As their names suggest, bear market funds seek capital appreciation during down markets, mostly by utilizing futures, options and/or short selling. I realize placing bets on a declining market is not for everyone – in the personal finance blogsphere it might even be considered heresy. Yet history suggests that the market moves in cycles; bear markets follow bull markets as surely as night follows day.Source: Profutures, click to enlarge
Personally, I maintain the belief that we are nearing the end of a cyclical bull within a secular bear market started in year 2000. The byline of this blog, “a middle way between active management and asset allocation”, is an acurate description of my investing approach. Roughly half of my portfolio is actively managed and the other half follows an asset allocation plan that I have been writing about. As I take a more defensive stance, my intention is not to achieve a net short position but to hedge against my exposure to the general stock market in the asset allocation accounts.
I have been dabbling with shorting individual home builder stocks, but it was with risk capital only, and based on a confirmed macroeconomic trend. The downside risks are unlimited in shorting individual stocks or ETFs, so it is preferable to use one of the bear market funds for general short-side exposure where one cannot lose more than the principle.
However antithetical this may be to your investing (or general) philosophy, I hope some readers are open-minded enough to file this post somewhere in the back of their mind, to be recalled at the appropriate time.
Without further ado, below is the list of bear market funds. Note all but one are geared towards producing inverse movements of a target index. A leverage of 1X means the fund aims to reproduce 100% of the inverse daily performance of the target each day; 2X means twice the inverse performance. In addition to the funds listed, ProFunds also offer various sector short funds. I own two of the funds mentioned, BEARX and URPIX. Some of these funds have related loaded shares with lower minimums, cater to nimble traders, or have order cut-off time other than 4pm. Readers are urged to do their own research before purchasing.
|Fund Name||Symbol||Target Index||Leverage||Expense Ratio|
|Potomac Contrabond Inv||PCBDX||10 yr Treasury||2X||1.75%|
|Potomac Small Cap/short||POSSX||Russell 2000||1X||1.95%|
|Potomac US/short||PSPSX||S&P 500||1X||3.32%|
|ProFunds Bear Inv||BRPIX||S&P 500||1X||1.51%|
|ProFunds Rising Rates 10 Inv||RTPIX||10 yr Treasury||1X||N/A|
|ProFunds Rising Rates Opp Inv||RRPIX||30 yr Treasury||1-1.25X||1.42%|
|ProFunds Short OTC Inv||SOPIX||Nasdaq 100||1X||1.51%|
|ProFunds Short Small Cap Inv||SHPIX||Russell 2000||1X||1.51%|
|ProFunds Ultrabear Inv||URPIX||S&P 500||2X||1.43%|
|ProFunds Ultrashort Dow 30 Inv||UWPIX||Dow Industrials||2X||1.95%|
|ProFunds Ultrashort Mid Cap Inv||UIPIX||S&P Mid Cap 400||2X||1.82%|
|ProFunds Ultrashort OTC Inv||USPIX||Nasdaq 100||2X||1.41%|
|ProFunds Ultrashort Small Cap Inv||UCPIX||Russell 2000||2X||1.35%|
|Prudent Bear||BEARX||Actively managed, with gold stocks||1.85%|
|Rydex Arktos Inv||RYAIX||Nasdaq 100||1X||1.38%|
|Rydex Juno Inv||RYJUX||30 yr Treasury||1X||1.32%|
|Rydex Inverse Dynamic Dow 30 H||RYCWX||Dow Industrials||1X||1.67%|
|Rydex Inverse Mid Cap H||RYMHX||S&P Mid Cap 400||1X||1.60%|
|Rydex Inverse Sm Cap H||RYSHX||Russell 2000||1X||1.63%|
|Rydex Tempest 500 H||RYTPX||S&P 500||2X||1.70%|
|Rydex Ursa Inv||RYURX||S&P 500||1X||1.38%|
|Rydex Venture 100 H||RYVNX||Nasdaq 100||2X||1.70%|
The following chart compares BEARX with the 1X S&P inverse funds from Rydex and ProFunds. First of all, the gains during the bear market from 2000-2003 are self-evident. Secondly, the actively managed fund had greater volatility and return during the bear market, indicating a leverage greater than 1. After 2003, the volatility was about the same but BEARX had a higher return probably due to the gold component. Some basic mutual fund portfolios that use BEARX can be found in the archive of Robert Gordon.
So there it is. You may never have to purchase these funds, but it's always good to know what your options are.