Take a look at the top performing mutual funds last quarter and the winners were bear market funds, which are funds that bet the market is going down rather than up.
Four of Lippers 25-top performing funds this year have came from one fund family, Rydex ( 800-820-0888). And all four are index funds with a twist---instead of going long the index, as typical index funds do, they short the index.
Using a short investment strategy means that portfolio managers sell borrowed stock then buy it back at a later time, hopefully, at lower prices. Money is made from the investment if the stock price falls between the time it is purchased and the time the position is closed out.
"These are funds whose investment strategies are designed to do the opposite of what the market does, " says Chuck Tennes, senior vice president of Rydex Global Advisors. "They will go up when the market does down and down when the market goes up. Interestingly, we've had some terrible markets lately so this is the time when the sun shines on inverse funds."
And shine it has, for the 13 weeks ending March 29, the Rdyex Dynamic Venture 100 Fund was up 72.05 percent, making it the Lipper's No.1 performer during that time period. Following were the Rydex Arktos Fund, up 41.04 percent; the Rydex Dynamic Tempest 500 Fund, up 31.71 percent; and the Rydex Ursa Fund, up 17.41 percent.
What's appealing about these inverse funds is their hot-shot performance. And, having a small percentage of one's total assets invested in them can smooth out an otherwise awful ride on Wall Street. But, don't be blind sighted by them as their expense ratios are considerably higher than those on ordinary index funds, around 1.3 percent annually; minimum investments are $25,000 when dealing with the Rydex directly but considerably lower with various brokerage supermarkets; and performance swings can be devastating over the long haul.
"Bear market funds will provide some protection on the down side for those who believe the market is headed downward, " says Jeff Keil, a vice president at Lipper. "The risk is you time it incorrectly and that the market turns around and goes up."
While market timers have been the typical audience for short funds, that's not to say they don't have a place in some investors portfolios. Provided, that is, they understand the risks, the rewards, and have the capacity to use them as tools for tweaking their portfolios in down markets rather than as long-term buy-and-hold investments.
If you've an interest in inverse funds, but don't know whether or not you've the stomach for them, make sure to take a look at their performance charts.It will provide a good visual representation of their volatility.
Finally, if you're wondering whether the market has more bear power to it this year, Tennes doesn't see any signs of a turnaround just yet. Then again, these funds have been performing on the upside since last September and no one knows for sure how long it will take for the market to get back to previous high levels. So, make doubly sure to do your homework before investing in bear market funds.
Here's more about each of the four Rydex top-performing inverse funds:Rydex Dynamic Venture 100 Fund, (RYVNX). The reason this fund has had such a great run this year is because its performance benchmark is 200 percent of the inverse performance of the NASDAQ 100 index.. That index contains the 100 largest non-financial, no-utility stocks in the NASDAQ Composite and is chock-full of tech stocks like Microsoft, Intel, Qualcom and Cisco. The fund was created in May 2000.Rydex Arktos (RYAIX). Similar to the Venture 100, this fund, whose name is Greek for "bear", is designed to perform opposite of the daily performance of the NASDAQ 100. It has been around longer, established in September 1998, and thus has a track record: For the last four months of 1998, the fund was down 36.41 percent; at year-end 1999, it was down 54.31 percent; and in 2000, up 23.53 percent.Rydex Dynamic Tempest 500 Fund (RYTPX). Around since May of 2000 as well, this fund's benchmark is the S & P 500., which fell 12 percent in the first quarter. Like the Dynamic Venture 100 fund, its performance is designed to correspond to 200 percent the inverse performance of the index. The S & P 500 is made up of 500 stocks from a wide range of industries. Top names in it include General Electric, Microsoft, Exxon Mobil, Pfizer, and Citigroup.Rydex Ursa Fund (RYURX). The oldest of the four funds, expect this fund---named after the Latin word for "bear"---to perform opposite of the S & P 500 Index. Since its inception in January 1994, year-end results show the Ursa Fund has had two positive performance years and five negative ones from 1994 through 2000. The up years were 1994, when the fund was up 3.72 percent, and 2000, when it was up 17.45 percent. The worst down year was 1997 when the fund was off 20.99 percent.
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