultra Short QQQ and the firm's other short ETFs. For the year to date through Friday, the Ultra Short QQQ has returned 1.74%, according to Morningstar.
Jeff Tjornehoj, a senior research analyst with Lipper, says that "when it comes to investor interest, these products certainly get more attention when the market takes a wild swing. ... They get interest from people who say, 'I wish I would have done that.'"
When the market's losses started to mount on Feb. 26, he says, the short ETFs provided a great way to get out of an unfavorable position, especially for investors who owned one of ProShares ultrabullish ETFs -- which rise twice as much as the market.
Opinions are varied as to whether shorting a security or buying the ETF is cheaper. But most agree that the ETF is certainly a more convenient option.
It may be a safer option as well.
When you sell a security short, there's no limit to the amount of money you can lose if its price keeps rising, forcing you to buy it back at a higher price. But when you buy shares in an ETF, you can lose only as much as you have invested.
While inverse ETFs clearly benefit when the market is selling off, Paul Mazzilli, director of ETF research at Morgan Stanley, says there are other ways for investors to use these products, aside from taking advantage of short-term swings in the market.
They are also useful, he says, for hedging against declines in other holdings, particularly if you sell securities short or use leverage. For instance, shorting and using leverage are prohibited in individual retirement accounts.
ProShares' Sapir says investors use the firm's ETFs for both purposes. He says that on the one-week anniversary of the market's big fall, when the DJIA was up almost 160 points, trading in the inverse ETFs was still heavy.
