I bought a ProShares UltraShort ETF to short crude oil. Crude oil fell exactly as I predicted. I still lost money. Here's the daily rebalancing trap that catches out thousands of retail investors — and why these funds are almost never the right tool for what you're trying to do.
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 falls slightly in the upcoming weeks, 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 I’d be able to make a profit if I predict the price movement of crude oil correctly.
But, guess what? At the time of writing, crude oil was trading at $87 per barrel, and the ETF was 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. I didn’t lose a large sum of money but felt like I needed to share this information with someone who might make the same mistake.
“Crude oil fell from $99 to $87. I was right. And I still lost money. That’s the ProShares UltraShort trap.”
What Is a ProShares UltraShort ETF?
Before getting into why these funds are so dangerous for long-term investors, it helps to understand exactly what they are.
ProShares UltraShort ETFs are leveraged inverse exchange-traded funds. The word “ultra” refers to leverage, and “short” means they move in the opposite direction of their underlying index. The SCO, for example, is designed to deliver -2x the daily return of the Bloomberg Commodity Balanced WTI Crude Oil Index. If crude oil falls 1% in a day, SCO should rise approximately 2%. If crude oil rises 1%, SCO should fall approximately 2%.
They trade on major stock exchanges like any regular ETF or stock — you can buy them through any standard brokerage account in the US, no futures account or margin required. That accessibility is exactly what makes them appealing, and exactly what makes them dangerous for the uninformed investor.
ProShares offers UltraShort funds on a wide range of assets:
- SCO — ProShares UltraShort Bloomberg Crude Oil (-2x)
- KOLD — ProShares UltraShort Bloomberg Natural Gas (-2x)
- SDS — ProShares UltraShort S&P 500 (-2x)
- QID — ProShares UltraShort QQQ / Nasdaq-100 (-2x)
- DXD — ProShares UltraShort Dow 30 (-2x)
- GLL — ProShares UltraShort Gold (-2x)
Why Do People Buy These ETFs?
The tricky thing is that sometimes it’s not easy to find ways to short assets. For example, if you want to short crude oil, natural gas, or the S&P 500, how do you do it? CFDs are one way, but they’re not available in the US and they’re a very risky form of trading. Futures contracts are another option, but they require a large investment and a complicated process of opening a dedicated futures trading account.
So this is why many people turn to ProShares UltraShort funds. They’re accessible. You can buy them in your regular brokerage account. No margin. No futures approval. No complex setup. Just click buy and you’re short crude oil. Or so it seems.
The Daily Rebalancing Problem — Why You Lose Even When You’re Right
Here’s the core of the problem — and it’s something that isn’t obvious until you’ve lived it, which is exactly what happened to me.
ProShares UltraShort ETFs are designed to deliver their -2x return on a daily basis. Every single day, the fund rebalances to maintain its leverage ratio. This daily rebalancing creates a phenomenon called volatility decay (also called beta slippage), and it’s the reason why you can be right about the long-term direction of an asset and still lose money holding the inverse ETF.
Imagine crude oil starts at $100. On Day 1, it falls 10% to $90. Your -2x ETF rises 20%, from $100 to $120. So far, so good.
On Day 2, crude oil recovers 11.1% (back to $100). Your -2x ETF falls 22.2%, from $120 to $93.36.
Result: Crude oil is back exactly where it started at $100. But your ETF is at $93.36 — you’ve lost 6.64% while the underlying asset went nowhere.
Now imagine this happening every day for weeks in a volatile market. The decay compounds. The longer you hold, the more you lose — even in a sideways market, and sometimes even in a falling market if the path is volatile enough.
This is not a bug. It is a feature — or rather, a mathematical consequence of daily compounding with leverage. ProShares discloses this in their fund documentation. The problem is that most retail investors don’t read fund documentation, and the funds look deceptively simple from the outside.
What Are These ETFs Actually Designed For?
ProShares UltraShort ETFs were designed for one specific purpose: short-term tactical trades and intraday hedging. A professional trader who wakes up in the morning thinking “I believe the S&P is going to drop 2% today” might use SDS to express that view for a few hours. A portfolio manager who wants to hedge existing equity exposure for a specific short window might use these instruments.
They are emphatically not designed to be held overnight, over a weekend, or over any extended period. The daily rebalancing mechanism makes them structurally unsuitable for anything other than very short-term positions.
Should You Invest in ProShares UltraShort ETFs?
If you are planning to invest in any ProShares UltraShort ETF for anything other than a very short-term trade, then don’t. These funds are made for day trading and short-term trades only. In some cases, you’ll notice that when the underlying asset’s price is rising, the fund falls more than the other way around. This means that oil prices can fall from $100 to $50, and the fund can still end up at the same price — or lower — because of the volatility along the way. And that applies to all types of ProShares UltraShort funds.
Should you invest in ProShares UltraShort ETFs? No — not for long-term investments. Holding them means paying fairly expensive fees, suffering from daily decay, and fighting a mathematical structure that is working against you. Because you can only buy the ETF and not short it, you will almost always lose if you hold it for more than a few days. It’s kind of like playing against Don Corleone — don’t even try. Unless it is a short-term trade, move on and find another way to short the asset.
For alternatives that actually work for longer-term short exposure, see our guide on how to short-sell crude oil and natural gas — which covers futures, options, and CFDs that don’t have the decay problem built into them.
This article reflects personal experience and is for informational purposes only. It does not constitute financial advice. All investments carry risk. Always conduct your own research before making investment decisions.