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Tuesday, December 23, 2008

ProShares surprises investors today

A big selection of ProShares ETFs went ex-dividend today. The surprise in the announcement was that a short term capital gain was also declared for these ETFs and it many cases it was a whopper.

The chart below shows the dividend, the capital gain and the impact it had on the price of each ETF. I have chosen to use just a few ETFs as an illustration of the general situation though there was a total of 35 ETFs that went ex today (see the full list at the ProShares site).

Fund Name Ticker Dividend S.T. Cap Gain Closing price 12/22/2008 ex-dividend price percent change
UltraShort QQQ QID 0.005739 9.49928 68.82 59.31 14%
UltraShort Dow30 DXD 0.027612 16.0274 73.12 57.06 22%
UltraShort S&P500 SDS 0.028553 11.46188 87.44 75.95 13%
UltraShort MidCap400 MZZ 0.007783 23.84952 88.39 64.53 27%
UltraShort Russell2000 TWM 0.066508 25.00731 94.22 69.15 27%
UltraShort Basic Materials SMN 0.008847 26.57907 69.48 42.89 38%
UltraShort Consumer Services SCC 0.008631 33.91358 124.92 91.00 27%
UltraShort Real Estate SRS 0.023996 4.56656 61.03 56.44 8%

You can see that the combination of the dividend and the short term capital gain had a large effect on the price of each ETF. Reductions in price ranged from 8% to 38%.

It's true that investors receive the income from this action. The problem is that the money is taxable and ProShares gave little warning that today was the ex-dividend date. They made the announcement last night and today it took effect. For those who were holding the ETFs for just a few days or as a quick overnight trade there was no opportunity to sell the ETFs beforehand - they are now stuck paying taxes on the capital gains.

Why are the distributions so big? As it says on the ProShares site, all ETFs are required by the IRS to distribute substantially all of their income and capital gains to shareholders at least annually.

So here is another aspect of the ProShares ETFs that investors need to be cautious about. As if these ETFs weren't volatile enough already.

3 comments:

salgat said...

Hi and Merry Christmas,

You write that "ProShares gave little warning" ...

It is a joke : for me, there has not been warning at all !!!

A warning, as little it could be, should have been one day or two at least : shareholders as traders would have been able to decide, in true knowledge, the consequences of keeping or selling before the detachment, don't you think so !?

In fact, their decision without legal or human or social warning has provoked a real disaster for millions and millions of shareholders and traders : their kind of action is not of nature to give actually confidence.

Do you think a plaintiff's action is possible ?

Thanks for reading me.

Sal.

Pam Holloway said...

There must be something we can do. I bought SDS on Dec 18, so essentially owned it for two days before the reset on the 22nd. I lost 3K immediately then held on to it through the end of the year waiting on a dividend. My broker suggested there would be a dividend of 11.46 per share. The dividend was actually a whopping $5.40 which posted today and the 11.46 is an additional captial gains tax.

This is one of my worst trades ever and I actually bet the right direction! Go figure.

Anonymous said...

Now result season is going on and results are not that positive in broader terms. More or less results are mix for Indian companies. Still Indian stock market requires one triggering point which can give clear trend in the market.

Still Nifty is in mix zone. Nifty will be bullish only if Nifty manages to trade and sustain above 3150-3200 level below these levels bears will rule the dalaal street.
Few Stocks to stay away from for short term
1. DLF
2. Satyam comp
3. Bharti Airtel
4. Tata steel
5. Rcom

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