Leveraged, Short ETFs Hit the Market

In order to tap investor demand for alternative investments, ProShares is introducing eight exchange-traded funds (ETFs) that utilize leverage and short positions on key stock indices. The funds are or will be listed on the Amex and all will carry expense ratios of 0.95 percent.

Four of the new ETFs — the “ultra” group — are already on the market and have been designed to double the upside performance of the Dow Jones Industrial Average, Nasdaq 100, S&P 500 and S&P MidCap 400, respectively. The other four funds, still in the pipeline, take a more bearish approach by using short-selling techniques to deliver opposite market performance on the same indices.

While leveraged and inverse performance products have been mainstays of the closed-end and mutual fund business for some time, they are new to the ETF marketplace. In fact, ProShares is affiliated with ProFunds Group, which offers mutual funds that have the same leveraged and short strategies but at a higher price to investors. According to the prospectus, the Ultra Dow 30 ProFund charges an expense ratio of 1.51 percent for its investor share class and 2.51 percent for its service share class. However, the ETF version is only charging 0.95 percent.

Although the ProShares ETFs could put pressure on the parent company’s mutual fund business, the long-term impact remains to be seen. “We look at ProShares as the start of a whole new chapter in the development of ETFs,” says ProShare Advisors CEO Michael Sapir. “In times like these, when the markets haven’t necessarily offered a lot of help, we’ve seen investors interested in pursuing more sophisticated strategies — for example, hedging to manage risk. Now, to execute that strategy, they no longer have to go through the process of setting up margin accounts or covering margin calls. They can simply trade ProShares.”