ProShares, known for pioneering short and 2x leveraged and inverse leveraged ETFs, is once again blazing a new trail in the ETF industry. The fund family has filed for approval from the SEC to launch two new ETFs, a 3x S&P 500 fund and a 3x inverse S&P 500 fund. ProShares‘ proposed funds would be the first to offer leveraged ETF exposure to the S&P 500.
ProShares is largely regarded as the market leader in the leveraged ETF arena, with dozens of funds offering 200% leverage (as well as 200% inverse leverage) on many popular indexes. Over the last year, however, ProShares has watched rival Direxion introduce numerous successful 300% funds, attracting significant inflows from the most sophisticated and adventurous investors. Now ProShares is looking to give Direxion a fight for day trader cash by offering leveraged exposure to one of the most widely-reported indexes in the world.
Direxion already offers 3x bull and bear exposure to large cap equities through BGU and BGZ, which are based on the Russell 1000 Index. Direxion also offers mutual fund products offering 250% leverage on the S&P 500. While the S&P 500 and Russell 1000 typically generate similar returns (SPY is down 0.1% so far this year, while IWB is up 1.3%), ProShares proposed funds would likely be hugely popular with day traders and other sophisticated investors, simply because of the popularity of its underlying index. ProShares’ proposed funds (the UltraPro S&P 500 and the UltraPro Short S&P 500) would have an expense ratio of 0.95%, equivalent to Direxion funds.
Fuel To The Fire
ProShares’ filing is sure to further intensify the debate that has been raging in the ETF industry over the integrity of leveraged ETFs and the need for increased regulatory oversight. While the securities are beloved by day traders for their ability to amplify winning bets on short-term market movements, they have been labeled as fundamentally dishonest and deceptive products by others who claim they are being widely misused. Opponents of leveraged ETFs worry that individual investors unaware of the complexities that can dramatically alter fund returns over an extended period of time are exposing themselves to inappropriate risk factors.
Given the timing of the filing, I’m curious to see how the industry and the regulatory authorities respond. Considering that ProShares had already filed to launch 94 additional leveraged ETFs (none of which were S&P 500 funds), it seems as if we’re quickly arriving at a crossroads. As the number of leveraged ETFs on the market continues to grow, implementing regulatory procedures becomes more and more difficult. And given the numerous concerned parties raising issues about these funds, it seems that regulators are setting themselves up for harsh criticisms if they allow an increasing number of ETFs to run unchecked. But at the same time, it seems as if noone really has an idea of just how widespread or severe the problem is, let alone a productive plan for fixing it.
So stay tuned. Things are quickly coming to a head, and the fallout is sure to leave somone feeling burned.
Disclosure: No positions.