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Investors who fear an impending stock market correction may wish to consider bear market mutual funds, which are designed to profit during struggling economies by short selling stocks. This strategy relies on the principle that stock prices typically fall at faster rates than they rise, enabling investors to quickly realize substantial gains. The following five bear market funds warrant a close look.
Note: all data is current as of January 9, 2010.
Grizzly Short Fund (GRZZX)
Launched in 1992, the Grizzly Short Fund, managed by Leuthold Weeden Capital Management LLC, strives to achieve short- and long-term capital appreciation by short selling a portfolio of 60 to 90 stocks. Although this approach increases the fund’s risk level, it enables it to thrive during bear markets. Case in point: in 2008, it realized a 73% profit, handily outperforming the 30% average bear market fund gain.
The fund’s five-year annualized return is -12.77%, which is understandable given the bull market over the past decade. Nevertheless, it has outperformed other funds in this category, which have averaged -16.46% during the same time period.
The fund has a 2.79% expense ratio, and due to the fact that it sells stocks short, it offers no dividend yield. The fund’s $73 million assets are currently 100% allocated to cash positions.
Federated Prudent Bear A (BEARX)
Federated Prudent Bear, a no-load fund managed by David W. Tice & Associates, Inc., aims for maximum capital appreciation through a combination of buying equities long and selling them short. Launched in 1995, the fund also buys put options in an effort to profit from declining stock prices. The fund may further invest in futures contracts, U.S. Treasuries, and foreign stocks, while also taking long positions in undervalued precious metals stocks that are poised to appreciate during bear market conditions.
The fund has a 2.89% expense ratio and a five-year annualized return of -12.11%. During the 2007-2009 bear market, it gained 54% while the inverse-oriented S&P 500 Index lost 43%.
Currently, the fund’s largest sector weighting is in financial services (17.26%), with its largest single position in the SPDR S&P 500 ETF Trust (SPY), which commands 66.84% of the overall portfolio.
PIMCO StocksPLUS Short A Fund (PSSAX)
This PIMCO Funds product was created in 2003 and is managed by Pilgrim Baxter & Associates, Ltd. The fund seeks to generate capital growth through short selling small- and mid-cap common stocks listed on the S&P 500 Index that demonstrate high earnings potential. It also invests in bonds and other debt securities.
Its expense ratio is a comparatively low 1.17%, and its dividend yield is 0.96%. Its five-year annualized return of -9.14% positions it as one of the best-performing bear funds during a bull market. Furthermore, during the 2007-2009 bear market, the fund boasted realized gains of nearly 100%.
Currently, 51.25% of the fund’s assets are parked in cash, while more than 30% of the portfolio is invested in fixed income products.
ProFunds Short Nasdaq-100 Inv Fund (SOPIX)
Launched in 2002, this $12 million ProFunds product is managed by Rachel Ames, who strives to achieve the inverse daily performance of the Nasdaq 100 Index. The fund primarily invests in futures, options, swaps, and other derivatives. Since the Nasdaq 100 features more growth stocks than the S&P 500 Index, it tends to experience steeper declines during bear market climates. Not surprisingly, in 2008, SOPIX ushered in an impressive 65% return.
The fund has an expense ratio of 1.78% and shows a five-year annualized return of -16.76%.
Rydex Inverse S&P 500 2X Inverse Strategy A Fund (RYTMX)
Investors seeking bear market profits should consider this offering from Rydex Global Advisors, which launched in 2000. The fund uses short selling to produce daily results that represent the inverse performance of the S&P 500 Index. It likewise invests in futures, options, index equity swaps, and repurchase agreements.
The $17 million fund’s expense ratio is 1.85%, and while its five-year annualized return was -22.62%, during the 2007-2009 bear market, its profits exceeded150%.
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