Inverse ETFs on Market's Good Side

The bear market of 2008 has provided a launching pad for inverse exchange-traded funds.

Inverse ETFs have been in existence for about two years, yet the timing of their origination couldn't have been any better. In summer 2006, the ProFunds Group launched the Short QQQ ProShares Fund(PSQ Quote) the Short S&P 500 ProShares Fund (SH Quote), the Short Dow 30 ProShares Fund (DOG Quote)and the Short MidCap 400 ProShares Fund(MYY Quote). These were the first ETFs that allowed investors the ability to gain short exposure to well-known market indices.

The idea for this family of ETFs dates to 1997, when ProFunds launched bear market index funds that were targeted towards investment professionals. "We knew early on that these funds had a real place in the world of investing for the registered investment adviser market," says Steve Cohen, managing director at ProShares. "The ETFs were launched to give other audiences access to this short exposure."

The ProShares family of ETFs, which also includes ETFs that are designed to provide magnified exposure to underlying indices, surpassed $1 billion in assets within three months of their launch. "It's been a phenomenal story," says Cohen. "It's been the most successful ETF product launch ever. At the end of 2007, we had about $10 billion in assets after just 18 months. This year we surpassed $21 billion in total ETF assets."

The market's volatile path this year has played right into the hands of inverse ETF providers. The deteriorating financial sector has been a popular play for investors who have utilized inverse ETFs. The UltraShort Financials ProShares Fund (SKF Quote), which aims to return twice the inverse of the performance of the Dow Jones U.S. Financials index, has a market cap of about $4.2 billion.