The new ETFs are:

• ProShares Ultra Russell 3000 Index (UWC)
  
• ProShares UltraShort Russell 3000 Index (TWQ)
  

The funds will replicate the performance of the index on a daily basis, tracking the moves of both upward and downward momentum. This brings the innovative ProShares ETF family that track Russell Indexes to a total of 17 ETFs, according to the press release.

Always be aware of the caveats when it comes to leveraged and inverse ETFs.

For more stories on these types of ETFs, visit our long-short ETF category.

Here is a list of them:

• UltraShort Semiconductor ProShares (SSG), which gained a whopping 113%
• UltraShort Technology ProShares (REW), which was up 98%
• UltraShort Russell MidCap Gr ProShares (SDK), which was up 96%
• UltraShort Russell 1000 Growth ProShares (SFK), which was up 83%
• UltraShort Individuals ProShares (SIJ), which was up 80%
• UltrsShort QQQ ProShares (QID), which was up 77%

Not surprisingly, all of these ETFs took a short position, in essence betting against the market. Among actively managed mutual funds, several short ones also did well, but none of them could touch the triple-digit returns of SSG.

This doesn’t mean that all ETFs performed well. Last year’s market left no sector untouched, and even the safe havens took a beating.  Some ETFs were down sharply, many in high double digits.

Another thing to keep in mind is that ETFs generally have larger Sharpe Ratios then mutual funds.  The standard deviation for mutual funds is 13%, meaning that most funds generated returns between negative 51% and negative 25%.  The standard deviation for ETFs is 27%, meaning that most ETFs generated returns between negative 65% and negative 11%, states Max Rottersman, principle at Hanover Tech Group for Index Universe.

It’s virtually impossible to predict the future and that’s why investors should educate themselves on all of their investments and make sure they don’t get taken to the cleaners.  If you are still worried about your portfolio, take a look at our ETF Analyzer to do some analysis and homework. And if you’re still in high-priced mutual funds, think about switching over to an ETF in a similar asset class.

The fund chooses ETFs based on a proprietary screening method, using patterns of price behavior and trading volume across a mix of asset classes and sectors. The method of screening automatically sorts out similar ETFs, and only focuses on those that trade in the top half of the entire stock universe, to ensure a diversified mix.

Jim Porter, president and founder at New Century Capital Management and the creator of the screening method, began his career in the securities and futures industries in 1969 and founded New Century in 1993. The company was created to research and develop trading and portfolio management systems, as well as to develop and manage alternative investment portfolios and portfolio systems.

At any time, the fund holds from about 25 to 50 holdings, although it currently has 42 components. No component has more than a 5% weighting. When a buy signal is received, the fund enters incrementally, and exits the same way when a sell signal is hit.

The portfolio is essentially a “popularity contest,” says David Robinow, a partner at Aston Asset Management. At first, the portfolio started in stocks, but it migrated over into ETFs – a testament to how popular these funds have become in recent years. When a new fund is qualified for entry, everything in the fund is requalified for the following day.

As of Dec. 31, the top holding in the fund was the Pharmaceutical HOLDRs (PPH), which was 3.5%. Health Care Select Sector SPDRs (XLV) was 3.3%, and the iShares Russell 3000 (IWV) was 3.2%.

This fund, which is actively managed, comes with an expense ratio of 1.5%. Year-to-date, it’s down 6.4%, and since inception it’s down 6.3%.

In rough markets, the ability to go short or long either 200% or 300% of an index’s daily value can prove to be a useful trading tool. But these types of funds should be used with caution, as with any investment, since they amplify market movements. In these times of higher volatility, that means big swings one way or the other than can catch an investor off guard if they aren’t paying attention.

It seems like for most of this year, long and short funds have been perched at the top in terms of daily performance. They can also give a quick snapshot of what sectors are feeling pain and how the markets are doing in general. Seeing a cluster of shorts sitting at the top of a list of funds ranked by daily, weekly or monthly returns tells you that the markets are hurting right now.

For the last five trading days, among the funds at the top are:

• Rydex Inverse 2x S&P Select Sector Financial (RFN)
• ProShares UltraShort Financials (SKF)
• ProShares UltraShort Real Estate (SRS)
• ProShares UltraShort SmallCap 600 (SDD)
• Rydex Inverse 2x Russell 2000 (RRZ)

Not all funds are right for every investor, so investors need to decide what is right and what works for them while using caution, and supplementing that with some education and research. If you think these funds might be right for you, do a gut check and make sure your risk profile fits.

We advocate sticking to a strategy of considering only those funds that are above their long-term trend lines (the 200-day moving average). Once they fall below that mark or 8% off the high, it’s time to let it go.

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

Last year, 17 out of 20 of the largest mutual fund companies were using them last year. Providers that are most popular among managers are Barclays Global Investors, State Street Global Advisors, Vanguard Group and Invesco PowerShares.

So, is this acceptance much more than an endorsement of the ETFs value for active managers? Some say it indicates how hard single-stock selection can be. One of the main ways that managers are using ETFs is for cash equalization or “parking” cash in ETFs for a short time period until the fund invests in single stocks, reports David Hoffman for Investment News.

It turns out to be proper for a fund manager to also use ETFs for a long-term sector rotation strategy, as long as the client is aware of this. Despite concerns or naysayers, it is evident that mutual funds will continue to use ETFs for their advantage.

According to a study by SSGA, the top ETFs among mutual funds by assets are:

• iShares Russell 2000 ETF (IWM) $1.8 billion
• iShares S&P 500 ETF (IVV) $1.4 billion
• SPDR S&P 500 (SPY) $1.3 billion

Gary Gordon for ETF Expert points out that risk or risky investments are often associated with NASDAQ, tech, or small stocks. However, these types of stocks have been the leaders through the close of last week in this bear market.

This is exemplified by the iShares Russell 2000 Index (IWM), which is showing a technical uptrend. IWM is down 3.5% year-to-date, but is up 5.8% over the past month. This is not bad at all compared to alternative indexes. The S&P 500, for instance, has lost more than 12% this year and the S&P 500 SPDR Trust (SPY) is down 12.3% year-to-date and still more than 5% below its 200-day moving average.

These tech and small companies seem to be early leaders in the race toward economic recovery. However, these types of stocks are not the solution for the tough economic times. This being said, it is important to note what can be taken away from this bear market as an investor.

As an investor, one can limit the impact of costs, taxes and other potential adverse outcomes. ETFs, for example, are a great way to reduce both costs and taxes.

Even more important, an investor can make certain that they do not suffer big losses on investments by accepting smaller losses. Of course this is easier said than done, but it shows the importance of not falling in love with a stock, a company, or a particular investing theme.

A good example of this would have been to expect oil to soar to more than $200 per barrel, as many top investment professionals did. Feeling that oil would climb this high, one may have purchased United States Oil (USO), perhaps at a price well above $100 per share. However, as oil prices fell and USO selling at $91 per share on Monday, the tendency to fall in love with this investing theme would leave an investor with a quick and substantial loss.

It’s a good reminder to stick with your plan – sell when it drops 8% of the high or falls below its 200-day moving average.

According to a report on “ETF Liquidity Trends” filed by Deutsche Bank on July 22, inverse (short) and leveraged ETFs generated the third- and sixth-highest turnover levels respectively.

Paul Amery of IndexUniverse notes that in this same report by Deutsche Bank, there were 18 leveraged and 18 inverse ETFs in Europe, which represents roughly 2% of the European ETF market. This lags behind U.S. numbers, in which there are 45 inverse and 31 leveraged ETFs, combining for more than 4% of the U.S. ETF market.

Despite the domestic ETF market being larger than that of the European market, inverse and leveraged ETFs in Europe are not yet as prevalent as those in the United States for a number of potential reasons. In Europe, for one, there’s a relative lack of interest on the part of retail investors.

Regardless of the development of the European leveraged and inverse ETF sector being slower than this sector here, it is an area which is host to dynamic product development and increasing demand. Some long and short ETFs include:

• UltraShort Financials ProShares (SKF), up 33.1% year-to-date
• Rydex Inverse 2x Russell 2000 (RRZ), up 11.1% year-to-date
• Rydex 2x S&P Select Sector Health Care (RHM), launched July 22
• UltraShort Basic Materials ProShares (SMN), down 13.2% year-to-date
• Ultra Financials ProShares (UYG), down 50% year-to-date

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

For instance, the ProShares Ultra Oil and Gas (DIG) beefed up more than 60% through June since its early 2007 inception, only to lose 30% in less than one month’s time as oil prices slipped, reports Chris Bain for Associated Press

These types of funds retain their popularity because of their ability to make investors money, even in a down market. Money has been pouring into these ETFs as they aim to profit by taking sizable bets on a sector or the broad market using leverage. “Ultra” ETFs made up 6 of the 20 most actively traded ETFs, and each touted a daily volume above 10 million shares.

The short and ultra short ETFs are for short term hedges, and are not recommended for long term bets. The ETFs, which use futures and swap agreements, are easy to trade and can protect a portfolio. It is a good way to provide insurance without actually having to go short. They are useful for investors who do not want to sell a losing position but want to protect against further declines.

These ETFs have been successful, but they are not for everyone. Use them with caution and know when to quit. Other short and ultra short ETFs:

• ProShares Ultra Short Financials (SKF), up 24.2% year-to-date
• ProShares Ultra Dow 30 (DDM), down 88% year-to-date
• Rydex Inverse Russell 2000 (RRZ), up 5.8% year-to-date
• Rydex 2x S&P 500 (RSU), down 27.6% year-to-date

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