Traditional mutual funds have restrictions on margins and short trading. As a rule, when it comes to investment strategies for retirement, education and other long-term investments, traditional funds can be the best choice. However, with the introduction of index tracking funds (funds that track the performance of the indexes), mutual fund trading began to attract more and more speculators. Following the demand of active traders, the stock market has developed inverse mutual funds (funds that profit in Bear markets) and dynamic mutual funds (funds that use dynamic asset allocation strategies).
As a rule, dynamic mutual funds utilize leveraged instruments, such as futures contracts and options on securities, futures contracts, and stock indices. When it comes to the index tracking funds, dynamic index funds (also known as double index funds and ultra index funds) track the double performance of the corresponding benchmark indexes. As an example, the Rydex Dynamic S&P 500 Fund performance corresponds to 200 percent of the daily performance of the S&P 500 index (^SPX). If the S&P 500 made a one percent upward move by the end of the session, the Rydex Dynamic S&P 500 Fund would report a 2% profit. Similarly, if the S&P 500 index declined by one percent by the end of the session, the Rydex Dynamic S&P 500 Fund would report a 2% loss. However, due to the fund adjustment, the dynamic index funds may report return that differs from the index performance in some cases.
Mechanism of the dynamic index funds could be compared to trading stocks on margin. Like stock margin trading, the dynamic index funds are subject to margin requirements. The difference is that stocks can be traded during the trading session and funds can be traded once a day at the market close. The other difference (in favor of funds) is that a retirement portfolio cannot be used to trade stocks on margin, although it can be used to trade dynamic mutual funds.
There are many different families of dynamic index funds beginning with the double Exchange Traded Funds (ETFs) and finishing with Rydex, Potomac and other dynamic funds. The majority of dynamic mutual funds are available through many online discount brokerages. Some of the popular Rydex Dynamic funds are listed below:
By V. K. for MarketVolume.com