ProShares Launches UltraShort TIPS Fund (TPS)

by on February 11, 2011 | ETFs Mentioned:

ProShares, the largest issuer of short and leveraged exchange traded funds, announced the launch of the first product offering leveraged inverse exposure to U.S. Treasury Inflation-Protected Securities (TIPS) yesterday. ProShares added to its lineup the UltraShort TIPS ETF (TPS), bringing their total number of funds up to 115, covering investment strategies from inverse equities to leveraged bonds and everything in between.

The new fund seeks daily investment results that correspond to twice (200%) the inverse (short) of the daily performance of the Barclays Capital U.S. Treasury Inflation Protected Securities (TIPS) Index (Series-L) (-200%). The underlying Barclays (TIPS) Index includes all publicly issued, U.S. Treasury inflation protected securities that have at least one year remaining maturity, are non-convertible, are denominated in U.S. dollars, are rated investment grade (at least Baa3 by Moody’s Investors Service or BBB- by S&P), are fixed rate, and have more than $250 million or more par value outstanding. Additionally, the underlying index is weighted by the relative market value of all securities meeting the above stated criteria, and its holdings are updated on the last calender day of each month.

It is important to understand that this leveraged fund resets on a daily basis, meaning that its performance over multiple trading sessions depends on the direction of the underlying index during that period. As such, TPS may be more of a  “trading instrument”, as opposed to a traditional “buy-and-hold” product. Leveraged and inverse funds entail significant risks that are often overlooked by many investors, and it is best to understand the risks thoroughly before adding the fund to your portfolio [see The Ultimate Guide To Leveraged ETFs].

TPS will invest its assets in derivatives that are deemed to have the same daily return characteristics as twice the inverse of the daily return of the underlying Barclays TIPS Index. In addition, assets not invested in derivatives will typically be held in money market instruments. More specifically, the fund will invest in short-term cash instruments that have a maturity of less than 397 days and are rated to be of a high-quality credit profile.

Given the ongoing concern for inflation and expectations for tougher times ahead, TPS should attract significant interest from investors interested in betting against one of the most common asset classes used to protect against inflation. While the global economic recovery is still gloomy overall, there have been numerous signs that the recovery is progressing in both developed in emerging markets. Numerous central banks around the globe including those of China, India, and South Korea have begun to tighten interest rates to ensure that inflation does not spiral out of control [consider reading Inflation Fighting ETFs Back In Focus]. Also, commodity prices have been surging over the past year and many are beginning to make bets that they are due for a correction. In fact, gold which is traditionally seen as a hedge against inflation, has been struggling to march higher lately, perhaps hinting that worries of inflation are a bit overdone. Given that TIPS move with inflation, TPS makes for an interesting addition to an already defensive portfolio, since the fund is expected to rise when inflation proves to be far less of a problem than many are expecting.

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Disclosure: No positions at time of writing.