ProShares Launches 12 More Leveraged and Inverse-Leveraged ETFs

ProShares launched 12 new leveraged and inverse-leveraged exchange-traded funds onto the American Stock Exchange this morning, bringing the total number of ProShares ETFs currently trading to 52.

The new funds provide 200 percent upside (“Ultra”) and 200 percent downside (“UltraShort”) exposure to Russell’s six main style indexes, and are:

Fund	Ticker	Exchange	Expense Ratio
ProShares Ultra Russell 1000 Growth	UKF	AMEX	0.95%
ProShares UltraShort Russell 1000 Growth	SFK	AMEX	0.95%
ProShares Ultra Russell 1000 Value	UVG	AMEX	0.95%
ProShares UltraShort Russell 1000 Value	SJF	AMEX	0.95%
ProShares Ultra Russell MidCap Growth	UKW	AMEX	0.95%
ProShares UltraShort Russell MidCap Growth	SDK	AMEX	0.95%
ProShares Ultra Russell MidCap Value	UVU	AMEX	0.95%
ProShares UltraShort Russell MidCap Value	SJL	AMEX	0.95%
ProShares Ultra Russell 2000 Growth	UKK	AMEX	0.95%
ProShares UltraShort Russell 2000 Growth	SKK	AMEX	0.95%
ProShares Ultra Russell 2000 Value	UVT	AMEX	0.95%
ProShares UltraShort Russell 2000 Value	SJH	AMEX	0.95%

Bill Seale, chief investment officer for ProShares, said that the new listings would both satisfy existing ProShares users and attract new ones, allowing people to over- and underweight different styles within their portfolios.

The funds join 38 ProShares ETFs that are already trading, including funds tied to broad market indexes like the Dow Jones Industrial Average, NASDAQ-100, and S&P 500; size indexes like the S&P MidCap 400 and S&P SmallCap 600; and eleven Dow Jones sector indexes. For each index, ProShares offers leverage (200 percent) and inverse-leveraged (-200 percent) ETFs.  For the broad market and size indexes, ProShares also provides straight short (-100 percent) ETFs. Seale said that the inverse-leveraged funds were more popular than the straight short funds, and suggested that ProShares will not issue additional straight short ETFs.

What’s Next?

The wave of leveraged and inverse-leveraged ETFs, however, will continue. ProShares already has more than 20 additional funds in registration, including a full suite of S&P style funds and funds tied to the Biotech and Precious Metals business

The obvious gap in the line-up is international funds, which would likely be a major hit with volatility seeking investors.

“We are working on it … diligently,” said Seale, of the overseas products. “They were not in the initial exemptive application with the Securities and Exchange Commission, so we will have to amend that application to include them. But it is something we are extremely interested in, and something that our shareholders continue to be interested in. We are working on it.”

Already, ProShares has over $3 billion in assets for its funds, which trade in incredible volumes. The ProShares UltraShort QQQ (AMEX: QID), the most popular fund, with over $1.1 billion in assets, boast an average daily trading volume of over 4.3 million shares, according to Yahoo! Finance. That’s a fair cry from the 110 million shares of the Nasdaq-100 Tracking Stock (NDAQ: QQQQ), but compared to most newly listed ETFs, which struggle to rise above the 100,000 share mark, 4.3 million is impressive.

Interestingly, despite all this volume, ProShares says that its asset counts on a day-to-day basis are relatively stable.

“There tend to be redemptions in the context of net creations,” said Scott Ebner, head of new product development at the AMEX. “There are redemptions, but those are part of an ongoing process of net creations.”

In other words, for every two folks selling the ETFs, there are three or more stepping in to buy.

Taxes

The one thorn in the ProShares story is taxes. Last year, holders of the Ultra ETFs got walloped by short-term capital gains:

Fund	Ticker	ST-Gain	LT-Gain	Dividend	Share Price  12/29/06
Ultra QQQ	QLD	$5.13986	$0.17313	$0.10837	$81.04
Ultra Dow30	DDM	$5.96495	$0.18300	$0.65286	$83.00
Ultra S&P500	SSO	$3.25215	$0.11861	$0.42631	$86.30
Ultra MidCap 400	MVV	$3.76082	$0.17208	$0.41405	$78.43

 

A five-dollar gain on an $80 fund is quite something, especially in a market like ETFs, where any capital gain raises eyebrows.

“It’s the nature of the beast,” explained Seale. “You get that tax-treatment when you go in to get the leverage.”

Of course, he’s right – to an extent. The ProShares funds achieve their leveraged exposure through a combination of futures and swaps. All futures positions are “marked-to-market” at year end, meaning you can’t defer capital gains, and any profits are taxed as 60 percent long-term gains and 40 percent short-term gains. Swaps, on the other hand, are taxed as 100 percent short-term gains.

Looking at the ratio of short- to long-term gains for 2006, however, it’s clear that ProShares is relying almost entirely on swaps to achieve its exposure.

“People are interested in our funds for the tactical uses and the gains they can receive,” said Seale. “I think they are not as interested in tax efficiency as holders of traditional ETFs like a SPDR.”

Still, the group said it is looking at the problem seriously.

“We are looking for ways to minimize the gains by spreading them out,” said Bob Holderith, vice president and national sales manager at ProShares. “I don’t know if there is a real or easy solution to the problem, but we are on the case, and are looking at alternatives vigorously.”

That could become a more pressing concern later this year if – as expected – Rydex launches a competing slate of leveraged ETFs. While first-mover advantage should lock in the bulk of product flows for ProShares, if Rydex finds a more tax-efficient mousetrap, that could turn the tides a bit

Cannibalization Update

On a different note: When the first ProShares were launched, everyone – including this author – suggested that they would eat substantially into the ProFunds mutual funds business. Those mutual funds are substantially identical to the ETFs, expect they have higher expense ratios and only once-daily liquidity. There seems to be a continuing market for the funds, however. Seale said that the mutual funds continue to grow assets as well.

Go figure.

Comments

[Malkiel:]

I'm not sure why the cap gains issue with ETF's would be different from the cap gains issue with mutual funds--if you're buying for a taxable account, you expect to pay som cap gains from dividends or share distributions, don't you? The key is to be using these inside of tax-deferred accounts, where you have maximal flexibility.

2007 Feb 22 05:35 PM

[James Cullen:]

Just one small correction - the ProShares ETF that trades under the "QLD" symbol is an ultalong version of QQQ. The ultrashort ETF trades under the ticker "QID".

2007 Feb 22 07:06 PM

[SA Editor J...:]

James,

Thanks for pointing that out. I've changed the ticker symbol to 'QID' to reflect your correction.

All the best,
Jonathan Liss
SA Editorial Team

2007 Feb 23 04:11 AM