One of the most powerful things with the Cake website is transparency- that anyone can see how other investors are navigating these volatile markets.  What I find most helpful to get a sense of broad trends is to look at the Researchtab to see “Top Bought” and “Top Sold” positions over a few day period.  This metric takes an aggregated view of activity and simply adds up all the buys and sells in Cake and reports on the Top 4 buys and Top 4 sells.  You don’t get to see the quality of the people buying and selling (you can do that here ) but it is a great cursory view of the sentiment of the markets at any particular time.

Over the past few months, Proshares levered ETF’s have become quite popular.  These ETF’s attempt to not simply mimic an underlying index, such as the S&P, but to take that bet to 11 (Spinal Tap style).  If you think the S&P is going to go up, then you can buy the Proshares Ultra S&P.  If you think the markets will be headed south, then the Proshares Short S&P 500 may be your cup of tea.  Proshares has 64 such products that give everyday investors like you and me the opportunity to take short or magnified exposure to market indices like the Dow, Nasdaq, Russell and the S&P as well as sectors such as real estate, financials, consumer staples, health care, and commodities.

Philosphically, this seems to make a lot of sense, especially after the market turmoil of the past 12 months.  However, I am not convinced that they work they way they were intended and these ETF’s may in fact be exposing to unknown risk.  I did a simple charting exercise where I charted the ETF with its underlying index and found that the results varied wildly, as did the volatility.  After a cursory study, I am not sure these ETF’s are for the average investor and would be careful with how much exposure you are taking on.

For example, here is the chart for the S&P and for the “double performance” S&P Proshares (SSO) and the UltraShort (SDS) for the year.

First off, my condolences if you were long the S&P this year.  What troubles me is how volatile the Short ETF appears to be.  When I see that it makes me think they are doing something funny behind the curtain to achieve those returns.

I did a similar exercise with Proshares Oil and Gas ETF’s.  The results were similar.

The great Paul Kedrosky also wrote about this recently.  If you are thinking about or already involved in these kinds of ETF’s, just be aware that you might be taking extra risk.  Not that there is anything wrong with that.

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