A good example of how bad it can get is the mutual fund UVPIX. It is 200% of the inverse of EEM Emerging Markets(More or less). If you look at a 2 year chart, it was near 50 in June of 06. http://finance.yahoo.com/q/bc?s=UVPIX&t=2y It is now at around $7 a share. I believe it is mathamatically impossible for UVPIX to reach its June 06 high again. (or so unlikely that it might as well be impossible). I lost about 40% on UVPIX last year. I more than doubled my money using SRS though. The trick is not to get greedy. Make your 5-10% or even 15% and then get out. Buy it back when it drops and do it again. Another thing to look at is when IYR (or RWR) drops substaintially SRS will go higher than it should, the same applies the other direction. As far as I understand it, the ETF must purchase its own shares when SRS goes up and sell its own shares when SRS goes down. That also could be a factor in why the prices dont always seem to match up to the rise or fall in the index. Another observation I noticed is that SRS has hit near $117 several times since bottoming out at 98. The REIT's seem to be forming a base. This worries me. I sold most of my SRS this week and only have 500 shares now. Nasdaq.com is saying that SRS technical indicators are at 80% bearish. http://www.nasdaq.com/asp/stock_consultant.asp?&symbol=SRS&selected=SRS The MACD on IYR looks very bearish though. the black line has crossed over the red one below the zero mark. http://stockcharts.com/h-sc/ui?s=IYR&p=D&yr=1&mn=0&dy=0&id=p01037181067
Your UVPIX example is fascinating on a number of levels.
On one hand, it actually seems like UVPIX has performed unexpectedly well. The underlying index, ADRE, doubled (+100%) from 6/13/06 to 10/1/07. In that time, UVPIX went from 47.5 to 8.9. Because ADRE doubled, you'd figure that UVPIX would now be trading near zero since it should have "lost" about 200%. Yet UVPIX lost 81%, while its underlying index gained 100%.
On the other hand, ADRE closed at the same price, 54.8, on both 10/1/07 and, recently, 2/27/08. Yet UVPIX went from 8.9 to 6.9 during that time period. So while ADRE was flat, UVPIX lost 22%!
It looks to me that an ultra-short ETF has one of the characteristics of a near-the-money option. That is, it is exposed to some degree of time decay -- even if the underlying index is net flat. I know this is a rather simplistic way to put it, but you get the idea.