CHICAGO (Reuters) – There is such a thing as being too cautious – betting on fear to such an extent that it derails your portfolio.
But if you are pessimistic about economic prospects in 2013 and thinking of investing in some bearish funds, this strategy could be hazardous to your wealth. You should consider yourself forewarned by what happened in 2012 with funds that embraced an aggressive bearish strategy: They were mauled.
Take the iPath S&P 500 VIX ST Futures A ETN, which was one the most hotly traded funds in 2012, according the Top 20 list of average daily trading volume compiled by trade newspaper Investment News. This specialized fund is an exchange-traded note – a publicly traded instrument issued by a bank – which gains when volatility-linked futures contracts soar in price. A short-term measure of investor anxiety, these funds make sense when the market is topsy-turvy, but not in a bull rally. Last year, the iPath note lost 78 percent.
Another big, bearish loser, the Direxion Daily Small Cap Bear 3X Shares fund, lost 49 percent of its value last year. The fund, which gains three times what a small-cap index does during a decline, was 10th on the top-volume ETF list.
Overall, a pessimistic view was represented by eight bearish, non-precious metals funds in the high-volume, hot-money list. All but one of them lost – from 12 percent for the ProShares Ultrashort 20+ Year Treasury ETF, which makes money if prices on long-maturity Treasury bonds fall, to the ProShares Ultra Vix Short-Term Futures fund, which lost a heart-stopping 97 percent last year and offers twice the return of an S&P 500 volatility index.