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The Best, Worst 'Inverse' Funds for Your Portfolio

Kevin Baker

05/12/07 - 09:00 AM EDT

On more than one occasion this year, former Federal Reserve Chairman Alan Greenspan said he believes there is a 33% chance of a U.S. recession this year.

Even if you're a glass-is-two-thirds-full kind of person, it is clear that the U.S. economy is slowing down and may even shift into reverse.

The theory that U.S. stocks make so much money overseas that they can weather a U.S. recession does not hold water. But, never before in stock market history have there been so many funds designed to go up as equities fall.

In the good old days, if you wanted to short the 30 stocks of the Dow Jones Industrial Average, you had to open a margin account and sell each one short individually.

Then on January 14, 1998, an exchange-traded fund came along called Diamonds Trust (DIA) that allowed you to sell short all 30 stocks with one trade.

On June 21, 2006, the Short Dow30 ProShares (DOG) began trading. With this ETF, you don't even need a margin account to be short the Dow Industrials.

Less than one month later on July 13, 2006, UltraShort Dow30 ProShares (DXD) was born.

This ETF tracks twice the inverse daily return of the Dow Jones Industrial Average and is the inverse fund that fell the most over the last month ending May 10. Open-end funds, (RYCWX)Rydex Inverse Dynamic Dow Fund (RYCWX) and (UWPIX)ProFunds UltraShort Dow 20 (UWPIX), use equity index swaps, futures contracts and options to implement the same double inverse target.


Top-performing Inverse Funds
Fund Ticker Rating Fund Type 1 Month Total Return
ProFunds Short Precious Metals ProFund SPPIX U Open-End 3.99%
ProFunds Ultra Short Japan ProFund UKPIX U Open-End 2.81%
ProFunds Short Real Estate ProFund SRPIX U Open-End 2.78%
UltraShort Russell2000 Value ProShares SJH U ETF 0.62%
Short Russell2000 ProShares RWM U ETF 0.12%
Rydex Series - Inverse Russell 2000 Fund RYSHX E+ Open-End -0.09%
Profunds Short Small-Cap ProFund SHPIX E- Open-End -0.13%
ProFunds UltraShort International ProFund UXPIX U Open-End -0.32%
Direxion Developed Markets Bear 2X Fund DXDSX U Open-End -0.42%
Rydex Inverse Dynamic Russell 2000 Fund RYIRX U Open-End -0.52%
Source: Bloomberg

If 200% leverage is not risky enough for you, Direxion Funds has open-end funds designed to match -250% of the daily movements of the Nasdaq 100 and the S&P 500. If the market takes a swan dive, these funds could shoot the moon.

Inverse funds are not restricted to major U.S. stock indexes. The three falling sectors -- precious metals, Japanese stocks and real estate -- translated into inverse fund successes.

The winner over the last month is the (SPPIX)ProFunds Short Precious Metals (SPPIX), which gained 3.99%. The U.S. dollar bottomed on May 1 and has been climbing in value against the major currencies. This helps to lower the price of gold.

A sell-off in Japan's Nikkei 225 Stock Average, amplified by 200% inverse leverage, turned into a positive return of 2.81% for (UKPIX)ProFunds Ultra Short Japan (UKPIX). Lastly, the real estate sector's loss is (SRPIX)ProFunds Short Real Estate's (SRPIX) 2.78% gain.

Inverse funds are generally grouped together as contrarian funds. But, not all contrarian funds short the market. A group of funds that professes to be contrarian plays the long side of the market and did well over the last month.

The (JSVAX)Janus Contrarian Fund (JSVAX) was up 5.57%; the (PARNX)Parnassus Fund (PARNX) increased 2.51%. The (FCNTX)Fidelity Contrafund (FCNTX) advanced 2.17%, and (MATRX)GAMCO Mathers Fund (MATRX) rose 0.67%.

These gains justify the contrarian label with a strategy to find out of favor companies with unrecognized value.

If we do head into a recession and a major market sell-off, inverse contrarian funds are more appropriately designed to capture that gain than an out of favor contrarian style. But be warned, companies won't stop trying to make profits, so over the long run inverse funds are likely to be losers.

Over the past week ending Thursday May 10, every single inverse fund we track gained in value. Stocks sank Thursday but failed to collapse on Friday. Wait for the market to confirm its southward turn before jumping on the inverse bandwagon.


Worst-performing Inverse Funds
Fund Ticker Rating Fund Type 1 Month Total Return
UltraShort Dow30 ProShares DXD U ETF -9.35%
Rydex Inverse Dynamic Dow Fund RYCWX E+ Open-End -8.98%
ProFunds Ultra Short Dow 30 ProFund UWPIX U Open-End -8.97%
Direxion NASDAQ 100 Bear 2.5X Fund DXQSX U Open-End -6.77%
Direxion S&P 500 Bear 2.5X Fund DXSSX U Open-End -6.44%
UltraShort QQQ ProShares QID U ETF -5.95%
UltraShort Russell1000 Growth ProShares SFK U ETF -5.85%
UltraShort S&P500 ProShares SDS U ETF -5.46%
Rydex Inverse Dynamic OTC Fund RYVNX E- Open-End -5.37%
ProFunds UltraShort OTC ProFund USPIX E- Open-End -5.37%
Source: Bloomberg

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