A timely toolbox of CDS-focused ETFs designed to wager on the rate outlook comes into focus.
ProShares, putting new emphasis on its desire to be called “The Alternative ETF Company,” filed regulatory paperwork this week detailing eight ETF strategies designed around credit default swaps, marking the first time since 2008 that an ETF provider has signaled so strongly that it wanted to open up a front in the rapidly growing world of exchange-traded funds.
The company, the biggest purveyor of leveraged and inverse funds, is filing for four long and short pairs of U.S.-listed funds that target high-yield and investment-grade debt credit default swaps (CDSs) in both North America and Europe. That makes the ProShares filing more ambitious than the San Francisco-based Exchange Traded Spreads’ 2008 registration statement detailing U.S. investment-grade and high-yield CDS ETFs in long-and-short pairs.
Those Exchange Traded Spreads funds have never come to market, in part because Exchange Traded Spreads put them into registration before it even had the regulatory permission to market any ETFs. Moreover U.S. regulatory restrictions imposed in March 2010 on allowing use of derivatives in ETFs may have slowed Exchange Traded Spreads’ winning the right to market its planned CDS ETFs.
But the Securities and Exchange Commission relaxed some of those restrictions in December of last year and, what’s more, ProShares appears to have in place the regulatory permission necessary to actually bring the strategies to market.
In either case, the products allow investors to bet on the interest-rate outlook, whatever their direction. There could scarcely be a more topical concern in financial markets today, given the increasing uncertainty about how soon the Federal Reserve will begin to reverse the massive monetary easing it has put in place since the market crash of 2008-2009.
Specifically, the “long” ProShares funds are designed to increase in value as the credit quality of underlying parties improves—a scenario that implies the overall rate outlook is trending lower; meaning that yields on junk debt and investment-grade debt are converging with those of Treasury debt, and that the rate environment isn’t threatening in any way to the credit quality of issuers.
Conversely, the “short” funds are designed to increase in value as the credit quality of the underlying parties deteriorates—a scenario that implies the overall rate outlook is trending higher; meaning that that yields on junk debt and investment-grade debt are diverging from those on Treasury debt, and that the rate environment is becoming a threat to the credit quality of issuers.
The eight CDS funds, organized as long and short pairs that ProShares hopes to market, are as follows:
- ProShares CDS Long North American HY Credit ETF and ProShares CDS Short North American HY Credit ETF
- ProShares CDS Long North American IG Credit ETF and ProShares CDS Short North American IG Credit ETF
- ProShares CDS Long European HY Credit ETF and ProShares CDS Short European HY Credit ETF
- ProShares CDS Long European IG Credit ETF and ProShares CDS Short European IG Credit ETF
The funds will seek to provide either long exposure to credit by investing primarily in index-based CDSs or other credit derivatives whose reference entities in their respective markets in North America and Europe are high-yield or investment-grade debt issuers.
ProShares didn’t disclose the tickers and the expense ratios on any of the eight proposed funds.
ProShares also didn’t detail any underlying indexes for the funds, suggesting the strategies are likely to end up being actively managed.