Sept 22, 2011: Portrait Of A Bad Day
Let's move beyond the theoretical and into the realm of the specific. The most recent big-swing day in the S&P 500 was Sept. 22, when the index lost 3.19 percent. Here's how the actual leveraged and inverse ETFs tracking the S&P 500 fared on that day:
|Ticker||Name||Leverage Factor||Starting AUM on 9/22||Starting Exposure on 9/22||Exposure on Close||Exposure Needed on Close||Net Market on Close Trade|
|Assets Under Management Figures in $MM|
|SPXU||ProShares UltraPro Short S&P 500||-3||$507.00||-$1,520.99||-$1,472.49||-$1,666.47||-$193.98|
|SDS||ProShares UltraShort S&P 500||-2||$2,822.84||-$5,645.68||-$5,465.68||-$6,005.69||-$540.01|
|RSW||Rydex Inverse 2x S&P 500||-2||$68.68||-$137.35||-$132.98||-$146.11||-$13.14|
|SH||ProShares Short S&P 500||-1||$2,604.19||-$2,604.19||-$2,521.16||-$2,687.22||-$166.06|
|SSO||ProShares Ultra S&P 500||2||$1,480.10||$2,960.21||$2,865.83||$2,771.45||-$94.38|
|RSU||Rydex 2x S&P 500||2||$69.29||$138.58||$134.16||$129.74||-$4.42|
|UPRO||ProShares UltraPro S&P 500||3||$285.38||$856.14||$828.85||$774.25||-$54.59|
|Net Rebalance of Inverse/Leveraged Funds:||-$1,066.57|
Just like in the imaginary example, these seven funds were variously betting both for and against the S&P 500, and they all had to sell or short going into the close on a day the market was already down.
This looks bad for levered and inverse funds. It's entirely rational to walk through the above logic and conclude that the presence of these funds in the market should make a bad day worse. But before we jump to conclusions, let's place that $1 billion trade in context.
What was the aggregate traded value of the S&P 500 going into the close? We calculated this by looking at the value traded in 10-minute blocks, from the open through the close, including the market-on-close auction, which is generally reported after the close.
|Full Day's Trading:||174,947,423,779|
|Final 10 minutes+MOC||19,504,155,239|
|Final 30 minutes+MOC||35,566,878,772|
In the final 10 minutes of trading, almost $20 billion of underlying S&P 500 stock changed hands. Of that, we can assume that $1 billion was the result of the leveraged and inverse funds, or about 5 percent.
More realistically, the portfolio managers at the leveraged and inverse fund shops probably started working their swap positions well before the close, and thus their counterparties were in the market establishing or liquidating positions in anticipation of the final exposure requirements.