The strategy of shorting long and inverse leveraged ETFs can work - but it is not risk free. In order to employ it successfully one need to understand its mechanics and risks well, and continuously monitor and adjust positions as otherwise drawdowns could be substantial.

Leveraged ETFs decay at periods of volatility, but rise faster than the underlying index multiple in a directional market. The perceived downward returns are a result of non-symmetrical statistical distribution, not a negative expectancy.

I use the strategy from time to time in a conservative manner, targeting only modest returns by adjusting positions in order to reduce risks. Balancing risk/reward is not trivial. When the market moves in one direction the initial position is in a loss, and the position is not market-neutral anymore; return to the mean will be profitable, but further move in the same direction will create a loss. Re-balancing the position to be market-neutral will reduce the potential gain.

In periods of volatile sideways market - like we have seen recently - the strategy works great. I squeezed a few percents out of it in the last couple of months. One could have gained much more, but with the cost of risk. If one were holding short equal amounts of both TNA and TZA in the last 6 months, the return would have been about 29%. However, holding 6 months starting around market bottom in March 20 2009 without any adjustment would have resulted in about 69% loss; continuing to hold without adjustments until now would have had a drawdown of over 200% of the original amount shorted.

This strategy sells volatiliy, but in a different manner than selling options.
The bottom line - it can be profitable, especially in volatile sideways market - but one needs to be very careful to avoid losses when the market starts trending.

Most blog posts I found about the strategy do not discuss much the path-dependent behavior or performance in a trending market. There are several academic papers discussing the behavior of leveraged ETFs - see references below. For less academic discussion there is a good summary in a Futures Magazine article:
http://www.futuresmag.com/Issues/201...Fs.aspx?page=2

senco

http://math.nyu.edu/faculty/avellane...TF20090515.pdf
http://www.docstoc.com/docs/5577389/...e-Traded-Funds
http://papers.ssrn.com/sol3/papers.c...act_id=1344133