How does a bear ETF work? The sponsors give themselves a lot of room to maneuver in the prospectus. Generally, the sponsors can use a wide variety of derivative products including options, futures, options on futures, forward contracts and swaps to execute the strategy of the fund. They have leeway to use almost any instrument that has an inverse performance relationship with the underlying index.
According to the ProShares Performance Guide, there are several advantages of using a bear ETF compared to a margin account for a short strategy:
• You don’t need a margin account
• You won’t get a margin call
• You can easily follow your investments throughout the day
• You can use them where you couldn’t use margin before, like IRAs
• You can’t lose more than you invest (unlike margin accounts)
The Performance Guide also urges you to seek advice from your financial adviser or broker. Financial professionals have a special hotline they can use with ProShares at 866.PRO.5125.
ProShares sponsors over 35 short ETFs and ultrashort ETFs to fit any Bear ETF appetite. Short means that the bear ETF targets 100% of the inverse of the daily index performance. The UltraShort bear ETF has an objective of 200% of the inverse of the daily index performance.
Choices range from the mainstream indices such as the Short Dow 30 ETF (DOG) to sector-based ETFs such as Ultrashort Financials (SKF) and Ultrashort Oil & Gas (DUG). ProShares even offers Bear ETF fans chances to short emerging markets with funds such as the UltraShort MSCI Emerging Markets (EEV) and UltraShort FTSE/Xinhua China 25 (FXP). Read more at the ProShares website.
Another option is Rydex Investments’ family of “Inverse 2x” funds that track 200% of the inverse performance of several major indices including the S&P 500 (RSW), S&P Midcap 400 (RMS) and the Russell 2000 (RRZ). Read more at the Rydex website.