The Problem With Multiple Inverse ETFs

With the popularity of inverse ETFs on the rise it's a good idea to consider some of the hazards. Ideally we would just be able to go long or short any ETF, but experience has shown this not to be the case with OIL, USO, IAU, and GLD on at least one occasion. It may be impossible to short a stock any stock when all its shares are outstanding so none are available for shorting, this is precisely when you want to short it the most. There are times when you want to go long an ETF such as DIG and then go long its double inverse DUG. Beware the possibility's as Minyanville points out here using iShares Dow Jones US Real Estate (IYR) and its double inverse UltraShort Real Estate ProShares (SRS).

Let's say they're both $100. And then on Day 1 IYR rallies 1%. SRS will go down 2%, or $2 to $98. Then on Day 2, IYR dips back 1% to 99.99. SRS should then go up 2%, to $99.96. No one will really notice, but obviously this adds up.

On the flip side, an extended move in one direction will cause the combo to lift. Let's say IYR goes up 1% a day for five straight days. IYR is now 105.10, SRS is 90.39. You can even throw in some reversal days and get similar results.