Investors who think the stock market’s bull run may soon be coming to an end may want to consider investing in bear market mutual funds, which are designed to profit in an overall down market. Among the most popular mutual funds that perform best during bear markets are the Grizzly Short Fund (NASDAQ: GRZZX), Federated Prudent Bear A (NASDAQ: BEARX), the PIMCO StocksPLUS Short A Fund (NASDAQ: PSSAX), ProFunds Short Nasdaq-100 Inv Fund (NASDAQ: SOPIX) and the Rydex Inverse S&;P 500 2X Inverse Strategy A Fund (RYTMX).
While some investors choose to weather bull markets by shifting more of their investment portfolios into fixed-income securities or parking the bulk of their investment capital on the sidelines in cash, other investors aggressively seek to profit from falling stock prices. For these investors, there are a number of mutual funds available oriented toward short selling stocks and using various other strategies designed to generate maximum profits from an overall downturn in the stock market.
Because stock prices typically fall at a faster rate than they rise, investors can realize substantial gains from adopting a bear stance in the market at the appropriate time.
Grizzly Short Fund (GRZZX)
The Grizzly Short Fund is managed by Leuthold Weeden Capital Management, LLC. Launched in 1992, the fund’s aim is short- and long-term capital appreciation. It typically maintains a portfolio of between 60 to 90 stocks it sells short. It aims to continually have 100% of its approximately $76 million in assets invested in short-equity positions. Although this approach increases the fund’s risk level, it also enables it to generate impressive returns during bear markets. In 2008, GRZZX realized a profit of 73%, compared to the average bear market fund that gained only 30%.
The fund’s expense ratio is 2.5%, about average for bear market funds. Since it sells stocks short, there is no dividend yield. The fund’s five-year annualized return is -16%, which is understandable given the fact a bull market in stocks has been in place since 2010. However, the fund’s -16% performance is better than that of the average bear market fund with a negative 20% five-year annualized return for the period between 2010 and 2015.
During the most recent bear market phase that extended from October 2007 through February 2009, the fund returned a very impressive profit of 122%.
One of the fund’s major short positions is in the SPDR S&;P 500 ETF, which accounts for about 10% of its portfolio. Among its other short positions are Post Holdings Inc.; building materials manufacturers Louisiana-Pacific Corporation and the USG Corporation; and T-Mobile US, Inc.
Federated Prudent Bear A (BEARX)
Federated Prudent Bear, a no-load fund managed by David W. Tice &; Associates, Inc., was launched in 1995. The fund aims for maximum capital appreciation through a combination of buying long and selling short. Overall, more of the fund’s assets are committed to short selling. In addition to selling stocks short, the fund also buys put options to profit from a decline in stock prices. Long positions are taken in stocks the fund manager considers to be undervalued and in stocks considered likely to appreciate in value during bear stock market conditions, such as stocks in gold and silver mining companies. The fund may also invest in futures contracts, U.S. Treasurys and foreign stocks.
The fund has an expense ratio of 1.76%, which is below average for similar bear market funds. Its five-year annualized return for 2010-2015 is -16.4%. During the 2007-2009 bear market, it gained 54% while the inverse-oriented S&;P 500 Index lost 43%.
Some of the fund’s major holdings, short and long, include S&;P 500 Index futures; the Financial Select Sector SPDR ETF; Duke Energy; health care REITs HCP, Inc. and Ventas, Inc.; Verizon Communications, Inc.; and Stillwater Mining Company.
PIMCO StocksPLUS Short A Fund (PSSAX)
This PIMCO Funds product was created in 2003 and is managed by Pilgrim Baxter &; Associates, Ltd. The stated aim of the fund is to generate capital growth through short selling of common stocks included in the S&;P 500 Index and through the purchase of stocks the fund manager believes have strong growth momentum and above-average earnings potential. The composition of the fund’s portfolio favors small- and mid-cap stocks. The fund typically invests 80% of its $30 million asset base in stocks but also invests in bonds and other debt securities, both government and private.
Its expense ratio is a comparatively low 1.04%, and it offers a dividend yield of 1.78%. Its five-year annualized return of -13% ranks it as one of the best-performing bear funds during a major bull market. During the 2007-2009 bear market, it realized gains of almost 100%.
Some of the fund’s top short sell holdings include GMAC Capital Trust and Wells Fargo &; Company. The fund also holds 10-year U.S. Treasury Note futures.
ProFunds Short Nasdaq-100 Inv Fund (SOPIX)
This offering from the ProFunds group was launched in 2002, and its $12 million in assets are managed by Rachel Ames. The investment goal of SOPIX is to produce daily results that mirror the inverse of the daily performance of the Nasdaq 100 Index. The fund primarily invests, not in stocks, but in futures and forward contracts, options, swaps and other derivatives. Since the Nasdaq 100 contains relatively more growth stocks than the S&;P 500, it may be projected to experience steeper declines during bear market periods. In 2008, SOPIX paid investors nearly a 50% return.
The fund has an expense ratio of 1.78%. Its five-year annualized return is -21%, but during 2008, the bulk of the last bear market period, the fund realized a gain of 65%.
Rydex Inverse S&;P 500 2X Inverse Strategy A Fund (RYTMX)
For investors who wish to aggressively pursue bear market profits, this leveraged fund from Rydex Global Advisors, launched in 2000, may be very suitable. It aims to produce daily investment results that approximate 200% of the inverse performance of the S&;P 500 Index. The fund invests in selling short stocks and uses futures, options, index equity swaps and repurchase agreements. Futures contracts are cash collateralized using U.S. Treasury bills.
The fund’s expense ratio is 1.77%, and it has $35 million in investment assets. Its five-year annualized return is a very unfavorable 31%; however, during the most recent 2007-2009 bear market, the fund returned over a 150% profit to its investors in the space of just over one year. Among the fund’s top holdings are S&;P 500 e-mini futures contracts. As of July, 2015, the fund is almost wholly invested in cash.