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 Quote), 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 Quote), down 34.51%; International Coal Group(ICO Quote), down 28.85%; and Saia(SAIA Quote), 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 Quote) (RYIRX Quote)Rydex Inverse Russell 2000 2x Strategy Fund (RYIRX) and (UCPIX Quote)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 Quote) sank 32.39% after disclosing plans to issue $200 million in common stock. Also, Skechers USA.(SKX Quote) 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 Quote), a builder of robotic surgery systems, jumped 34.13% after beating estimates for second-quarter earnings. Amazon.com (AMZN Quote) tipped the scales with a return of 14.53%, and Apple(AAPL Quote) 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 Quote) share price and the 1.19% addition to the value of Boeing(BA Quote) shares. Both companies reported solid second-quarter results. This held back the Short Dow30 ProShares (DOG Quote) 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 Quote), a 5.76% rise in Biogen Idex (BIIB Quote) and a 5.63% gain in Genzyme(GENZ Quote).

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.