With stocks plunging into a steep bear market early in 2020 amid the global COVID-19 pandemic, many investors are looking for ways to cushion their losses or even exploit the next downturn in stocks. However, short-selling individual stocks can be very risky, as predicting their movements is difficult, and there is no limit on the size of losses. Indeed, stocks rallied back strong into 2021, reaching new all-time highs. To keep overall risk lower, investors can instead purchase mutual funds that make bearish bets and profit when the broader market falls.
Below, we look at three such bear mutual funds, which experienced the best performance during the previous severe market downturn, during the Fall of 2018.
Key Takeaways
- In a down market, investors can turn to bear mutual funds to get diversified, professional asset management that profits from falling prices.
- A bear fund may provide a more accessible and less risky way to bet against the market than selling short or directly trading derivatives, although they generally carry higher expense ratios than long mutual funds or short ETFs.
- Here, we look at three popular bear funds that performed especially well during the Fall 2018 market correction.
All data are from Morningstar, as of 4/21/2021.
Bear Mutual Funds
One way to manage this risk is by investing in so-called bear market mutual funds, which are funds that short a basket of stocks or an entire stock index. These funds can post rising returns as the broader market falls. Because the current bear market isn't over, and stocks are incredibly volatile, we looked at the performance of mutual funds during the last major market downturn. During that prior downturn, the declined from a high of 2930.75 on Sept. 20, 2018, to a low of 2351.10 on Dec. 24, 2018, a total decline of 19.8%, just short of the 20% drop required to be considered a bear market.
Bear funds typically follow several different strategies to generate returns when markets fall. The fund may bet against the broader market by purchasingput optionson an index while selling shortfuturesin the same index. Another strategy isto sell specific securities short in the hope that their share values dip. In addition, the fund may invest in assets that have a tendency to gain value during periods of when the market falls, such as gold or other precious metals. Overall, there is an element ofvolatilityto several of the strategies that bear fund managers deploy. A bear mutual fund may be a way for investors to findalphaduring turbulent times, but this type should never be an investor's only holding.
Rydex Inverse Nasdaq-100 (RYAIX)
- Total Return During 2018 Downturn: 25.9%
- YTD Return ended April 21, 2021: -8.7%
- Expense Ratio: 1.59%
- Assets Under Management: $23 million
- Benchmark Index: Nasdaq-100 Index
- Inception Date: Sept. 3, 1998
- Fund Adviser/Distributor: Security Investors/Guggenheim Funds Distributors
The Rydex Inverse Nasdaq 100 fund tries to replicate the inverse daily performance of the Nasdaq 100 Index. This means that if the Nasdaq 100 goes up 5% in a day, this fund will go down 5%, and if the Nasdaq 100 goes down 5% in a day, the fund will go up 5%. The fund attempts to do this by holding a variety of investments including mutual funds, federal agency notes, and repurchase agreements. Note that the Nasdaq 100 Index should not be confused with the Nasdaq Composite Index; the former is an index of the largest 100 non-financial companies listed on the Nasdaq stock exchange.
According to Morningstar, "The fund employs as its investment strategy a program of engaging in short sales of securities included in the underlying index and investing to a significant extent in derivative instruments. It will invest at least 80% of its net assets, plus any borrowings for investment purposes, in financial instruments with economic characteristics that should perform opposite to the securities of companies included in the underlying index."
Grizzly Short (GRZZX)
- Total Return During 2018 Downturn: 24.0%
- YTD Return ended April 21, 2021: -12.50%
- Expense Ratio: 2.97%
- Assets Under Management: $50.2 million
- Benchmark Index: N/A
- Inception Date: June 19, 2000
- Fund Adviser/Distributor: Leuthold Weeden Capital Management/Rafferty Capital Markets
The Grizzly Short fund, unlike the other two funds on this list, is an actively-managed fund. This mean's the fund's two portfolio managers choose specific stocks to sell short. The fund aims to short 60-100 stocks at any one time, all of which need to be large-cap stocks traded in the U.S.
According to Morningstar, "The fund sells stocks short. Short selling involves the sale of borrowed securities. When the fund sells a stock short, it incurs an obligation to replace the stock borrowed at whatever its price may be at the time it purchases the stock for delivery to the securities lender. The fund generally will have outstanding approximately 60 to 100 stocks that it has sold short."
Rydex Inverse S&P 500 Strategy (RYURX)
- Total Return During 2018 Downturn: 23.6%
- YTD Return ended April 21, 2021: -10.33%
- Expense Ratio: 1.55%
- Assets Under Management: $55.5 million
- Benchmark Index: S&P 500
- Inception Date: Jan. 7, 1994
- Fund Adviser/Distributor: Security Investors/Guggenheim Funds Distributors
The Rydex Inverse S&P 500 Strategy fund tries to replicate the inverse daily performance of the S&P 500 index. This means that if the S&P 500 goes up 5% in a day, this fund will go down 5%, and if the S&P 500 goes down 5% in a day, the fund will go up 5%. The fund attempts to do this by holding a variety of investments including mutual funds, federal agency notes, and repurchase agreements. The S&P 500 is an index of 505 large-cap U.S. stocks.
According to Morningstar, "The fund employs as its investment strategy a program of engaging in short sales of securities included in the underlying index and investing to a significant extent in derivative instruments. It will invest at least 80% of its net assets, plus any borrowings for investment purposes, in financial instruments with economic characteristics that should perform opposite to the securities of companies included in the underlying index."[cite]
We point out to readers that the list above excludes: funds closed to new investors; funds with under $50 million in assets under management because their size makes them too illiquid to invest in; and leveraged funds, which are extraordinarily risky and not recommended for the average investor.
The comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. While we believe the information provided herein is reliable, we do not warrant its accuracy or completeness. The views and strategies described in our content may not be suitable for all investors. Because market and economic conditions are subject to rapid change, all comments, opinions, and analyses contained within our content are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment, or strategy.
