Your Guide to the UltraPro Short Dow30 (SDOW) 3x Leveraged Inverse ETF

Know the Risks Before Investing in This Hedge Against Declines

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The UltraPro Short Dow30 (SDOW) is an inverse and leveraged exchange-traded fund (ETF) that's designed to aggressively move in the opposite direction of the Dow Jones Industrial Average (DJIA). Investors can use this product to hedge against stock market declines, though there are significant risks to holding an inverse or a leveraged ETF—and this product is both inverse and leveraged.

Here's what you should know about the UltraPro Short Dow30 before trading it.

What Is the UltraPro Short Dow30?

The ProShares UltraPro Short Dow30 ETF (SDOW) tracks the Dow Jones, but unlike ETFs like SPDR's DIA, which seek to replicate the Dow's performance exactly, SDOW is both leveraged and inverse. That means it is designed to move in the opposite direction as the Dow ("inverse"), and it's also designed to multiply the amount of daily movement by three ("leveraged"). In other words, if the Dow falls by 1% on a given day, the SDOW would, in theory, rise by 3%.

In March 2020, the DJIA experienced a historic price decline, entering a bear market. Because the DJIA decreased, SDOW experienced an increase in price. However, those gains were short-lived. Any investors who held SDOW through the following months would have ultimately lost their gains as the Dow recovered somewhat from its sharp March decline.

Holding SDOW is a similar position as shorting the Dow with leverage, though your risks are limited to the price of the ETF. An investor who buys SDOW is bearish on the Dow, and they think stocks on the Dow will fall in the short-term.

Fast Facts About UltraPro Short Dow30
ETF Ticker SDOW 
ETF Provider  ProShares
Index Tracked  Dow Jones Industrial Average (DJIA) 
ETF Category  Inverse and leveraged
Inception Date  Feb. 9, 2010 
Expense Ratio 0.95%

How Does the UltraPro Short Dow30 Work?

Standard ETFs can replicate an index by simply buying the same stocks in the same proportion as the underlying index. If the Dow has "X" amount of "ABC" company in it, then a standard ETF like DIA will also have "X" amount of "ABC" company in it.

SDOW is not a standard ETF—it is both leveraged and inverse. To achieve those returns, SDOW holds a complicated combination of derivatives like swaps, as well as Treasury bills and cash. These swaps allow SDOW to take both bearish and leveraged positions, which would be impossible to achieve with outright ownership of the index's stocks. These swaps also make SDOW an extremely risky product.

Leveraged and inverse ETFs may not be right for the average investor. There are high risks involved in trading inverse and leveraged investment products. While 3x returns could mean a larger payout, it can just as easily mean a larger loss. Whether you lose or make money will largely come down to market timing, which is an extremely difficult aspect of trading to consistently get right.

The single-day returns of this ETF are measured from one net asset value (NAV) calculation to the next. These daily returns compound, and that means the returns over a period of time won't necessarily be the same as those single day results.

Pros and Cons of UltraPro Short Dow30

Pros Explained
  • Less risk than shorting

  • Simplifies the process of taking complex positions

Cons Explained
  • Requires a keen sense of market timing

  • Any unfavorable movement has a multiplied effect on portfolio

Pros Explained

  • Less risk than shorting: Shorting involves selling a security and then buying it back later. This exposes an investor to significant risk—the investor will have to buy it back later, even if the price of the security has risen significantly. With short ETFs like SDOW, you are buying a product outright, so your losses are limited to what you spent on the ETF.
  • Simplifies the process of taking complex positions: Aside from the risks involved, shorting is also a complex position. You'll need a brokerage that's willing to offer you leverage, and not all investors will have an easy time accessing this type of account. Anyone—with any type of brokerage account—can buy SDOW shares.

Cons Explained

  • Requires a keen sense of market timing: Historically, stocks have risen over time. There are periods of declines, and SDOW can help you profit off these declines. However, the SDOW investor needs to have fairly precise and accurate estimates about when the markets will decline, or else they will lose money. That's much easier said than done.
  • Any unfavorable movement has a multiplied effect on the portfolio: Since it is leveraged, SDOW will multiply any movement in the Dow. That means, if you inaccurately guess the movement of the Dow, you could end up with significant losses in your account.

The Bottom Line

It's important to be disciplined in your selection process of any exchange-traded product, and that's especially true with leveraged and inverse ETFs. While ETFs and ETNs offer a lot of advantages, they are not without risk. No asset is risk-free, and as far as ETFs go, SDOW is particularly risky. Ensure that you have thoroughly researched the ETF before making any trades. If you have any questions or concerns, consult a financial professional.

Those warnings aside, if you have a strong inclination that the Dow will decline in the short-term, SDOW could help you capitalize on that inclination.