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IYR and SRS: When Opposites Attack


Inverse fund performance sometimes needs some explaining.


The more of these you look at these Inverses, the uglier it gets. Here's iShares Dow Jones US Real Estate (IYR), down about 5% over the past six months.

Click to enlarge

So how about the UltraShort Real Estate ProShares (SRS), the Double Inverse of this? It's up 10%, right? Well, not exactly. It's down 12%. I'm sure there were some dividends over this stretch, but that can't quite make up this shortfall.

Click to enlarge

David Merkel is not optimistic about the Triple Funds coming down the pike. I'm afraid to mention my "Duodecaphonic Inverse ETF," currently in the pipeline.

So what's going on? It could be bad management, but Woodshedder has a simpler explanation.

Let's say they're both $100. And then on Day 1 IYR rallies 1%. SRS will go down 2%, or $2 to $98. Then on Day 2, IYR dips back 1% to 99.99. SRS should then go up 2%, to $99.96. No one will really notice, but obviously this adds up.

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On the flip side, an extended move in one direction will cause the combo to lift. Let's say IYR goes up 1% a day for five straight days. IYR is now 105.10, SRS is 90.39. You can even throw in some reversal days and get similar results.

The bottom line though, is any round trip to "unch." will cause a loss in the combo over that particular time frame.

Why is this important? I mean, after all, it's essentially a directional bet, no?

Well, if nothing else, it implies an Inverse Fund is not likely your best alternative over the course of time, when compared with something like simply shorting the regular ETF, or using puts and/or calls.

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