This is a very actively traded contract trading several million shares per day so liquidity is not an issue.

The annual expense ratio is .95% (95 Basis Points) which is normal for these leveraged ETF products.

This ETF is for traders who want to take a leveraged position against the S&P 500 Index. It is designed to provide a triple inverse or -300% correlation to the daily performance of the S&P 500 Index minus fees and expenses. In other words, if the S&P 500 falls by 1% then SPXU should rise about 3%.

Since leveraged ETFs are designed strictly for short term trading, not long term investing let’s take a look at a short term chart and see how well this relationship works.

Here is a 10 day chart of SPXU compared to the price movement of the S&P 500 Index. You can see that over the 10 day period the index rose just under 2% and SPXU was down nearly 6% so you can see that in the short run it works as it should.

The problem with Leveraged ETFs is that you need to have very good market timing skills, that’s why most of the volume comes from short term traders. These ETFs are not designed for the average investor.

If you look at a short term chart, you will see that this ETF works quite well. This chart is of the rally that occurred from September to January in the S&P. In this powerful upswing you can see that SSO actually produced more than twice the return of the S&P 500 index.

However, don’t even think about making this ETF a long term holding in your investment portfolio. If you hang on through a down turn, the leverage will destroy your overall return. In fact, over the life of SSO the S&P 500 Index is basically flat, but you would be behind by 30% or more by holding SSO over that time period.

These stock charts cover the time period from ETF inception until January 21, 2011. As this example shows Leveraged ETFs are designed for short term trading, not long term stock market investing.

SH has been trading since 6/19/2006 so it has seen a few ups and downs already. The annual expense ratio is .92% (92 basis points) and it is currently trading almost 2 million shares per day so it is a liquid ETF for trading.

As you can see from the chart below it does a good job of mirroring the moves in the S&P over the short term but you don’t want to hold this ETF for the long term. As you can see the S&P 500 is basically flat over the entire life of this ETF but SH is down over 35%. Inverse and leveraged ETFs are designed to be trading vehicles, not long term investments.

The second short S&P 500 ETF is a leveraged double short called the ProShares UltraShort S&P500 (SDS). Since this is a double leveraged short etf the goal is to create a double inverse correlation (-200%) to the daily performance of the S&P 500 before fees and expenses. So if the S&P 500 falls by 1% on a given day, the goal of this fund is to rally by 2%.

This ETF is way more popular than SH trading about 25 Million shares per day right now. It has roughly the same annual expense ratio at .90% (90 basis points) and has been trading since 7/11/2006.

As you can see by the chart below the performance of SDS was good when the S&P 500 dove in 2008 as it rose 80% or more when the index fell 40%. However, the index is basically flat over the life of this ETF and SDS has lost nearly 70%. Leading again to the conclusion that it should be used as a trading vehicle to take advantage of short term moves, but is not suitable as a long term investment.

Charts are both from inception of the funds through 1/21/2011

There is an ETF that you can purchase if you want to have exposure to an equally weighted S&P500, it is called the Rydex S&P Equal Weight ETF – Symbol RSP. As with the more heavily traded SPY it contains all the companies found in the S&P 500 but each one has the same dollar value in the fund.

Let’s face it, there is no reason to think about this if there isn’t a performance advantage so let’s take a look at a comparison between the SPY and RSP ETFs. This chart goes back to April 24, 2003 which is the first trading date for RSP.

(There are two bad data points on this chart, please ignore them)

As you can see, there has been a distinct performance advantage by being invested in the equal weighted version of the S&P 500. This is why RSP has attracted a couple billion dollars worth of capital and trades almost a million shares per day.

The annual expense ratio is .40% (40 basis points) which is much higher than the 9 basis points charged by SPY, but historically the performance advantage has made this insignificant.