Short and Leveraged ETFs Are Beefing Up

Some investors like to say short and ultra short exchange traded funds (ETFs) are similar to steroid use – bulking way up on an unnatural time scale.

For instance, the ProShares Ultra Oil and Gas (DIG) beefed up more than 60% through June since its early 2007 inception, only to lose 30% in less than one month’s time as oil prices slipped, reports Chris Bain for Associated Press

These types of funds retain their popularity because of their ability to make investors money, even in a down market. Money has been pouring into these ETFs as they aim to profit by taking sizable bets on a sector or the broad market using leverage. “Ultra” ETFs made up 6 of the 20 most actively traded ETFs, and each touted a daily volume above 10 million shares.

The short and ultra short ETFs are for short term hedges, and are not recommended for long term bets. The ETFs, which use futures and swap agreements, are easy to trade and can protect a portfolio. It is a good way to provide insurance without actually having to go short. They are useful for investors who do not want to sell a losing position but want to protect against further declines.

These ETFs have been successful, but they are not for everyone. Use them with caution and know when to quit. Other short and ultra short ETFs:

• ProShares Ultra Short Financials (SKF), up 24.2% year-to-date
• ProShares Ultra Dow 30 (DDM), down 88% year-to-date
• Rydex Inverse Russell 2000 (RRZ), up 5.8% year-to-date
• Rydex 2x S&P 500 (RSU), down 27.6% year-to-date

Read the disclosure, as Tom Lydon is a board member of Rydex Funds.