Shorting the S&P 500: Comparison of Rydex & ProShares Inverse ETFs

Jeremy Rutherfurd, Yahoo! Contributor Network
Jan 12, 2008 "Share your voice on Yahoo! websites. Start Here."

As the economy shows signs of weakening and consumer spending slackens, corporate profits are bound to suffer, and share prices with them. In such an environment, the stock market can fall and one of its leading indexes, the S&P 500 (which tracks 500 of the largest listed companies), will fall with it.

If you think you see this coming, what can you, as an investor, do? One approach is to "short" the stock market, or bet against it. As share prices fall, your investments rise in value.

Two companies, Rydex and ProShares, offer exchange traded funds that do just that. By shorting the S&P 500, these "inverse" or "bear market" ETFs soar as the S&P 500 slides. (Note: they also fall as the S&P 500 rises.) But which one should you invest in? Below I detail the different inverse ETFs provided by the two companies and compare their costs and performance to date.

ProShares' SH & SDS

ProShares, which is part of the ProFunds Group, offers two ETFs that short the S&P 500 index. Their ticker symbols are SH and SDS. The first, SH, which was launched on June 19, 2006, is designed to perform the inverse of the S&P 500 on a one-to-one basis. For every dollar in value the S&P 500 falls, SH is supposed to rise one dollar in value. It has a relatively high expense ratio of 0.95% (a fee you will pay on top of trading commissions).

But has SH performed as advertised? Somewhat. Since the ETF's inception, the S&P 500 has risen 13.73% in value and SH has fallen 9.50% (all performance data compiled from Google Finance). It's done better recently. Since Oct. 12, 2007, when the S&P 500 hit its all-time high of 1561, SH has risen 10%, while the S&P 500 has fallen 9.5% (as of Jan. 8, 2008).

ProShares' other ETF that shorts the S&P 500 is SDS. Launched on July 11, 2006, this is an "ultrashort" ETF, which means it doubles the inverse performance of the S&P 500. For every dollar the S&P 500 falls in value, SDS is designed to rise two dollars in value. (And for every dollar in value the S&P 500 rises, SDS will fall two dollars.) SDS also has an expense ratio of 0.95%.

In practice, SDS has not performed exactly as stated. Since its inception, it has fallen 22.14%, while the S&P 500 has risen 14.67%. However, like SH, its older brother, SDS has done a better job of fulfilling its mission in recent months. Since Oct. 12, 2007, SDS has risen 19.51%, while the S&P 500 has fallen 9.5%. (There is a learning curve in managing such funds, it seems.)

Rydex's RSW

Rydex Investments, no doubt noticing the popularity of ProShares' shorting products, came out with its own inverse-S&P 500 ETF on Nov. 5, 2007. Carrying the ticker symbol RSW, this ETF performs more like ProShares' SDS than SH, in that RSW performs the inverse, times two, of the S&P 500.

One attractive feature of RSW is that it's cheaper than its ProShares rival, charging an expense ratio of only 0.70%. But how does it perform? Two months is not a lot of data to judge by, but RSW has risen 7.67% in value since its inception, while the S&P 500 has fallen 3.46%. That's more than double the inverse of the S&P 500, but it's still pretty close.

I tracked the performance the RSW and SDS over the past month and found (as always, from Google Finance) that RSW rose 12.33% and SDS 10.97%. During this same period, the S&P 500 fell 5.32%. Therefore, it seems SDS is the truer of the two double-inverse ETFs.

For ease of reference, I have summarized the data regarding all three ETFs below:

Ticker: SH
Name: ProShares Short S&P500
Purpose: shorts S&P 500 one for one
Expense Ratio: 0.95%
Inception: June 19, 2006
Performance: -9.5% (since inception)
+10% (since Oct. 12, 2007 )

Ticker: SDS
Name: ProShares UltraShort S&P500
Purpose: shorts S&P 500 two for one
Expense Ratio: 0.95%
Inception: July 11, 2006
Performance: -22.14% (since inception)
+19.51% (since Oct. 12, 2007)

Ticker: RSW
Name: Rydex Inverse 2x S&P 500
Purpose: shorts S&P 500 two for one
Expense Ratio: 0.70%
Inception: Nov. 5, 2007
Performance: +7.67% (since inception)

Published by Jeremy Rutherfurd

An experienced reporter and editor who has worked for the Economist Intelligence Unit, Foreign Trade magazine, a China business-news site and several trade publications, I have been freelancing for the past... View profile

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www.proshares.com/funds/sds.html

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Shorting the S&P 500: Comparison of Rydex & ProShares Inverse ETFs

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