ProShares 130/30 ETF Off To A Hot Start

by on October 5, 2009 | Updated October 7, 2009 | ETFs Mentioned:

ProShares is best known for its line of leveraged and inverse ETFs covering a variety of asset classes and benchmarks. But earlier this year, the firm made its initial foray beyond this space, launching a new category of ProShares ETFs called Alpha ProShares. The first installment in this series is the ProShares Credit Suisse 130/30 (CSM), an ETF implementing an innovative strategy that has many investors taking notice.

CSM Offers 130/30 Exposure To All Levels of InvestorsCSM tracks the Credit Suisse 130/30 Large-Cap Index, a benchmark that was introduced in 2007 and detailed in a 2008 paper, “130/30: The New Long-Only” published in The Journal of Portfolio Management. This index is designed to replicate the performance of an investment strategy that establishes either long or short positions in the 500 largest U.S. equities (as measured by market capitalization) utilizing a rules-based ranking and weighting methodology. As the name of the fund implies, the index has total long exposure of 130% and total short exposure of 30%, resulting in a net 100% long position.

There are several investment strategies that were once reserved for only the largest and most sophisticated investors but are now readily available through ETFs. Commodity investments, 2x and 3x leverage, and hedge fund strategies used to require significant capital and use of complex financial instruments. The rise of ETFs has “democratized” the business of investing, making these strategies easier than ever to attain through the purchase of a single security. The 130/30 strategy isn’t a new innovation – it’s been popular among many investors for years – but it has never been made available in an ETF (it is noted that First Trust offers a similar product, JFT, through an ETN structure). See our Guide to ETFs for Very High Net Worth Investors for a more complete look at some of these products.

Seeking Alpha

By shorting the components of the S&P 500 expected to be the weakest-performing of the group and doubling down on those expected to post the strongest gains, CSM seeks to generate excess returns for investors. And through its first few months of operation, it’s been pretty successful.

Since its inception in July of this year, CSM has gained about 14.4%. By comparison, the more traditional SPDR S&P 500 (SPY) has gained about 13.7%, meaning the 130/30 fund has generated excess returns of about 0.7%. This might not seem like much, but given that CSM began trading in the middle of July, the potential for excess returns seems more significant. Moreover, the impact of a few extra basis points over a number of years can be significant.

Growth of $1 Million Over:
Annual Gain 10 Years 20 Years 30 Years
Alpha Portfolio (14.4%) $3,839,372 $14,740,781 $56,595,348
Beta Portfolio (13.7%) $3,610,810 $13,037,949 $47,077,559

Recently, CSM had a long position in about 255 companies with a P/E ratio of about 16 and a short position in 135 firms with a P/E of of nearly 28. The largest holdings of CSM are very similar to SPY, including Exxon Mobil and JP Morgan. The most significant short positions established by CSM include:

Company Short Position
Ciena Corp 1.37%
Zions Bancorp 1.32%
Patterson Cos. 1.32%
MBIA Inc. 1.31%
JDS Uniphase 1.29%
Nicor 1.29%
CB Richard Ellis 1.28%
KB Home 1.28%
Pinnacle West Capital 1.26%
Tiffany & Co. 1.26%
Source: ProShares Web site. All info as of 9/18/09

Because CSM holds components of the S&P 500, it will have risk and return characteristics similar to the one of the world’s most widely-followed equity benchmarks. And because the fund’s exposure is net 100% long, investments in CSM don’t come with the caveats that traditionally accompany leveraged and inverse funds.

Investors are beginning to take note of CSM. In August, the fund saw inflows of $9 million, equal to roughly 50% of total assets just a month earlier. If CSM continues to outperform traditional market cap-weighted benchmarks, assets will continue to surge.

Disclosure: No positions at time of writing.