You don’t have to be a market timer or expert technical trader to make money when stock prices take a dive. Instead you can simply buy bear market funds.

next-bear-marketThis is similar to the hedging strategy with funds we covered last week in the article, Top 3 Hedge Funds for Every Investor. The typical hedge fund may bet on falling prices by taking short positions in securities and it may also take long positions to benefit from rising valuations. In summary, hedge funds use leverage to hedge against market declines.

But this time, you are doing the hedging yourself with bear market mutual funds — you are the hedge fund manager of your own portfolio.

Bear market funds — which typically go short stocks, use options, or find other ways of betting against the market — can be a smart way of adding diversity to a portfolio when it appears that a bull market is nearing its end.

With regard to performance, there will be an inverse relationship with the performance of a broad market index. For example, if the S&P 500 Index fell 20% over the next 12 months, a well-managed bear market fund would rise roughly 20%.

3 Top Mutual Funds to Buy for a Major Market Correction

  • Rydex Inverse S&P Strategy (RYURX): As the name suggests, RYURX seeks to achieve the opposite performance results of the S&P 500 Index, before fees and expenses. For example, over the past one month, the S&P 500 Index had a 1.34% decline, whereas RYURX has a positive 1.16% gain. In 2008, when the S&P 500 declined 37%, the Rydex Inverse S&P Strategy fund had a 40.94% gain. For added assurance to potential investors in RYURX, the lead manager, Michael P. Byrum, has been at the helm since 2001. For a bear market fund, RYURX also has a low expense ratio of 1.42% and the minimum initial purchase is only $2,500.
  • Grizzly Short Fund (GRZZX): If you want to make a bigger bet on a market decline, and you are willing to take on significantly more market risk, the Grizzly Short Fund can get the job done. True to its name, GRZZX attempts to profit big in the worst of bear markets by maintaining a position of 100% short individual stocks at all times. This carries added risk compared to the average bear market fund, but history shows how GRZZX can come up with incredible gains when the broad market is losing. For an extreme example, in 2008, GRZZX had a huge gain of 73.3%, which is almost a double-inverse return of the S&P 500’s decline of 37%. The lead manager, Matthew B. Paschke, has been with GRZZX since 2005 so the experience is there for the next big market decline. The expense ratio of 1.57% is below-average for bear market funds but you’ll need to come up with at least $10,000 to make your initial purchase into shares of the Grizzly Short Fund.
  • ProFunds Short Nasdaq 100 Fund (SOPIX): If you like the idea of being an aggressive bear market investor but don’t want to make huge bets against the market, you might like ProFunds Short Nasdaq 100 Fund. Rather than profiting from the pain of declines in the S&P 500 Index, SOPIX can potentially have larger gains by seeking an inverse performance relationship to the Nasdaq 100 Index. For example in the 2008 bloodbath for growth stocks SOPIX had a big gain. Compared to PowerShares QQQ trust (QQQ), an index fund that invests in the Nasdaq, SOPIX jumped 45.38% in 2008, whereas QQQ fell 41.73% in price that year. While most of the ProFunds Short Nasdaq 100 analyst team has been in place since 2008, the lead managers have been there for only two years. The expense ratio of 1.78% is average for bear market funds but the minimum initial purchase amount is a bit higher at $15,000.

As a word of caution, timing is crucial with using bear market funds and they are not best used as stand-alone market-timing vehicles. Stock prices can fall quickly over a short period of time but they can also rebound higher just as fast.

But bear market funds can be used wisely as a hedging strategy in a diversified portfolio to protect against expected market declines.

As of this writing, Kent Thune did not hold a position in any of the aforementioned securities. Under no circumstances does this information represent a recommendation to buy or sell securities.

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