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Trading The Fed’s Interest Rates – The ProShares UltraPro S&P 500 ETF?

Updated 14 Jul 2022

Key points:

  • We expect the Federal Reserve to change interest rates in two weeks
  • Whichever way the decision goes this should move the whole market
  • An S&P ETF could be a way to trade this
  • key point

The big market moving economic news that we expect in the next couple of weeks might make the ProShares UltraPro S&P500 ETFs (NYSEARCA: UPRO) and (NYSEARCA: SPXU) worth a look. These are 3x leveraged ETFs on the S&P 500 index of course and they're not, at all, an investment tool. They're a speculative, or trading tool, to be used carefully and judiciously.

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The news we expect is from the Federal Reserve meeting on July 26 and 27. Barring emergency action that's the next time we can expect a change in US interest rates. The Fed has said that it's going to be aggressive in closing off inflation – that means interest rate rises. The big question though is how fast are those interest rates going to rise? Given that inflation just clocked in at 9.1% there could be a substantial interest rate movement.

It's also possible to think not, given that core (ie, without energy and food) came in at “only” around 6% and it has long been a Fed insistence that core inflation is what they consider to be the important measure. So, there's going to be aggressive action on interest rates, but how aggressive is that going to be, given that divergence between headline and core inflation? Especially since energy prices have been declining this past couple of weeks, something not in the last inflation read?

ProShares UltraPro Short S&P500
ProShares UltraPro Short S&P500 from IG
ProShares UltraPro S&P500
ProShares UltraPro S&P500 from IG

Also read: How To Trade ETFs.

As we can see those are near mirror images of each other, as they should be. One is – SPXU, or the ProShares UltraPro Short S&P500 – going short on that index, the other – UPRO, ProShares UltraPro S&P500 – going long. The UltraPro there means that it's 3x leveraged. That makes it a exhilarating but also dangerous thing to trade as the leverage can get away with a trader. It also means that it's simply not for long term holdings, it's for a trading strategy of a few hours, a day maybe at most. For simply by construction of that leverage both ETFs lose money over time.

As to what the trade should be there's the difficulty. It's quite clear to the market as a whole that the Federal Reserve will raise interest rates again. We also know that the Fed raises in 0.25% increments. So, it could raise by 0.25, 0.5 and so on. The current market pricing reflects that the Fed will raise by 0.81% – which is a number the Fed definitely won't raise by. So, really, the betting is between a 0.75% or a 1% rise.

As and when that decision comes through we can expect a move in the market. Those who expected heavier action and didn't get it will be bearish, those who expected lighter and got hit bullish. So, we really are expecting a market move – and the S&P 500 is one of the best indices for the market as a whole – as a result of this coming decision.

The problem, of course, is that none of us knows which way the interest rate is going to surprise, on the up side or the down. So the choice between UPOR and SPXU is the difficulty here.