ProShares stepped up their leveraged ETF game last week with the introduction of their first pair of 3x ETFs. Many analysts covered this story. However, a significant part of the story was mostly overlooked – ProShares also stepped up the “disclosure” game.
Many have criticized the industry for not adequately warning investors about the negative effect of holding leveraged ETFs for more than short periods of time. Some have gone so far as saying that leveraged ETFs should be banned. I believe education is a better solution, and last April I wrote an article showing a real life example of the 3x impact.
ETF sponsors have long explained the negative effects of daily compounding in words and tables, but as they say, “a picture is worth a thousand words” and ProShares is now using pictures.
The new ProShares prospectus includes many graphic examples of the impact of “daily” leverage over longer periods of time. The chart below, taken from the prospectus, shows how both the +3x and -3x funds can lose money during a period when the underlying index has a 0% return.