Even while silver has rallied in the rest of 2011, ZSL has been a better way to be wrong—to be a silver bear. If you put your own 200% percent levered short trade on SLV in January 2011, with silver up 50 percent on the year, you’d be wiped out today. ZSL, however, would have staunched the bleeding, leading you to “just” a 63% percent loss on the year because of the compounding.
Despite the fact it’s “worked” for these periods, it’s important to recognize just how wrong things can go. In a sideways market (instead of these strongly trending ones), the compounding can absolutely destroy returns.
In this example from a couple of weeks in mid-November 2010, SLV dropped 3.6 percent over the period. A naive investor in ZSL might expect double that return—7.23 percent—but ended up with just 4.5 percent. And that’s just over a few weeks– longer holding periods are subject to erode returns even further in volatile markets.
In this case, at least, the package of convenience the inverse ETF represents is likely to continue to draw assets. Investors should just make sure they know what they’re getting into.