SDS vs. SPXU: Comparing Short Leveraged U.S. Equity ETFs

The Standard and Poor’s 500 index (S&P 500) is an index of 500 companies and a leading indicator of the performance of large cap U.S. stocks. The index serves as a benchmark by which many investment professionals measure the success of their strategies. The S&P 500 also serves as a barometer of the health of the U.S. economy.

Mutual funds and exchange traded funds (ETFs) have created many products that correlate with the performance of the S&P 500. Most of these funds are ideal for long-term investors looking to track the performance of the index. However, a few of these products, known as leveraged ETFs, are more suitable for short-term traders.

Leveraged ETFs use derivatives and debt to enhance returns on their investments. In addition, some leveraged funds are inverse ETFs and seek results that track the inverse of the performance of the index. The following is a comparison of two inverse, leveraged ETFs based on the S&P 500, as well as key information for investors who might find these ETFs attractive.

ProShares UltraShort S&P500 ETF

ProShares UltraShort S&P500 ETF (NYSEARCA: SDS) began trading on July 11, 2006, as a member of the trading-inverse equity category of the ProShares fund family. As of March 31, 2020, the fund had $1.57 billion in net assets and an annual expense ratio of 0.89%. The fund’s objective is to achieve daily performance results, before fees and expenses, that equate to two times the inverse of the daily performance of the S&P 500.

The fund generated negative returns over multiple time frames. As of June 30, 2020, the fund’s three-month return of -36.29% and year-to-date (YTD) return of -21.83% were below average relative to its peer group, while its one-year return of -36.23% was about average for funds in the leveraged equities category. Over a longer time frame, SDS has performed poorly. The fund’s three-year and five-year returns of -26.62% and -24.96%, respectively, rank below average in comparison to its peers.

It’s important to note that during the first quarter of 2020, SDS experienced higher volatility as global stock markets crashed in response to the COVID-19 pandemic and an oil price war between Russia and the OPEC countries. For the first quarter of 2020, the fund was up 22.69%, while the return for the S&P 500 was -19.60%, clearly showing the inverse relationship between the two.

ProShares UltraPro Short S&P500

ProShares UltraPro Short S&P500 (NYSEARCA: SPXU) is in the trading-inverse equity category of the ProShares family of funds and began trading on June 23, 2009. As of March 31, 2020, the fund had $1.25 billion in net assets and an annual expense ratio of 0.91%. The fund’s objective is to achieve daily performance results, before expenses, that equate to 300% of the inverse of the daily performance of the S&P 500. SPXU invests in derivatives to help achieve its performance objectives.

Like SDS, SPXU generated poor returns over multiple time frames. As of June 30, 2020, the fund’s three-month return of -51.08% and YTD returns of -40.97% were below average compared to its peers. Over an intermediate time frame, the fund’s shares also performed poorly both in absolute terms and relative to its peer group. SPXU has a one-year return of -57.16%, a three-year return of -41.98%, and a five-year return of -38.67%. However, similar to SDS, SPXU showed strong results during the first quarter of 2020, achieving a total return of 20.65%.

A Comparison of Both Funds

ProShares UltraShort S&P500 ETF and ProShares UltraPro Short S&P500 are both appropriate funds for traders looking to time short-term moves in the market. Both of these funds amplify the daily returns, and not the annual returns, of the S&P 500 index. In addition, both funds seek to profit when the index declines in value. These features make these funds highly speculative instruments.

ProShares UltraPro Short S&P500 (SPXU) is leveraged to produce returns that are three times the inverse daily returns of the S&P 500, while ProShares UltraShort S&P500 ETF (SDS) is leveraged to produce returns that are twice the inverse daily returns of the S&P 500. Therefore, an investor should expect greater daily volatility and a greater daily price range for SPXU than for SDS. Investors who are seeking a larger daily return and who are willing to absorb greater daily risk should prefer SPXU.