SKF Regaining Its Old Form?

by: Trade Radar Operator September 30, 2008 | about stocks: IYF / SKF    
Trade Radar Operator

Trade Radar Operator

About this author:
Become a Contributor Submit an Article
  • Font Size:
  • Print

The ProShares UltraShort Financial ETF (SKF) had a big day Monday as the market plunged. The ETF didn't do a bad job of tracking the double inverse of its underlying index, the Dow Jones U.S. Financials Index.

It is appropriate to contrast the performance of SKF with the performance of IYF, the iShares Financial ETF, which also uses the DJ Financials index as its underlying. Monday IYF fell more than 9% and SKF gained less than 19%. The two ETFs seemed to track each other pretty well.

Short selling ban having an effect?

As you may know, when the SEC instituted the ban on short sales of financial stocks on September 18, ProShares made a decision to stop creating new shares of SKF. The company explained it on its web site as follows:

"...we thought there was the potential for extraordinary demand to create new shares of these ETFs. We were concerned there might be limitations in getting sufficient short investment exposure to cover any new shares of SKF or SEF. So we decided it would be in the best interests of the ETFs to cease creation of new shares."

Thus far, ProShares has not announced any change in this policy.

With the number of shares outstanding now essentially fixed, ProShares offered the following warning:

"ProShares cannot predict whether shares will trade above, below or at their NAV. It is possible that because no new shares are currently being created, there could be a supply and demand imbalance in the secondary market for SKF and SEF shares, which may cause those ETFs to trade at a premium or discount to their indicative values..."

It is clear that they were correct in this assumption. The following chart (courtesy of ProShares) shows the distribution of times when SKF traded at a premium or discount to its Net Asset Value (NAV) in the April to June timeframe. It shows the premium/discount to be tightly clustered around the NAV, ranging between +1% to -1%.

SKF Premium/Discount 4-08 to 6-08
Now look at the chart for July to the present:

SKF Premium/Discount 7-08 to 9-08
This chart shows premiums as high as 6% and discounts as low as 4%. The general distribution is still mostly clustered around the NAV but now the range has doubled from +2% to -2% and tends toward a slight discount.

What does this mean for investors?

Large temporary premiums and discounts make investing in SKF more treacherous. These differences from NAV may be manifested as wider bid/ask spreads. They may also lead to higher volatility.

On the other hand, though no new shares are being created, SKF does seem to be tracking better these days than it did immediately after the short selling ban was announced. Back then there was one day when trading was halted and afterward it seemed as if the ETF wasn't even coming close to tracking the double inverse of its underlying index.

Things seem a lot better now. If you want to bet against the financials, SKF seems to have returned pretty nearly to its old form.

PS: Interestingly, according to the Dow Jones site, the index itself fell 14%. Neither ETF seemed to track the index as well as it should have. If anyone has an idea as to why that is, please leave a comment.


Disclosure: long SKF

Related Articles

This article has 8 comments:

  •  
    Sep 30 10:45 AM
    Didn't move a inch last Monday when it should have jumped 16%!
    Reply | Link to Comment
  •  
    Sep 30 12:25 PM
    Yes, E F Nuttin. I also watched in pain as SKF just sat there. But that was over a week ago and more recently SKF has been acting somewhat more normally.
    Reply | Link to Comment
  •  
    Sep 30 12:30 PM
    Not normal enough for me. Government intervention ruined this ETF at a time when real short term gains couldve been made. The ETF hit 154 the week of Sept 15th, then came crashing down while financials were still being buried, made me sick...
    Reply | Link to Comment
  •  
    Sep 30 01:39 PM
    can we sue anyone over it?
    Reply | Link to Comment
  •  
    Sep 30 06:19 PM
    Any thoughts on significance of Oct 2 on SKF?
    Reply | Link to Comment
  •  
    Sep 30 09:51 PM
    I'm going to put bids in for other short sector ETFs. The Powers That Be obviously don't want us to make money on this one. They'll keep messing with the regulations until the problem goes away. SKF is too visible a thumbs up/down on the Golden Rule crowd: them's with the gold makes the rules. This particular casino table has been tilted.
    Reply | Link to Comment
  •  
    Oct 01 12:29 PM
    Go back and look at the relative performance of IYF and SKF. Over the last 3 months SKF has underperformed IYF by 30%. Why is this? In fact are we buying an option that has a depreciating value? Compare the performance of IYF and SKF on June 26th with that of Oct 25th.
    Reply | Link to Comment
  •  
    Oct 03 01:36 AM
    Nothing can be known until SKF can trade normally. Some two weeks ago, SKF was trading about $100. Since that time several financials have imploded. Today SKF is trading about $100.

    This does not make any sense. The reason that this does not make sense is that there is a political process involved. Proshares does not want the public to know that their customers are making money off of the pain of the public.

    My guess is that SKF is making a considerable amount of money and is only reporting profits/losses at 10% of their true value. That said, Proshares has an obligation to protect its investors and to make this right.

    The market will continue to deteriorate for some time longer than Congress could predict, this will pay off quite well once the no-short ban is lifted.

    Seriously. I bought more SKF on Tuesday.

    Clark Jenkins
    Reply | Link to Comment
More Comments on SKF »
Top Rated Comment Streams:

Numbers are net rating-

See all Top 100 »
More by Trade Radar Operator

Investment Resources
Money Management
Research
Seeking Alpha provides these ads as a service to its leading contributors
Articles on related themes
Short Ideas
Asset Allocation with ETFs
Closed-End Funds
Commodity ETFs