An Easier Way to Short Emerging Markets
10/30/07 - 10:37 AM EDT
Lawrence Carrel
While inverse funds can play a role in hedging the portfolios of ordinary investors, "the double inverse ETFs are strictly for traders," says David Fry, founder and publisher of ETF Digest.com, an online investment newsletter. "But I'm glad they are coming out, because when you need them, and who knows when that will be, it's good to know they will be there."
The expense ratio for all the ProShares funds is 0.95%, one of the highest expense ratios charged by any ETF company. That's partly a function of their design. The funds don't short individual stocks. Instead they short index futures contracts and buy swap agreements, which are contracts between two parties to exchange a revenue stream. It's important to understand that the short ETFs are designed to produce the inverse performance of a given index on a daily basis. That means their performance can move out of line with their benchmarks over longer periods of time. "On a market price basis, both sets of ETFs usually delivered 70% to 130% of their daily expected return. Over longer time periods, ProShares ETFs are unlikely to precisely double benchmark returns," Paul Mazzilli, the director of ETF research at Morgan Stanley, said in a report earlier this month. The interest income of inverse ETFs and fund expenses contribute to this discrepancy, he wrote. To hear ProShares Chief Executive Officer Michael Sapir discuss the new ETFs, click here.
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