ProShares work by offering specialized Exchange Traded Funds (ETFs) that employ advanced strategies like smart beta to deliver amplified or inverse daily returns relative to their underlying benchmarks. They blend active and passive investment styles, aiming to enhance the benefits of both by providing targeted exposure to market movements.
Understanding ProShares: Beyond Traditional ETFs
Unlike traditional ETFs that typically track an index one-to-one, ProShares are designed to provide magnified or inverse exposure to an index's daily performance. This is achieved through sophisticated investment strategies and the use of financial instruments such as futures contracts, options, and swap agreements (collectively referred to as financial derivatives).
Smart Beta Strategies
ProShares utilize smart beta strategies, which are a rules-based approach to investing that aims to achieve specific investment objectives beyond simple market-capitalization weighting. By blending elements of active management (factor selection, specific rules) with the transparency and cost-efficiency of passive investing, ProShares seek to offer unique return profiles.
Key Product Types and How They Operate
ProShares primarily offer two main types of products that cater to different market views: leveraged ETFs and inverse ETFs.
1. Leveraged ETFs: Amplifying Daily Returns
Leveraged ProShares aim to multiply the daily performance of a specific index or benchmark. For instance, if an index moves up by 1%, a 2x leveraged ETF tracking that index would aim to increase by 2% on that same day.
- Objective: To achieve a multiple (e.g., 1.5x, 2x, 3x) of the daily return of an underlying index.
- Mechanism: They use financial derivatives to create this amplified exposure.
- Example: A popular product is the ProShares Ultra S&P500, an ETF that specifically aims to double the performance of the S&P 500 Index on a given day. This means if the S&P 500 rises 1% in a day, the Ultra S&P500 would target a 2% gain.
2. Inverse ETFs: Profiting from Declines
Inverse ProShares are designed to move in the opposite direction of their underlying benchmark. They are used by investors who anticipate a decline in a particular market segment or index.
- Objective: To provide returns that are the inverse (opposite) of the daily performance of an underlying index.
- Mechanism: They use derivatives to take short positions or otherwise profit as their benchmark falls.
- Example: An inverse ETF seeks to increase in value as its benchmark drops. If the S&P 500 Index falls by 1% in a day, an inverse S&P 500 ETF would aim for a 1% gain on that day. Some inverse ETFs also offer leveraged inverse exposure (e.g., -2x or -3x).
How ProShares Products Differ
The table below highlights the core differences in objective and how leveraged and inverse ProShares products operate:
| Feature | Leveraged ProShares | Inverse ProShares |
|---|---|---|
| Primary Goal | Multiply daily index returns | Profit from daily index declines |
| Market Outlook | Bullish (expecting market to rise) | Bearish (expecting market to fall) |
| Exposure Type | Amplified positive | Inverse (negative) |
| Example | Ultra S&P500 (2x S&P 500 daily return) | Short S&P500 (-1x S&P 500 daily return) |
| Core Strategy | Uses derivatives for magnified long exposure | Uses derivatives for short exposure |
Important Considerations for Investors
It's crucial to understand that ProShares, especially their leveraged and inverse offerings, are designed for daily objectives. Their performance is reset at the end of each trading day. This daily reset can lead to significant deviations from the stated multiple over periods longer than one day, due to the effects of compounding and volatility.
- Daily Rebalancing Impact: Due to daily rebalancing, holding these ETFs for extended periods (weeks, months, or years) can result in returns that diverge significantly from the target multiple of the underlying index's long-term performance. This phenomenon is often referred to as "volatility decay" or "compounding risk."
- Volatility: These products are inherently more volatile than traditional ETFs and are typically suited for sophisticated investors or traders with short-term market views.
- Liquidity: Like other ETFs, ProShares trade on major exchanges throughout the trading day, offering liquidity.
ProShares provide investors with tools to express strong, short-term convictions about market direction, whether for magnification of gains or for hedging against downturns.
