A Pair of Ultra Trades

One thing that has been clear to me over the last couple of years is that ETF innovation would allow do-it-yourself investors to have cheap and easy access to potentially sophisticated strategies.

The latest batch of ultra short (i.e., double short) sector funds are a big step in this direction for market-neutral strategies and paired trades.

ProShares has listed 11 funds that go short various Dow Jones versions of different sectors. In this article, I will profile a possible strategy that I think could be applied to all of them, so roll up your sleeves. The example here will be with the financial sector, the Ultra Short Financials (SKF Quote). This fund captures double the inverse of the Dow Jones Financial Sector Index. The proxy for this index exists as a single long ETF: the iShares Dow Jones Financial Sector Index Fund (IYF Quote).

To be clear, $10,000 in IYF paired with $5000 in SKF, save for whatever the tracking error might be, would offset each other on a daily basis. ...