ProShares Files To Offer Active ETFs

Devon Layne, Olly Ludwig
June 13, 2012

ProShares seeks to add active ETFs, puts ELD in cross hairs with plans for emerging market debt fund.

ProShares, the world’s largest purveyor of leveraged and inverse ETFs, filed with the Securities and Exchange Commission for broad permission to market active ETFs that target stocks, bonds and currencies, and detailed an emerging market debt fund as the first fund it plans to roll out.

The mention of the ProShares Emerging Market Debt ETF makes it clear that the company is casting a wide net around the world as it begins its foray into actively managed ETFs. The filing didn’t make clear whether the fund would hold bonds denominated in dollars or in other currencies, though the imprecise wording suggests the fund could hold both.

Whatever the case, choosing an initial fund focused on both fixed income and on the emerging markets suggests that Bethesda, Md.-based company has its finger on the pulse of what’s hot in the world of ETFs. The filing also suggests ProShares is serious about adding another piece to its business that isn’t directly related to the leveraged and inverse space it dominates.

Indeed, one of the most successful realms of active ETFs has been fixed income, and emerging market debt funds per se have pretty much been all the rage for almost the past two years. One of the granddaddies in the space, the dollar-denominated iShares JPMorgan USD Emerging Markets Bond Fund (NYSEArca: EMB), has about $4.31 billion in assets. But EMB is an index ETF.

Active Debt ETFs Are Hot

Closer to home is the actively managed WisdomTree Emerging Markets Local Debt Fund (NYSEArca: ELD). ELD has gathered $1.17 billion in assets since its inception in August 2010.

ELD is now the third-biggest active ETF behind the Pimco Enhanced Short Maturity Strategy (NYSEArca: MINT) and the Pimco Total Return ETF (NYSEArca: BOND).

MINT, the biggest active fund, has $1.74 billion in assets, and BOND, which came to market March 1, has $1.37 billion, making it among the most successful launches ever.

Still, active ETFs make up less than 1 percent of the $1.150 trillion in total U.S.-listed ETF assets as of June 12, according to data compiled by IndexUniverse. That percentage jumps to between 4 and 5 percent when considering just fixed-income ETFs.

No Derivatives For Now

ProShares said in the filing that the proposed emerging markets fund—or any future funds that the “exemptive relief” filing will allow—won’t for now use derivatives in the form of options contract, futures contracts or swap agreements.

That said, ProShares said it might reserve the right to pursue the use of such derivatives if SEC rules change to permit them. Derivatives use in active and leveraged funds has been under review at the commission since March 2010.

ProShares’ initial emerging markets debt fund will seek to achieve its strategy by typically investing at least 80 percent of its total assets in a diversified portfolio of fixed-income instruments of varying maturities issued by government, corporate and/or other issuers domiciled in emerging market countries, the company said in the filing.

Also, the ETF may invest a large percentage of its assets in issuers in a single country, a small number of countries or a particular geographic region, the exemptive relief filing said.

Exemptive relief grants ETF firms exception to sections of the Investment Act of 1940 and is just the first step in the path to launching ETFs. It often takes at least six to 12 months from the date of the initial filing for a company’s first ETF to hit the market.



Investors plowed money into currency-hedged equity funds like ‘HEDJ’ and ‘DBEF’ on Wednesday, March 4, while yanking assets out of sundry bond funds, such as ‘HYG.’ Total U.S.-listed ETF assets dropped to $2.084 trillion as a market pullback offset net inflows.

Sizable outflows from various iShares bond funds paced that firm’s outflows on Wednesday, March 4. Total U.S.-listed ETF assets ended the day at $2.084 trillion.


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