Zero Cap Gains At ProShares

November 17, 2009


In a surprising development, ProShares, a leading developer of leveraged and inverse exchange-traded funds, announced today that it does not expect to pay out any capital gains distributions for its ETFs in 2009.

This stands in marked contrast to 2008, when nearly all inverse exchange-traded funds paid out significant capital gains. The payouts in 2008 were so large—86 percent of a fund’s net asset value in one case—that the Securities and Exchange Commission issued a statement warning investors about the tax risks associated with the funds.

“Leveraged or inverse ETFs,” it warned in August, “may be less tax-efficient than traditional ETFs, in part because daily resets can cause the ETF to realize significant short-term capital gains that may not be offset by a loss.”

But this year, ProShares has apparently managed to avoid distributions altogether.

“While we manage ProShares to minimize capital gain distributions, a myriad of factors may impact the level of capital gains that tax regulations require to be distributed," said Michael Sapir, chairman and CEO of ProShares, in a statement. "These factors include, among other things, the path of the underlying index during the period and the size and the timing of asset flows. In contrast to last year when the funds were faced with a confluence of highly unusual circumstances with respect to such factors, this year presented circumstances that we view as more typical."

The other providers of leveraged and inverse exchange-traded funds, including Direxion and Rydex, have yet to comment on 2009 distributions. The ProShares announcement augurs well for their tax efficiency as well, but there is no guarantee that they will achieve similar tax efficiency. Smaller funds, particularly on the leveraged side this year, could still face significant distributions.



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