UltraShort ETF Losses Go to 'Money Heaven'

We like to think of trading as a zero-sum game -- the money you lose is money someone else has made. But that is not always the case. Sometimes the money you lose simply goes away to "money heaven."

Never has that concept been truer than when looking at the levered ultra-short ETFs. Periodically, I check in on these to see how they are "performing." Typically, what I will do is take the vanilla ETF on an index and compare it with the 2x short sided ETF on the same index and figure out how much the levered short ETF has outperformed or underperformed.

I started this exercise back in November, when I first noticed the tremendous volatility of these levered funds. I keep a spreadsheet, use the adjusted prices to account for dividends and compare the actual performance with the implied performance over various periods of time. Take a look at the data for the U.S. Financial Sector ETFs, the unlevered iShares Dow Jones Financial Sector (IYF Quote) and the 2x short UltraShort Financials ProShares(SKF Quote):

3-Apr From 3/26 From 3/6 From 2/23 From 12/31 From 11/20 IYF 36 5.0% 50.8% 30.2% -19.7% 8.0% 36.12nav SKF 80.95 -13.1% -67.6% -59.9% -21.4% -69.2% 80.38nav implied -10.0% -101.6% -60.4% 39.4% -16.1% over/(under) -3.1% 34.0% 0.5% -60.8% -53.1%

...