SPXU ProShares ETF

Q&ACategory: QuestionsSPXU ProShares ETF
Peng Yeow Loh asked 3 years ago

Dear Mr PC Wong,
A good day to you. In previous talk, you mentioned to invest a small portion in gold miners, inverse ETF as the \’insurance\’ for our investment. I have since 4 months ago bought the SPXU UltraPro Short S&P500 which in inverse 3x with the S&P500 performance. The price I bought was USD14.80 and has been down trending with today USD11.56, my paper loss was RM2.7k. Understand that this is for insurance and the down trend is because of the up trend of S&P500, I wasn’t bothered by this.
But then in your recent talk, you mentioned just go for inverse 1x or 2x and advice not to go for the inverse 3x like this SPXU, cautioned that the funds can easily wiped out. This caught my attention back to my this stock, probably I had made a mistake in choosing the inverse 3x. 
What would be your comment or suggestion on my current situation, shall I just minimize loss and sell it now or just leave it waiting for market crash that it probably shoot up? My total investment in this is around RM12.5k, it is just a small portion from my total financial investment, so shall I just ignore the current down trend?
And I have no idea what this guy was commenting:  https://seekingalpha.com/article/4046336-leveraged-etfs-bad-spxu-case
Appreciate if  you could provide some advice and your personal opinion on this. Thanks, Loh

1 Answers
paul wong answered 3 years ago

Yes the ultra inverse are riskier than the normal inverse ETFs. 
How ultra inverse (x3) ETFs work:
Say the price is now $20 and you have 40 shares. If the price falls to $10 because the S&P moves much higher, the ETFs may reserve split 4 to 1, consolidating your shares to only 10 but the price will be $40. So if the S&P continues to move another few hundred points, then the ETF price may fall to $10 again, and you may see another reverse split of 4 to 1 and now you have only 1 share but the price will be $40.
So you can see that from an initial holding of ($800) our holding is now just $40. If another reverse split happens, you will lose your entire capital.
The current trend for the S&P is driven by extreme greed even  as economic indicators are remain weak.. The collapse of the yield between 2 Year Treasuries and 10 year Treasuries is indicating that a recession may be just around the corner.
But as the saying goes, “the market can remain irrational than you can remain solvent.” 
The hype on the S&P could see the S&P trending even higher sill. 
This is just my opinion, but it may be prudent to reduce your exposure or liquidate your position. 
A more viable ultra position is AGQ which is the 3x ultra silver ETF. First silver price has been hammered down from $21/oz to just above $16/oz over the last one year. Because of the heaver short by the bullion banks they need to cover their shorts and thus the price could move higher.
There is also shortage of physical silver in the market. Mexico one of the largest producers in the world has seen production drop. 
Second, the price of silver will never be zero so it provides some stability in the price of the ETF.  At a certain price, it becomes unprofitable to produce silver and mines have to shut therefore restricting further supply of silver in the market. So there is be a floor on the price of silver.
Hope this helps. 

Peng Yeow Loh replied 3 years ago

Dear Mr PC Wong,
Thanks for the comment.
Best regards,