Epic Fail Part II: Short Financial ETFs An Unpleasant Surprise In 2011

We recently noted that when used improperly, leveraged ETFs can bring unpleasant surprises to investors. In that case, we examined the disappointing year-to-date returns offered by the ProShares UltraShort Europe EPV. That inverse double-leveraged ETF is sharply down for the year while the Vanguard MSCI Europe ETF VGK, the fund EPV is supposed to be the bearish equivalent of, and every other long Europe ETF are also negative. While that example bolsters the argument that leveraged ETFs should only be used as short-term trades, not long-term investments, there are instances where leveraged ETFs have been abysmal failures over long holding periods. Consider the following: The Financial Select Sector SPDR XLF was down more than 20% for the year at the start of trading today. Bank of America BAC was down almost 65%. Wells Fargo WFC, JPMorgan Chase JPM and Citigroup C have all handed investors losses that go from bad (Wells) to worse (JPMorgan Chase) to borderline catastrophic (Citi). So would it not have been an excellent idea to buy the ProShares UltraShort Financials SKF or the Direxion Daily Financial Bear 3X Shares FAZ in January of this year and just let them marinate in your portfolio? Actually, it would have been a terrible idea in the case of FAZ and a mediocre one at best in the case of SKF, though owning SKF without mention of it being a short-term trading vehicle has been a favorite idea of some pundits. Factoring in what looks like an 11% loss just today, FAZ will be down almost 20% year-to-date. With a one-day loss bordering on 8% today, SKF will now be up less than 3% for the year. In other words, SKF and FAZ have stunk up the joint as long-term investments, especially when considering one could have bought the Utilities Select Sector SPDR XLU and captured excellent returns. That's right. A boring utilities ETF, with a yield of almost 4%, is up 14% year-to-date and that's without any of the heartburn leverage ETFs are so notorious for providing. Again, it's right there on the ProShares Web site and it's a reminder as to why investors should have a healthy amount of skepticism toward anyone that advocates the use of leveraged ETFs over time frames that go beyond a week or two. "This Short ProShares ETF seeks a return that is -2x the return of an index or other benchmark (target) for a single day, as measured from one NAV calculation to the next. Due to the compounding of daily returns, ProShares' returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period."