last two months (data from Yahoo historical prices):
iShares Dow Jones US Basic Materials IYM
23-Dec-08 $ 0.41 Dividend
41.89 - 37.50 = 4.39 down 10.48%
Ultra Basic Materials ProShares UYM
23-Dec-08 $ 0.07 Dividend
21.06 - 14.41 = 6.65 down 31.6%
Is this correct?
Understanding ProShares' Long-Term Performance
Understanding Long-Term Performance | Performance | FAQs on Performance and Pricing
ProShares are designed to provide either 200%, -200% or -100% of index performance on a daily basis (before fees and expenses).
A common misconception is that ProShares should also provide 200%, -200% or -100% of index performance over longer periods, such as a week, month or year. However, ProShares' returns may be greater than—or less than—what you’d expect over longer periods.
How does this happen?
The hypothetical example below demonstrates how ProShares' long-term returns may be different than what you'd expect:
Fund XYZ seeks to double the daily performance of Index XYZ. On each day, Fund XYZ performs in line with its objective (200% of the index’s daily performance). You might expect that over the entire five-day period, the fund’s total return would be double that of the index, but that’s not the case. For the entire period, Index XYZ gained 5.1% while Fund XYZ gained only 9.8%.
Index XYZ Fund XYZ
Level Daily Performance Daily Performance Net Asset Value
Start 100.0 $100.00
Day 1 103.0 3.0% 6.0% $106.00
Day 2 99.9 -3.0% -6.0% $99.64
Day 3 103.9 4.0% 8.0% $107.61
Day 4 101.3 -2.5% -5.0% $102.23
Day 5 105.1 3.7% 7.4% $109.80
Total Return 5.1% 9.8%
Why does this happen?
This is due to several factors, but a significant one is index volatility and its effect on fund compounding. In general, periods of high index volatility will cause the effect of compounding to be more pronounced, while lower index volatility will produce a more muted effect.
To demonstrate this point, let’s compare Fund XYZ from the previous example to the less volatile (and also hypothetical) Fund ABC, designed to double (200%) the daily performance of Index ABC.
Fund ABC: Less Volatile Fund XYZ: More Volatile
At left, the steady uptrend of Index ABC led to a compounding effect (magnified gains upon gains) in Fund ABC that more than doubled the index’s return (10.4% vs. 5.1%). At right, the more volatile Index XYZ led to magnified fund gains and losses, producing less than 200% (9.8% vs 5.1%).
(Remember, you can’t invest directly in an index, and hypothetical fund performance does not reflect fund fees and expenses.)
What it means to you
In the end, ProShares are designed to accomplish their objectives on a daily basis. As a result, you shouldn't expect ProShares to provide 200%, -200% or -100% of index performance over longer periods.
If you're interested in more details about ProShares' long-term performance, please see the description of correlation risk in the ProShares prospectus. Also, you can download the ProShares statement of additional information for a deeper discussion of the factors that affect ProShares' long-term performance, including a tool that estimates one-year fund performance based on index behavior.
A note about daily benchmarks
A fund could be designed with a benchmark that uses a time period longer than one day (for instance, a week, a month or a year), but index volatility and its effect on compounding will create a similar effect over multiple periods, regardless of their duration.
If the index upon which a double ETF is based did the following:
Assume 2 trading days - Day 1, the index rises 25%; day 2 the index falls 20%.
Index rises 25% on day 1 from 100 to 125. On day 2, it falls 20% back to 100.
The double ETF rises 50% on day 1 from 100 to 150. On day 2, it falls 40% to 90.
So the index would be back at 100, but the double ETF would be at 90 (a loss of 10%)
Is this correct, or is the double ETF reset to 100?
The article points out a very important point about 2X funds. Create a chart that plots both DIG (ultra-long oil and gas) and DUG (ultra-short oil and gas) during the past 6 months. Shorting DIG was a money maker, but being long DUG, you eventually wound up without significant earnings, even though oil and gas took a historical plunge during the 6 months. Same result if you plot SKF (Ultra-short financials) against UYG (ultra-long financials) for the past 6 months.
Tricky items to play.