Short Financial ETFs: Running For Cover… Again
07 September 2008 at 8:16 pm by Gary Gordon
You’ve been right as rain if you’ve been bearish on financial stocks in 2008. Bear Stearns imploded. Indymac failed. And the public lost faith in the ability of the GSEs (Fan/Fred) to function.
Still, did you make money shorting financial companies? As a trader, maybe. As an investor, the buy-n-hold model has earned you little for your troubles.
Through 9/5/08, ProShares UltraShort Financials (SKF) had unrealized YTD gains of roughly 13%. The profits are certainly better than a kick in the head… if you banked them.
However, buy-n-hold gains are about to be wiped out. Why? The U.S. government’s action to take control of Fannie and Freddie has "jazzed up" global stock investors. In fact, if the overnight surge in Asia stocks is any indication, ProShares UltraShort Financials (SKF) may actually have YTD losses by the time the closing bell sounds on Monday 9/8/08.
Isn’t a 13% loss in a single day unlikely? Not when it comes to ultra-shorts, which seek 2x the inverse of the sector.
On July 16th, for example, the markets reacted favorably to the SEC’s temporary moratorium on naked shorting of financial companies. ProShares UltraShort Financials (SKF) fell 21.5% in a single session.
If we receive anywhere near the enthusiasm over the stabilizing of the GSEs, holding ProShares UltraShort Financials (SKF) will be a losing proposition for 2008. Hard to fathom.
Then again, the more excitedly that the public has embraced the new short ETFs, the more they seem to have struggled. Consider Rydex 2x Inverse Select Financials (RFN) and ProShares Short Financials (SEF). Both are down since July inception. (And they are about to lose a whole lot more.)
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