My understanding is that these ETFs do not actually engage in plain-vanilla short selling, but use options, futures, forward contracts and swap agreements in order to perfectly track their respective indexes. The ProShares ETFs that I have been watching lately have been doing a good job of operating exactly as advertised, providing twice the inverse of the indexes on a daily basis. I expect them to continue to do so, and believe that their vital risks are still counterparty defaults and government meddling in the derivatives markets.

Page 7 of the ProShares prospectus (PDF) has a rundown of strategies employed by its short funds.

MarketWatch reports that ProShares ETFs have seen massive volume this week, especially SKF, the double short financial ETF, which benefited from earlier naked shorting restrictions.

—

This is one heck of a rally. Dow futures are up 347 points on top of a 600 point rise from the intraday low yesterday afternoon. This is a gift for shorts using means other than plain short sales, since it sets us up for a spectacular failure, financials included.