ProShares to launch investment-grade, long/short CDS-exposure funds

By Toni Weeks

San Luis Obispo, Calif., June 3 - ProShares Trust announced plans to launch four new investment-grade funds based on long or short exposure to credit default swaps, according to an N-1A filing with the Securities and Exchange Commission. Jeffrey Ploshnick will be the portfolio manager for all four funds, two of which will focus on the North American credit market and two of which will target the European credit market.

Selling credit protection is equivalent to obtaining or being "long credit," the filing noted, whereas buying credit protection is equal to hedging or being "short credit." Therefore, the long-exposure funds will generally be a seller of credit protection, and the short-exposure (or inverse-exposure) funds will generally be a buyer of credit protection.

The ProShares CDS Long North American IG Credit ETF will seek to provide long exposure, before fees and expenses, to the credit of a diversified portfolio of North American investment-grade debt issuers by investing primarily in index-based credit default swaps or other credit derivatives whose reference entities are North American investment-grade debt issuers. The fund is designed to increase in value when the North American investment-grade credit market improves, which means the probability of payment by North American investment-grade issuers increases.

The investment adviser will generally seek to obtain long exposure to credit through the most liquid and most recently issued index-based CDS contracts and will use centrally cleared index-based CDSs or exchange-listed futures contracts.

As of Friday, the most liquid index-based CDS contracts focused on North American investment-grade debt issuers are those in the Markit CDX North American Investment Grade series, which includes 125 of the most liquid North American investment-grade issuers based on criteria from Markit North America, Inc. The adviser will initially focus its investments on the most recently issued contracts in this series.

The ProShares CDS Short North American IG Credit ETF will seek to provide inverse exposure, before fees and expenses, to the credit of a diversified portfolio of North American investment-grade debt issuers, and, like its long counterpart, the fund will invest primarily in index-based CDSs or other credit derivatives whose reference entities are North American investment-grade debt issuers. However, this fund is designed to increase in value when the North American investment-grade credit market declines and the probability of payment by North American investment-grade issuers decreases.

ProShares also plans to offer two similar funds focused on the European credit market.

The ProShares CDS Long European IG Credit ETF will seek to provide long exposure, before fees and expenses, to the credit of a diversified portfolio of European investment-grade debt issuers by investing primarily in index-based CDSs or other credit derivatives whose reference entities are European investment-grade debt issuers.

As of Friday, the most liquid index-based CDS contracts focused on European investment-grade debt issuers are those in the Markit iTraxx Europe series, which includes 125 of the most liquid European investment-grade issuers based on criteria set forth by Markit Group Ltd. The investment adviser expects to initially focus its investments in this series.

The ProShares CDS Short European IG Credit ETF will seek to provide inverse exposure, before fees and expenses, to the credit of a diversified portfolio of European investment-grade debt issuers and will select the same class of investments as its long counterpart. The fund is designed to increase in value when the probability of payment by European investment-grade issuers decreases.

Ticker symbols, investment advisory fees and total annual operating expenses have not yet been set.

Bethesda, Md.-based ProShares Advisors will serve as the investment adviser to the funds.

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