First of all, jw, I suspect you have the wrong idea about what "hedging" can and cannot do. You can reshape
the profile of the probabilities of various outcomes. And, if you are a gambler, you can use hedging to create the Wall Street equivalent of the "proposition bet." As a long-term investor, there's no way to magically cancel out the risk and be left only with the reward. When you cancel out the risk you cancel out the reward, too, and are left only with (high expenses).
These ETFs are for people making gambles on single-day market moves
. You don't even need to read the darned prospectus, just look at the silly fund descriptions. They practically spell it out. ProShares UltraShort S&P 500
The boldface is theirs, not mine.
This Short ProShares ETF seeks a return that is -2x the return of an index or other benchmark (target) for a single day, as measured from one NAV calculation to the next. Due to the compounding of daily returns, ProShares' returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period. These effects may be more pronounced in funds with larger or inverse multiples and in funds with volatile benchmarks. Investors should monitor their holdings consistent with their strategies, as frequently as daily. For more on correlation, leverage and other risks, please read the prospectus.
Consider this period of time over which an S&P 500 index investor, starting with $10,000, ended up with $9,639, i.e. a small loss of $361. So, the -2X ETF should have resulted in a small gain of about $722, right? Wrong.
While the S&P 500 fund was losing $361, the UltraShort S&P fund LOST over $5,000.
These funds have a huge degree of "volatility drag" created by the daily rebalancing. Notice how, yes, they follow the wiggles in the opposite direction but notice how, superimposed on that, is a steady drag down, down, down.
Is it possible to make money by timing the market properly in this ETF? Sure, but the chart above should convince you that the only way to do it is by successfully gambling on short-term movements, not on even medium-term holding.
These funds are the subject of a FINRA alert (FINRA-ese for "warning"):Leveraged and Inverse ETFs: Specialized Products with Extra Risks for Buy-and-Hold Investors
The SEC staff and FINRA are issuing this Alert because we believe individual investors may be confused about the performance objectives of leveraged and inverse exchange-traded funds (ETFs). Leveraged and inverse ETFs typically are designed to achieve their stated performance objectives on a daily basis. Some investors might invest in these ETFs with the expectation that the ETFs may meet their stated daily performance objectives over the long term as well. Investors should be aware that performance of these ETFs over a period longer than one day can differ significantly from their stated daily performance objectives.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.