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Bear Market, Volatility, and Trading Funds and ETFs

Bear market funds bet against the stock market by taking short positions in a basket of stocks, or delivering the net return of a short basket of stocks. Some funds in this category also take long bets, but their net beta to broad equity indexes is -0.3 or lower. Most funds in this category are passively managed index funds, which can be leveraged.
Volatility is currently only a category among ETFs. Most mutual fund and ETF categories are the same, except when there are not enough funds to create a category. Volatility funds trade stock market volatility by tracking VIX (CBOE Volatility Index) futures. Some products are long volatility futures (short-term or mid-term in expiration) while others take short positions.

Morningstar's Trading categories also currently apply only to ETFs. The categories are as follows: Trading—Leveraged (Equity, Debt, or Commodity), Trading—Inverse (Equity, Debt, or Commodity), and Trading—Miscellaneous.

Funds in these categories track the leveraged or inverse return of an index, usually over a short-term (daily or monthly) compounding period. The compounding frequency can cause returns to diverge from the index over longer periods of time, which is why these funds are generally used for short-term trading.

Future mutual fund or ETF categories will arise as alternative products proliferate in liquid, regulated structures. For example, Morningstar has global macro or event-driven hedge fund categories, but very few mutual funds or ETFs follow these strategies. Global macro funds use derivatives such as futures to take long or short bets on macroeconomic events, while event-driven funds trade on corporate events such as spin-offs, restructurings, or management changes.
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