The ProShares UltraPro Short S&P 500 (SPXU) is a leveraged inverse exchange-traded fund (ETF) seeking to provide traders and speculators with a return that is three times the inverse of the daily performance of the S&P 500 Index. As of Nov. 26, 2019, since the fund's inception on June 23, 2009, SPXU has an annualized market return of negative 41.5%.

Key Takeaways

  • The ProShares UltraPro Short S&P 500 (SPXU) is a 3x leveraged inverse ETF. It seeks to replicate the moves of the S&P 500, just in the opposite direction and multiplied by three.
  • The ETF is not suitable for long-term investing and is meant to be held for less than a day. 
  • The fund’s exposure level varies day-to-day due to the daily rebalancing of the portfolio.

To provide three times the inverse daily exposure to the S&P 500 Index, SPXU holds swaps from multiple counterparties and futures contracts. For example, the SPXU’s top holdings are S&P 500 swaps from various big banks.  

Since SPXU invests in financial instruments with a few counterparties, it is considered a non-diversified fund. This may cause the credit of these counterparties to impact SPXU's performance. Like all leveraged ETFs, SPXU should be held for no longer than one day due to the compounding of daily returns. The fund's exposure level varies day-to-day due to the daily rebalancing of the portfolio.

Characteristics

SPXU was issued by ProShares on June 23, 2009. The ProShares UltraPro Short S&P 500 ETF is listed on the New York Stock Exchange Arca, and speculative traders can trade it on multiple platforms. The fund is legally structured as an open-ended investment company, and its adviser is ProShares Advisors. The fund has assets under management of $652 million.

SPXU has a high expense ratio of 0.91%, and investors should keep in mind the ratio does not include trading and broker fees, which vary between traders. The fund's high expense ratio can be attributed to its daily rebalancing.

Suitability and Recommendations

Like any investment, the ProShares UltraPro Short S&P 500 ETF carries risk. Traders and investors are exposed to a multitude of risks, such as correlation risk, equity risk, market risk, intraday price-performance risk, counterparty risk, and non-diversification risk when trading SPXU.

SPXU has an alpha, against the S&P 500 Total Return Index, of negative 4.74. Its beta is negative 2.9 and its R-squared is 99.2. The SPXU Sharpe ratio is negative 1.15.

Based on modern portfolio theory (MPT), the fund's alpha indicates it underperformed the S&P 500 Total Return Index by an annualized 4.74% over the last five years. The fund's beta indicates it is inversely correlated to and theoretically more volatile than the S&P 500 Total Return Index. This may indicate SPXU carries more risk. 

The fund's R-squared of 99.2 indicates 99.2% of its past price fluctuations were explained by fluctuations in its benchmark index. The fund's Sharpe ratio of a negative 2.9 indicates the fund has done poorly to provide investors with an adequate return given the amount of risk taken. The fund's negative Sharpe ratio indicates it underperformed securities that return the risk-free rate.

SPXU is one of the most aggressive inverse ETFs in the market and allows traders to place single-day trades against the S&P 500 Index. Since the ProShares UltraPro Short S&P 500 ETF seeks to provide three times the inverse daily return of the S&P 500 Index, it is extremely risky and not suitable for everyone. 

According to MPT, SPXU is best-suited for speculative traders and investors who monitor their positions daily and are bearish on the S&P 500 Index. If investors are extremely bearish on the index and want leveraged inverse exposure for more than one day, the positions need to be adjusted daily.