Looking at the two year chart on the QID (Ultra Short QQQ Powershares) one has to wonder who has been buying. The chart tells an interesting story of the pain that investors who have been short the markets have experienced over that time period. QID is leveraged, and designed to make a 2:1 move in the opposite direction of the QQQQ (the fund that holds all the stocks in the NASDAQ-100 index) which is accomplished through the use of derivatives and other financial tools. Given the past history that the broader markets trend up, buying into the QID would seem like an unwise decision… but is it? That is exactly what I wish to examine.

Generally, the rule is that the value of stock and the underlying company will rise over time. This does not bode well for the long term outlook of a grouping of stocks that is ultra short like QID, so who will buy it?
Actually, many different types of investors and traders. Some people will put a certain percentage of their portfolio into QID as a hedge against a decline in stock prices. Others will buy QID shares when they fell that the market is temporarily overvalued and due for a short-term correction. QID is also an investment device for people who are looking for a short-term solution in a down market. In a bull market, as the chart shows, QID is obviously not a good choice if you are seeking to maximize returns, but we haven’t really had the opportunity to see how QID acts when the markets suffer a prolonged downturn.

In order to fully understand why a person would want to invest in a short fund or index you may want to read this article. As stated there, investing while betting on the downside is often taking the losing side of the fight. Even with these grim possibilities, I still feel that given the right opportunity money can be made investing in QID and it can be a very important asset to hold in order to have a portfolio that can withstand bear markets. Along with my thesis that, in particular, tech has become overvalued, I purchased QID today. With Google’s (GOOG) announcing earnings afterhours that missed expectations, I believe that should serve as a catalyst for a pullback and allow me to profit.

Disclosure: Author is long QID.