If you are in mutual funds, your fund manager generally only has two choices - cash or equities. A conservative and well hedged fund manager will maintain a reserve cash position during times of lofty valuations. When prices return to a decent value, the fund managers with cash on the sidelines can swoop in to steal the value. But what if you think valuations are to high at any level, and the US is headed for a major downturn? Or what if you buy into the current valuations, but you just can’t stomach the wild ups and downs of the market? This is where the inverse funds and shares come into play. Profunds and proshares are two such vehicles for easy portfolio hedging, or downright bets against the economy.

The difference between the profunds and the proshares offerings are the same as the difference between mutual funds and exchange traded funds. I personally personally prefer ETF’s for the following reasons:

Benefits of ETF’s

  • Intraday trading (mutual fund purchases and sales are settled only at end of day pricing)
  • Lower expenses then mutual funds
  • Tax efficiency (mutual fund owners get hit with end of year distributions)
  • You can short and even write options with ETF’s

The proshares ETF’s offer low fee methods to gain exposure to market indexes. But through their ultra shares, short and ultra short shares, they also offer an innovative way to manage risk and enhance return of your portfolio. The list of proshares is available here. My personal favorite is the Ultra Short S&P 500 shares (SDS), the objective of which is to double the inverse performance of the S&P 500. I’ve used it in the past as a downside hedge to my otherwise mildly bullish portfolio, and have also sold short term options against it.

The profunds offerings are similar in nature to proshares, but using mutual funds instead of ETF’s. The Ultrabear profund seeks to double the inverse of the S&P 500. There are also classic profunds, ultra profunds, and sector profunds to choose from.