Is the Bull Market in Short ETFs Over?

• By Ron DeLegge, Editor
• On 12:32 pm EST, Wednesday November 26, 2008

SAN DIEGO (ETFguide.com) - With 2008 almost in the history books, a quick glance at the scorecard shows short exchange-traded funds (ETFs) are among this year's best performers. Barring a major reversal in the price of stocks, the bears will be winners.

Year-to-date, the UltraShort QQQ ProShares (NYSEArca: QID - News) has jumped 110.1% and the UltraShort Financial ProShares (NYSEArca: SKF - News) has climbed 56.3%. Both funds rise when Nasdaq 100 and financial stocks fall.

Will the bull market in short ETFs continue?

Short ETFs are also sometimes called 'bear funds.' The way they work is this: If stocks increase in value, short funds fall. If stocks decrease in value, short funds rise. Put another way, they move opposite direction of the stock market or whatever benchmark they're attempting to shadow.

Yesterday, ProShares added another 8 short and leveraged ETFs to its lineup. The funds are focused on commodities and currencies. The funds are registered with the SEC as partnerships and will attempt to magnify daily upside and downside performance.

Up until now, the only way to get leveraged exposure to commodities has been through financial products called 'exchange-traded notes' (ETNs). The PowerShares DB Commodity Double Long (NYSEArca: DYY - News) and the PowerShares DB Gold Double Short ETN and examples of ETNs that use leverage to magnify their returns.

Investors have been shying away from ETNs because of their credit exposure. The implosion of Lehman Brothers and its Opta ETNs deteriorated confidence in the market. The new ProShares will provide investors with a solid alternative and a financial structure that avoids acute credit risk.

ProShares is also planning to unveil leveraged funds that go long and short both gold and silver.

According to the prospectus, all of the new ProShares have annual expense ratios of 0.95%.

ETFguide's online database currently has 50 long/leveraged and 67 short/leveraged ETFs and ETNs. Most of these ETFs have annual expense ratios between 0.70 to 0.95%.

Other providers that offer leveraged long/short ETFs are Rydex Investments and DirexionShares.

While the Rydex ETFs and ProShares ETFs mostly attempt to double the daily performance of various stock indexes, the DirexionShares ETFs use even more leverage. For example, the DirexionShares Small Cap Bear 3x ETF (NYSEArca: TZA - News) provides investors or traders that are bearish on the prospects of small company stocks with 300 percent upside exposure to the daily performance of the Russell 2000.

Short ETFs can help you to hedge your investments or ETF portfolio against losses. Unlike buying put options, short ETFs can be used in an IRA retirement account.

Unfortunately, some of Wall Street's most prominent fund analysts have continued to demonize long/short ETFs with scathing articles and reports. Instead of offering balanced advice, they continue to favor Wall Street's heavy buy side always go long approach to investing. Yet, ETFguide has successfully used leveraged long/short funds inside its Ready-to-Go ETF Portfolios. Through the November 25th market close, five of the six portfolios were outperforming the S&P 500.

It is usually best to use leveraged long/short ETFs in conjunction with a balanced portfolio. This will prevent your money from having too much leverage and volatility.

List of New ProShares Currency/Commodity ETFs

--ProShares Ultra DJ-AIG Commodity (NYSEArca: UCD - News)

--ProShares UltraShort DJ-AIG Commodity (NYSEArca: CMD - News)

--ProShares Ultra DJ-AIG Crude Oil (NYSEArca: UCO - News)

--ProShares UltraShort DJ-AIG Crude Oil (NYSEArca: SCO - News)

--ProShares Ultra Euro (NYSEArca: ULE - News)

--ProShares UltraShort Euro (NYSEArca: EUO - News)

--ProShares Ultra Yen (NYSEArca: YCL - News)

--ProShares UltraShort Yen (NYSEArca: YCS - News)

Buzz up!