When the markets are in a downward spiral for weeks at a time, it can be hard to shake the itch to sell off your holdings. There’s a better option than running away, though; these days, there are a number of exchange-traded funds (ETFs) that provide investors the opportunity to benefit from market declines.

These funds have found their sweet spot in the crisis-challenged market of 2008. But they're not for the most risk-averse investors, as their ride can be as terrifying as the roller coaster at a two-bit carnival. Investors who were willing to take the ride this fall saw some eye-popping returns, though, and even for conservative investors, these funds offer some unique portfolio-diversification benefits.

Fund specifics
Varying based on your willingness to take on volatility, ProShares offers ETFs that allow investors to ramp up their returns from the decline of certain indices. Three of these funds seek inverse returns of the market as defined by Dow Jones indexes. The funds allow an investor to take positions with no time restrictions and limit the amount of a total loss to the initial investment -- unlike a short position, which can have unlimited risk. Although the ETFs are designed to track equity indexes, they hold positions only in financial instruments, including derivatives, and do not hold the underlying stocks of the index.

The Short Dow30 ProShares ETF (NYSE:DOG) aims to produce a daily return equal to the inverse (opposite) of the Dow Jones Industrial Average. This is the least volatile of the three funds; the others seek enhanced returns that double those of their designated benchmark. The UltraShort Dow30 ProShares (DXD), for example, looks for returns that are twice the inverse of the daily performance of the DJIA. Because the Dow is an average rather than an index, the stocks with the highest share prices -- at the moment, IBM (NYSE:IBM), Chevron (NYSE:CVX), and ExxonMobil (NYSE:XOM) -- have the biggest impact.

Although, like the other two funds, it does track a Dow index, the UltraShort Industrials ProShares (SIJ) is different. It tracks twice the inverse of the daily performance of the Dow Jones U.S. Industrials Index, which is a much more diversified index incorporating more than 250 companies. Unlike the DJIA, the top holdings in this index are GE (NYSE:GE), United Technologies (NYSE:UTX), and 3M (NYSE:MMM). The difference in the similar-sounding indexes may not seem like a big deal, but a look at the year-to-date returns for the two funds shows a startling divergence.

Fund facts

Fund

1-Year Return

Expense Ratio

Assets

DOG

36.9%

0.95%

$167 million

DXD

54.7%

0.95%

$683 million

SIJ

106.9%

0.95%

$113 million

Sources: Morningstar, Yahoo! Finance.

Fund prospects and risks
These funds typically use derivatives rather than buying actual shares. As a result, during extreme market conditions, their performance could differ markedly from the benchmarks they track, especially if the fund’s manager is unable to execute the fund's strategy effectively.

Lately, there have been wide variations in the returns of the market from day to day, and that volatility is magnified by the double-inverse funds. Investment losses can be rapid and painful for investors in these funds, but rewards can also be large.

Portfolio fit?
Most conservative investors should probably pass on these funds, although even an extremely risk-averse investor might use these as part of an overall hedging strategy. The funds' ability to realize significant positive returns in down markets makes them extremely attractive at a time when most other investments are declining in value -- especially in IRAs and other retirement accounts where short-selling is often not permitted.

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