ZSL teaching some investors harsh lessons

While cruising around the Yahoo Finance message boards, I read many posts similar to this one:

I learned a painful lesson with this POS. After making a small gain in SLV calls a few weeks ago, lost it all in 2 days. Turned to this and managed to turn $4k into $0 within 3 days with useless calls. I have to agree this is totally rigged, down big when silver is down, but not last week....up big when silver was down....WTF?!!!! I'll be interested if a class action lawsuit is forthcoming.

ZSL is a double inverse ETF based on the silver price. In other words, it is a way to short silver with leverage. From the ProShares web site:

This ETF invests substantially in financial instruments linked to the performance of commodities and currencies, such as swap agreements, forward contracts, and futures and options contracts, which may be subject to greater volatility than investments in traditional securities.

A derivative monster on steroids. If you hold it for more than one day, the transaction and roll costs will eat you alive. ZSL has usually tracked the double inverse of the silver price pretty well for one day periods. But what really changed this past week is that the short silver trade got very crowded. Everyone wanted to short silver on the way down and bid up the price of ZSL far beyond it's net asset value. That premium gets wrung out through resets in derivative prices and from arbs coming in to take the eager short sellers' money.

Even after the horrendous performance last week, the NAV of ZSL is $18.76 while the closing price was $19.70, a 5% premium. I made a little on ZSL early in the week but got out when the premium started getting too high. You can see an outrageous premium in the Sprott Physical Silver Fund (PSLV) as well, something close to 15%. That is not likely to end well. These premiums can build up for a number of reasons, but Reflexivity is probably the best explanation.

This poor investor thinks the ZSL tracking error is due to fraud.

I called proshares about this fraud, they soooo fawked up, gave some bull@#$% explanation, what ever. But people lost lot of money. When silver 5% down ZSL also down too doesn't make any sence at all. This morning SLV up 2% but this turd is down 10%. Play this POS if you just want to loose money. Total fraud, people have to file class actions about proshares doing too much looting with these 2x and 3x scams. SEC should get rid of all these fancy etfs and toss em into toilet.

While there is plenty of fraud in the operation of stock markets, investment companies, and the SEC, this case is not one of them. This investor is probably making investment decisions with the same expertise shown in his grammar and spelling.