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Understanding Leveraged and Inverse Funds

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Presentation on theme: "Understanding Leveraged and Inverse Funds"— Presentation transcript:

1 Understanding Leveraged and Inverse Funds
Louis Mayberg President, ProFunds Group

2 To get a prospectus Carefully consider the investment objectives, risks, and charges and expenses of ProShares or ProFunds before investing. This and other information can be found in the summary and full prospectuses. Read them carefully before investing. For a ProShares prospectus, visit proshares.com. For a ProFunds mutual fund prospectus, visit profunds.com. Most ProShares ETFs and many ProFunds employ leveraged investment techniques that magnify gains and losses and result in greater volatility in value. Each Ultra and Short ProShares ETF and leveraged or inverse ProFund seeks a return that is a multiple or inverse multiple (e.g. -200%) of the return of an index or other benchmark (target) for a single day. Due to the compounding of daily returns, Ultra and Short ProShares’ and leveraged or inverse ProFunds’ returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period. Investors should monitor their holdings consistent with their strategies, as frequently as daily. For more on correlation, leverage and other risks, please read the ProShares or ProFunds prospectus. “ProFunds Group” includes ProFunds mutual funds and ProShares ETFs. ProFunds are distributed by ProFunds Distributors, Inc. ProShares registered under the Investment Company Act of 1940 are distributed by SEI Investments Distribution Co. (One Freedom Valley Dr., Oaks, PA 19456), which is not affiliated with ProFunds Group or its affiliates.

3 Agenda 1) ProFunds Group history 2) Understanding leveraged and inverse funds 3) Trends in ProShares ETF flows

4 Leveraged and inverse funds and ETFs: History and profile
Leveraged and inverse mutual funds introduced in 1993 Grew to over 100 funds with $10 billion in assets ETFs introduced in 2006 in the U.S. Today more than 178 U.S. traded ETFs have assets > $31 billion with daily volume of > $18 billion1 A wide range of leveraged and inverse funds spanning a variety of asset classes and market segments Internationally, 186 leveraged and inverse ETPs with assets > $10 billion2 Source: Bloomberg, March 2010 Bloomberg, January 2010

5 Leading manager of leveraged and inverse funds
13 years of experience in managing leveraged and inverse funds The first in the U.S. to offer leveraged and inverse ETFs $31 billion in assets as of 3/31/10 64 mutual funds 51 variable life funds Classic Ultra Inverse UltraSector Non-equity Access 99 ETFs 12 Commodity & Currency ETFs Ultra (2x) UltraPro (3x) Short (-1x) UltraShort (-2x) UltraPro Short (-3x) Alpha The leader in leveraged and inverse funds* *As of 6/30/2009 Source: Lipper, based on a worldwide analysis of all of the known providers of publicly traded funds in these categories. The analysis covered ETFs, ETNs, and mutual funds by the number of funds and assets .

6 Rapid asset growth November 1997 – March 2010 $ billions

7 ProFunds Group The world’s leader in leveraged and inverse funds1
ProShares is a leading ETF provider The nation’s 5th largest ETF provider2 and 7th largest ETF provider in the world3 Ranked 3rd among ETF companies in shares traded5 8 of the top 25 most-traded ETFs in 20094 Over $2.7 trillion were traded in 2009 using ProShares4 ProShares manages 75% of the nation’s leveraged and inverse ETFs6 1 Source: Lipper, based on a worldwide analysis of all of the known providers of publicly traded funds in these categories. The analysis covered ETFs, ETNs, and mutual funds by the number of funds and assets (as of 6/30/2009). 2 Source: Bloomberg, based on assets for 12/31/2009. 3 Source: BlackRock report “ETF Landscape: Industry Review” for December 2009 ranking of ETP “providers” 4 Source: Bloomberg, trading volume on an average daily basis for 2009 YTD (ending 12/31/2009). 5 Source: Bloomberg, share volume on an average daily basis for 2009 YTD (ending 12/31/2009). 6 Source: Bloomberg and Morningstar. Based on a comparison of average daily short and leveraged ETF, ETN and mutual fund assets as of 12/31/2009, for ProFunds Group, DireXion, MacroShares, PowerShares/Deutsche Bank, Rydex, UBS, and Van Eck.

8 Average Daily Trading Volume in 2009: ProShares vs. TASE
42.0 B In millions $10.7 B $432 M 1.7 B Source:  Tel Aviv Exchange, FactSet, and Bloomberg. Based on average exchange rates over period.

9 Overview of leveraged and inverse ETFs

10 Basic differences between ETFs and ETNs
Exchange-Traded Funds (ETFs) Exchange-Traded Notes (ETNs) Offer continuous trading and pricing throughout the day? Yes Can be purchased through a traditional brokerage account? Can be bought on margin? Is there tracking error? Low What are the risks to principal? Market and counterparty risk Market and issuer risk What recourse do investors have? Portfolio of securities Issuer credit

11 Expected daily performance of leveraged & inverse ETFs
Example Using 2x and -2x ETFs Up Day (Index up 1%) Down Day (Index down 1%) 2% 2% Leveraged inverse fund should fall Leveraged long fund should fall Leveraged long fund should gain Leveraged inverse fund should gain -2% -2% The ETFs seek a daily return that is a multiple of the return of the index (target). Due to compounding of daily returns, results over periods other than a day will likely differ in amount and possibly direction from the target return for the same period. * Before fees and expenses.

12 Example of compounding on indexes and leveraged funds
2x F U N D Daily Return U P W A R D T R E N D Day 1 Return +10% +20% Day 2 Return Compounded 2-day Return +21% +44% D O W N W A R D T R E N D -10% -20% -19% -36% V O L A T I L E M A R K E T -1% -4% For illustrative purposes only. The example does not take into account any fees or costs associated with an investment in the funds. Actual investment returns may vary in amount and direction from the stated objective.

13 Universal effects of compounding on investment returns
Compounding affects all investments over time Upward trending periods enhances returns Downward trending periods reduces losses Volatile periods may reduce returns and increase losses Positive and negative effects of compounding are magnified in leveraged and inverse funds Actual investment returns may vary in amount and direction from the stated objective.

14 Why do leveraged and inverse funds seek daily returns?
Consistent leverage each trading day helps investors by preventing leverage from becoming too excessive An open-end fund that provides a specified, constant leverage level for all investors is not possible Investing involves risk, including the possible loss of principal.

15 Volatility and its impact on leveraged and inverse funds
Highest short-term volatility levels for U.S. equities in 80 years affected all investments, including leveraged funds 72% (12/16/08) 66% (12/31/29) 69% (10/21/32) 60% (1/11/88) S&P Month Volatility (annualized %) Source: Bloomberg, January Past performance is no guarantee of future results. For illustrative purposes only.

16 Importance of monitoring & rebalancing
Similar concept to rebalancing asset allocations Some investors want returns closer to the fund multiple times the index return over time Monitoring and rebalancing may be necessary Rebalancing doesn’t always increase returns In trending markets, rebalanced returns may in fact be lower (although closer to the fund multiple) than if no rebalancing was done Source: Understanding Returns of Leveraged and Inverse Funds, Journal of Indexes, September/October 2009

17 Key takeaways Just like many ETFs, leveraged and inverse ETFs can be effective tactical investment tools The effects of compounding are universal Rebalancing can be an effective tool to help pursue returns closer to the fund multiple over time

18 Why they’re valued Efficient tool for investors with a view of the market Can trade and follow like a stock Can’t lose more than you invest Institutional pricing Liquid

19 Trends in ProShares ETF Flows

20 Leveraged and Inverse ETFs: Strategies evolve with market conditions
Strategy options Recent trends and applications Tactical tools like other ETFs Seek to profit from small-cap correction, shifts in oil prices, or Euro currency weakness Target exposure with less cash Leverage emerging market or country exposure Overweight or underweight exposure Shift to an underweight in basic materials or an overweight in energy Help manage overall portfolio risk or seek to hedge specific risk exposure Mitigate risk of rising Treasury yields, downside risk to holdings of U.S. equities

21 Short bias has been in line with or just ahead of market trends
% Inverse Equity ProShares vs. S&P 500 Consistent with their appeal as efficient ways to express market views and help manage risk Pattern in line with S&P through early 2009 Through July 2008: Inverse funds were clearly dominant February 2009: Peak in long assets at 50% March 2009–2010: Steady inverse assets around 60% as S&P 500 has continued to rebound % Inverse Equity ProShares % Inverse Equity Assets S&P 500 S&P 500 Source: ProFunds Group, April 5, 2007 – April 17, S&P 500 rebased to 0.0 as of April 5, For illustrative purposes only. Past performance does not guarantee future results.

22 Allocation toward inverse assets ebbs and flows with market volatility
% Inverse Equity ProShares vs. VIX In early 2008, inverse assets represented more than 75% of total ProShares AUM Large shift from % inverse to long ETFs coincided with surge of market volatility late in 2008 As market volatility has fallen to pre-crisis levels more long exposure than in – may indicate more divided market outlook % Inverse Equity ProShares % Inverse Equity Assets VIX VIX Source: ProFunds Group, April 2007 – March For illustrative purposes only. Past performance does not guarantee future results.

23 Market conditions can lead to sudden surge in trading and assets
Interest in inverse exposure to Euro as Greek debt crisis dominated the news this year $ Assets Volume Benchmark level Source: ProFunds Group, January 2009 – March For illustrative purposes only. Past performance does not guarantee future results.

24 A reminder about risk ProShares ETFs and many ProFunds entail certain risks, including, aggressive investment techniques (futures contracts, options, forward contracts, swap agreements and similar instruments), imperfect benchmark correlation, leverage and market price variance, all of which can increase volatility and decrease performance. Investments in smaller companies and narrowly-focused investments, including single country funds, typically exhibit higher volatility. International investments may also involve risk from unfavorable fluctuation in currency values, differences in generally accepted accounting principles and from economic or political instability. In emerging markets, all these risks are heightened, and lower trading volumes may occur. Bonds will decrease in value as interest rates rise. In addition to the normal risks associated with investing, technology companies may be subject to the severe competition and product obsolescence. ProShares and some ProFunds are non-diversified investments. For more information on possible risks please see summary and full prospectuses at proshares.com or profunds.com.

25 For more information


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