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ProShares Ultra Short Dow30 and UltraShort QQQ Inverse Leveraged ETF

written by: Brian Nelson•edited by: Rebecca Scudder•updated: 6/29/2011

Inverse Leveraged ETFs like the ones offered by ProShares are designed to provide investors with positive returns in downward moving markets. ProShares Ultra Short Dow30 and UltraShort QQQ are some of the firms most popular offerings and can offer a way to profit in falling markets, or hedge against

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    Short ETFs That Go Up When the Market Goes Down

    Most investors know about shorting stock. In order to short stock, you borrow stock from your brokerage firm and then sell that stock. To profit, you buy back the stock to pay back your broker at a lower price than you sold it for. In other words, if the stock price goes down, you make a profit.

    However, there are many nuances with shorting stocks, including maintaining the proper amount of margin in your account. Additionally, when shorting stock, the investor chooses a single stock to short. This isn’t very advantageous when the investor wishes to make an investment based on a belief that the overall market will fall, as opposed to a single security.

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    Ultra Short QQQ and UltraShort Dow30

    A company called ProShares has created several ETFs to address this very issue. Two of its most popular offerings are the UltraShort QQQ, which seeks to return 200% of the inverse (opposite direction) of the NASDAQ-100 Index, and the Ultra Short Dow30 which seeks to return 200% of the inverse of the Dow Jones Industrial Average.

    It is important to note that these funds are inverse ETFs. That means that their prices should move in the opposite direction of the targeted index. In other words, if the NASDAQ-100 price is rising, then the targeted price of the UltraShort QQQ would be falling, and vice versa. Additionally, the overall amount of the movement is aimed to be 200%. So, if the NASDAQ-100 lost 5% of its value, the UltraShort QQQ would hypothetically gain 10% if its objective was met.

    Thus, both the UltraShort Dow30 and the UltraShort QQQ allow investors to profit from downward movements in the overall stock market without having to maintain a margin account and short individual stocks. Typically, the UltraShort QQQ will be the more volatile of the two investments, reflecting the additional volatility of the NASDAQ-100 as compared to the Dow. With the magnification of the returns via leverage, these two funds can have wildly different days, so investors should fully understand how leveraged ETF work before investing any money.

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    FINRA and SEC Warning About Leveraged ETFs

    FINRA, the organization that used to be the NASD and the SEC have become increasingly concerned with leveraged ETFs and inverse leveraged ETFs being used by investors that don't fully understand them. They recently released a Leveraged ETF Investor Advisory that you should read and understand before investing in any leveraged ETF.