ProShares' Distributions at Historic Proportions

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 |  Includes: EEV, FXP, MZZ, RWM, RXD, SBB, SCC, SDD, SDK, SDP, SEF, SFK, SIJ, SJH, SJL, SKK, SMN, SSG, TLL, TWM
by: IndexUniverse

by Matthew Hougan

ProShares announced distributions on 35 of its 76 ETFs on December 22, including all but three of its inverse equity ETFs, which aim to deliver either -100% or -200% of the daily return of a benchmark index.

The announcement came just a few weeks after Rydex announced record distributions on its own inverse family of ETFs, including a near-record distribution of 86% of one fund's net asset value. The ProShares gains did not reach the 86% level, but they were still of historic proportions, ranging in size from 44.3% of one fund's net asset value (the UltraShort Industrials ETF (NYSEARCA:SIJ)) to 4.1% of another fund (the Short Financials ETF (NYSEARCA:SEF)). Eighteen of the ProShares ETFs had payouts of more than 25% of their NAV.

The distributions are listed below.

Fund Name

Ticker Symbol

Long-Term Cap Gain

Short-Term Cap Gain

Price

% of NAV

UltraShort Industrials

SIJ

--

47.85

108.08

44.3%

UltraShort Basic Materials

SMN

--

26.58

69.93

38.0%

UltraShort Utilities

SDP

--

28.42

75.39

37.7%

UltraShort Russell2000 Growth

SKK

--

39.74

109.67

36.2%

UltraShort Russell MidCap Value

SJL

--

50.35

139.79

36.0%

UltraShort Telecommunications

TLL

--

30.09

84.4

35.6%

UltraShort Russell MidCap Growth

SDK

--

47.78

134.64

35.5%

Short SmallCap600

SBB

--

32.30

91.78

35.2%

UltraShort Semiconductors

SSG

--

42.35

124.57

34.0%

UltraShort Health Care

RXD

--

29.65

91.31

32.5%

UltraShort Russell2000 Value

SJH

--

30.54

102.38

29.8%

UltraShort SmallCap600

SDD

--

28.61

97.68

29.3%

UltraShort Russell1000 Growth

SFK

--

32.96

119.62

27.6%

UltraShort Consumer Services

SCC

--

33.91

125.14

27.1%

UltraShort MidCap400

MZZ

--

23.85

88.55

26.9%

UltraShort Russell2000

TWM

--

25.01

94.79

26.4%

Short Russell2000

RWM

0.27

23.95

93.53

25.9%

Short Oil & Gas

DDG

--

24.29

97.59

24.9%

UltraShort Technology

REW

--

26.46

108.42

24.4%

UltraShort Dow30

DXD

--

16.03

73.01

22.0%

UltraShort MSCI EAFE

EFU

--

24.11

123.11

19.6%

UltraShort Consumer Goods

SZK

--

18.86

97.07

19.4%

UltraShort Oil & Gas

DUG

--

6.06

34.7

17.5%

Short MSCI EAFE

EFZ

--

16.24

105.2

15.4%

UltraShort MSCI Japan

EWV

--

12.13

87.63

13.8%

Short S&P500

SH

0.04

11.94

86.82

13.8%

UltraShort QQQ

QID

--

9.50

69.01

13.8%

Short MidCap400

MYY

1.09

10.22

83.53

13.5%

UltraShort S&P500

SDS

--

11.46

87.73

13.1%

Short Dow30

DOG

0.27

8.44

79.52

11.0%

Short MSCI Emerging Markets

EUM

--

7.66

88.98

8.6%

UltraShort Russell1000 Value

SJF

--

9.53

122.1

7.8%

UltraShort Real Estate

SRS

--

4.57

62.03

7.4%

Short QQQ

PSQ

0.21

4.04

78.88

5.4%

Short Financials

SEF

--

3.44

83.87

4.1%

Source: ProShares

Click to enlarge

The three inverse ETFs avoiding payouts were the UltraShort Financials (NYSEARCA:SKF), the UltraShort MSCI Emerging Markets (NYSEARCA:EEV) and the UltraShort FTSE/Xinhua China 25 (NYSEARCA:FXP). It's not clear why these funds avoided distributions.

Surprised By Trading

Many shareholders in the ProShares ETFs were surprised on December 23 when the funds traded down sharply, but that is simply how distributions work. For instance, for SIJ, ProShares made a distribution of $47.85/share on December 22; as a result, the fund opened down $47.85/share on the morning of December 23.

That money doesn't simply disappear. Rather, shareholders who held SIJ on December 22 will receive a cash payment of $47.85/share in their brokerage accounts by the end of this year.

Unfortunately, that cash payment is taxable. In fact, the short-term capital gains distributions are taxable as "income." That means that a shareholder who held $10,000 in SIJ as of December 23 will have to report and pay taxes on an extra $4,430 in income this year.

Any long-term capital gains distributions are taxed as long-term capital gains rates.

What's Wrong With Inverse ETFs?

The huge payouts in both the Rydex and ProShares inverse ETFs have some worried about the structure of the funds. Most ETFs are extremely tax efficient. The vast majority pay no distributions at all, and for those that do pay distributions, the amount is usually trivial.

The inverse and leveraged ETFs rely on a different structure from traditional equity ETFs, using swaps and options to gain exposure to the market rather than holding individual equities. That, and their cash-based redemption system, likely contributed to the difficult tax scenario.

The distributions are particularly onerous because the ProShares and Rydex ETFs are by and large trading vehicles. Chances are, most of the people who held these funds on December 22 did not hold these funds earlier in the year. And yet, they are being saddled with a full year of capital gains distributions.

One wonders: Given the large distributions, will taxable investors be willing to hold these ETFs in December 2009? Or will they sidestep the threat of distributions by selling the funds before the capital gains announcements are made?