Question If The ETF SSO (which is the ProShares Ultra S&P500 which seeks daily investment results, before fees and expenses, that correspond to twice (200%) the daily performance of the S&P 500) is trading at 24.40 and the ETF SPY (which tracks the S&P 500) is trading at 86.10. It seems that it would be much cheaper to buy the S&P 500 using the SSO since you are essentially getting the benefit of 2 shares for less than the price of 1 share of the SPY. It would seem that the SPY would trade at 50% of the value of the SSO. Is there something I'm missing here?
Answer Brad, there are two questions here, I'll answer your main one first and then answer one you didn't ask, because you're looking at a "multiplier" index fund.
First, regardless of the investment you're looking at, share prices are irrelevant. For example you can find dozens of S&P 500 index funds and their share prices are arbitrary - $30, $50, $94, it doesn't matter. If you own $1000 worth of one, and the fund meets its goal of matching the index performance, you'll have $1050 if the index goes up 5% (minus whatever fund expenses there are). It truly doesn't matter whether that $1000 represents 10 shares, 50 shares, or what have you because of the nominal share price of the fund. It's just a record-keeping entry really, for tracking how much you've invested. Some funds try to match their share prices to some multiple of the index values (e.g. it's $100/share if the index is at 1,000) but that's an exception and still doesn't affect the basic point.
Further, comparing the share prices of two funds with different investment goal is irrelevant too. Always think in terms of the dollar amount you're investing, because that's what matters.
But there is a much more buried issue with the "multiplier" funds that aim for, as an example, 2X the return of a given index. Verify this for the fund you're looking at BY READING THE PROSPECTUS, but in general the goal of these funds is not to achieve 2X the performance of an index over a lengthy time period, but rather on a given day.
This is an enormous difference! The reason, to use some jargon, is "variance drain" or "volatility drag" which is the reduction in compounded returns that occurs over time, when your return varies from day to day. That's a mouthful, best illustrated by an extreme example.
Let's look at imaginary index XYZ's performance over five very volatile days, and the value of an index fund that exactly matches XYZ's performance at the end of those 5 days:
$100 start value
day 1 down -25% = $75 at end of day
day 2 up 1/3 - +33.33%% = $100
day 3 down -25% = $75
day 4 up 1/3 - +33.33% = $100
day 5 up 50% = $150
So the index is up 50%, and so is the index fund, before factoring in any expenses.
Now where is the 2X fund that achieves its goal of 2X the daily performance of the index? It should be $200, right...? Not by a long shot.
$1.00 start value
day 1 down 2X 25% = -50% = $50
day 2 up 2X 33.33% = 66.67% = $83.33
day 3 down 2X 25% = -50% = $41.67
day 4 up 2X 33.33% = 66.67% = $69.44
day 5 up 50% = $104
What? It's correct - due to variance drain, the 2X investor, instead of having $200 (2X the index gain of $50), has just $104, before expenses (which are typically higher with 2X funds than regular index funds). Just owning the index would have left him with $150. He got hit by variance drain - because returns varied so much from day to day, and in math terms the volatility/variance was high, it ended up draining a lot of his money.
So this answers the question you didn't ask: "instead of buying $1000 worth of an index fund, why don't I just risk $500 in a 2X index fund won't that leave me ahead with less risk?" One big reason not to do that is that the long-term returns of the 2X index fund won't be 2X those of the index. Now it would be hard to find an index as volatile as my XYZ example above, but the same principle applies - variations in returns is likely to reduce your bottom line as time goes on. You could even lose money even though the index is up over the time you owned the 2X fund.
