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When Markets Dip, Consider Inverse ProFunds
When the market turns down, many investors see only two options: Wait it out or sit it out.
If you decide to wait it out — holding your equity investments — you risk losing gains as the market declines. If you sit it out by selling your equity investments or staying in cash, you might miss future upturns.
Inverse ProFunds offer additional options for dealing with — and even potentially profiting from — market declines.
Two strategies for market dips
Inverse ProFunds offer you ways to short a broad market or specific market segments. They are designed to go up when market indexes go down (and vice versa) — results that are the opposite of traditional mutual funds.
So, Inverse ProFunds can be used to either seek profit or manage risk in your portfolio if the equity markets fall.
Seek profit. If you believe the market is headed for a downturn, you can attempt to profit from it by using Inverse ProFunds. For example, if you think the tech-heavy NASDAQ-100 is likely to fall, you might consider buying the Short OTC ProFund.
Hedge an investment. If you own equities that have increased in value, you may be able to protect those gains by using Inverse ProFunds as part of a hedging strategy.
A hedge is an investment that should perform the opposite of the one you want to shield from losses.
For instance, you believe in the long-term prospects of your large-cap equity investments, but you're concerned about the near-term direction of the market.
By investing in Bear ProFund, you could seek to hedge a decline in the value of your large-cap stock investments. A hedge also allows you to remain invested if the market goes up, and it may limit transaction costs or tax liabilities associated with selling.
It's important to keep in mind that hedging is generally not a long-term strategy, and you should reevaluate your portfolio frequently to determine if the hedge should remain a part of your strategy.
In addition, a hedge will result in a loss should the original investment increase in value, and it will incur fees, expenses and tax consequences of its own.
The advantages over selling short
Of course, you could also pursue these strategies by shorting securities yourself. However, Inverse ProFunds offer three advantages over short selling.
- To sell short, you need a margin account. And margin loans may entail high borrowing costs.
- When you short securities directly, you can lose more than the amount invested. With Inverse ProFunds, as with all mutual funds, your losses can't exceed the amount you invested.
- You cannot sell securities short in many retirement accounts, while Inverse ProFunds generally may be used in retirement accounts.
A range of inverse opportunities
The Nation's Largest Lineup of Inverse Equity Mutual Funds¹
² Each fund strives to seek its daily multiple of the index, before fees and expenses.
Domestic broad markets. Eight Inverse ProFunds are designed to seek a daily return of either 100% or 200% the inverse of a U.S. broad market index, such as the S&P 500 and Russell 2000 (before fees and expenses).
Sectors and industries. Three Inverse Sector ProFunds are designed to seek a daily return of 100% the inverse of a Dow Jones U.S. sector or industry index (before fees and expenses).
Foreign equity markets. Three Inverse ProFunds are designed to seek a daily return of 200% the inverse of popular foreign equity market indexes, such as the MSCI EAFE and Nikkei 225 (before fees and expenses).
Risks of Inverse ProFunds
Although Inverse ProFunds may help individuals make the best of a down market, they are not suitable for all investors.
Investing in the funds involves certain risks, including in all or some cases, leverage, liquidity, short sale, small-cap company, international investing and repurchase agreement risks. These risks can increase volatility and decrease performance. In addition, because the sector funds are concentrated in a single area of the market, they can be more volatile and riskier than more diversified mutual funds, and therefore in themselves, don't constitute a complete investment program.
For more information on the funds and a complete description of the risks of Inverse ProFunds, please read the prospectus . All ProFunds permit active investment strategies that can decrease performance and increase expenses.
¹ Source: Lipper. July 22, 2008. Lipper defines ''inverse funds'' as an open-end mutual fund (not an Exchange Traded Fund, or ETF) that seeks investment results corresponding to the inverse (opposite) of the performance of an assigned index.
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