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).

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

Key Takeways

  • The UltraPro Short Dow is an inverse ETF designed for price moves opposite the Dow Jones Industrial Average.
  • Inverse ETFs use leverage (debt), swaps, and other riskier investment types to achieve the inverse pricing effect.
  • You have to time the downward swings and reversals to take advantage of the UltraPro Short Dow.

What Is the UltraPro Short Dow30?

The ProShares UltraPro Short Dow30 ETF (SDOW) tracks the Dow Jones, but unlike ETFs (such as 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%.

Holding SDOW is a similar position as shorting the Dow with leverage, though your risks are limited to the ETF price. You'd buy the SDOW if you're bearish on the Dow, and think stocks will fall in the short term.

You 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.

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%

In March 2020, the DJIA experienced a historic price decline, entering a bear market. Because the DJIA decreased, SDOW experienced a price increase. 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.

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. For example, 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. SDOW holds a complicated combination of derivatives like swaps and Treasury bills and cash to achieve those returns.

These swaps allow SDOW to take both bearish and leveraged positions, which would be impossible to achieve with outright ownership of stocks on or off the index.

The nature of swaps make SDOW an extremely risky product as they depend on other parties fullfilling an agreement.

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.

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

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.

Pros and Cons of UltraPro Short Dow30

Pros
  • Less risk than shorting

  • Simplifies the process of taking complex positions

Cons
  • Requires a keen sense of market timing

  • Any unfavorable movement has a multiplied effect on your portfolio

Pros Explained

  • Less risk than shorting: Shorting involves selling a security you don't own and then buying it back later. This exposes you to significant risk—you'll have to buy it back later, even if the price of the security has risen significantly. With short ETFs like SDOW, you buy 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 everyone has an easy time accessing this type of account. Anyone—with any 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.