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Debunking the UltraShort ETFs Myth

We have been waging a crusade to get the SEC to ban these Proshares Ultra Short ETFs that give you $2 worth of selling power for just $1. Initially we opposed these ETFs because they make it possible for hedge funds to do horrific amounts of damage to entire sectors by bringing to bear tremendous amounts of selling pressure. And if someone wanted to manipulate the market and cause a panic, these ETFs are the perfect instrument for doing so.

But as Jim discussed during Tuesday's Outrage, there's another reason why these ultra-levered short ETFs must go: They don't work the way people think they do. Jim cited a piece written by Eric Oberg, a 17-year Goldman Sachs veteran who retired as a managing director, which explains how even the smart money is getting fooled when it comes to these products. Here's the link to that story: "The Perils of the Proshares Ultrashorts."

And here's the link to an earlier story written by Oberg that Jim cited on air when we first realized that these double-short ETFs don't work the way they're supposed to: "Why Short Sector ETFs Aren't So Smart."

How can it be, as Jim mention during Tuesday's outrage, that shorting the iShares FTSE/Xinhua 25 Index ETF in 2008 produced a 46.7% gain, but buying the ProShares UltraShort FTSE/Xinhua China 25 ETF, an ETF that's supposed to let you short that same index with double the firepower, produced a 57% loss over the same time period? Because the UltraShort funds track daily changes and thus rebalance daily, so any kind of volatility will eat away at your returns and then turn them into losses. Buying one of these ETFs is not the same as shorting $100 worth of some basket of stocks and then levering up and shorting another $100 worth with borrowed money over any period of time longer than a day.

You should read Oberg's pieces about these instruments. They are a revelation.

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Cliff Mason is the Senior Writer of CNBC's Mad Money w/Jim Cramer, and has been that program's primary writer, in cooperation with and under the supervision of Jim Cramer, since he began at CNBC as an intern during the summer of 2005. Mason was the author of a column at TheStreet.com during 2007, which he describes as "hilarious, if short-lived." He graduated from Harvard College in 2007. It was at Harvard that Mason learned to multi-task, mastering the art of seeming to pay attention to professors while writing scripts for Mad Money. Mason has co-written two books with Jim Cramer: Jim Cramer's Mad Money: Watch TV, Get Richand Stay Mad For Life: Get Rich, Stay Rich (Make Your Kids Even Richer). He is 100% responsible for any parts of either book that you did not like.

Mason has also had a fruitful relationship with Jim Cramer as his nephew for the last 23 years and will hopefully continue to hold that position for many more as long as he doesn't do anything to get himself kicked out of the family.




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