ProShares Files For Innovative ‘Inflation ETFs’

by on September 28, 2011 | ETFs Mentioned:

ProShares, the Bethesda, Maryland-based ETF issuer best known for its suite of leveraged and inverse products, announced plans to expand its offering in the Treasury bond space with its latest SEC filing. In the document, the company detailed four new funds that are vastly different from anything else in the market, giving investors new ways to play inflation with government bonds. If approved, the new funds would help push ProShares above the 125 fund mark and would greatly expand the company’s lineup of Treasury-focused ETFs. Although a number of important details were not released in this initial filing, expense ratios and ticker symbols are still unavailable, we offer up some of the key points from the release below:

The company looks to offer four products in total with two focused on the Ten Year bond space and two focused on the long term 30 year bond space. Basically, in the two ‘rising’ inflation funds– one for Ten Year Bonds and the other for 30 Year Bonds– the proposed products will take long positions in TIPS and short positions in comparable U.S. Treasury securities, either in the ten year or thirty year variety, depending on the fund. Either way, this will reflect a position in the ‘breakeven’ rate of inflation, or in other words, the level of inflation required for a TIPS product to equal the performance of a comparable Treasury fund over the time frame in question. Meanwhile, in the ‘falling’ inflation funds, the opposite method is applied; the product, by matching the inverse of the index, goes short in TIPS and long in U.S. Treasury securities, in either ten year or 30 year denominations [read Five Inflation ETFs To Hedge Against The Next Black Swan].

With this method, when demand for TIPS soars, it will likely signal rising inflation expectations and thus will increase the value of the ‘rising’ inflation funds. On the other side, if Treasury bonds manage to be in greater demand than their TIPS counterparts, it will signal declining fears over inflation and will likely lead to gains in the ‘falling’ funds. Investors should also note that the products have varying degrees of leverage as both of the 10 year focused funds employ 300% leverage while the 30 year funds use the regular, 1x variety. Additionally, all of the products reset on a daily basis, so the long term performance of the index may not correlate to investor returns in any of the proposed funds [see Inflation ETF Special: 25 Funds To Fight Rising Prices].


The specter of inflation is beginning to creep up on many portfolios as CPI readings suggest that prices are beginning to rise across the board. The most recent report showed a month over month increase in prices of 0.4%, ahead of expectations which called for just a 0.2% rise. This led the year-over-year figures to come in at 3.8%, an uncomfortably high figure for most developed market investors. With that being said, the ‘core’ CPI, which strips out volatile food and energy prices, came in line with consensus estimates and is only showing a 2.0% move y/y, suggesting that inflation is still in-line with expectations.

Thanks in part to these recent figures, investors remain deeply divided over the idea of rapid price increases in the near future. Some point to the extremely loose monetary policies as a reason to expect broad price increases as well as the increase in demand for one of the most popular hedges against currency debasement, gold. Meanwhile, those who are predicting a lower rate of inflation point to the extremely weak global economy and the immense amount of deleveraging taking place across developed markets [see Five ETFs To Own During The Great Deflation]. After all, these proponents often say, how can you have inflation when home prices are still falling and dragging down consumer confidence across the board? Either view point could certainly be correct, highlighting the need for products targeting both ‘rising’ and ‘falling’ inflation [Beyond TIP: 10 ETFs To Protect Against Rising Prices]. 

Inflation ETFs in Focus

Currently, there aren’t any products that try to do the same thing as these proposed ProShares funds, but that doesn’t mean that investors don’t have options when it comes to the question of inflation. There are currently 13 funds in the Inflation-Protected Bonds ETFdb Category while a number of more active products also exist in the space as well. These include the Real Return ETF (CPI) and the Real Return Fund (RRF) which both seek to give investors returns that beat out the Consumer Price Index. Meanwhile, for those betting on deflation or a sharp decline in the rate of price increases, there is a plethora of funds in the long-term bond category that could make for great choices for most investors including the ultra long duration EDV or ZROZ

With that being said, none of these choices offer the same ‘hedged’ exposure that is being proposed by the ProShares lineup. Given the rising concerns over inflation– or at least the talk of more price increases– investors may want to keep a close eye on these funds if they are ever able to make it over the regulatory hurdles and launch into the market. If they do, ProShares could potentially have a few winners on its hands, especially among active traders on key data release days such as when new CPI reports hit the market. 

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Disclosure: No positions at time of writing.