Skip to main content

SKF regaining its old form?

The ProShares UltraShort Financial ETF (SKF) had a big day today as the market plunged. The ETF didn't do a bad job of tracking the double inverse of its underlying index, the Dow Jones U.S. Financials Index.

It is appropriate to contrast the performance of SKF with the performance of IYF, the iShares Financial ETF which also uses the DJ Financials index as its underlying. Today IYF fell more than 9% and SKF gained less than 19%. The two ETFs seemed to track each other pretty well.

Short selling ban having an effect?

As you may know, when the SEC instituted the ban on short sales of financial stocks on September 18, ProShares made a decision to stop creating new shares of SKF. The company explained it on their web site as follows:
"...we thought there was the potential for extraordinary demand to create new shares of these ETFs. We were concerned there might be limitations in getting sufficient short investment exposure to cover any new shares of SKF or SEF. So we decided it would be in the best interests of the ETFs to cease creation of new shares."
Thus far, ProShares has not announced any change in this policy.

With the number of shares outstanding now essentially fixed, ProShares offered the following warning:
"ProShares cannot predict whether shares will trade above, below or at their NAV. It is possible that because no new shares are currently being created, there could be a supply and demand imbalance in the secondary market for SKF and SEF shares, which may cause those ETFs to trade at a premium or discount to their indicative values..."
It is clear that they were correct in this assumption. The following chart (courtesy of ProShares) shows the distribution of times when SKF traded at a premium or discount to its Net Asset Value (NAV) in the April to June timeframe. It shows the premium/discount to be tightly clustered around the NAV, ranging between +1% to -1%.

SKF Premium/Discount 4-08 to 6-08
Now look at the chart for July to the present:

SKF Premium/Discount 7-08 to 9-08
This chart shows premiums as high as 6% and discounts as low as 4%. The general distribution is still mostly clustered around the NAV but now the range has doubled from +2% to -2% and tends toward a slight discount.

What does this mean for investors?

Large temporary premiums and discounts make investing in SKF more treacherous. These differences from NAV may be manifested as wider bid/ask spreads. They may also lead to higher volatility.

On the other hand, though no new shares are being created, SKF does seem to be tracking better these days than it did immediately after the short selling ban was announced. Back then there was one day when trading was halted and afterward it seemed as if the ETF wasn't even coming close to tracking the double inverse of its underlying index.

Things seem a lot better now. If you want to bet against the financials, SKF seems to have returned pretty nearly to its old form.

PS: Interestingly, according to the Dow Jones site, the index itself fell 14%. Neither ETF seemed to track the index as well as it should have. If anyone has an idea as to why that is, please leave a comment.

Related articles: ProShares Ultra Short Financial ETF staggers and recovers

Disclosure: long SKF


Anonymous said…
The miss pricing of options has been running rampid over the past week. I'm wondering if this effects the price of the SKF.
Anonymous said…
well this is really nice thing if they are doing so

Popular posts from this blog

Brazil - in a bubble or on a roll?

A couple of years ago, no one recognized the real estate bubble even though it was under everyone's nose. Now, analysts and bloggers are seeing bubbles everywhere they look. One of them, they say is in Brazil whose Bovespa stock market index has doubled in the last 12 months. Does the bubble accusation hold water? I don't think so and here are 7 reasons why Brazil is by no means a bubble economy: Exports have held up over the past year thanks to demand from China for Brazil's soya exports and iron ore. This was helped by the the Brazilian government's drive to improve trade links with Asia and Africa. Export diversification, spurred by a more active trade policy and increased focus on "south-south" trade under current president Lula, helped mitigate the decline in demand from OECD (Organization for Economic Co-operation and Development) countries A "sensible" economic framework has been in place since the 1990's. This has included inflation

Thursday Bounce: Trend Busters, Swing Signals and Trend Leaders for July 9, 2009

This is a quick post to announce that we have published Thursday's Trend Leaders, Swing Signals and Trend Busters at Alert HQ . All are based on daily data. Today we have the following: 72 Swing Signals -- A couple of days ago we had 35 signals, today we have twice as many. Happily, we now have 65 BUY signals, a mere 4 SELL Signals plus 3 Strong BUYs. Whoo-hoo! 56 Trend Leaders , all in strong up-trends according to Aroon, MACD and DMI. There are 18 new stocks that made today's list and 60 that fell off Tuesday's list. 48 Trend Busters of which 5 are BUY signals and 43 are SELL signals The view from Alert HQ -- Talk about mixed signals. If you look at our Swing Signals list you would think the market was in the middle of a big bounce. BUY signals are swamping the SELL signals and we even have a few Strong BUYs. Yes, there's a good sprinkling of tech stocks and tech ETFs but the distribution is pretty broad-based with a good number of different sectors represented, eve

Trade Radar gets another update

Some of our data sources changed again and it impacted our ability to load fundamental/financial data. In response, we are rolling out a new version of the software: 7.1.24 The data sourcing issues are fixed and some dead links in the Chart menu were removed. So whether you are a registered user or someone engaged in the free trial, head over to our update page and download the latest version. The update page is here: Contact us if you have questions or identify any new issues.