This past March, I wrote an article titled ETF’ed, in which I discuss an inverse EFT, one supposed to rise when the index it tracks, falls. I observed how for RTN, the double inverse ETF tracking the financial spider, in a time when the underlying index fell 50%, the etf was barely up 10%, far worse than simply shorting the XLF itself, and certainly nowhere need twice its inverse.
Now it seems others have jumped on the bandwagon. Financial Planning magazine reports Class-Action Suit Filed Against ProShares Leveraged ETF. The suit cites a spectacular tracking error. ProShares UltraShort Real Estate seeks to deliver twice the opposite of the daily performance of the Dow Jones U.S. Real Estate Index.Last year, the index fell 39%, whereas the fund fell 48%. Spectacular indeed. Buyer beware.
Note – Most ETFs do not suffer from such wide tracking errors. SPY has an expense ratio of .09% ($9 per $1000 invested, compared to $100+ for a managed mutual fund.) and aside from this expense, virtually zero tracking error. Look at the details of the ETF you intend to buy, and compare it to its underlying index, and decide if it’s right for you.