Short Japan! Short Emerging Markets! Double-Short EAFE!

January 27, 2006

ProFunds wants to give you the chance to short everything that’s working on the market.

ProFunds just loves to buck the trend. This January, the headline-grabbing mutual fund company has either launched or made plans to launch "short" funds offering investors a way to bet against almost all of the hottest segments of the market.

For example, with gold at a 25-year high and silver at a 19-year peak, the fund company launched the Short Precious Metals fund on January 9 offering 100 percent negative exposure to the Dow Jones Precious Metals Index.  To be clear: The index offers exposure to mining companies and not the underlying precious metals themselves, but the two are intimately linked. In fact, mining companies have done even better than the metals themselves, thanks to leveraged production and generally high levels of debt: Shares of precious metal mining companies are trading at an all-time high, and have tripled in the past four years.

"Mutual fund investors who closely follow a sector like precious metals have many choices when they believe the stocks in that sector are heading up," said Michael L. Sapir, chairman and CEO of ProFund Advisors LLC.  "But when they believe a sector is headed down, it hasn't been as easy to take action--other than sitting out the downturns."

What else has been working in the market? Well, how about oil and gas? The Dow Jones Oil and Gas Index is also trading at a 52-week high, and has more than doubled in the past two years.  Now, ProFunds has a way for you to short that, too, with the ProFunds Short Oil & Gas Fund, which has been on the market since October. 

The company also launched a short Real Estate fund in October, based on the Dow Jones U.S. Real Estate Index.

But why focus solely on the U.S.?  Foreign markets have been booming as well. Take Japan: After years of slumbering, the Japanese market soared 40 percent in 2005, and many experts are calling for continued solid returns.  But if you want to bet against the Japanese, ProFunds will help you: The company has announced plans for a Short Japan fund offering 100 percent reverse exposure to the Nikkei 225 Stock Index.

Japan isn't the only market doing well.  As we all know, Emerging Markets have been red hot, with the MSCI  Emerging Markets Index soaring almost 50 percent in the past year alone.  Of course, if you think things will reverse course, ProFunds is there for you: The company announced plans for a new fund that will go short the MSCI Emerging Markets Index.

And finally, the entire ex-U.S. market has had a great run recently, with the MSCI EAFE Index doubling since early 2003.  ProFunds believes that at least some investors think that run is over - really over - and soon, they'll be offering a new Short International Fund that will aim to offer 200 percent negative exposure to the MSCI EAFE Index.

Why is the company so bearish, you ask?

Well, really, they're not: For every short fund, ProFund has a long fund that offers leveraged long exposure (typically 150%) to the same area. For instance, for investors who think the Oil & Gas party is just getting started, there's the ProFunds UltraSector Oil and Gas fund, which offers 150% exposure to the same Dow Jones Oil & Gas Index tracked by the short fund.  And for investors who think Japan's going to the moon, ProFunds offers the UltraJapan ProFund, which doubles the positive return of the Nikkei Index.

Generally, both the leveraged and short funds charge expense ratios in excess of 1.5 percent - something investors should keep in mind when deciding how to achieve a desired position. For the leveraged funds, that 1.5+ percent is a pretty good deal, as its much lower than the 6-9 percent generally charged for margined positions in a brokerage accounts. 

But for the short funds, investors may be better served by shorting a similar exchange-traded fund (ETF); in that case, the ETF's expense ratio actually works in your favor, as it produces a negative net return for the fund, while you still have to pay the 1.5 percent plus for the ProFunds.

(No word yet, btw, on ProFunds' filing with the Securities and Exchange Commission for the right to launch leveraged ETFs. The company filed for the right to launch eight ETFs in August 2005: four offering 200 percent leveraged exposure to the S&P 500, Nasdaq-100, S&P MidCap 400 and Dow Jones Industrial Average; and four offering 100% inverse exposure to the same markets.  The inverse funds seem redundant, as - as mentioned above - investors can simply short exisitng ETFs. But in practice, some investors have had difficulty locating ETF shares to shorts, and reports of short failures remain common.  The inverse ProFunds would side-step that issue.)

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