I have been trading SRS for over a year, and got stuck a few times when it seemed cheap only to find out it went much lower, later finding out that this thing leaks like a Harley from the 70's. Todays 79 is equivelant to 90+ if you dont believe me compare charts with URE and IYR and SRS you will see the vanishing of SRS strength
That's not the way a management fee refund works.
The management fee could be 1.8% but they would waive 0.6% for the first two years as an incentive for early investors... to get the fund going. Then it would look the the fee was 1.2% for the first 2 years because of the partial fee waver. Then, theoreticaly they could be returning the waved portion of the fee as a dividend.
I have a couple of closed end funds that waive a portion of the management fee for the first 5 years (although I think they just re-invest it rather than paying it out). But, that's what made me think of it as a possible source of a payout on an index short ETF.
A 3rd possible explanation couuld be some form of contango or bakwardation going on when they roll over the swap agreements. For example, suppose you have an oil futures contract for this month, but you don't want to actualy take delivery of all that oil. At some point you would sell this month's contract and buy the same position for next month or next quater. However the contract for next month or next quarter is for delivery at some date further in the future. So depending on what people think of the future of oil prices that very same contract for next month or next quarter might be more or less expensive than the contract for delivery this month. I belive when I looked at the annual report the SRS swaps did have some kind of time frame on them. So another possible way SRS could generate a dividend would be if when they went to renew the swaps they got a cheaper deal on the same 2X index bet and returned the difference rather than taking a larger position on the renewal.
The more I think about it, that actually seems like the most plausable explanation.
"this thing leaks like a Harley from the 70's"
Nicely put. Many of us who have followed SRS have grasped this divergence and are comfortable with it. I never hold SRS. I only trade it and at specific times - based on IYR's action.
Currently, I look to get into SRS when IYR hits between 66 & 72. As of today thats means a range of 65 to 80 for SRS.
SRS has bled 19% in the past two months alone. That is indeed brutal. One has to keep changing the range weekly if they expect to avoid getting caught.
I tried to explain before about all this, but I guess to no avail.
There are periods when SRS GREATLY exceeds 2X inverse, even 5X to the upside and periods like the last 30 days where SRS has 3X+ the loss vs 1x gain on IYR.
Again, you definitely do not want to stay in SRS when IYR is uptrending or even trading sideways. Trade it if you are very nimble, but right now IYR is in a mild uptrend and it is costing anyone that keeps holding dearly.
On this performance comparison chart, click on the histogram button for easier comparison, slide the period bar to see different periods and change the time to 30 days or past month or whatever you want. I think you'll find it very interesting.
My rule of thumb recently has been to sell SRS when IYR touches or near touches it's uprising 20 SMA and then buy back at your own risk. But to argue against the IYR chart and keep holding is asking for trouble, big trouble in the case of an 2X inverse fund. Good luck
There are 2 answers and I believe both are correct and both play a major role:
(1) Dividends. SRS has got to be a 2X inverse of the total return of the indiex it tracks. That means 2X the dividends is being subtracted from the value of IYR. So, no where does it explain this. But this has to be true because otherwise you could lever up, buy both SRS and IYR (buying two times as much IYR as SRS), be market neutral, sit back and collect the IYR dividends with ZERO market risk.
REITs are REQUIRED by law to pay out 90% of their earnings in dividends. Wouldn't it be great to double short an entire sector with double disregard for 90% of it's earnings. That would actualy be twice as good as having your cake and eating it too.
(2) There is also a mathematical issue that causes loss any time there is a retracement. This has probably played a huge role recently because of all the retracements. For more on this, look here: