William Edwards

Ultra and Inverse ETFs: The Downside of Doubling Up

I found that below the surface of “Proshares” ultra products resides an unregulated black box full of derivative contracts, a chimera of creative imagination. I voted with my dollars and stopped using these instruments. I will be buying gold instead.

It's only on the surface that “Proshares ETF Ultra Short ETF's” appear to be the product of choice for navigating a bear market. With what other instrument can you double short an Index while receiving a three percent yield? Are “Proshares” too good to be true?

Normally you and I would be severely constrained to short an index because we would need to borrow the underlying shares, pay the dividends for those shares, and manage restrictive margin requirements. A Proshare ETF such as MZZ addresses every limitation to the problem of shorting the market or an index. You need very little cash to short the market or a sector, your holdings are recorded in your account as margin eligible long positions, and instead of paying a dividend you get paid a dividend. It sounded too good to be true so I read the prospectus. I had to read the prospectus many times and the net result was that it was useless.

Because, the “Proshares” prospectus provides very little decipherable information as to structure; I was forced to postulate. I would challenge Proshares to correct this posit by providing fact and making full disclosure.

Perhaps;

LLC #1 and LLC #2 have entered into reciprocal contracts to swap cash flows based on an index. Perhaps these LLC's are off balance sheet shell companies crafted for this specific purpose. These LLC corporations and the underlying contracts are black box entities not subject to disclosure. These LLC's are not regulated. Sales of shares are put into ETF form and sold into the market to generate a cash pool from which fees are collected and interest is derived and then swapped. These shares can only be redeemed in large blocks intentionally making them illiquid as to prevent a possible a run aka Bear Stearns. A third party brokerage firm, JP Morgan, gets tasked with assigning a net asset value to these contracts. These contracts are aggressively marketed on financial TV (CNBC lists Proshares in orange ticker!). Please remember the Enron commercials and the catchphrase “Why?” Perhaps LLC #1 provides a floating interest rate to LLC #2 while LLC #2 provides LLC #1 with an equity index return. The security trades on the exchange and we believe as investors that risk has been negated entirely through netting. The regulators are nowhere to be found, they don't understand that Ponzi may be at play. What exactly are S&P Midcap 400 Swaps? Please tell me as I can only guess.

MZZ – Proshare Double Short S&P Midcap. Holdings..

Security Description
Notional Value
Market Value
Shares/ Contracts
S&P MIDCAP 400 SWAPS
(396,543,080.19)
-
(497,045.72)
MID 400 E-MINI 20/06/08
(28,632,840.00)
-
(358.00)
Net Other Assets / Cash
-
212,627,636.57
212,627,636.57

Investment Advice for the GE Hangover

I found that below the surface of “Proshares” ultra products resides an unregulated black box full of derivative contracts, a chimera of creative imagination. I voted with my dollars and stopped using these instruments. I will be buying gold instead.

It's only on the surface that “Proshares ETF Ultra Short ETF's” appear to be the product of choice for navigating a bear market. With what other instrument can you double short an Index while receiving a three percent yield? Are “Proshares” too good to be true?

Normally you and I would be severely constrained to short an index because we would need to borrow the underlying shares, pay the dividends for those shares, and manage restrictive margin requirements. A Proshare ETF such as MZZ addresses every limitation to the problem of shorting the market or an index. You need very little cash to short the market or a sector, your holdings are recorded in your account as margin eligible long positions, and instead of paying a dividend you get paid a dividend. It sounded too good to be true so I read the prospectus. I had to read the prospectus many times and the net result was that it was useless.

Because, the “Proshares” prospectus provides very little decipherable information as to structure; I was forced to postulate. I would challenge Proshares to correct this posit by providing fact and making full disclosure.

Perhaps;

LLC #1 and LLC #2 have entered into reciprocal contracts to swap cash flows based on an index. Perhaps these LLC's are off balance sheet shell companies crafted for this specific purpose. These LLC corporations and the underlying contracts are black box entities not subject to disclosure. These LLC's are not regulated. Sales of shares are put into ETF form and sold into the market to generate a cash pool from which fees are collected and interest is derived and then swapped. These shares can only be redeemed in large blocks intentionally making them illiquid as to prevent a possible a run aka Bear Stearns. A third party brokerage firm, JP Morgan, gets tasked with assigning a net asset value to these contracts. These contracts are aggressively marketed on financial TV (CNBC lists Proshares in orange ticker!). Please remember the Enron commercials and the catchphrase “Why?” Perhaps LLC #1 provides a floating interest rate to LLC #2 while LLC #2 provides LLC #1 with an equity index return. The security trades on the exchange and we believe as investors that risk has been negated entirely through netting. The regulators are nowhere to be found, they don't understand that Ponzi may be at play. What exactly are S&P Midcap 400 Swaps? Please tell me as I can only guess.

MZZ – Proshare Double Short S&P Midcap. Holdings..

Security Description
Notional Value
Market Value
Shares/ Contracts
S&P MIDCAP 400 SWAPS
(396,543,080.19)
-
(497,045.72)
MID 400 E-MINI 20/06/08
(28,632,840.00)
-
(358.00)
Net Other Assets / Cash
-
212,627,636.57
212,627,636.57