Armageddon Funds

As of February 2011 my preferred bear market fund is an exchange-traded fund (ETF) by AdvisorShares that actually sells stocks short: the Active Bear ETF (HDGE). For years I waited for an ETF like this, and it's almost the perfect Armageddon fund.

As discussed in a previous post, my ideal Armageddon fund would (1) short a market index like the S&P 500 rather than a managed portfolio of selected stocks, (2) be easy to buy or sell in minutes without trading penalties, and (3) gain value in any bear market even if the derivatives market collapsed.  The following table shows how HDGE stacks up against the other major bear market funds:

Minimum Investment None None $1,500 $10,000
Minimum IRA Investment None None $250 $1,000
Dangerous Derivatives No Yes Some No
Annual Expense 1.85% 0.89% 1.72% 1.49%
Trading penalty None None 1% (30 d) 2% (5 d)
Long stocks No No Yes No
Selection Managed Indexed Managed Managed

Although dozens of inverse/short ETFs like SDS and SH have become popular investment tools, they may be extremely risky in a serious bear market due to their use of derivatives in place of actually selling stocks short. Indeed, during the worst part of the bear market in 2008 some of these ETFs temporarily stopped trading. My wish to avoid derivatives led me to search for less popular but safer alternatives to these funds.

The Federated Prudent Bear mutual fund (BEARX) was the first bear fund I found that actually held short positions in some stocks, but since BEARX also has long positions in some stocks and uses derivatives, I later dropped it in favor of the Leuthold Grizzly Short fund (GRZZX) which strictly sells stocks short. Neither of these was a completely satisfactory replacement for the derivative ETFs however, because they aren't indexed to the S&P, and because mutual funds take more than one day to complete a buy or sell order and come with hefty short-term trading penalties.

The Active Bear ETF meets my requirements for simple instant trading and the safety of real short positions in stocks. It would be nice if it were an index fund instead of a managed fund, but so far its price movements are close enough to the inverse of the S&P 500 index that its a pretty safe bet it will gain some value in bear markets - and that's the most important property of any bear fund in my market timing strategy.