After the only bear market in U.S. history worse than this one -- the one that ended in 1932 -- Joe Kennedy, Bernard Baruch and Jesse Livermore were dragged before Congress and pilloried for being short the stock market.
Betting that stocks would go down was considered un-American.
Actually, it's not. Kennedy used some of his proceeds to buy the White House for his beamish boy, JFK, a deeply patriotic act.
Today, shorting is still controversial. It's also considerably easier to do.
Scores of exchange-traded funds and a handful of mutual funds allow you to bet easily against virtually every asset class. You can also leverage those bets with funds designed to go up $2 whenever the asset you're shorting goes down $1.
Not enough for you? As of late last year, you can buy short ETFs that reward you 3-1 when the market declines.
These bets are very profitable right now. No fewer than four leveraged short ETFs have more than doubled already this year, and one has nearly tripled. That explains why one or two of these funds can now usually be found among the list of the market's most active equities -- a sign that more and more everyday investors are using them.
More from MSN Money
High risks, rewards and potential losses
Be warned before you proceed, however. This market's hottest plays are also the riskiest.Explosive rallies happen in even the worst bear markets, and these funds move just as fast the wrong way. A sudden 15% advance could drain away nearly half of the miserably few dollars you've got left at this point if you have them in a leveraged short fund.
But if you think we ain't seen nothing yet, you stand to make a killing while the rest of us are sucked into poverty. You can make a buck -- or two or three -- for every dollar the guy on the long side loses.
You probably can't access these short funds from your 401(k), unless it has a mutual fund window that allows you to buy any fund. But you can buy the funds from any straight brokerage account, whether taxable or tax-deferred (such as an IRA).
It's much easier to buy these funds than to short individual stocks. See "A beginner's guide to selling short" for details on that.
There are scores of short ETFs and a handful of mutual funds to consider. Gains in the range of 60% in little more than two months are common with the leveraged versions. Direxion Financial Bear 3X Shares (FAZ, news, msgs) had galloped ahead 179% so far this year, as of March 5.
Still, leverage adds rocket fuel to what's already a roller-coaster ride, so laying down a bet like this more closely resembles assisted suicide than a search for safety. You cannot watch these positions too closely.
There's also a lot of concern on Wall Street right now that the growth of such funds is helping keep the market down. That may be true, though a cynic might wonder if Wall Street isn't simply upset that we've caught on to a game the pros have been playing for quite a while.
Video on MSN Money
Jubak on short-sellingMSN Money's senior markets editor, Jim Jubak, explains how it works.
How they work
Rydex Investments introduced two-times leveraged inverse mutual funds in 2004. Two years later, ProShares began unleashing two-times leveraged inverse ETFs. Late last year, Direxion Funds began bringing out three-times leveraged inverse ETFs.In every case, the funds use financial derivatives to accomplish what Joe Kennedy did when he borrowed other people's stock and sold it, expecting to replace it later on the cheap. But since today's funds don't actually sell stock short -- they buy contracts that accomplish this synthetically -- they are legal in accounts that don't allow short sales, including pension accounts.
The funds are designed to work with absolute precision on a daily basis, and they generally do. Over time they can wander, however. This can be due to simple tracking error -- the inability of a fund manager to do his job perfectly -- and to the different ways negative and positive numbers compound; $100 becomes $110 when it goes up 10%, but it then falls to $99 if it goes down 10%.
Continued: Leveraged bear market funds
Rate this Article
High