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Inverse Funds Clean Up in Market Rout

For inverse funds, good things do come in small packages -- at least they did over the five trading sessions ended Thursday July 26.

The Dow Jones Industrial Average of large bellwether stocks finished the period down 526.84 points, or 3.76%, from 14,000.41 on Thursday July 19. But that was only a minor decline compared with the 6.47% drop in the S&P 600 Small Cap Index and the 7.03% walloping of the Russell 2000 Index. True to its name, the S&P 400 Mid Cap Index split the difference between big- and small-caps, losing 5.78% for the week.

Inverse mutual funds and exchange-traded funds are designed to increase in value as the indexes they track decline. The 47 inverse funds we follow averaged an oversized total return of 8.87% during the week.

Just as small- and mid-cap stocks were hurt worse than big stocks, the best-performing funds were those that used leverage to bet against the smaller fries. The largest gainer of the bunch, the UltraShort Russell2000 Value ProShares (SJH), super-cruised to a return of 15.96%. The fund is designed to track twice the inverse of the performance of the Russell 2000 Value Index on a daily basis.

The index constituents that sustained the most damage, thus contributing most to the fund's rise, include Fremont General (FMT), down 34.51%; International Coal Group (ICO), down 28.85%; and Saia (SAIA - Get Report), off 26.01% .

Fremont General continues to be delinquent in filing financial statements. International Coal is borrowing $180 million in convertible notes that could eventually dilute the shares. And trucking company Saia released second-quarter results of 51 cents a diluted share that missed the expectations for 62 cents a share by a country mile.

The next three funds on the best-performers list seek two times the inverse performance of the entire Russell 2000 Index. The UltraShort Russell2000 ProShares (TWM) (RYIRX) (RYIRX) and (UCPIX)(UCPIX) all accomplished their missions, with returns in excess of 15% each.

Two of the Russell 2000 constituents had particularly bad weeks. Protalix BioTherapeutics (PLX - Get Report) sank 32.39% after disclosing plans to issue $200 million in common stock. Also, Skechers USA. (SKX - Get Report) admitted that its third quarter looks to be less profitable that it had earlier estimated. The shares screeched lower by 27.17%.

Best-Performing Inverse Funds
Ranked by returns for the week ending July 26
Fund Ticker Rating Fund Type 1 Week Total Return
UltraShort Russell2000 Value ProShares SJH U ETF 15.96%
UltraShort Russell2000 ProShares TWM U ETF 15.54%
Rydex Inverse Russell 2000 2x Strategy Fund RYIRX U Open-End 15.49%
ProFunds Ultra Short Small-Cap ProFund UCPIX E- Open-End 15.38%
UltraShort SmallCap600 ProShares SDD U ETF 14.62%
UltraShort Russell2000 Growth ProShares SKK U ETF 14.52%
ProFunds UltraShort Emerging Markets UVPIX U Open-End 13.61%
ProFunds Ultra Short Mid-Cap ProFund UIPIX E- Open-End 12.52%
UltraShort Russell MidCap Value ProShares SJL U ETF 12.41%
UltraShort MidCap400 ProShares MZZ U ETF 12.29%
Source: Bloomberg

The first three funds on the worst-performers list track the unleveraged, inverse daily returns of the Nasdaq 100 index, which held up relatively well during the market downdraught. Index member Intuitive Surgical (ISRG - Get Report), a builder of robotic surgery systems, jumped 34.13% after beating estimates for second-quarter earnings. Amazon.com (AMZN) tipped the scales with a return of 14.53%, and Apple (AAPL) gained 4.29%, both for the same reason.

These positive performances offset a portion of the overall decline in the Nasdaq 100 index, limiting the inverse funds' returns.

The same holds true for the 5.33% improvement in Merck's (MRK) share price and the 1.19% addition to the value of Boeing (BA) shares. Both companies reported solid second-quarter results. This held back the Short Dow30 ProShares (DOG) to a return of 3.87%.

The next four funds on the worst-performers list rise in value as the S&P 500 Index falls. Index components that bucked the market's downward trend by reporting solid earnings and outlooks include: a 6.29% rise in Snap-On (SNA), a 5.76% rise in Biogen Idex (BIIB) and a 5.63% gain in Genzyme (GENZ).

Worst-Performing Inverse Funds
Ranked by returns for week ending July 26
Fund Ticker Rating Fund Type 1 Week Total Return
Short QQQ ProShares PSQ E ETF 3.25%
Rydex Series Trust - Inverse OTC Strategy Fund RYAIX E- Open-End 3.40%
Profunds Short OTC ProFund SOPIX E- Open-End 3.41%
Short Dow30 ProShares DOG E+ ETF 3.87%
ProFunds Bear ProFund BRPIX E- Open-End 4.71%
Rydex Series - Inverse S&P 500 Strategy Fund RYURX E- Open-End 4.76%
Direxion S&P 500 Bear 1X Fund PSPSX E- Open-End 4.78%
Short S&P500 ProShares SH E+ ETF 4.83%
Prudent Bear Fund BEARX E+ Open-End 4.86%
ProFunds Short Oil & Gas ProFund SNPIX U Open-End 5.01%
Source: Bloomberg

With all the inverse funds available, there are always funds moving up regardless of the direction of the movements in the overall stock market. Unless we sink into a protracted bear market, none of these funds make good long-term investments. But during short-term periods of market weakness, they can provide a hedge against greater losses.
Kevin Baker became the senior financial analyst for TSC Ratings upon the August 2006 acquisition of Weiss Ratings by TheStreet.com, covering mutual funds. He joined the Weiss Group in 1997 as a banking and brokerage analyst. In 1999, he created the Weiss Group's first ratings to gauge the level of risk in U.S. equities. Baker received a B.S. degree in management from Rensselaer Polytechnic Institute and an M.B.A. with a finance specialization from Nova Southeastern University.

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SYM TRADE IT LAST %CHG
SJH $49.87 -4.57%
ISRG $526.50 0.00%
PLX $1.72 0.00%
SAIA $45.04 0.00%
SKX $148.65 0.00%

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