Big Gains With Little Risk... the New Breed of Investment Funds
By Dr. Steve Sjuggerud
August 15, 2007
Just over a month, and we're already halfway there...
In the July issue of Sjuggerud Confidential, my new recommendation was to buy shares of "SRS." I told readers to "close out your position once you have a 50% profit, which could be as quickly as 12 months."
Our timing has turned out pretty well... we're up more than 25% in just six weeks.
So what is SRS? It's part of a new breed of investment funds... Funds that mimic an index of stocks, but amplify the returns. In this case, for every dollar the index goes up, this should go up by two dollars.
Actually, in the case of SRS – the UltraShort Real Estate Fund – it returns twice the opposite of an index of stocks.
According to the ProShares website, "The UltraShort Real Estate Fund (SRS) seeks daily investment results... that correspond to twice (200%) the inverse (opposite) of the daily performance of the Dow Jones U.S. Real Estate Index."
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Fortunately, for Sjuggerud Confidential subscribers that took me up on my recommendation, our timing couldn't have been much better. Not long after we made our bet against U.S. commercial real estate (by buying SRS), the subprime mess got worse.
We bet against commercial property because it was offering record-low yields compared to safe Treasury bonds, and the Dow Jones U.S. Real Estate Index had just started a downtrend. The subprime flight from real estate stocks has helped send the index even lower... and our ProShares have risen by twice the inverse of the Dow Real Estate Index.
I wrote a bit about the risks of these funds that amplify your returns about a month ago.
In that article, I quoted an analyst from Morningstar who called them a "fairly gimmicky idea."
I understand what he's trying to say. But my reply was "If you control your risk with trailing stops, as I always recommend, then 'gimmicky ideas' like these can make you some real money."
We're up more than 25% in six weeks on SRS. Our downside risk is limited, as we're using a 25% trailing stop. I've now moved this to a "hold" for my Sjuggerud Confidential readers, as we've already made half of what we wanted to make here... and the reward-to-risk ratio isn't good enough for me anymore.
But my point today is not to get you interested in shorting real estate stocks, but to show the new possibilities for us as investors...
For instance, if you think international stocks are ready to fall, you could buy the UltraShort International Profund. This fund is designed to return twice the inverse of a basket of international stocks. If you believe oil stocks will rise, you could buy the Oil and Gas UltraSector ProFund, which returns 150% of an oil index.
If you can dream it up, chances are one of the ETF companies has an offering for you... Japanese stocks, small-cap stocks, currencies, precious metals... even Internet stocks.
I see these types of funds as somewhere between stocks and options. They allow investors to get a little more leverage... without getting into options, which are much more risky for most people.
If you're looking to "amplify" your returns... or you're looking to make "bearish" bets on something in your retirement accounts (where you're not allowed to sell short), you ought to look into the innovative fund companies that offer "bear" funds and funds that offer double the performance of an index. The leaders here are Rydex Funds (www.rydexfunds.com), ProFunds (www.profunds.com), ProShares (www.proshares.com), and Direxion Funds (www.direxionfunds.com).
I like these things... In my two newsletters, my recommended lists aren't that big. But I have funds like these in each newsletter. As long as you control your risk through trailing stops, these funds are safe ways to make big gains with little risk.
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