Inverse exchange traded funds (ETFs) played out well in 2008, as market conditions did a reverse and let these types of funds play their part.

These types of funds are merely two years old, and the timing of their market debut was perfect.

ProFunds originated these funds back in 1997, when bear market index funds were created for investment professionals, reports Billy Fisher for TheStreet. The first short ETFs were launched in the summer of 2006, and those funds were:

• Short QQQ ProShares Fund (PSQ)
• Short S&P 500 ProShares Fund (SH)
• Short Dow 30 ProShares Fund (DOG)
• Short Midcap 400 ProShares Fund (MYY)

Since then, the number of not only these ETFs, but providers offering them and asset classes they cover, has expanded to include such funds as:

• PowerShares DB Agriculture Double Short (AGA)
• PowerShares DB Gold Short (DGZ)
  
• Rydex Inverse 2x Russell 2000 (RRZ)
• Rydex Inverse 2x S&P Select Sector Financial (RFN)
• Market Vectors Double Short Euro (DRR)

ETF investors no longer have to wait out on the sidelines while market turbulence dominates. Instead, they can benefit from both the ups and downs of markets while hedging their short-term risk. By subtracting the short-term risk, inverse ETFs have given investors the option to expand one’s holding period in a long position quite comfortably.

We caution investors, however, to be aware of the risks of these funds and to understand what they’re getting into. Because they can be especially susceptible to whipsaws in the marketplace, sticking to your sell strategy is key.

Read the disclosure, as Tom Lydon is a board member of Rydex Funds.

Tags | AGA, Agriculture, DGZ, DOG, Dow Jones Industrial Average, DRR, Euro, Gold, Mid-Cap, MYY, NASDAQ, Precious Metals, PSQ, RFN, RRZ, S&P 500, SH, Small-Cap