ProShares UltraShort Yen (NYSEARCA: YCS) attempts to reproduce daily investment results, before fees and expenses, that equate to twice the inverse, or -2x, of the value of the U.S. dollar against the Japanese yen, or JPY/USD cross rate. The intraday ticker for this exchange-traded fund, or ETF, is YCS IV.
It is important to understand that YCS is not an investment fund and does not fall under the jurisdiction of the Investment Company Act of 1940. Rather, think of this ETF as an inverse derivative on a currency pair with a day-trading emphasis. The benchmark for YCS is not an index; it is the exchange price of yen in dollars.
The inverse relationship is targeted to produce the opposite of the dollar price of the yen, or how many dollars have to be given up for one yen. To calculate the JPY/USD cross rate, divide 1 by the U.S. dollar to the Yen exchange rate.
YCS is a leveraged ETF, meaning its returns are an exaggerated version of its benchmark's value. If the change in yen versus dollar increases, the value of YCS decreases by approximately twice as much. YCS holds futures contracts and other derivatives to achieve the desired leverage.
Characteristics
ProShares released the UltraShort Yen ETF in November 2008. It is probably best described as a leveraged commodity pool that is only linked to ProShares because of its -2x exposure to a currency exchange rate.
YCS operates with a different tax structure than most ETFs. The average investor is familiar with a Form 1099, but YCS gains and losses are not reported on the 1099. Instead, YCS gains and losses are reported on the Schedule K-1 because this ETF is technically considered a partnership.
As far as fund expenses, YCS caps out at 0.95% thanks to contractual limitations. This ETF is frequently traded and deploys a complex methodology, so high fees are not unexpected. Ninety-five basis points is only slightly above the category average of 87 basis points.
Unfortunately, YCS is not available for commission-free trading on any platforms. Commissions and other trading fees are independent of the expense ratio. As a daily return ETF, trading costs are more important than the expense ratio in almost every case.
Suitability and Recommendations
Like all daily tracking ETFs, the returns for YCS compound over time and create time decay in the portfolio. This means investors are less and less likely to realize the target -200% exposure if they continue to hold their position for longer and longer periods of time.
Since YCS tracks an exchange pair rather than an index, it faces many more different kinds of risks than the standard ETF. It faces regulatory and legislative risk in the realm of international trade; restrictions on trade might benefit or help YCS returns. The monetary policy of the Federal Reserve and the Bank of Japan affects performance.
Essentially, anything that influences the relative purchasing power of yen or dollars has an impact on YCS. As it is a daily-traded ETF, investors should dedicate themselves to significant economic and political news coming out of the United States and Japan. This helps capitalize on any materially significant news.
By holding futures contracts, YCS gets taxed at a higher rate than nonleveraged ETFs, regardless of how long the position is held. The only saving grace for YCS' cost structure is it is relatively liquid, saving investors on bid-ask spreads.
All told, YCS is a niche holding that should be treated like a speculative and high-risk trading opportunity. Investors should not make investment decisions based on this ETF's modern portfolio theory, or MPT, measurables; inverse-leveraged commodity pools are managed very differently than the sorts of mutual funds MPT was designed to encourage.
