Ok, so here’s a story. A few weeks ago I purchased ProShares UltraShort Bloomberg Crude Oil (SCO) at a price of $26.78. At the time of purchase, the price of crude oil was hovering around $99 per barrel. My feeling – crude oil is going to drop soon. My expectations – if the crude oil price is falling slightly in the upcoming weeks, then I can take at least a $2-$3 gain from holding this ETF. Even if I don’t know and understand exactly what this ETF is, I was pretty sure that I’ll be able to make a profit if I predict the price movement of crude oil…
But, guess what? At the time of writing, crude oil is trading at $87 per barrel and the ETF is trading at $24.23. Annoying right? Now listen, I’m not completely clueless and I understand that if you buy a fund like this, then it is very likely that it will go down in value over the long term. And yes, I know that the fund essentially tracks the inverse (-2x) of the daily performance of the Bloomberg Commodity Balanced WTI Crude Oil Index. But still…
Anyway, I sent an email to Bloomberg just to understand how it works and I got a generic reply back, basically telling me what I already know. So far, I didn’t lose a large sum of money but felt like I need to share this information with someone that might make the same mistake.
So, here’s my two cents about it.
Should you invest in ProShares UltraShort ETFs?
If you are planning to invest in any ProShares UltraShort ETF, then don’t. These funds are made for day trading and short-term trades only. In some cases, you’ll notice that when oil prices are rising, the fund is falling more than the other way around. This means that basically oil prices can fall from $100 to $50 and the fund will stay at the same price. And that applies to all types of ProShares UltraShort Funds.
So why do many people invest in these ETFs? The tricky thing is that sometimes it’s not easy to find ways to short assets. For example, let’s say you want to short sell crude oil, natural gas, or the S&P 500 index. How can you do it? CFDs is one way but it’s not legal in the US and it’s a very risky type of trading. Future contracts is another way but it requires a large investment and a complicated process of opening a futures trading account. So, this is why many people go with ProShare UltraShort funds.
The bottom line – should you invest in ProShares UltraShort ETFs? No!!!!! These funds are not made for long-term investments. Holding them means you have to pay fairly expensive fees and other charges and because you can only buy the ETF and not short it, you most likely will always lose. It’s kind of like playing against Don Corleone so don’t even try. Unless it is a short-term trade, move on and look for another way to short the asset.