Key Points
How bear market stock funds mitigate periods of economic downturns.
The best mutual funds for a bear market.
Many bear market ETFs are leveraged, meaning they’re constructed to amplify the losses and returns.

As investors search for safe havens in volatile markets, bear market funds are gaining popularity as a diversified asset class designed to withstand exceptionally volatile markets. While bear market funds can be appealing during periods of economic downturn due to their potential to produce returns against market movements, these funds can also be exceptionally volatile and risky. 
Read on to learn more about bear market funds, how they are managed and how you can use these funds to complement a more complete overall portfolio.  Get stock market alerts:Sign Up
Key Takeaway
Bear market funds are stock market funds designed to mitigate overall portfolio performance in poorer economic climates. These funds are most often created with the intention of seeing the best performance when the overall market is down by more than 20%. 
What is a Bear Market Fund? 
In the context of the stock market, a bear market is a financial market in the midst of stress and decline. Though specific definitions of when a bear market arrives can vary by definition source, most agree that the telltale sign of a bear market is when the overall market declines by at least 20%. Historically, previous bear markets have hit a low point of 34% on average. The opposite of a bear market is a bull market, in which the entire market sees an increase in prices. 
While all bear markets end eventually, some investors take preventative steps to mitigate loss during these periods of economic loss. Bear market ETF and mutual funds take a proactive approach to bear markets by using active selling strategies likely to increase the fund’s assets if the overall market sees a loss. 
Each market fund uses its own strategy to combat losses, with popular strategies including using higher-risk assets and activities like options and futures contracts, as well as scalping and short-selling. The best funds for a bear market will vary over time, thanks to the success or failure of the upper management team. Some examples of top bear market funds currently trading on major exchanges include: 

ProShares UltraPro Short QQQ ETF: The ProShares UltraPro Short QQQ ETF (NASDAQ: SQQQ) is an exchange-traded fund with inclusions that aim to return three times the inverse of the Nasdaq 100 Index. In other words, this fund is designed to return 3% in growth for each 1% decline the Nasdaq 100 sees. Conversely, if the Nasdaq 100 sees an increase in value, the ProShares UltraPro Short QQQ ETF will see losses. In March of 2024, the SQQQ had more than $3 billion in assets under management, making it one of the largest bear market index funds. 

ProShares Short S&P500: The ProShares Short S&P500 (NYSE: SH) is another of the top index funds for a bear market, utilizing short-selling strategies to reverse the returns of the S&P 500 index fund. It had a total market capitalization of $1.42 billion and a total of $1.04 billion in assets under management as of March 2024, making it another large-cap ETF option. 
Direxion Daily S&P 500 Bear 3X Shares: The Direxion Daily S&P 500 Bear 3X Shares (NYSE: SPXS), as the name suggests, seeks to return triple the reverse of the S&P 500. This powerful leveraged fund can result in significant gains during periods of extended economic downturn but may be a riskier investment due to its leveraged assets. It had a total of about $550 million in assets under management as of March 2024, making it a smaller option than both of the best bear market funds from ProShares. 

Understanding Bear Market Funds
How exactly do bear market stock funds mitigate periods of economic downturns? These funds accomplish their goals by taking inverse positions on major assets that make up large, total market indexes. Many of the best bear market index funds track the S&P 500 stock market index, which is a list of the 500 most influential companies in the United States.  The strategies that bear market funds use to achieve inverse returns of major indexes vary depending on the fund’s goals. One common strategy is short selling, in which the fund borrows shares of a stock or an ETF from a broker and sells them on the open market at the current price. The fund then waits for the price of the borrowed shares to decline, buys them back at a lower price and returns the shares to the broker, profiting from the price difference. This allows the fund to profit when the underlying index or market declines.
Bear market funds may also use derivatives such as futures contracts, options or swaps to achieve inverse exposure to the market. For example, a fund may purchase put options on an index or a stock, which gives the fund the right to sell the underlying asset at a predetermined price within a specified period. If the index or stock price falls below the strike price, the put options gain value, offsetting losses in the fund’s other holdings. These active management strategies are usually detailed in the fund’s prospectus, which you can review on the holding company’s website. 
Some bear market funds are structured as inverse leveraged ETFs, aiming to amplify the inverse index’s standard returns. These bear market funds usually aim to produce multiples (such as 2x or 3x) of the inverse daily performance of the index they track. However, it’s important to note that leveraged ETFs can be riskier due to the use of leverage, making them unsuitable assets for those with lower risk tolerance. 
Types of Bear Market Funds

ETFs
Exchange-traded funds (ETFs) are investment funds that trade on stock exchanges, providing investors with diversified exposure to various assets like stocks, bonds, commodities and currencies. These funds combine the features of mutual funds and individual stocks, offering flexibility and lower costs compared to traditional mutual funds. ETFs can be bought and sold throughout the trading day at market prices, making them popular among investors seeking efficient and transparent investment vehicles. 
 
Bear market ETFs are popular options for investors, providing instant exposure to some of the best stocks to buy in a bear market without the need to evaluate individual items. Many bear market ETFs are leveraged, meaning that they’re constructed in a way that amplifies the losses and returns of the major index they track. Leveraged bear market ETFs can provide enhanced returns in periods of downturn but can also see sharp losses when the market improves. These assets are particularly risky in the event of a bear market rally, in which investors can see higher than average volatility. 
Mutual Funds
Mutual funds are investment vehicles that pool money from multiple investors in a diversified portfolio of stocks and other assets, similar to an ETF. These funds are priced once a day after the market closes and are bought and sold directly through the fund company, while ETFs trade throughout the day like normal stocks. Mutual funds usually offer greater tax efficiency but provide less flexibility to investors due to their limited purchase routes and available accounts. Examples of major bear market mutual funds include the Rydex Inverse Nasdaq-100 and the Grizzly Short.
Index Funds
Most bear market funds are structured as index funds. Index funds are mutual funds, ETFs or other collections of stocks that aim to replicate the performance of a market index, a benchmark of stocks used to measure a specific segment of the economy. Common stock indexes that an index fund may replicate include the S&P 500 and the Dow Jones Industrial Average. Reviewing the underlying index of each bear market fund you’re considering is an important step in research before investing. 
Pros and Cons of Bear Market Funds
Before investing, understanding the pros and cons of investing in the top bear market ETFs and mutual funds is essential. Anticipate and plan for the following potential for both upsides and downsides when investing in these often volatile assets. 
Pros 

Diversification: Bear market funds use unique assets not normally incorporated into ETFs and mutual funds in large portions, such as put options. This helps mitigate the overall effects of bear markets and their multiple stages with assets you might have trouble finding included in other funds. 
Hedging option: Hedging is a market strategy that involves strategically investing in assets that are likely to increase in value if the general market declines. Bear market fund ETFs and mutual funds provide an institutional, traditional hedging option with easier liquidation than alternative assets like real estate and precious metals. 

Liquidity and accessibility: Many bear market fund options are available as ETFs, providing investors with liquidity and easy access to short or inverse strategies without the complexities of directly short-selling securities. They also provide easier buying and selling opportunities than the best mutual funds in the bear market, which do not trade throughout the day like stocks. 

Cons

Higher volatility: Bear market funds can be highly volatile, especially leveraged funds that aim for amplified inverse returns. This volatility can lead to significant fluctuations in fund value and increased risk for investors.
Decreases when the market is thriving: Bear market funds use strategies like short selling to reverse the overall market’s return or underlying market index. As a result, these funds should only be used strategically, making them less viable long-term investments. 
Higher fees and expense ratios: The best index funds for a bear market in terms of performance usually use active buying and selling strategies to mitigate market changes. This usually results in higher expense ratios to compensate fund managers and professionals, which you’ll need to take…