Taking the Measure of the Double-Short ETF

A few weeks ago, I wrote about the ProShares Ultra S&P 500 Fund(SSO Quote). It is an ETF meant to capture twice the daily performance of the S&P 500 index; that is, it's double-long the market.

The converse of double-long is double-short. ProShares has now listed the Ultra Short S&P 500 Fund(SDS Quote), which is meant to capture twice the daily inverse of the S&P 500, double-short.

Using the open-end equivalent, (URPIX Quote)ProFunds Ultra Bear Fund, as a litmus test, the double-short ETF is likely to have tracking errors due to things like cash building up and rolling of derivatives owned in the ETF. To be crystal clear, I expect there to be a noticeable tracking error that will vary in size over time.

As in my column on the double-long ETF, I would like to focus on potential strategy for the double-short ETF. The prospectus will spell out the potential flaws better than I will, and is essential reading for anyone considering the investment. ...