What are Powershares ultrashorts?

[MaxPowers]

can someone explain to me how these work?
like QID, SDS.... Are they good to get into?

[jIM_Ohio]

short means you sell the stock then agree to buy it later

sell high then buy later (short selling). This is a bet the market is going down.

get into them at your own risk.

[Broken Arrow]

get into them at your own risk.

Jim is quite correct, and I don't think the risk can be emphasized enough.

Funds like these are usually a basket of shorts, and shorts, like all options contracts, have an expiration date attached. So, not only does the market have to fall, but if it doesn't fall before it reaches your deadline, you'll still lose money somehow.

When you go long, time is on your side. When you go short, time is against you.

And speaking of losing money, in traditional stock purchases, the absolute worst thing that can happen to you is you lose 100%. Not so with shorts. With shorts, the most you can make is 100%, but the losses has no theoretical limit!

Going long has no theoretical limit on gains, and 100% limit on loss. Going short has no theoretical limit on loss, and 100% limit on gain.

So why are short funds so popular? Because despite the spectacular risks involved, 2008 has turned out to be such a bad year that funds like this have performed absolutely beautifully! And where there is a ton of money being made, it always attracts people... who are ultimately coming to the party too late I think.

Due to the limited timeframe of options, most options traders are technical analysts by default. And their analysis will tell you that the market appears to be consolidating; a common technical sign of a possible reversal. In this case, a rebound, perhaps even a massive rally; a shorter's worst nightmare.

In other words, it's an extremely dangerous time to be shorting right about now, and that's coming from some of the more noted fund managers that short, such as Bill Fleckenstein (whom I follow from time to time).

And no matter how exotic you get with your investments, basic fundamental principles such as "buy low, sell high" still apply. In shorting, you basically want to do the same, but backwards, "sell high, buy low". But here's the problem: The short funds have grown by quite a bit at this point. If you buy into it now, you're effectively buying high, and there's a good chance that it might start to lose a lot of value soon, perhaps eventually forcing you to sell low.

Some investors with more peculiar tastes may decide that it's still worth it as a small hedge against the market, similar to what one would allocate along with bonds, cash, and precious metals. With the limits of a proper asset allocation, I think it's OK to hold ultra short funds.

Still, knowing what little I know so far, I'd hate to be shorting right about now. Perhaps you can get away with it into 2009, but if you ask me, I think it would actually be safer to be running with the bulls at this point. For example, Warren Buffett, Bill Miller, and Ken Heebner have all gone head-long into financials. That's where my mind and my money is on too.

[Car Insurance Guy]

Well put. I follow this stuff at my day job and I'd have to agree with most of what was said.

One other thing to consider...I hear Broken Arrow calling a bottom. That may be a little premature. Bear markets usually last longer than anyone anticipates. We may very well be in the middle of it. If that's the case, then QID and SDS could grow a lot more. Personally, I don't know what will happen, but things don't look bullish right now. Only time will tell for sure.

Here's one more thing about these ETFs:they're ULTRAshorts. Take QID for instance. For every 1% the NASDAQ goes down, then QID (theoretically) goes up 2%. Your gains are magnified 2x with a Ultrashort. However, as Broken Arrow and Jim pointed out, "there's risk in them-there funds." For every 1% the NASDAQ goes up, QID goes down 2%.

Utilize them in a well-considered strategy. Don't buy these ETFs on a whim. I guess that goes for any investment.

[Broken Arrow]

Oh no. Please don't misunderstand me. I have yet to call a bottom. I'm saying some technical analysts (other people)have taken the current market's consolidation as the sign of a bottom. I'm more fundamental than technical, and those who remember my previous posts regarding this subject matter will also recall that I have warned against calling this a bottom.

But here's what I will call: The margin of safety for shorting has thinned considerably. It's not the easy money it once was. Those who are still shorting are doing so at their own peril. Even if I do short, I would never do so at this time.

[banditfist]

None of these proshares are shorting stocks. They are using derivatives to mimic whatever indices/index they are against. For example, SRS is the Proshares Ultrashort Real Estate (Commercial). It is leverages 2X the inverse of the Dow Jones Real Estate index.

The problem with the Ultrashorts is slippage. The ETF mimics....but does not follow exactly the index that it is up against. Over time, this slippage means that when levels are retested, the ETF will be at a different and lower price.

These vehicles should not be used as a buy and hold strategy. They are a short term holding.

I use them to daytrade since they are also very volatile.

[Broken Arrow]

Interesting! Thanks for sharing, banditfist.