ITA Wealth Management readers know that the ultra-short ETF, SDS, is held in several portfolios. That position may need more thought based on information from a recent article in the AAII Journal. SDS is an ultra-short or contra ETF. What that means is the SDS is designed to move in the opposite direction as the S&P 500. In fact, it is to move twice as fast in the opposite direction as the S&P 500.
My idea for using the SDS was a hedge against an over-bought market condition, not dissimilar to what we have right now. It was not my intention to use SH or SDS as day trading vehicles. Instead, I planned to hold them for months or until such time as the broad market retraced some of its current gains. Then I read the AAII Journal article, "The Individual Investor's Guide to Exchange-Traded Funds 2010." Let me quote directly from the article.
On page 16 of the AAII October issue we read, "Funds that move with a greater magnitude than the index they track use leverage. For every dollar invested, an investor has the potential to earn double or triple the return he would otherwise earn. At the same time, the magnitude of potential losses is two to three times greater. In other words, these are very risky investments. [Read more...]