Financial advisors often have to field clients’ questions on whether it’s a bull or bear market and, in either event, whether they should be buying or selling. Regardless of the answer given, one eternal truth will always live: There’s money to be made in any kind of market.
To that end, ProShares Advisors in conjunction with the American Stock Exchange (Amex) recently introduced 12 exchange-traded funds (ETFs) that apply leverage and short positions to key stock indices. No matter whether equities are in bull or bear mode, the ProShares can be utilized to aggressively grow capital or to hedge portfolio positions. Ultimately, the decision to play either defense or offense is up to the advisor, depending on his or her outlook (and, of course, the client’s needs).
Four of the new ETFs are designed to double the upside performance of the Dow Jones industrial average, Nasdaq 100, S&P 500 and S&P MidCap 400. Another four funds take a short or “bearish” approach by attempting to deliver opposite market performance on the same indices, while the remaining four funds aim to deliver highly concentrated shorts by doubling the associated benchmark’s downside performance.
While leveraged and inverse performance has been a standard feature of closed-end and mutual fund products for some time, they are new to the ETF marketplace. In fact, ProShares is affiliated with ProFunds Group, which already offers mutual funds that have the same leveraged and short strategies. Now that the company is looking to make a big impact on how investors approach their ETF strategies, Research recently met with ProShares CEO Michael Sapir to discuss this and other related news.
Research: Why did ProFunds decide to enter the ETF business?
Sapir: We viewed ProShares as an opportunity to provide our indexing expertise to address unmet investor needs in the ETF market. ProShares are the only ETFs that provide built-in short or magnified exposure to market indices without the need for a margin account. For ETF investors, they make sophisticated strategies simpler to execute.
The fact that four of the ProShares use leverage is unique to ETFs. Many closed-end funds use leverage; how are the ProShares different? Also, how are the ProShares obtaining their leverage?
The major difference is that ProShares are indexed and closed-end funds generally are not. And while closed-end funds typically use leverage tactically, ProShares uses leverage to magnify the return of an index. On the long side, Ultra ProShares attempt to provide performance that doubles the daily performance of their underlying indices. On the short side, the UltraShort ProShares attempt to double the inverse of an index’s daily performance. So, an investor can look at an index’s daily return and know how the corresponding ProShares should have performed that day.
Also, with an ETF, differences between the net asset value (NAV) and the market price are usually small because authorized participants will attempt to arbitrage any premiums or discounts that exist. Closed-end funds don’t have a mechanism to bring the market price of its shares back in line with its NAV.
To obtain leverage, ProShares may invest in equities and other financial instruments like futures contracts, swap agreements, options on futures contracts, forwards, etc.
Is this a better way for bears to play the market versus outright shorting?