ProShares Launches UltraShort TIPS Fund

Feb.11.11 | About: ProShares UltraShort (TPS)

By Stoyan Bojinov

ProShares, the largest manager of short and leveraged exchange traded funds, announced the launch of the first product offering leveraged inverse exposure to U.S. Treasury Inflation-Protected Securities (TIPS) yesterday. ProShares added to its lineup the UltraShort TIPS ETF (NYSEARCA:TPS), bringing its total number of funds up to 115, covering investment strategies from inverse equities to leveraged bonds and everything in between.

The new fund seeks daily investment results that correspond to twice (200%) the inverse (short) of the daily performance of the Barclays Capital U.S. Treasury Inflation Protected Securities (TIPS) Index (Series-L) (-200%). The underlying Barclays (TIPS) Index includes all publicly issued, U.S. Treasury inflation protected securities that have at least one year remaining maturity, are non-convertible, are denominated in U.S. dollars, are rated investment grade (at least Baa3 by Moody’s Investors Service or BBB- by S&P), are fixed rate, and have more than $250 million or more par value outstanding. Additionally, the underlying index is weighted by the relative market value of all securities meeting the above stated criteria, and its holdings are updated on the last calender day of each month.

It is important to understand that this fund is only appropriate for holding during short time periods; it seeks to achieve its stated investment objective over just one trading day. This means that TPS is designed as more of a “trading instrument," as opposed to a traditional “buy-and-hold” product. Leveraged and inverse funds entail significant risks that are often overlooked by many investors, and it is best to understand the risks thoroughly before adding the fund to a portfolio.

TPS will invest its assets in derivatives that are deemed to have the same daily return characteristics as twice the inverse of the daily return of the underlying Barclays TIPS Index. In addition, assets not invested in derivatives will typically be held in money market instruments. More specifically, the fund will invest in short-term cash instruments that have a maturity of less than 397 days and are rated to be of a high-quality credit profile. TPS will remain fully invested in financial derivatives at all times providing exposure to the underlying index, without regard to market conditions, trends, or direction (see Fund Prospectus). Since the fund is reliant on using derivatives to achieve its objective, at certain times these financial instruments may lead to a less-than-perfect correlation with the underlying index, in which case the fund’s performance will vary from what is theoretically expected.

Given the ongoing concern for inflation and expectations for tougher times ahead, TPS stands out as quite a compelling investment strategy from a contrarian perspective. While the global economic recovery is still gloomy overall, there have been numerous signs that the recovery is progressing in both developed and emerging markets. Numerous central banks around the globe including those of China, India and South Korea have started to tighten interest rates to ensure that inflation does not spiral out of control. Also, commodity prices have been surging over the past year and many are beginning to make bets that they are due for a correction. In fact, gold which is traditionally seen as a hedge against inflation, has been struggling to march higher lately, perhaps hinting that worries of inflation are a bit overdone. Given that TIPS move with inflation, TPS makes for an interesting addition to an already defensive portfolio, since the fund is expected to rise when inflation proves to be far less of a problem than many are expecting, suggesting that the fund could be an excellent choice for those seeking to bet on deflation or for traders seeking to hedge their bets against other inflation prone trading instruments.

Disclosure: No positions at time of writing.

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