Cramer's Outrage: Ultra Short ETFs

President-Elect Barack Obama’s incoming SEC chair should get rid of ultra short exchange-traded funds, Cramer said during Monday’s Mad Money, but not just for the most obvious.

Cramer’s railed against these ETFs before. These are the funds that take a dollar’s investment and turn it into two. So $5,000 in an ultra short becomes $10,000, doing extra damage to a targeted stock. This is how hedge funds and other big money managers have been able to drive the financials, just to pick one group, into near oblivion. The practice has left our banking system on the brink of collapse and no doubt cost you a chunk of change to boot.

Even worse, though, is that these ETFs don’t actually work as an investment. Look: As of Dec. 17, the Dow Jones US Real Estate Index was down 39.2% year to date. You’d assume then that the UltraShort Real Estate ProShares ETF (ticker symbol SRS) would be up big, but it’s not. In fact, it’s down 48.3% for the year. Even with 100% leverage SRS underperformed the sector it was short. A very similar thing happened at UltraShort Financials ProShares (SKF). While its corresponding sector, the Dow Jones US Financial index, was down 49.3%, SKF was up only 1.4%.

The explanation here, Cramer pointed out, is that these ETFs rebalance daily. They track the day-to-day changes in the sectors they cover. So any volatility can negate these funds’ long-term performance. And since these funds by definition create extra volatility, they offer virtually no returns – or worse: negative returns.

So why then do these ultra short ETFs exist at all? To sidestep margins rules. Normally, an investor needs to borrow from a broker to short with credit, and have a required amount of reserve capital before he does. With these funds, those limitations no longer exist.

Cramer’s suggestion: Get rid of these ultra short ETFs, incoming SEC Chairperson Mary Schapiro, right after you reinstate the uptick rule.

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