Here is an interesting strategy . . . shorting QQQ. Hey, Jim, that is your pick in my contest!!
February 25, 2000
Dow Jones Newswires
SMARTMONEY.COM WEEK IN FUNDS:
Shorting the Nasdaq
By JOE HAGAN
Smartmoney.com
NEW YORK -- The gulf between the tech-driven Nasdaq and the
meat-and-potatoes stocks that make up the rest of the market heaved wider
this week. The Dow Jones Industrials sunk below 10000, while the New
New Things hit a record, climbing 1.5% for the week ended Thursday. It's
enough to make one suspect impending doom. After all, Icarus eventually got
burned, right?
Either investors are not well-versed in mythology, or they think the sun is still
miles away. Just look at how they're chasing returns. While tech funds make
up just 3.2% of the assets in all mutual funds, they accounted for more than
100% of net inflows into funds in December. The sector received $8.6 billion
in inflows, while the rest of the fund world suffered $2.2 billion in net
redemptions, according to the fund trackers at Financial Research
Corporation. Consider that in January of 1999, net flows into tech funds were
less than half those into S&P 500 index funds. By December, tech funds
received 12 times the inflows to S&P 500 funds.
How long can the Nasdaq soar without melting? If you're worried a market
top is at hand, you could consider shorting the Nasdaq 100. Sound suicidal?
Well, if you've got a portfolio full of tech stocks, think of it as insurance.
One way to hedge your tech exposure is to short the American Stock
Exchange's Nasdaq-100 Index Tracking Stock (QQQ), otherwise known as
the Cube. You'll have to pay a brokerage commission, of course. If you'd
rather use a no-load mutual fund, Rydex, Potomac and Profunds all offer
variations on the short-the-Nasdaq theme. Rydex Arktos (RYAIX) and
Potomac OTC/Short (POTSX) are the most basic. They use short positions,
futures and options in an attempt to do the opposite of the Nasdaq 100's daily
performance. Last year, these funds lost 57.4% and 56.8%, respectively,
reducing a hypothetical $10,000 investment to about $4,300. (Remember,
though, that past performance does not guarantee future results: You could
actually make money!) As with the Nasdaq itself, these funds are wildly
volatile, but then again you're shorting the Nasdaq, so what do you expect?
But let's say that you're the Evel Knievel of investors. You want to make the
Grand Canyon jump of investing, actually double-shorting the Nasdaq 100.
You can do it with Profunds UltraShort OTC (USPIX). Last year, the fund,
which also uses short positions, options and futures, lost 78.3%. Not quite the
double reverse of the index. But actually, better performance on the whole.
(Isn't it ironic?) Year-to-date, Profunds UltraShort OTC is the absolute worst
portfolio in fundom, down 31.9%.
These funds, according to their makers, are for market-timing, not long-term
investments. They do charge moderately high expenses - Potomac's 1.37%
expense ratio is the highest of the bunch. And you'll have to make a sizable
bet in order to play: Potomac OTC/Short requires a $10,000 initial
investment; Rydex, $15,000. For the Profunds investor, well, you can get in
for just $5,000.
Best & Worst
Take a look. You might think that you're seeing the fund results from last
week or the week before or even the week before that. But you're not.
Domestically, technology funds and their tech-driven midcap brothers were
up, while everybody else was down. Techs gained 3.7% on average and
S&P 500 index funds were among the worst performers, losing 2.5% for the
week ended Thursday. Yes, financials and gold funds were down as usual,
but so were growth funds, small caps, telecom funds, even health and
biotechnology funds. Technology and health care funds are now neck and
neck year-to-date, with the average tech fund up 20.7% to the average health
fund's 22.2%.
If investors need any more evidence that international investments are a good
hedge against downturns at home, this week is it. Europe-oriented funds and
global small-cap funds gained 2.4% and 1.6%, respectively for the week
ended Thursday. They were among the (count 'em) seven fund sectors with
positive returns. For more on good Europe funds, check out this week's
mutual fund screen.
SmartMoney.com's Quote of the Week:
"There's a whole new market for wireless devices to do e-commerce and
control your appliances remotely. Your dishwasher, refrigerator, alarm system
- they'll all be controlled by wireless devices soon. You'll be able to crank up
the hot tub on the way home."
- David Plants, lead manager of Dresdner RCM Europe (DRENX), on the
wireless market potential of top holding Nokia (NOK).
For more information and analysis of companies and mutual funds, visit
SmartMoney.com at smartmoney.com |
