This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

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), 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)Rydex Inverse Russell 2000 2x Strategy Fund (RYIRX) and (UCPIX)ProFunds Ultra Short Small-Cap ProFund (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) sank 32.39% after disclosing plans to issue $200 million in common stock. Also, Skechers USA. (SKX) 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), 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.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,104.03 +52.30 0.31%
S&P 500 1,982.56 +8.93 0.45%
NASDAQ 4,451.4230 +26.7190 0.60%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto
Advertising Partners

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs