Aalan88:
Can someone explain this?
You're not alone in asking that. Someone from SeekingAlpha actually went to ProShares to get an answer.
http://seekingalpha.com/article/65002-proshares-ultrashort-china-etf-caveat-emptor
The short answer is:
...the fund's objective is to to match 200% of the performance
of the index on a given DAY... for periods greater than one day, the
use of leverage tends to cause the performance of a ProFund to be
either greater than, or less than, the index performance times the
stated multiple in the fund objective.
Here are the scary implications:
As the ProShares folks explain it this phenomenon is caused by
the leverage and the volatility of the index they are tracking. This is
such an important concept that ProShares even went so far as to produce
a table of estimates of how the fund would perform under different
combinations of index return and volatility. What it shows is pretty
staggering. With 40% volatility the fund can drop by 38% over the
course of one year even if the underlying index is unchanged. With no
volatility the fund can rise by almost 178% in one year while the index
drops by only 40%.
This is why I avoid the ultra funds - both long and short. Edit:
Oh and for what it's worth, I've seen huge variations on a single
day! That's not supposed to happen per the above. So
there's other tracking error going on.
