3 Bear Market Funds to Profit From Pain

by Kent Thune | August 6, 2014 10:15 am

3 Bear Market Funds to Profit From Pain

The idea of making money in stocks no matter which direction the market is heading sounds like some kind of solicitation to buy into the latest investment scheme.

bear v bull 630 iStockphoto 300x235 3 Bear Market Funds to Profit From Pain
Source: iStockphoto.com

But you don’t have to use questionable tactics or be a short seller or options trader to make money in a bear market. Nor do you have to bet the farm on a major market correction.

Instead, you can just buy bear market funds.

Bear market funds — which typically go short stocks, use options or find other ways of betting against the market — can be a smart way of adding diversity to a portfolio when it appears that a bull market is nearing its end.

With that said, timing is crucial when betting against the market. So is now a good time to buy bear market funds? The major stock indices keep hitting all-time highs, investors seem to think of bad news only as opportunities to buy on dips, and August is historically one of the worst months, on average, for stocks. Most would agree that a significant correction is overdue, the current bull market is much closer to the end than the beginning, and Tuesday certainly fueled some worries across Wall Street.

Although hindsight will only confirm the best timing to buy, now is as good of a time as any to at least educate yourself on expanding your diversification options. Here are three bear market funds worth your consideration.

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Bear Market Funds to Buy – Rydex Inverse S&P Strategy (RYURX)

Rydex Funds 3 Bear Market Funds to Profit From PainAs the name suggests, the objective of Rydex Inverse S&P Strategy (RYURX[1]) is to provide investment results that match, before fees and expenses, the inverse (opposite) of the performance of the S&P 500 Index on a daily basis.

For reference, consider 2008, the last calendar year where there was a steep decline in stock prices. The S&P 500 Index fell 37%, but RYURX gained 40.9%, which is better than opposite.

What makes this fund even more outstanding is its consistent outperformance of the average bear market fund. Also, the expense ratio of 1.42% (and no load fee, to boot) makes it much cheaper than your typical bear market fund, which will set you back 2.3% in expenses.

Making RYURX more accessible than most bear market funds, the minimum initial purchase is $2,500 and just $1,500 for IRAs.

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Bear Market Funds to Buy – ProFunds Short Nasdaq-100 Fund (SOPIX)

ProFunds1852 3 Bear Market Funds to Profit From PainIf you want to step up a level in aggressiveness, you can bet against the Nasdaq-100 Index with the ProFunds Short Nasdaq-100 Fund (SOPIX[2]).

In 2008, SOPIX had a gain of 45.4%, whereas an ETF that can be considered its opposite — the PowerShares QQQ Trust (QQQ[3]), declined 41.7%.

With more growth stocks compared to the S&P 500 Index, the Nasdaq-100 Index should be expected to have steeper declines in bear markets but more pronounced jumps off of market lows. Therefore, when you buy a bear market fund like SOPIX, you can have a bigger payoff with good timing … but lose big with poor timing.

The added market risk also comes with a higher expense ratio of 1.78% and minimum initial investment of $15,000.

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Bear Market Funds to Buy – Grizzly Short Fund (GRZZX)

grizzly short fund grzzx 185 3 Bear Market Funds to Profit From PainGrizzly Short Fund (GRZZX[4]) is not your average bear (sorry).

Although the best performance does not necessarily translate to the best mutual fund selection for your portfolio, investors buying bear market funds typically want a fund that shows promise of high returns in a negative return environment.

Offered by Leuthold Weeden Capital Management, GRZZX attempts to maintain a position of 100% short individual stocks at all times. This carries added risk compared to the average bear market fund, but does allow GRZZX to come up with some pretty impressive gains in an otherwise losing bear market. In 2008, GRZZX had a staggering gain of 73.3%, while the average bear market fund gained 29.9%.

However, that performance also comes with a high expense ratio of 3.44% and, although below average for the category, you’ll have to buy at least $10,000 worth of shares for an initial investment amount (in regular accounts — IRA holders only need to buy $1,000 initially).

As is the case with any form of investment, extreme returns go hand in hand with extreme risk. Therefore extreme caution is also given for anyone considering this fund or other bear market funds.

As of this writing, Kent Thune did not hold a position in any of the aforementioned securities. Under no circumstances does this information represent a recommendation to buy or sell securities.

Endnotes:
  1. RYURX: /stock-quotes/RYURX-stock-quote/
  2. SOPIX: /stock-quotes/SOPIX-stock-quote/
  3. QQQ: /stock-quotes/QQQ-stock-quote/
  4. GRZZX: http://investorplace.com/stock-quotes/GRZZX-stock-quote/

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