SDS

Overview

ProShares UltraShort S&P500 (SDS) tracks the S&P 500 -2x Inverse index synthetically, through a swap agreement rather than by holding the constituents, and is managed by ProShares. Dividends are paid out to holders rather than reinvested, so SDS suits investors seeking regular income. The fund is domiciled in US, which determines the withholding tax treatment applied to its dividends. Annual charges come to 0.89% of assets, and the fund holds 350M under management. Over five years the fund returned -22.7% a year on average, against -34.2% over three years. It is not eligible for the French PEA, but can be held in a securities account, a UK ISA or a German Depot. Its risk level is rated high. Launched on 2006-07-11, the fund is denominated in USD and has 20 years of track record. Because SDS distributes, every payment is taxable in the year it is received, against the dividend allowance in a general account, while it stays sheltered inside an ISA or a SIPP. Domicile in US sets the withholding the fund itself suffers on the dividends it receives, a cost absent from the stated fee but present in the return.

At 0.89%, this fund costs more than twice the median of its category (0.19%) and over 44.5 times the cheapest (0.02%). On £10,000 the gap to the median is worth about 700 over ten years, and that difference is certain in a way no performance gap is. A premium can be justified, by an index no competitor tracks, by a useful trading currency, or by size that guarantees liquidity; it is not justified by the brand. The question is therefore plain: what does this fund offer that the cheapest on the list does not?

This fund tracks S&P 500 -2x Inverse through a swap: it does not hold the index constituents but a collateral basket, and exchanges that basket's return for the index's with a bank. Two consequences are real. It introduces counterparty risk, bounded by collateral revalued daily and by regulation, but not zero. And it makes possible what direct holding cannot: tracking an index closed to direct purchase, or avoiding withholding tax on dividends, which is why a synthetic fund sometimes beats its physical twin after tax. The swap's cost does not appear in the ongoing charge; it shows up in tracking difference measured over several years.

The fund is domiciled in the United States, and for a European investor that is the point to settle before any other. A US fund is outside UCITS regulation: most European brokers cannot offer it to a retail client for want of a key information document, so access depends on the investor's status. Two tax consequences follow as well: dividends paid to a non-resident bear US withholding, reduced by treaty where a W-8BEN is in place, and US securities held directly fall within US estate tax above a threshold that is low for a non-resident. An Irish-domiciled equivalent avoids both questions.

Income is distributed: the fund pays out the dividends it receives, usually one to four times a year. For a holder living off the portfolio that is what is wanted, since the income arrives without selling. For someone still accumulating it is a tax disadvantage in a taxable account: each payment is taxed in the year received, so the amount reinvested is reduced before it starts working again. Reinvesting by hand also costs a dealing commission each time and often leaves cash idle for want of the price of a whole unit. An accumulating class on the same index, where one exists, settles the question.

With 350 million in assets and 20 years of history, this fund has the size and the record that make closure unlikely and the spread narrow. Three checks remain, once a year, none of which depends on the market. The ongoing charge, which an issuer revises without notice and whose gap to a competitor can invert. The tracking difference, the only figure that says whether replication stays faithful. And the methodology of S&P 500 -2x Inverse, which can change its selection or weighting rules without the fund's name moving, in which case what you hold has changed with nothing to announce it.

S&P 500 -2x Inverse is a broad index, and that is the building block most portfolios have reason to own before any other, for a simple reason: it requires no forecast. Two points deserve checking before calling it diversified. Cap weighting concentrates the portfolio on the largest companies, so the top ten holdings can make up a substantial share, and that concentration grows without any rule changing. And the geographic scope matters: a developed-world index leaves out emerging markets, while a broad US index is not global exposure despite the international revenue of the companies it holds.

Over one year the fund shows -22.2% and over five years -22.7% annualised, two figures close together, which is the most ordinary and least informative configuration: it does not say the fund is steady, only that the chosen start and end points resemble each other. Comparing these figures with another fund means something only if the index is the same; otherwise it is an index comparison dressed as a fund comparison.

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