Daily ETF Watch: New Takes On The S&P 500

ProShares has filed for two ETFs that will use the S&P 500 as their starting point. The ProShares S&P 500 Bond ETF and the ProShares S&P 500 Dynamic Treasury Hedge ETF are designed to offer two very different types of exposure to one of the world’s most followed indexes.

Corporate Debt Fund

The bond fund will cover corporate debt issued by components of the S&P 500. However, the prospectus notes that not every company in the S&P 500 Index will be represented in the fund’s underlying index, as some may not have issued debt securities that meet its requirements.

To be eligible for inclusion in the index, a bond must be issued by an S&P 500 company and denominated in U.S. dollars, with a maturity of at least one month remaining as of the rebalancing date. Although both investment-grade and high-yield debt can be included in the ETF’s index, the former must have a minimum issuance of $250 million, while the latter is required to have an issuance of at least $100 million.

Bills, STRIPS and floating-rate debt are not eligible, but fixed, zero-coupon, step-up, callable, puttable and fixed-to-float debt issues are, the prospectus said.

Dynamically Hedged ETF

The Treasury-hedged ETF will be based on a benchmark that allocates its assets according to the signals provided by the Margrabe Exchange Option Pricing Model, which was developed by derivatives expert Willliam Margrabe, Ph.D.

The S&P Dynamic Asset Exchange – U.S. Index will start each year with a 50/50 allocation to the S&P 500 and the S&P 10-Year U.S. Treasury Note Futures Index, with the Margrabe model determining how it will be reallocated on a monthly basis. The prospectus describes the strategy as “momentum-like” and says that when the S&P 500 grows in value relative to the Treasury futures index, it will receive a greater weighting, and vice versa.

The Margrabe model takes into account the performance, volatility and correlations of both of the component indexes, as well as the time horizon.

The filing did not include tickers or expense ratios, but the funds are tentatively slated to list on the NYSE Arca exchange.

Contact Heather Bell at [email protected].