Leverage and low prices help heat up hot funds

By
John Waggoner, USA TODAY
September 23, 2009, 9:29 PM ET
2 min read

— -- Suddenly, the 100% club isn't so exclusive anymore.

An astonishing 426 stock mutual funds have soared 100% or more since the Standard & Poor's 500 index bottomed March 9. The average stock fund is up 65%.

The top-performing fund, Direxion Financial Bull 3X, has rocketed to a 560% gain, according to Lipper. The fund uses futures and options to gain 3% on days when the Russell financial services index gains 1%.

The hottest fund that doesn't use leverage, Oceanstone, has gained 370%. The tiny $2.5 million fund made a big hit with Dollar Thrifty Automotive, up 1,919% the past six months, and Avis Budget Group, up 1,538%.

What makes the hot funds hot:

•Lots of leverage. Many of the top performers, such as Direxion Financial Bull 3X, goose their returns through futures and options. The ride is great on the way up and hell on the way down. Its bear market equivalent, Direxion Financial Bear 3X, falls 3% on days when the Russell financial services index gains 1%. A $10,000 investment in the fund on March 9 would be worth $195 — a 98% loss. To get back even, you'd have to gain more than 5,000%.

•Low, low prices. Some of the hottest funds took big hits in the bear market. Financial services funds, for example, have jumped an average 119% since the bull market started. But they fell 70% in the bear market. "It makes perfect sense," says Russel Kinnel, director of mutual fund research at Morningstar, the Chicago investment trackers. "The best stuff was the stuff that was oversold the most."

•Sector savvy. Fidelity Select Automotive has driven to a 244% gain. And the SPDR S&P Metals and Mining ETF uncovered a 129% gain.

•International allure. Emerging markets have soared since the bull market started, and so have the funds that invest there. For example, the Market Vectors Indonesia index fund has leapt 171%.

The 100% club isn't limited to tiny funds. The $33.2 billion Dodge & Cox International stock fund, for example, has gained 102%. Other winners:

•Fidelity Value, with $7.5 billion, up 105%.

•Oakmark International, $3.8 billion, up 102%.

•Vanguard REIT Index, $3.2 billion, up 112%

The 100% club has its risks. The last time a large number of funds gained 100% or more in a year was 1999, during the dot-com bubble.

The average technology fund is still down 25%.