ajtj99's Market Pulse

[Randy1960]

Profund's short and leveraged ETF's out in June per this article:

http://www.smartmoney.com/etffocus/index.cfm?story=20060607

ALMOST FOUR YEARS to the day since it first applied to the Securities and Exchange Commission, ProFund Advisors finds itself finally on the verge of introducing ProShares Trust, a family of exchange-traded funds aimed at helping investors profit during falling markets. The launch could prove well timed. The Dow Jones Industrial Average shed nearly 200 points on Monday alone.

ProFund's proposed ETFs seek to produce the opposite, or inverse, return to the Dow, Standard & Poor's 500, Nasdaq 100 and S&P MidCap 400 indexes. That is, when an index falls 10%, the corresponding ETF gains 10% before fees. ProFund also plans to launch the first ETFs to use leverage, or borrowed capital. The four "ultra" short ETFs seek to return 200% of any decline in the same four indexes, while the four "ultra" long ETFs expect to double any upside in the indexes. ProFund currently uses the same strategies in some of its mutual funds.

"These funds will solve some of the problems retail investors have experienced trying to short ETFs," says David Fry, founder and publisher of ETFDigest.com, an online investment newsletter. "This also opens up the whole retirement fund industry to ProFunds. Many IRA and 401(k) retirement funds restrict individuals from shorting stocks. However, if you can buy a fund that shorts the market, that solves that issue."

The ETFs will be managed by an investment team led by Augustin Fleites. Fleites, the former head of ETF distribution at State Street Global Advisors, quit the industry pioneer in May 2005 and joined ProFund in August as chief investment officer.

"At the time, people took it as a sign that ProFunds was about to get approval," says Dan Culloton, Morningstar's lead ETF analyst, "or make a big push to get approval and get into the ETF market in general."

ProFund declined to comment because it's in a quiet period ahead of the launch. Industry insiders expect the new ETFs to debut on the American Stock Exchange by the end of June.

It's been a long road for ProFund Advisors. The Bethesda, Md., company first registered to sell its bear-market ETFs on June 5, 2002, when stocks were just beginning their last significant slide. That day the Dow closed at 9797, and over the subsequent four months it lost a quarter of its value. But the SEC, known for taking its time in approving products from first-time ETF issuers and even more notorious for its cautious approach when it comes to novel ETFs, was in no rush to act. Four years later the wait finally appears over.

"ProShares are more esoteric because they use all kinds of derivatives, so it took longer," says Culloton. "Probably because the SEC has a lot on its plate, and this was a more complicated structure and they wanted to take a good hard look at it before letting it out in the marketplace."

Hedging Your Bets
The years-long delay could work in ProFund's favor. As the application moved toward approval, the Dow climbed to a six-year high of 11643 — not exactly the environment that would attract many buyers of bear-market ETFs. Since peaking on May 10, however, the Dow has tumbled 5.5% amid sinking investor sentiment.

"It's very common for this kind of market, one with fast money, to become excessive on the upside, and I wouldn't be surprised if we were excessive on the downside as well," says Gary Tapp, quantitative strategist at Atlanta investment bank SunTrust Robinson Humphrey. "I think 1225 on the S&P 500, which is 3% from where we are now, might be around the bottom. Still, the ability to hedge through a bear ETF could add some protection to a portfolio."

The period when investors can comment on ETFs before they can receive trading clearance ends Wednesday, says SEC spokesman John Heine. "Next Monday ends the period when the public can request a hearing on the exemptive relief from provisions in the Investment Act of 1940," he says. "As for when the registration statement becomes effective, there's no timetable."

Barring any last-minute snags, investors will soon have the ability to play a declining market as well as hedge long portfolios against one. For average investors, some experts say hedging may be the preferable and less risky strategy. By investing a small sum in bear-market ETFs, a well-balanced portfolio can be protected to a degree against a sudden market correction. Less appealing to average investors is making substantial long-term bets on broad stock declines.

"I would caution anyone against making a major investment in a bearish bet unless they are very savvy and able to monitor the market," says Tom McManus, chief investment strategist at Bank of America Securities. "I believe that stock prices move higher over time and therefore you have to be tactical and not strategic."

There's a strong argument for the stock market to fall further in the near term. The dollar is weak, the economy is slowing, and Federal Reserve Chairman Ben Bernanke has made it clear he won't hesitate to continue raising rates to keep inflation in check. A rising-rate environment generally doesn't favor equities. The bearish outlook is compounded by the start of hurricane season and worries over a nuclear standoff with Iran.

"A 5% decline is really nothing after a four-year advance that gets up within a few hundred points of the Dow's all-time high," says Raymond DeVoe, market strategist at New York-based brokerage Jesup Lamont Securities. "This year is beginning to look like a remake of 1987. [Back then] it started as a dollar crisis, which became an interest-rate problem, which then became a stock-market problem. And there are some imponderables that could not only go wrong, but could go terribly wrong. These start with the housing market, the consumer, inflation, interest rates, fallout from the crash in emerging markets, the dollar. And a president with a 29% approval rating means people don't expect a rosy presidency."

Of course, bulls can make equally compelling arguments for stocks. Corporate profits are strong, unemployment is low, and the economy, though slowing, is still on solid footing by most measures. And even if the market is in the midst of a correction, the slide may be neither steady nor long lasting, which could squeeze aggressive investors in bear-market ETFs.

"Bear markets seldom drop off a cliff, or head straight south," said James Stack, president of InvesTech, an independent technical research firm in Whitefish, Mont., in a May 19 report. "Expect a reflex rally of some type to unfold over the next several weeks [at least technical odds suggest such a rally].... We think bear markets are something to survive, not make a killing in."

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