STATEMENT OF ADDITIONAL INFORMATION
PROSHARES TRUST
7501 WISCONSIN AVENUE, SUITE 1000
BETHESDA, MARYLAND 20814
PHONE:
(866) PRO-5125
OCTOBER 1, 2007
Ultra ProShares
Ultra MarketCap
Ultra SmallCap600 ProShares
Ultra Russell2000 ProShares
Ultra S&P 500 ProShares
®
Ultra QQQ ProShares
®
Ultra Dow 30 ProShares
SM
Ultra MidCap400 ProShares
Ultra Sector
Ultra Basic Materials ProShares
Ultra Consumer Goods ProShares
Ultra Consumer Services ProShares
Ultra Financials ProShares
Ultra Health Care ProShares
Ultra
Industrials ProShares
Ultra Oil & Gas ProShares
Ultra Real Estate ProShares
Ultra Semiconductors ProShares
Ultra Technology ProShares
Ultra Utilities
ProShares
Ultra Style
Ultra
Russell1000 Value ProShares
Ultra Russell1000 Growth ProShares
Ultra Russell MidCap Value ProShares
Ultra
Russell MidCap Growth ProShares
Ultra Russell2000 Value ProShares
Ultra Russell2000 Growth ProShares
Short ProShares
Short/UltraShort MarketCap
Short
SmallCap600 ProShares
Short Russell2000 ProShares
UltraShort SmallCap600 ProShares
UltraShort Russell2000 ProShares
Short S&P 500 ProShares
®
Short QQQ ProShares
®
Short Dow 30 ProShares
SM
Short MidCap400 ProShares
UltraShort S&P 500 ProShares
®
UltraShort QQQ ProShares
®
UltraShort Dow 30 ProShares
SM
UltraShort MidCap400 ProShares
UltraShort Sector
UltraShort Basic
Materials ProShares
UltraShort Consumer Goods ProShares
UltraShort Consumer Services ProShares
UltraShort Financials ProShares
UltraShort Health Care ProShares
UltraShort
Industrials ProShares
UltraShort Oil & Gas ProShares
UltraShort Real Estate ProShares
UltraShort Semiconductors ProShares
UltraShort Technology ProShares
UltraShort
Utilities ProShares
UltraShort Style
UltraShort Russell1000 Value ProShares
UltraShort Russell1000 Growth ProShares
UltraShort Russell MidCap Value ProShares
UltraShort Russell MidCap Growth ProShares
UltraShort Russell2000 Value ProShares
UltraShort Russell2000 Growth ProShares
Short
International
Short MSCI EAFE ProShares
Short MSCI Emerging Markets ProShares
UltraShort MSCI EAFE ProShares
UltraShort MSCI Emerging Markets ProShares
UltraShort FTSE/Xinhua China 25 ProShares
UltraShort MSCI Japan ProShares
This SAI is not a prospectus. It should be read in conjunction with the Prospectus of ProShares Trust, dated October 1, 2007 (the
“Prospectus”), which incorporates this Statement of Additional Information by reference. A copy of the Prospectus and Annual Report for each Fund are available, without charge, upon request to the address above, by telephone at the number
above, or on the Trust’s website at
www.proshares.com
. The Financial Statements and Notes contained in the Annual Report for the fiscal year ended May 31, 2007 are incorporated by reference into and are deemed part of this SAI.
TABLE OF CONTENTS
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GLOSSARY OF TERMS
For ease of use, certain terms or names that are used in this SAI have been shortened or abbreviated. A list of these terms and their corresponding full names or definitions can be found below. An investor may find it
helpful to review the terms and names before reading the SAI.
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Term
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Definition
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1933 Act
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Securities Act of 1933
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1934 Act
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Securities Exchange Act of 1934
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1940 Act
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Investment Company Act of 1940
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The Advisor or ProShare Advisors
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ProShare Advisors LLC
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AMEX
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American Stock Exchange LLC
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CFTC
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Commodity Futures Trading Commission
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Code or Internal Revenue Code
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Internal Revenue Code of 1986
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Distributor or SEI
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SEI Investments Distribution Co.
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Fund(s)
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One or more of the series of the Trust identified on the front cover of this SAI
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Independent Trustee(s)
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Trustees who are not “Interested Persons” as defined under Section 2(a)(19) of the 1940 Act
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SAI
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The Trust’s Statement of Additional Information dated October 1, 2007
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SEC
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U.S. Securities and Exchange Commission
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Shares
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The shares of the Funds
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Trust
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ProShares Trust
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Trustee(s)
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One or more of the trustees of the Trust
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PROSHARES TRUST
The Trust is a Delaware statutory trust and is registered with the SEC as an open-end
management investment company under the 1940 Act. The Trust was organized on May 29, 2002 and consists of the 58 separate series, or “Funds”, shown on the front cover of this SAI.
Other Funds may be added in the future. Each of the Funds is registered as a non-diversified managed investment company.
The Shares are listed on AMEX. The Shares trade on AMEX at market prices that may differ to some degree from the Shares’ net asset values. Each Fund
issues and redeems Shares on a continuous basis at net asset value in large, specified numbers of Shares called “Creation Units.” Creation Units of the Ultra ProShares are issued and redeemed principally in-kind for securities included in
the relevant underlying index. Creation Units of the Short ProShares are purchased and redeemed in cash. Except when aggregated in Creation Units, Shares are not redeemable securities of the Funds. Retail investors, therefore, generally will not be
able to purchase the Shares directly. Rather, most retail investors will purchase Shares in the secondary market with the assistance of a broker.
Reference is made to the Prospectus for a discussion of the investment objectives and policies of each of the Funds. The discussion below supplements, and should be read in conjunction with, the Prospectus. Portfolio management is provided
to the Funds by ProShare Advisors, a Maryland limited liability company with offices at 7501 Wisconsin Avenue, Suite 1000, Bethesda, Maryland.
The investment restrictions of the Funds specifically identified as fundamental policies may not be changed without the affirmative vote of at least a majority of the outstanding voting securities of that Fund, as defined in the 1940 Act.
The investment objectives and all other investment policies of the Funds not specified as fundamental (including the benchmarks of the Funds) may be changed by the Trustees of the Funds without the approval of shareholders.
The investment strategies of the Funds discussed below, and as discussed in the Prospectus, may be used by a Fund if, in the opinion of ProShare
Advisors, these strategies will be advantageous to the Fund. A Fund is free to reduce or eliminate its activity in any of these areas without changing the Fund’s fundamental policies. There is no assurance that any of these strategies or any
other strategies and methods of investment available to a Fund will result in the achievement of the Fund’s objectives. Also, there can be no assurance that any Fund will grow to, or maintain, an economically viable size, in which case
management may determine to liquidate the Fund at a time that may not be opportune for shareholders.
The use of the term
“favorable market conditions” throughout this SAI is intended to convey rising markets for the Ultra ProShares and falling markets for the Short ProShares. The use of the term “adverse market conditions” is intended to convey
falling markets for the Ultra ProShares and rising markets for the Short ProShares.
AMEX Listing and Trading
The Shares of each Fund are approved for listing and trading on the AMEX. Shares (redeemable only when aggregated in Creation Units) trade on the AMEX at
prices that may differ to some degree from their net asset value. There can be no assurance that the requirements of the AMEX necessary to maintain the listing of Shares of any Fund will continue to be met. The AMEX may, but is not required to,
remove a Fund from listing if (i) following the initial 12 month period beginning upon the commencement of trading of a Fund, there are fewer than 50 beneficial owners or a Fund for 30 or more consecutive trading days; (ii) the value of
the index to which such Fund is based is no longer calculated or available; or (iii) such other event shall occur or condition exists that, in the opinion of the AMEX, makes further dealings on the AMEX inadvisable. In addition, the AMEX may
remove the Shares from listing and trading upon termination of the Trust.
As in the case of stocks traded on the AMEX, the brokers’
commission on transactions in the Funds will be based on negotiated commission rates at customary levels for retail customers.
In order to
provide current Share pricing information, the AMEX disseminates an updated “Indicative Intra-Day Value” (“IIV”) for each Fund. The Trust is not involved in or responsible for any aspect of the calculation
4
or dissemination of the IIVs and makes no warranty as to the accuracy of the IIVs. IIVs are expected to be disseminated on a per Fund basis every 15 seconds
during regular trading hours of the AMEX.
The AMEX will calculate and disseminate the IIV throughout the trading day for each Ultra
ProShares by (i) calculating the current value of all Equity Securities held by a Fund, (ii) calculating the estimated amount of the value of cash and Money Market Instruments held in the Fund’s portfolio (“Estimated Cash”),
(iii) calculating the marked-to-market gains or losses from the Fund’s total return swap exposure based on the Underlying Index percentage change, the swap costs determined by the daily imbedded weighted interest rate and the notional
value of the swap contracts, if any, (iv) calculating the marked-to-market gains or losses of the futures contracts and other Financial Instruments held by the Fund, if any, (v) adding the current value of Equity Securities, the Estimated
Cash, the marked-to-market gains/losses from swaps and the futures contracts and other Financial Instruments, to arrive at a value and (vi) dividing that value by the total shares outstanding to obtain current IIV.
The AMEX will calculate and disseminate the IIV throughout the trading day for each Short ProShares by (i) calculating the Estimated Cash,
(ii) calculating the marked-to-market gains/losses of swaps, futures and other Financial Instruments held by the Fund in a manner described above, (iii) adding the Estimated Cash and the marked-to-market gains or losses of the Financial
Instruments to arrive at a value, and (iv) dividing that value by the total shares outstanding to obtain current IIV.
INVESTMENT POLICIES, TECHNIQUES AND RELATED RISKS
A Fund may consider changing its benchmark or the index
underlying its benchmark at any time, including if, for example, the current index becomes unavailable; the Board of Trustees believes that the current index no longer serves the investment needs of a majority of shareholders or another index better
serves their needs; or the financial or economic environment makes it difficult for its investment results to correspond sufficiently to its current benchmark or underlying index. If believed appropriate, a Fund may specify a benchmark index for
itself that is “leveraged” or proprietary. Of course, there can be no assurance that a Fund will achieve its objective.
Fundamental securities analysis is not used by ProShare Advisors in seeking to correlate with the Funds’ respective benchmarks. Rather, ProShare Advisors primarily uses a mathematical approach to determine the investments a Fund makes
and techniques it employs. While ProShare Advisors attempts to minimize any “tracking error,” certain factors will tend to cause a Fund’s investment results to vary from a perfect correlation to its benchmark. See “Special
Considerations.”
Certain Funds have non-fundamental investment policies obligating such Fund to commit, under normal market
conditions, at least 80% of its assets to investments that, in combination, have economic characteristics similar to the type of investments suggested by its name. For purposes of such an investment policy, “assets” includes the
Fund’s net assets, as well as any amounts borrowed for investment purposes. In addition, for purposes of such an investment policy, “assets” includes not only the amount of a ProShares’ net assets attributable to investments
directly providing investment exposure to the type of investments suggested by its name (e.g., the value of stocks, or the value of derivative instruments such as futures, options or options on futures), but also the amount of the Fund’s net
assets that are segregated on the Fund’s books and records, as required by applicable regulatory guidance, or otherwise used to cover such investment exposure. The Board of Trustees has adopted a policy to provide investors with at least 60
days notice prior to changes in such an investment policy.
Additional information concerning the Funds and the securities and financial
instruments in which they may invest and investment techniques in which they may engage is set forth below.
Equity Securities
The market price of securities owned by a Fund may go up or down, sometimes rapidly or unpredictably. Securities may decline in value due to factors
affecting securities markets generally or particular industries represented in the securities markets. The value of a security may decline due to general market conditions which are not specifically related to a particular company, such as real or
perceived adverse economic conditions, changes in the general outlook for corporate earnings, changes in interest or currency rates, or adverse investor sentiment generally. They may also decline due to factors which affect a particular industry or
industries, such as labor shortages or increased production costs and competitive conditions within an industry. The value of a security may
5
also decline for a number of reasons that directly relate to the issuer, such as management performance, financial leverage and reduced demand for the
issuer’s goods or services. Equity securities generally have greater price volatility than fixed income securities, and the Funds are particularly sensitive to these market risks.
Foreign Securities
Certain of the Funds may invest in securities of foreign issuers (“foreign
securities”). These securities involve certain risks. These include the risk that an investment in a foreign issuer could be adversely affected as a result of a decline in value of the local currency versus the dollar. There is also the
possibility of expropriation, nationalization or confiscatory taxation, taxation of income earned in foreign nations or other taxes imposed with respect to investments in foreign nations, foreign exchange controls (which may include suspension of
the ability to transfer currency from a given country), default in foreign government securities, political or social instability or diplomatic developments which could affect investments in securities of issuers in foreign nations. Some countries
may withhold portions of interest and dividends at the source. In addition, in many countries there is less publicly available information about issuers than is available in reports about companies in the United States. Foreign companies are not
generally subject to uniform accounting, auditing and financial reporting standards, and auditing practices and requirements may not be comparable to those applicable to United States companies. Further, the Funds may encounter difficulties or be
unable to pursue legal remedies and obtain judgments in foreign courts.
Exposure to Emerging Markets Companies
The risks of investing in foreign securities are particularly high when securities of issuers based in developing (or “emerging market”)
countries are involved. Investing in emerging market countries involves certain risks not typically associated with investing in U.S. securities, and imposes risks greater than, or in addition to, risks of investing in foreign, developed countries.
These risks include: greater risks of nationalization or expropriation of assets of confiscatory taxation; currency devaluations and other currency exchange rate fluctuations; greater social, economic and political uncertainty and supervision and
regulation of the securities markets and participants in those markets; controls on foreign investment and limitations on reparation of invested capital and on the Fund’s ability to exchange local currencies for U.S. dollars; unavailability of
currency hedging techniques in certain emerging market countries; the difference in, or lack of, auditing and financial reporting standards, which may result in unavailability of material information about issuers; the risk that it may be more
difficult to obtain and/or enforce a judgment in a court outside the United States; and great price volatility, substantially less liquidity and significantly smaller market capitalization of securities markets. In addition, a number of emerging
market countries restrict, to various degrees, foreign investment in securities. High rates of inflation and rapid fluctuations in inflation rates have had, and may continue to have, negative effects on the economies and securities markets of
certain emerging market countries. Also, any change in the leadership or politics of emerging market countries, or the countries that exercise a significant influence over those countries, may halt the expansion of or reverse the liberalization of
foreign investment policies now occurring and adversely affect existing investment opportunities.
Exposure to Japanese Companies
The UltraShort MSCI Japan ProShares invests a large portion of their assets in securities providing economic exposure to companies located or operating in
Japan.
The UltraShort MSCI Japan ProShares’ performance will be affected by political, social and economic conditions in Japan. In
addition, the Japanese economy may be affected by Southeast Asian and Chinese consumer demands and the state of Southeast Asian and Chinese economies.
The Japanese economy and financial markets produced disappointing returns from 1990 to 2003. Over that period, and since then, the Japanese stock market, as measured by the Tokyo Stock Price Index, has been volatile.
The economy faced a number of problems such as non-performing loans, deflation, a large government budget deficit and low interest rates. A number of high profile bankruptcies occurred in the construction, real-estate and retail sectors. While many
structural improvements have been made at the corporate level since 2003, problems still persist, most notably a large government budget deficit.
Japanese institutional investors such as banks, insurance companies and pension funds have been large sellers of equities, particularly since 2001. The banks and insurance companies have been restructuring, and selling
6
unnecessary shareholdings as part of this process, although this selling has diminished over time. Pension funds invest in fixed interest investments and
tend to sell shares in connection with portfolio rebalancing when the equity market rises. All of this selling could negatively affect Japanese equity returns.
Poor performance of the global economy could negatively affect equity returns in Japan. Japan’s economy and stock market have in the recent past had a strong correlation with the U.S. economic cycle and U.S.
stock markets, and thus Japan’s economy may be affected by economic trouble in the U.S. Japan also has a growing economic relationship with China and other Southeast Asia countries, and thus Japan’s economy may also be affected by economic
trouble in those countries.
The Japanese Yen has appreciated against the US dollar since 1986 and has at times been volatile. Such
currency volatility could affect returns in the future. The Japanese Yen may also be affected by currency volatility elsewhere in Asia, especially Southeast Asia.
Some companies in the region may have less established shareholder governance and disclosure than standards in the U.S. Some companies are controlled by family and financial institutional investors whose investment
decisions may be hard to predict based on standard U.S.-based equity analysis. Consequently, certain such investments may be vulnerable to unfavorable decisions by management or shareholders.
Overseas trade is important to Japan’s economy. Japan has few natural resources and must export to pay for its imports of these basic requirements.
Trade sanctions or other protectionist measures could adversely impact Japan’s economy. Japan has also experienced natural disasters of varying degrees of severity, and the risks of such phenomena and the resulting damage continue to exist.
Exposure to Chinese Companies
The
UltraShort FTSE/Xinhua China 25 ProShares invests a large portion of their assets in securities providing economic exposure to companies located or operating in China.
The UltraShort FTSE/Xinhua China 25 ProShares’ performance will be affected by political, social and economic conditions in China. In addition, the Chinese economy may be affected by Southeast Asian and Japanese
consumer demands and the state of Southeast Asian and Japanese economies.
Investment in China is subject to legal, regulatory, monetary
and economic risks. China is dominated by the one-party rule of the Communist Party. Investments in China involve greater control over the economy, political and legal uncertainties and currency fluctuations or blockage, the risk that the Chinese
government may decide not to continue to support the economic reform programs implemented in 1978 and possibly return to the completely centrally planned economy that existed prior to 1978, and the risk of confiscatory taxation, and nationalization
or expropriation of assets. The Chinese securities markets are emerging markets characterized by a relatively small number of equity issues and relatively low trading volume, resulting in substantially less liquidity and greater price volatility.
The Chinese government exercises significant control over China’s economic growth through the allocation of resources, controlling
payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. The willingness and ability of the Chinese government to support the Chinese economies is
uncertain.
The growing interconnectivity of global economies and financial markets has increased the possibilities that conditions in one
country or region might adversely impact the issuers of securities in a different country or region. In particular, the adoption or continuation of protectionist trade policies by one or more countries, or a slowdown in the U.S. economy, could lead
to a decrease in demand for Chinese products and reduced flows of private capital to these economies.
Brokerage commissions and other fees
generally are higher for securities traded in Chinese markets. Government supervision and regulation of Chinese stock exchanges, currency markets, trading systems and brokers may be less than in the U.S. The procedures and rules governing
transactions and custody in China also may involve delays in payment, delivery or recovery of money or investments.
7
Companies in the Chinese region may not be subject to the same disclosure, accounting, auditing and
financial reporting standards and practices as U.S. companies. Thus, there may be less information publicly available about Chinese companies than about most U.S. companies.
At times, there is a high correlation among the Chinese markets. Accordingly, because the Fund invests its assets primarily in these markets, it is
subject to much greater risks of adverse events that occur in that region and may experience greater volatility than a fund that is more broadly diversified geographically. Political, social or economic disruptions in the region, including conflicts
and currency devaluations, even in countries in which the Fund is not invested, may adversely affect security values in other countries in the region and thus the Fund’s holdings.
If a Fund concentrates in a single region of the world, the Fund’s performance may be more volatile than that of a fund that invests globally. For
example, if these Chinese region securities fall out of favor, it may cause the Fund to underperform funds that do not concentrate in a single region of the world.
Futures Contracts and Related Options
The Funds may purchase or sell stock index futures contracts and options thereon as a
substitute for a comparable market position in the underlying securities or to satisfy regulatory requirements. A futures contract generally obligates the seller to deliver (and the purchaser to take delivery of) the specified commodity on the
expiration date of the contract. A stock index futures contract obligates the seller to deliver (and the purchaser to take) an amount of cash equal to a specific dollar amount (the contract multiplier) multiplied by the difference between the final
settlement price of a specific stock index futures contract and the price at which the agreement is made. No physical delivery of the underlying stocks in the index is made.
The Funds generally choose to engage in closing or offsetting transactions before final settlement wherein a second identical futures contract is sold to
offset a long position (or bought to offset a short position). In such cases the obligation is to deliver (or take delivery of) cash equal to a specific dollar amount (the contract multiplier) multiplied by the difference between the price of the
offsetting transaction and the price at which the original contract was entered into. If the original position entered into is a long position (futures contract purchased) there will be a gain (loss) if the offsetting sell transaction is done at a
higher (lower) price, inclusive of commissions. If the original position entered into is a short position (futures contract sold) there will be a gain (loss) if the offsetting buy transaction is done at a lower (higher) price, inclusive of
commissions.
Whether a Fund realizes a gain or loss from futures activities depends generally upon movements in the underlying
commodity. The extent of the Fund’s loss from an unhedged short position in futures contracts is potentially unlimited. The Funds may engage in related closing transactions with respect to options on futures contracts. The Funds intend to
engage in transactions in futures contracts that are traded on a U.S. exchange or board of trade or that have been approved for sale in the United States by the CFTC.
When a Fund purchases or sells a stock index futures contract, or sells an option thereon, the Fund “covers” its position. To cover its position, a Fund may enter into an offsetting position or segregate
with its custodian bank or on the books and records of the Fund (and mark-to-market on a daily basis) cash or liquid instruments that, when added to any amounts deposited with a futures commission merchant as margin, are equal to the market value of
the futures contract or otherwise “cover” its position.
The CFTC has eliminated limitations on futures trading by certain
regulated entities, including registered investment companies, and consequently registered investment companies may engage in unlimited futures transactions and options thereon provided that the investment adviser to the company claims an exclusion
from regulation as a commodity pool operator. In connection with its management of the Trust, the Advisor has claimed such an exclusion from registration as a commodity pool operator under the Commodity Exchange Act (the “CEA”). Therefore,
it is not subject to the registration and regulatory requirements of the CEA. Therefore, there are no limitations on the extent to which each Fund may engage in non-hedging transactions involving futures and options thereon, except as set forth in
the Funds’ Prospectus and SAI.
Upon entering into a futures contract, each Fund will be required to deposit with the broker an
amount of cash or cash equivalents in the range of approximately 5% to 7% of the contract amount (this amount is subject to
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change by the exchange on which the contract is traded). This amount, known as “initial margin,” is in the nature of a performance bond or good
faith deposit on the contract and is returned to each Fund upon termination of the futures contract, assuming all contractual obligations have been satisfied. Subsequent payments, known as “variation margin,” to and from the broker will be
made daily as the price of the index underlying the futures contract fluctuates, making the long and short positions in the futures contract more or less valuable, a process known as “marking-to-market.” At any time prior to expiration of
a futures contract, each Fund may elect to close the position by taking an opposite position, which will operate to terminate each Fund’s existing position in the contract.
A Fund may cover its long position in a futures contract by taking a short position in the instruments underlying the futures contract, or by taking
positions in instruments the prices of which are expected to move relatively consistently with the futures contract. A Fund may cover its short position in a futures contract by taking a long position in the instruments underlying the futures
contract, or by taking positions in instruments, the prices of which are expected to move relatively consistently inverse to the futures contract. A Fund may “cover” its short position in a futures contract by purchasing a call option on
the same futures contract with a strike price (i.e., an exercise price) as low or lower than the price of the futures contract, or, if the strike price of the call is greater than the price of the futures contract, the Fund will earmark, or
segregate cash or liquid instruments equal in value to the difference between the strike price of the call and the price of the future. A Fund may cover its short position in a futures contract by taking a long position in the instruments underlying
the futures contract, or by taking positions in instruments, the prices of which are expected to move relatively consistently with a long position in the futures contract. A Fund may cover long or short positions in futures by earmarking or
segregating with its custodian bank or on the books and records of the Funds (and mark-to-market on a daily basis) cash or liquid instruments that, when added to any amounts deposited with a futures commission merchant as margin, are equal to the
market value of the futures contract or otherwise “cover” its position.
A Fund may cover its sale of a call option on a
futures contract by taking a long position in the underlying futures contract at a price less than or equal to the strike price of the call option, or, if the long position in the underlying futures contract is established at a price greater than
the strike price of the written (sold) call, the Fund will earmark or maintain in a segregated account liquid instruments equal in value to the difference between the strike price of the call and the price of the future. A Fund may also cover its
sale of a call option by taking positions in instruments, the prices of which are expected to move relatively consistently with the call option. A Fund may cover its sale of a put option on a futures contract by taking a short position in the
underlying futures contract at a price greater than or equal to the strike price of the put option, or, if the short position in the underlying futures contract is established at a price less than the strike price of the written put, the Fund will
segregate cash or liquid instruments equal in value to the difference between the strike price of the put and the price of the future. A Fund may also cover its sale of a put option by taking positions in instruments the prices of which are expected
to move relatively consistently with the put option.
Although the Funds intend to sell futures contracts only if there is an active market
for such contracts, no assurance can be given that a liquid market will exist for any particular contract at any particular time. Many futures exchanges and boards of trade limit the amount of fluctuation permitted in futures contract prices during
a single trading day. Once the daily limit has been reached in a particular contract, no trades may be made that day at a price beyond that limit or trading may be suspended for specified periods during the day. Futures contract prices could move to
the limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of futures positions and potentially subjecting a Fund to substantial losses. If trading is not possible, or if a Fund determines not to
close a futures position in anticipation of adverse price movements, the Fund will be required to make daily cash payments of variation margin. The risk that the Fund will be unable to close out a futures position will be minimized by entering into
such transactions on a national securities exchange with an active and liquid secondary market.
Forward Contracts
A principal investment strategy of the Funds is to enter into Financial Instruments, which may include forward contracts, and for the Short ProShares,
that may be the primary or sole investment strategy. The Funds may enter into equity, equity index or interest rate forward contracts for purposes of attempting to gain exposure to an index or group of securities without actually purchasing these
securities, or to hedge a position. Forward contracts are two-party contracts pursuant to which one party agrees to pay the counterparty a fixed price for an agreed upon
9
amount of commodities, securities, or the cash value of the commodities, securities or the securities index, at an agreed upon date. When required by law, a
Fund will segregate liquid assets in an amount equal to the value of the Fund’s total assets committed to the consummation of such forward contracts. Obligations under forward contracts so covered will not be considered senior securities for
purposes of a Fund’s investment restriction concerning senior securities. Because they are two-party contracts and because they may have terms greater than seven days, forward contracts may be considered to be illiquid for the Fund’s
illiquid investment limitations. A Fund will not enter into any forward contract unless the Advisor believes that the other party to the transaction is creditworthy. A Fund bears the risk of loss of the amount expected to be received under a forward
contract in the event of the default or bankruptcy of a counterparty. If such a default occurs, a Fund will have contractual remedies pursuant to the forward contract, but such remedies may be subject to bankruptcy and insolvency laws which could
affect the Fund’s rights as a creditor.
Index Options
The Funds may purchase and write options on stock indexes to create investment exposure consistent with their investment objectives, hedge or limit the exposure of their positions, or create synthetic money market
positions.
A stock index fluctuates with changes in the market values of the stocks included in the index. Options on stock indexes
give the holder the right to receive an amount of cash upon exercise of the option. Receipt of this cash amount will depend upon the closing level of the stock index upon which the option is based being greater than (in the case of a call) or less
than (in the case of a put) the exercise price of the option. The amount of cash received, if any, will be the difference between the closing price of the index and the exercise price of the option, multiplied by a specified dollar multiple. The
writer (seller) of the option is obligated, in return for the premiums received from the purchaser of the option, to make delivery of this amount to the purchaser. All settlements of index options transactions are in cash.
Index options are subject to substantial risks, including the risk of imperfect correlation between the option price and the value of the underlying
securities composing the stock index selected and the risk that there might not be a liquid secondary market for the option. Because the value of an index option depends upon movements in the level of the index rather than the price of a particular
stock, whether a Fund will realize a gain or loss from the purchase or writing (sale) of options on an index depends upon movements in the level of stock prices in the stock market generally or, in the case of certain indexes, in an industry or
market segment, rather than upon movements in the price of a particular stock. This requires different skills and techniques than are required for predicting changes in the price of individual stocks. A Fund will not enter into an option position
that exposes the Fund to an obligation to another party, unless the Fund either (i) owns an offsetting position in securities or other options and/or (ii) earmarks or segregates with the Fund’s custodian bank cash or liquid
instruments that, when added to the premiums deposited with respect to the option, are equal to the market value of the underlying stock index not otherwise covered.
The Funds may engage in transactions in stock index options listed on national securities exchanges or traded in the OTC market as an investment vehicle for the purpose of realizing the Fund’s investment
objective. Options on indexes are settled in cash, not by delivery of securities. The exercising holder of an index option receives, instead of a security, cash equal to the difference between the closing price of the securities index and the
exercise price of the option.
Some stock index options are based on a broad market index such as the S&P 500 Index, the NYSE Composite
Index, or the AMEX Major Market Index, or on a narrower index such as the Philadelphia Stock Exchange Over-the-Counter Index. Options currently are traded on the Chicago Board Options Exchange (the “CBOE”), the AMEX, and other exchanges
(“Exchanges”). Purchased OTC options and the cover for written OTC options will be subject to the respective Fund’s 15% limitation on investment in illiquid securities. See “Illiquid Securities.”
Each of the Exchanges has established limitations governing the maximum number of call or put options on the same index which may be bought or written
(sold) by a single investor, whether acting alone or in concert with others (regardless of whether such options are written on the same or different Exchanges or are held or written on one or more accounts or through one or more brokers). Under
these limitations, option positions of all
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investment companies advised by the same investment adviser are combined for purposes of these limits. Pursuant to these limitations, an Exchange may order
the liquidation of positions and may impose other sanctions or restrictions. These position limits may restrict the number of listed options which a Fund may buy or sell; however, the Advisor intends to comply with all limitations.
Options on Securities
The Funds may buy and write
(sell) options on securities for the purpose of realizing their respective investment objective. By buying a call option, a Fund has the right, in return for a premium paid during the term of the option, to buy the securities underlying the option
at the exercise price. By writing a call option on securities, a Fund becomes obligated during the term of the option to sell the securities underlying the option at the exercise price if the option is exercised. By buying a put option, a Fund has
the right, in return for a premium paid during the term of the option, to sell the securities underlying the option at the exercise price. By writing a put option, a Fund becomes obligated during the term of the option to purchase the securities
underlying the option at the exercise price if the option is exercised. During the term of the option, the writer may be assigned an exercise notice by the broker-dealer through whom the option was sold. The exercise notice would require the writer
to deliver, in the case of a call, or take delivery of, in the case of a put, the underlying security against payment of the exercise price. This obligation terminates upon expiration of the option, or at such earlier time that the writer effects a
closing purchase transaction by purchasing an option covering the same underlying security and having the same exercise price and expiration date as the one previously sold. Once an option has been exercised, the writer may not execute a closing
purchase transaction. To secure the obligation to deliver the underlying security in the case of a call option, the writer of a call option is required to deposit in escrow the underlying security or other assets in accordance with the rules of the
Options Clearing Corporation (the “OCC”), an institution created to interpose itself between buyers and sellers of options. The OCC assumes the other side of every purchase and sale transaction on an exchange and, by doing so, gives its
guarantee to the transaction. When writing call options on securities, a Fund may cover its position by owning the underlying security on which the option is written. Alternatively, the Fund may cover its position by owning a call option on the
underlying security, on a share-for-share basis, which is deliverable under the option contract at a price no higher than the exercise price of the call option written by the Fund or, if higher, by owning such call option and depositing and
segregating cash or liquid instruments equal in value to the difference between the two exercise prices. In addition, a Fund may cover its position by segregating cash or liquid instruments equal in value to the exercise price of the call option
written by the Fund. When a Fund writes a put option, the Fund will segregate with its custodian bank cash or liquid instruments having a value equal to the exercise value of the option. The principal reason for a Fund to write call options on
stocks held by the Fund is to attempt to realize, through the receipt of premiums, a greater return than would be realized on the underlying securities alone.
If a Fund that writes an option wishes to terminate the Fund’s obligation, the Fund may effect a “closing purchase transaction.” The Fund accomplishes this by buying an option of the same series as the
option previously written by the Fund. The effect of the purchase is that the writer’s position will be canceled by the OCC. However, a writer may not effect a closing purchase transaction after the writer has been notified of the exercise of
an option. Likewise, a Fund which is the holder of an option may liquidate its position by effecting a “closing sale transaction.” The Fund accomplishes this by selling an option of the same series as the option previously purchased by the
Fund. There is no guarantee that either a closing purchase or a closing sale transaction can be affected. If any call or put option is not exercised or sold, the option will become worthless on its expiration date. A Fund will realize a gain (or a
loss) on a closing purchase transaction with respect to a call or a put option previously written by the Fund if the premium, plus commission costs, paid by the Fund to purchase the call or put option to close the transaction is less (or greater)
than the premium, less commission costs, received by the Fund on the sale of the call or the put option. The Fund also will realize a gain if a call or put option which the Fund has written lapses unexercised, because the Fund would retain the
premium.
Although certain securities exchanges attempt to provide continuously liquid markets in which holders and writers of options can
close out their positions at any time prior to the expiration of the option, no assurance can be given that a market will exist at all times for all outstanding options purchased or sold by a Fund. If an options market were to become unavailable,
the Fund would be unable to realize its profits or limit its losses until the Fund could exercise options it holds, and the Fund would remain obligated until options it wrote were exercised or expired. Reasons for the absence of liquid secondary
market on an exchange include the following: (i) there may be insufficient trading interest in certain options; (ii) restrictions may be imposed by an exchange on opening or
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closing transactions or both; (iii) trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal operations on an exchange; (v) the facilities of an exchange or the OCC may not at all times be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class or series of options) would cease to exist, although outstanding options on that exchange that
had been issued by the OCC as a result of trades on that exchange would continue to be exercisable in accordance with their terms.
Swap Agreements
A principal investment strategy of the Funds is to enter into Financial Instruments, which may include swap agreements, and, for the Short
ProShares, that may be the primary or sole investment strategy (along with selling securities short). The Funds may enter into equity, equity index or interest rate swap agreements for purposes of attempting to gain exposure to an index or group of
securities without actually purchasing those securities, or to hedge a position. Swap agreements are two-party contracts entered into primarily by institutional investors for periods ranging from a day to more than one year. In a standard
“swap” transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross returns to be exchanged or “swapped” between
the parties are calculated with respect to a “notional amount,” i.e., the return on or increase in value of a particular dollar amount invested in a “basket” of securities representing a particular index or group of securities.
Forms of swap agreements include interest rate caps, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates exceed a specified rate, or “cap”; interest rate floors, under
which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates fall below a specified level, or “floor”; and interest rate collars, under which a party sells a cap and purchases a floor or
vice versa in an attempt to protect itself against interest rate movements exceeding given minimum or maximum levels.
Most swap agreements
entered into by the Funds calculate the obligations of the parties to the agreement on a “net basis.” Consequently, a Fund’s current obligations (or rights) under a swap agreement will generally be equal only to the net amount to be
paid or received under the agreement based on the relative values of the positions held by each party to the agreement (the “net amount”).
A Fund’s current obligations under a swap agreement will be accrued daily (offset against any amounts owing to the Fund) and any accrued but unpaid net amounts owed to a swap counterparty will be covered by
segregating or earmarking assets determined to be liquid. Obligations under swap agreements so covered will not be construed to be “senior securities” for purposes of a Fund’s investment restriction concerning senior securities.
Because they are two-party contracts and because they may have terms of greater than seven days, swap agreements may be considered to be illiquid for purposes of the Funds’ illiquid investment limitations. A Fund will not enter into any swap
agreement unless the Advisor believes that the other party to the transaction is creditworthy. A Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement
counterparty. If such a default occurs, a Fund will have contractual remedies pursuant to the swap agreements, but such remedies may be subject to bankruptcy and insolvency laws which could affect the Fund’s right as a creditor.
Each Fund may enter into swap agreements to invest in a market without owning or taking physical custody of securities in circumstances in which direct
investment is restricted for legal reasons or is otherwise impracticable. The counterparty to any swap agreement will typically be a bank, investment banking firm or broker/dealer. On a long swap, the counterparty will generally agree to pay the
Fund the amount, if any, by which the notional amount of the swap agreement would have increased in value had it been invested in the particular stocks, plus the dividends that would have been received on those stocks. The Fund will agree to pay to
the counterparty a floating rate of interest on the notional amount of the swap agreement plus the amount, if any, by which the notional amount would have decreased in value had it been invested in such stocks. Therefore, the return to the Fund on
any swap agreement should be the gain or loss on the notional amount plus dividends on the stocks less the interest paid by the Fund on the notional amount. As a trading technique, the Advisor may substitute physical securities with a swap agreement
having risk characteristics substantially similar to the underlying securities.
Swap agreements typically are settled on a net basis,
which means that the two payment streams are netted out, with the Fund receiving or paying, as the case may be, only the net amount of the two payments. Payments may
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be made at the conclusion of a swap agreement or periodically during its term. Swap agreements do not involve the delivery of securities or other underlying
assets. Accordingly, the risk of loss with respect to swap agreements is limited to the net amount of payments that a Fund is contractually obligated to make. If the other party to a swap agreement defaults, a Fund’s risk of loss consists of
the net amount of payments that such Fund is contractually entitled to receive, if any. The net amount of the excess, if any, of a Fund’s obligations over its entitlements with respect to each equity swap will be accrued on a daily basis and an
amount of cash or liquid assets, having an aggregate NAV at least equal to such accrued excess will be earmarked or segregated by a Fund’s custodian. Inasmuch as these transactions are entered into for hedging purposes or are offset by
earmarked or segregated cash or liquid assets, as permitted by applicable law, the Funds and their Advisor believe that transactions do not constitute senior securities within the meaning of the 1940 Act, and, accordingly, will not treat them as
being subject to a Fund’s borrowing restrictions.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. As a result, the swap market has become relatively liquid in comparison with the markets for other similar instruments which are
traded in the over-the-counter market. The Advisor, under the supervision of the Board of Trustees, is responsible for determining and monitoring the liquidity of the Funds’ transactions in swap agreements.
The use of equity swaps is a highly specialized activity which involves investment techniques and risks different from those associated with ordinary
portfolio securities transactions.
Short Sales
The Funds may engage in short sales transactions. To complete such a transaction, a Fund must borrow the security to make delivery to the buyer. The Fund is then obligated to replace the security borrowed by borrowing the same security from
another lender, purchasing it at the market price at the time of replacement or paying the lender an amount equal to the cost of purchasing the security. The price at such time may be more or less than the price at which the security was sold by the
Fund. Until the security is replaced, the Fund is required to repay the lender any dividends or interest which accrues during the period of the loan. To borrow the security, the Fund also may be required to pay a premium, which would increase the
cost of the security sold. The net proceeds of the short sale will be retained by the broker, to the extent necessary to meet the margin requirements, until the short position is closed out. A Fund also will incur transaction costs in effecting
short sales.
A Fund will incur a loss as a result of a short sale if the price of the security increases between the date of the short
sale and the date on which the Fund replaces the borrowed security. A Fund will realize a gain if the price of the security declines in price between those dates. The amount of any gain will be decreased, and the amount of any loss increased, by the
amount of the premium, dividends or interest a Fund may be required to pay, if any, in connection with a short sale.
The Funds may make
short sales “against the box,” i.e., when a security identical to or convertible or exchangeable into one owned by a Fund is borrowed and sold short. Whenever a Fund engages in short sales, it earmarks or segregates liquid securities in an
amount that, when combined with the amount of collateral deposited with the broker in connection with the short sale, equals the current market value of the security sold short. The earmarked or segregated assets are marked to market daily.
The Funds will not sell short the equity securities of issuers contained in the NASDAQ-100 Index.
Depository Receipts
Each Ultra ProShares may invest
in ADRs. For many foreign securities, U.S. Dollar denominated ADRs, which are traded in the United States on exchanges or over-the-counter, are issued by domestic banks. ADRs represent the right to receive securities of foreign issuers
deposited in a domestic bank or a correspondent bank. ADRs do not eliminate all the risk inherent in investing in the securities of foreign issuers. However, by investing in ADRs rather than directly in foreign issuers’ stock, the Funds can
avoid currency risks during the settlement period for either purchase or sales.
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In general, there is a large, liquid market in the United States for many ADRs. The information available
for ADRs is subject to the accounting, auditing and financial reporting standards of the domestic market or exchange on which they are traded, which standards are more uniform and more exacting than those to which many foreign issuers may be
subject. Certain ADRs, typically those denominated as unsponsored, require the holders thereof to bear most of the costs of such facilities, while issuers of sponsored facilities normally pay more of the costs thereof. The depository of an
unsponsored facility frequently is under no obligation to distribute shareholder communications received from the issuer of the deposited securities or to pass through the voting rights to facility holders with respect to the deposited securities,
whereas the depository of a sponsored facility typically distributes shareholder communications and passes through the voting rights.
The
Funds may invest in both sponsored and unsponsored ADRs. Unsponsored ADRs programs are organized independently and without the cooperation of the issuer of the underlying securities. As result, available information concerning the issuers may not be
as current for sponsored ADRs, and the prices of unsponsored depository receipts may be more volatile than if such instruments were sponsored by the issuer.
A Fund may also invest in Global Depository Receipts (“GDRs”). GDRs are receipts for shares in a foreign-based corporation traded in capital markets around the world. While ADRs permit foreign corporations
to offer shares to American citizens, GDRs allow companies in Europe, Asia, the United States and Latin American to offer shares in many markets around the world.
U.S. Government Securities
Each Fund also may invest in U.S. government securities in pursuit of their investment
objectives, as “cover” for the investment techniques these Funds employ, or for liquidity purposes.
U.S. government securities
include U.S. Treasury securities, which are backed by the full faith and credit of the U.S. Treasury and which differ only in their interest rates, maturities, and times of issuance. U.S. Treasury bills have initial maturities of one year or less;
U.S. Treasury notes have initial maturities of one to ten years; and U.S. Treasury bonds generally have initial maturities of greater than ten years. Certain U.S. government securities are issued or guaranteed by agencies or instrumentalities of the
U.S. government including, but not limited to, obligations of U.S. government agencies or instrumentalities, such as the Federal National Mortgage Association, the Government National Mortgage Association, the Small Business Administration, the
Federal Farm Credit Administration, the Federal Home Loan Banks, Banks for Cooperatives (including the Central Bank for Cooperatives), the Federal Land Banks, the Federal Intermediate Credit Banks, the Tennessee Valley Authority, the Export-Import
Bank of the United States, the Commodity Credit Corporation, the Federal Financing Bank, the Student Loan Marketing Association, and the National Credit Union Administration. Some obligations issued or guaranteed by U.S. government agencies and
instrumentalities, including, for example, Government National Mortgage Association pass-through certificates, are supported by the full faith and credit of the U.S. Treasury. Other obligations issued by or guaranteed by Federal agencies, such as
those securities issued by the Federal National Mortgage Association, are supported by the discretionary authority of the U.S. government to purchase certain obligations of the federal agency, while other obligations issued by or guaranteed by
federal agencies, such as those of the Federal Home Loan Banks, are supported by the right of the issuer to borrow from the U.S. Treasury. While the U.S. government provides financial support to such U.S. government-sponsored Federal agencies, no
assurance can be given that the U.S. government will always do so, since the U.S. government is not so obligated by law. U.S. Treasury notes and bonds typically pay coupon interest semi-annually and repay the principal at maturity.
Yields on U.S. government securities are dependent on a variety of factors, including the general conditions of the money and bond markets, the size of a
particular offering, and the maturity of the obligation. Debt securities with longer maturities tend to produce higher yields and are generally subject to potentially greater capital appreciation and depreciation than obligations with shorter
maturities and lower yields. The market value of U.S. government securities generally varies inversely with changes in market interest rates. An increase in interest rates, therefore, would generally reduce the market value of a Fund’s
portfolio investments in U.S. government securities, while a decline in interest rates would generally increase the market value of a Fund’s portfolio investments in these securities.
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Repurchase Agreements
Each of the Funds may enter into repurchase agreements with financial institutions in pursuit of their investment objectives, as “cover” for the investment techniques the Funds employ, or for
liquidity purposes. Under a repurchase agreement, a Fund purchases a debt security and simultaneously agrees to sell the security back to the seller at a mutually agreed-upon future price and date, normally one day or a few days later. The resale
price is greater than the purchase price, reflecting an agreed-upon market interest rate during the purchaser’s holding period. While the maturities of the underlying securities in repurchase transactions may be more than one year, the term of
each repurchase agreement will always be less than one year. The Funds follow certain procedures designed to minimize the risks inherent in such agreements. These procedures include effecting repurchase transactions only with large, well-capitalized
and well-established financial institutions whose condition will be continually monitored by ProShare Advisors. In addition, the value of the collateral underlying the repurchase agreement will always be at least equal to the repurchase price,
including any accrued interest earned on the repurchase agreement. In the event of a default or bankruptcy by a selling financial institution, a Fund will seek to liquidate such collateral which could involve certain costs or delays and, to the
extent that proceeds from any sale upon a default of the obligation to repurchase were less than the repurchase price, the Fund could suffer a loss. A Fund also may experience difficulties and incur certain costs in exercising its rights to the
collateral and may lose the interest the Fund expected to receive under the repurchase agreement. Repurchase agreements usually are for short periods, such as one week or less, but may be longer. It is the current policy of the Funds not to invest
in repurchase agreements that do not mature within seven days if any such investment, together with any other illiquid assets held by the Fund, amounts to more than 15% of the Fund’s total net assets. The investments of each of the Funds in
repurchase agreements at times may be substantial when, in the view of ProShare Advisors, liquidity, investment, regulatory, or other considerations so warrant.
Money Market Instruments
To seek its investment objective, as a cash reserve, for liquidity
purposes, or as “cover” for positions it has taken, each Fund may invest all or part of the Fund’s assets in cash or cash equivalents, which include, but are not limited to, short-term money market instruments, U.S. government
securities, certificates of deposit, bankers acceptances, or repurchase agreements secured by U.S. government securities.
Reverse Repurchase Agreements
Each Fund may use reverse repurchase agreements as part of its investment strategy. Reverse repurchase agreements involve sales by
a Fund of portfolio assets concurrently with an agreement by the Fund to repurchase the same assets at a later date at a fixed price. Generally, the effect of such a transaction is that the Fund can recover all or most of the cash invested in the
portfolio securities involved during the term of the reverse repurchase agreement, while the Fund will be able to keep the interest income associated with those portfolio securities. Such transactions are advantageous only if the interest cost to
the Fund of the reverse repurchase transaction is less than the cost of obtaining the cash otherwise. Opportunities to achieve this advantage may not always be available, and the Fund intends to use the reverse repurchase technique only when it will
be to the Fund’s advantage to do so. The Fund will earmark or segregate cash or liquid instruments equal in value to the Fund’s obligations in respect of reverse repurchase agreements.
Borrowing
The Funds may borrow money for cash
management purposes or investment purposes. Borrowing for investment is known as leveraging. Leveraging investments, by purchasing securities with borrowed money, is a speculative technique which increases investment risk, but also increases
investment opportunity. Since substantially all of a Fund’s assets will fluctuate in value, whereas the interest obligations on borrowings may be fixed, the net asset value per share of the Fund will fluctuate more when the Fund is leveraging
it investments than would otherwise be the case. Moreover, interest costs on borrowings may fluctuate with changing market rates of interest and may partially offset or exceed the returns on the borrowed funds. Under adverse conditions, a Fund might
have to sell portfolio securities to meet interest or principal payments at a time when investment considerations would not favor such sales.
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As required by the 1940 Act, a Fund must maintain continuous asset coverage (total assets, including
assets acquired with borrowed funds, less liabilities exclusive of borrowings) of 300% of all amounts borrowed. If at any time the value of a Fund’s assets should fail to meet this 300% coverage test, the Fund, within three days (not including
weekends and holidays), will reduce the amount of the Fund’s borrowings to the extent necessary to meet this 300% coverage. Maintenance of this percentage limitation may result in the sale of portfolio securities at a time when investment
considerations would not favor such sale. In addition to the foregoing, the Funds are authorized to borrow money as a temporary measure for extraordinary or emergency purposes in amounts not in excess of 5% of the value of each Fund’s total
assets. This borrowing is not subject to the foregoing 300% asset coverage requirement. The Funds are authorized to pledge portfolio securities as ProShare Advisors deems appropriate in connection with any borrowings.
Each Fund may also enter into reverse repurchase agreements, which may be viewed as a form of borrowing, with financial institutions. However, to the
extent a Fund “covers” its repurchase obligations as described above in “Reverse Repurchase Agreements,” such agreement will not be considered to be a “senior security” and, therefore, will not be subject to the 300%
asset coverage requirement otherwise applicable to borrowings by that Fund.
Lending of Portfolio Securities
Subject to the investment restrictions set forth below, a Fund may lend its portfolio securities to brokers, dealers, and financial institutions, provided
that cash equal to at least 100% of the market value of the securities loaned is deposited by the borrower with the Fund and is maintained each business day in a segregated account pursuant to applicable regulations. While such securities are on
loan, the borrower will pay the lending Fund any income accruing thereon, and the Fund may invest the cash collateral in portfolio securities, thereby earning additional income. A Fund will not lend more than 33 1/3% of the value of the Fund’s
total assets. Loans would be subject to termination by the lending Fund on four business days’ notice, or by the borrower on one day’s notice. Borrowed securities must be returned when the loan is terminated. Any gain or loss in the market
price of the borrowed securities which occurs during the term of the loan inures to the lending Fund and that Fund’s shareholders. There may be risks of delay in receiving additional collateral or risks of delay in recovery of the securities or
even loss of rights in the securities lent should the borrower of the securities fail financially. A Fund may pay reasonable finders, borrowers, administrative, and custodial fees in connection with a loan.
When-Issued and Delayed-Delivery Securities
Each
Fund, from time to time, in the ordinary course of business, may purchase securities on a when-issued or delayed-delivery basis (i.e., delivery and payment can take place between a month and 120 days after the date of the transaction). These
securities are subject to market fluctuations and no interest accrues to the purchaser during this period. At the time a Fund makes the commitment to purchase securities on a when-issued or delayed-delivery basis, the Fund will record the
transaction and thereafter reflect the value of the securities, each day, in determining the Fund’s net asset value. Each Fund will not purchase securities on a when-issued or delayed-delivery basis if, as a result, more than 15% of the
Fund’s net assets would be so invested. At the time of delivery of the securities, the value of the securities may be more or less than the purchase price.
The Trust will earmark or segregate cash or liquid instruments equal to or greater in value than the Fund’s purchase commitments for such when-issued or delayed-delivery securities, or when the Trust does not
believe that a Fund’s net asset value or income will be adversely affected by the Fund’s purchase of securities on a when-issued or delayed delivery basis.
Investments in Other Investment Companies
The Funds may invest in the securities of other investment
companies to the extent that such an investment would be consistent with the requirements of the 1940 Act. If a Fund invests in, and, thus, is a shareholder of, another investment company, the Fund’s shareholders will indirectly bear the
Fund’s proportionate share of the fees and expenses paid by such other investment company, including advisory fees, in addition to both the management fees payable directly by the Fund to the Fund’s own investment adviser and the other
expenses that the Fund bears directly in connection with the Fund’s own operations.
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Real Estate Investment Trusts
Each Fund may invest in real estate investment trusts (“REITs”). Equity REITs invest primarily in real property while mortgage REITs make construction, development and long term mortgage loans. Their value
may be affected by changes in the value of the underlying property of the REIT, the creditworthiness of the issuer, property taxes, interest rates, and tax and regulatory requirements, such as those relating to the environment. REITs are dependent
upon management skill, are not diversified and are subject to heavy cash flow dependency, default by borrowers, self liquidation and the possibility of failing to qualify for tax free income status under the Code and failing to maintain exempt
status under the 1940 Act.
Illiquid Securities
Each Fund may purchase illiquid securities, including securities that are not readily marketable and securities that are not registered (“restricted securities”) under the Securities Act, but which can be
sold to qualified institutional buyers under Rule 144A under the Securities Act. A Fund will not invest more than 15% of the Fund’s net assets in illiquid securities. The term “illiquid securities” for this purpose means securities
that cannot be disposed of within seven days in the ordinary course of business at approximately the amount at which the Fund has valued the securities. Under the current guidelines of the staff of the SEC, illiquid securities also are considered to
include, among other securities, purchased over-the-counter options, certain cover for OTC options, repurchase agreements with maturities in excess of seven days, and certain securities whose disposition is restricted under the Federal securities
laws. The Fund may not be able to sell illiquid securities when ProShare Advisors considers it desirable to do so or may have to sell such securities at a price that is lower than the price that could be obtained if the securities were more liquid.
In addition, the sale of illiquid securities also may require more time and may result in higher dealer discounts and other selling expenses than does the sale of securities that are not illiquid. Illiquid securities also may be more difficult to
value due to the unavailability of reliable market quotations for such securities, and investments in illiquid securities may have an adverse impact on net asset value.
Institutional markets for restricted securities have developed as a result of the promulgation of Rule 144A under the Securities Act, which provides a safe harbor from Securities Act registration requirements for
qualifying sales to institutional investors. When Rule 144A securities present an attractive investment opportunity and otherwise meet selection criteria, a Fund may make such investments. Whether or not such securities are illiquid depends on the
market that exists for the particular security. The staff of the SEC has taken the position that the liquidity of Rule 144A restricted securities is a question of fact for a board of trustees to determine, such determination to be based on a
consideration of the readily-available trading markets and the review of any contractual restrictions. The staff also has acknowledged that, while a board of trustees retains ultimate responsibility, trustees may delegate this function to an
investment adviser. The Board of Trustees of Funds has delegated this responsibility for determining the liquidity of Rule 144A restricted securities which may be invested in by a Fund to ProShare Advisors. It is not possible to predict with
assurance exactly how the market for Rule 144A restricted securities or any other security will develop. A security which when purchased enjoyed a fair degree of marketability may subsequently become illiquid and, accordingly, a security which was
deemed to be liquid at the time of acquisition may subsequently become illiquid. In such event, appropriate remedies will be considered to minimize the effect on the Fund’s liquidity.
Portfolio Turnover
Portfolio turnover may vary
from year to year, as well as within a year. The overall reasonableness of brokerage commissions is evaluated by ProShare Advisors based upon its knowledge of available information as to the general level of commissions paid by other institutional
investors for comparable services. In addition, a Fund’s portfolio turnover level may adversely affect the ability of the Fund to achieve its investment objective. “Portfolio Turnover Rate” is defined under the rules of the SEC as the
value of the securities purchased or securities sold, excluding all securities whose maturities at time of acquisition were one year or less, divided by the average monthly value of such securities owned during the year. Based on this definition,
instruments with remaining maturities of less than one year are excluded from the calculation of portfolio turnover rate. Instruments excluded from the calculation of portfolio turnover generally would include the futures contracts and option
contracts in which the Funds invest since such contracts generally have a remaining maturity of less than one year. Pursuant to the formula prescribed by the SEC, the portfolio turnover rate for each Fund is calculated without regard to instruments,
including options and futures contracts, having a maturity of less than one year. Exchange-traded
17
funds, such as the Funds, may incur very low levels of portfolio turnover (or none at all in accordance with the SEC methodology described above) because of
the way in which they operate and the way shares are created in creation units. Each Fund’s turnover rate for the fiscal year ended May 31, 2007 is set forth in the Funds’ annual report.
SPECIAL CONSIDERATIONS
As discussed above and in the Prospectus, the Funds present certain risks, some of
which are further described below.
Tracking and Correlation
While the Funds do not expect that their daily returns will deviate adversely from their respective daily investment objectives, several factors may affect their ability to achieve this correlation. Among these
factors are: (1) a Fund’s expenses, including brokerage (which may be increased by high portfolio turnover) and the cost of the investment techniques employed by that Fund; (2) less than all of the securities in the benchmark index
being held by a Fund and securities not included in the benchmark index being held by a Fund; (3) an imperfect correlation between the performance of instruments held by a Fund, such as futures contracts, and the performance of the underlying
securities in the cash market; (4) bid-ask spreads (the effect of which may be increased by portfolio turnover); (5) holding instruments traded in a market that has become illiquid or disrupted; (6) a Fund’s share prices being
rounded to the nearest cent; (7) changes to the benchmark index that are not disseminated in advance; (8) the need to conform a Fund’s portfolio holdings to comply with investment restrictions or policies or regulatory or tax law
requirements; and (9) early and unanticipated closings of the markets on which the holdings of a Fund trade, resulting in the inability of the Fund to execute intended portfolio transactions. While close tracking of any Fund to its benchmark
may be achieved on any single trading day, over time the cumulative percentage increase or decrease in the net asset value of the Shares of a Fund may diverge significantly from the cumulative percentage decrease or increase in the benchmark due to
a compounding effect.
Leverage
Each Fund intends regularly to use leveraged investment techniques in pursuing its investment objectives. Utilization of leverage involves special risks and should be considered to be speculative. Leverage exists when a Fund achieves the
right to a return on a capital base that exceeds the amount the Fund has invested. Leverage creates the potential for greater gains to shareholders of these Funds during favorable market conditions and the risk of magnified losses during adverse
market conditions. Leverage is likely to cause higher volatility of the net asset values of these Funds’ Shares. Leverage may involve the creation of a liability that does not entail any interest costs or the creation of a liability that
requires the Fund to pay interest which would decrease the Fund’s total return to shareholders. If these Funds achieve their investment objectives, during adverse market conditions, shareholders should experience a loss greater than they would
have incurred had these Funds not been leveraged.
Special Note Regarding the Correlation Risks of Leveraged Funds
. As discussed in
the Prospectus, each of the Funds are “leveraged” funds in the sense that each has an investment objective to match a multiple of the performance of an index on a given day. These ProFunds are subject to all of the correlation risks
described in the Prospectus. In addition, there is a special form of correlation risk that derives from these ProFunds’ use of leverage, which is that for periods greater than one day, the use of leverage tends to cause the performance of a
ProFund to be either greater than, or less than, the index performance times the stated multiple in the fund objective.
A leveraged
fund’s return for periods longer than one day is primarily a function of the following:
|
c)
|
financing rates associated with leverage;
|
|
e)
|
dividends paid by companies in the index; and
|
18
The fund performance for a leveraged fund can be estimated given any set of assumptions for the
factors described above. The tables below illustrate the impact of two factors, index volatility and index performance, on a leveraged fund. Index volatility is a statistical measure of the magnitude of fluctuations in the returns of an index and is
calculated as the standard deviation of the natural logarithms of one plus the index return (calculated daily), multiplied by the square root of the number of trading days per year (assumed to be 252). The tables show estimated fund returns for
a number of combinations of index performance and index volatility over a one year period. Assumptions used in the tables include: a) no dividends paid by the companies included in the index; b) no fund expenses; and c) borrowing/lending rates (to
obtain leverage) of zero percent. If fund expenses were included, the fund’s performance would be lower than shown.
The first table
below shows an example in which a leveraged fund that has an investment objective to correspond to twice (200% of) the daily performance of an index. The leveraged fund could be expected to achieve a 20% return on a yearly basis if the index
performance was 10%, absent any costs or the correlation risk or other factors described above and in the Prospectus under “Correlation Risk.” However, as the table shows, with an index volatility of 20%, such a fund would return 16.3%,
again absent any costs or other factors described above and in the Prospectus under “Correlation Risk.” In the charts below, areas shaded green represent those scenarios where a leveraged fund with the investment objective described will
outperform (i.e., return more than) the index performance times the stated multiple in the Fund’s investment objective; conversely areas shaded red represent those scenarios where the Fund will underperform (i.e., return less than) the index
performance times the stated multiple in the Fund’s investment objective.
Estimated Fund Return Over One Year When the Fund Objective is to Seek
Daily Investment Results, Before Fund Fees and Expenses and Leverage Costs, that Correspond to Twice (200%) the Daily Performance of an Index.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year Index
Performance
|
|
200%
One Year Index
Performance
|
|
Index Volatility
|
|
|
|
|
0%
|
|
|
5%
|
|
|
10%
|
|
|
15%
|
|
|
20%
|
|
|
25%
|
|
|
30%
|
|
|
35%
|
|
|
40%
|
|
|
-40%
|
|
-80%
|
|
-64.0
|
%
|
|
-64.1
|
%
|
|
-64.4
|
%
|
|
-64.8
|
%
|
|
-65.4
|
%
|
|
-66.2
|
%
|
|
-67.1
|
%
|
|
-68.2
|
%
|
|
-69.3
|
%
|
|
-35%
|
|
-70%
|
|
-57.8
|
%
|
|
-57.9
|
%
|
|
-58.2
|
%
|
|
-58.7
|
%
|
|
-59.4
|
%
|
|
-60.3
|
%
|
|
-61.4
|
%
|
|
-62.6
|
%
|
|
-64.0
|
%
|
|
-30%
|
|
-60%
|
|
-51.0
|
%
|
|
-51.1
|
%
|
|
-51.5
|
%
|
|
-52.1
|
%
|
|
-52.9
|
%
|
|
-54.0
|
%
|
|
-55.2
|
%
|
|
-56.6
|
%
|
|
-58.2
|
%
|
|
-25%
|
|
-50%
|
|
-43.8
|
%
|
|
-43.9
|
%
|
|
-44.3
|
%
|
|
-45.0
|
%
|
|
-46.0
|
%
|
|
-47.2
|
%
|
|
-48.6
|
%
|
|
-50.2
|
%
|
|
-52.1
|
%
|
|
-20%
|
|
-40%
|
|
-36.0
|
%
|
|
-36.2
|
%
|
|
-36.6
|
%
|
|
-37.4
|
%
|
|
-38.5
|
%
|
|
-39.9
|
%
|
|
-41.5
|
%
|
|
-43.4
|
%
|
|
-45.5
|
%
|
|
-15%
|
|
-30%
|
|
-27.8
|
%
|
|
-27.9
|
%
|
|
-28.5
|
%
|
|
-29.4
|
%
|
|
-30.6
|
%
|
|
-32.1
|
%
|
|
-34.0
|
%
|
|
-36.1
|
%
|
|
-38.4
|
%
|
|
-10%
|
|
-20%
|
|
-19.0
|
%
|
|
-19.2
|
%
|
|
-19.8
|
%
|
|
-20.8
|
%
|
|
-22.2
|
%
|
|
-23.9
|
%
|
|
-26.0
|
%
|
|
-28.3
|
%
|
|
-31.0
|
%
|
|
-5%
|
|
-10%
|
|
-9.8
|
%
|
|
-10.0
|
%
|
|
-10.6
|
%
|
|
-11.8
|
%
|
|
-13.3
|
%
|
|
-15.2
|
%
|
|
-17.5
|
%
|
|
-20.2
|
%
|
|
-23.1
|
%
|
|
0%
|
|
0%
|
|
0.0
|
%
|
|
-0.2
|
%
|
|
-1.0
|
%
|
|
-2.2
|
%
|
|
-3.9
|
%
|
|
-6.1
|
%
|
|
-8.6
|
%
|
|
-11.5
|
%
|
|
-14.8
|
%
|
|
5%
|
|
10%
|
|
10.3
|
%
|
|
10.0
|
%
|
|
9.2
|
%
|
|
7.8
|
%
|
|
5.9
|
%
|
|
3.6
|
%
|
|
0.8
|
%
|
|
-2.5
|
%
|
|
-6.1
|
%
|
|
10%
|
|
20%
|
|
21.0
|
%
|
|
20.7
|
%
|
|
19.8
|
%
|
|
18.3
|
%
|
|
16.3
|
%
|
|
13.7
|
%
|
|
10.6
|
%
|
|
7.0
|
%
|
|
3.1
|
%
|
|
15%
|
|
30%
|
|
32.3
|
%
|
|
31.9
|
%
|
|
30.9
|
%
|
|
29.3
|
%
|
|
27.1
|
%
|
|
24.2
|
%
|
|
20.9
|
%
|
|
17.0
|
%
|
|
12.7
|
%
|
|
20%
|
|
40%
|
|
44.0
|
%
|
|
43.6
|
%
|
|
42.6
|
%
|
|
40.8
|
%
|
|
38.4
|
%
|
|
35.3
|
%
|
|
31.6
|
%
|
|
27.4
|
%
|
|
22.7
|
%
|
|
25%
|
|
50%
|
|
56.3
|
%
|
|
55.9
|
%
|
|
54.7
|
%
|
|
52.8
|
%
|
|
50.1
|
%
|
|
46.8
|
%
|
|
42.8
|
%
|
|
38.2
|
%
|
|
33.1
|
%
|
|
30%
|
|
60%
|
|
69.0
|
%
|
|
68.6
|
%
|
|
67.3
|
%
|
|
65.2
|
%
|
|
62.4
|
%
|
|
58.8
|
%
|
|
54.5
|
%
|
|
49.5
|
%
|
|
44.0
|
%
|
|
35%
|
|
70%
|
|
82.3
|
%
|
|
81.8
|
%
|
|
80.4
|
%
|
|
78.2
|
%
|
|
75.1
|
%
|
|
71.2
|
%
|
|
66.6
|
%
|
|
61.2
|
%
|
|
55.3
|
%
|
|
40%
|
|
80%
|
|
96.0
|
%
|
|
95.5
|
%
|
|
94.0
|
%
|
|
91.6
|
%
|
|
88.3
|
%
|
|
84.1
|
%
|
|
79.1
|
%
|
|
73.4
|
%
|
|
67.0
|
%
|
19
Estimated Fund Return Over One Year When the Fund Objective is to Seek Daily Investment Results, Before Fees and
Expenses, that Correspond to the Inverse of the Daily Performance of an Index.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year Index
Performance
|
|
Inverse of
One Year Index
Performance
|
|
Index Volatility
|
|
|
|
|
0%
|
|
|
5%
|
|
|
10%
|
|
|
15%
|
|
|
20%
|
|
|
25%
|
|
|
30%
|
|
|
35%
|
|
|
40%
|
|
|
-40%
|
|
40%
|
|
66.7
|
%
|
|
66.3
|
%
|
|
65.0
|
%
|
|
63.0
|
%
|
|
60.1
|
%
|
|
56.6
|
%
|
|
52.3
|
%
|
|
47.5
|
%
|
|
42.0
|
%
|
|
-35%
|
|
35%
|
|
53.8
|
%
|
|
53.5
|
%
|
|
52.3
|
%
|
|
50.4
|
%
|
|
47.8
|
%
|
|
44.5
|
%
|
|
40.6
|
%
|
|
36.1
|
%
|
|
31.1
|
%
|
|
-30%
|
|
30%
|
|
42.9
|
%
|
|
42.5
|
%
|
|
41.4
|
%
|
|
39.7
|
%
|
|
37.3
|
%
|
|
34.2
|
%
|
|
30.6
|
%
|
|
26.4
|
%
|
|
21.7
|
%
|
|
-25%
|
|
25%
|
|
33.3
|
%
|
|
33.0
|
%
|
|
32.0
|
%
|
|
30.4
|
%
|
|
28.1
|
%
|
|
25.3
|
%
|
|
21.9
|
%
|
|
18.0
|
%
|
|
13.6
|
%
|
|
-20%
|
|
20%
|
|
25.0
|
%
|
|
24.7
|
%
|
|
23.8
|
%
|
|
22.2
|
%
|
|
20.1
|
%
|
|
17.4
|
%
|
|
14.2
|
%
|
|
10.6
|
%
|
|
6.5
|
%
|
|
-15%
|
|
15%
|
|
17.6
|
%
|
|
17.4
|
%
|
|
16.5
|
%
|
|
15.0
|
%
|
|
13.0
|
%
|
|
10.5
|
%
|
|
7.5
|
%
|
|
4.1
|
%
|
|
0.3
|
%
|
|
-10%
|
|
10%
|
|
11.1
|
%
|
|
10.8
|
%
|
|
10.0
|
%
|
|
8.6
|
%
|
|
6.8
|
%
|
|
4.4
|
%
|
|
1.5
|
%
|
|
-1.7
|
%
|
|
-5.3
|
%
|
|
-5%
|
|
5%
|
|
5.3
|
%
|
|
5.0
|
%
|
|
4.2
|
%
|
|
2.9
|
%
|
|
1.1
|
%
|
|
-1.1
|
%
|
|
-3.8
|
%
|
|
-6.9
|
%
|
|
-10.3
|
%
|
|
0%
|
|
0%
|
|
0.0
|
%
|
|
-0.2
|
%
|
|
-1.0
|
%
|
|
-2.2
|
%
|
|
-3.9
|
%
|
|
-6.1
|
%
|
|
-8.6
|
%
|
|
-11.5
|
%
|
|
-14.8
|
%
|
|
5%
|
|
-5%
|
|
-4.8
|
%
|
|
-5.0
|
%
|
|
-5.7
|
%
|
|
-6.9
|
%
|
|
-8.5
|
%
|
|
-10.5
|
%
|
|
-13.0
|
%
|
|
-15.7
|
%
|
|
-18.8
|
%
|
|
10%
|
|
-10%
|
|
-9.1
|
%
|
|
-9.3
|
%
|
|
-10.0
|
%
|
|
-11.1
|
%
|
|
-12.7
|
%
|
|
-14.6
|
%
|
|
-16.9
|
%
|
|
-19.6
|
%
|
|
-22.5
|
%
|
|
15%
|
|
-15%
|
|
-13.0
|
%
|
|
-13.3
|
%
|
|
-13.9
|
%
|
|
-15.0
|
%
|
|
-16.5
|
%
|
|
-18.3
|
%
|
|
-20.5
|
%
|
|
-23.1
|
%
|
|
-25.9
|
%
|
|
20%
|
|
-20%
|
|
-16.7
|
%
|
|
-16.9
|
%
|
|
-17.5
|
%
|
|
-18.5
|
%
|
|
-19.9
|
%
|
|
-21.7
|
%
|
|
-23.8
|
%
|
|
-26.3
|
%
|
|
-29.0
|
%
|
|
25%
|
|
-25%
|
|
-20.0
|
%
|
|
-20.2
|
%
|
|
-20.8
|
%
|
|
-21.8
|
%
|
|
-23.1
|
%
|
|
-24.8
|
%
|
|
-26.9
|
%
|
|
-29.2
|
%
|
|
-31.8
|
%
|
|
30%
|
|
-30%
|
|
-23.1
|
%
|
|
-23.3
|
%
|
|
-23.8
|
%
|
|
-24.8
|
%
|
|
-26.1
|
%
|
|
-27.7
|
%
|
|
-29.7
|
%
|
|
-31.9
|
%
|
|
-34.5
|
%
|
|
35%
|
|
-35%
|
|
-25.9
|
%
|
|
-26.1
|
%
|
|
-26.7
|
%
|
|
-27.6
|
%
|
|
-28.8
|
%
|
|
-30.4
|
%
|
|
-32.3
|
%
|
|
-34.5
|
%
|
|
-36.9
|
%
|
|
40%
|
|
-40%
|
|
-28.6
|
%
|
|
-28.7
|
%
|
|
-29.3
|
%
|
|
-30.2
|
%
|
|
-31.4
|
%
|
|
-32.9
|
%
|
|
-34.7
|
%
|
|
-36.8
|
%
|
|
-39.1
|
%
|
Estimated Fund Return Over One Year When the Fund Objective is to Seek Daily Investment Results,
Before Fees and Expenses, that Correspond to Twice (200%) the Inverse of the Daily Performance of an Index.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year Index
Performance
|
|
200% Inverse of
One
Year
Index
Performance
|
|
Index Volatility
|
|
|
|
0%
|
|
5%
|
|
10%
|
|
15%
|
|
20%
|
|
25%
|
|
30%
|
|
35%
|
|
40%
|
|
-40%
|
|
80%
|
|
177.8%
|
|
175.7%
|
|
169.6%
|
|
159.6%
|
|
146.4%
|
|
130.3%
|
|
112.0%
|
|
92.4%
|
|
71.9%
|
|
-35%
|
|
70%
|
|
136.7%
|
|
134.9%
|
|
129.7%
|
|
121.2%
|
|
109.9%
|
|
96.2%
|
|
80.7%
|
|
63.9%
|
|
46.5%
|
|
-30%
|
|
60%
|
|
104.1%
|
|
102.6%
|
|
98.1%
|
|
90.8%
|
|
81.0%
|
|
69.2%
|
|
55.8%
|
|
41.3%
|
|
26.3%
|
|
-25%
|
|
50%
|
|
77.8%
|
|
76.4%
|
|
72.5%
|
|
66.2%
|
|
57.7%
|
|
47.4%
|
|
35.7%
|
|
23.1%
|
|
10.0%
|
|
-20%
|
|
40%
|
|
56.3%
|
|
55.1%
|
|
51.6%
|
|
46.1%
|
|
38.6%
|
|
29.5%
|
|
19.3%
|
|
8.2%
|
|
-3.3%
|
|
-15%
|
|
30%
|
|
38.4%
|
|
37.4%
|
|
34.3%
|
|
29.4%
|
|
22.8%
|
|
14.7%
|
|
5.7%
|
|
-4.2%
|
|
-14.4%
|
|
-10%
|
|
20%
|
|
23.5%
|
|
22.5%
|
|
19.8%
|
|
15.4%
|
|
9.5%
|
|
2.3%
|
|
-5.8%
|
|
-14.5%
|
|
-23.6%
|
|
-5%
|
|
10%
|
|
10.8%
|
|
10.0%
|
|
7.5%
|
|
3.6%
|
|
-1.7%
|
|
-8.1%
|
|
-15.4%
|
|
-23.3%
|
|
-31.4%
|
|
0%
|
|
0%
|
|
0.0%
|
|
-0.7%
|
|
-3.0%
|
|
-6.5%
|
|
-11.3%
|
|
-17.1%
|
|
-23.7%
|
|
-30.8%
|
|
-38.1%
|
|
5%
|
|
-10%
|
|
-9.3%
|
|
-10.0%
|
|
-12.0%
|
|
-15.2%
|
|
-19.6%
|
|
-24.8%
|
|
-30.8%
|
|
-37.2%
|
|
-43.9%
|
|
10%
|
|
-20%
|
|
-17.4%
|
|
-18.0%
|
|
-19.8%
|
|
-22.7%
|
|
-26.7%
|
|
-31.5%
|
|
-36.9%
|
|
-42.8%
|
|
-48.9%
|
|
15%
|
|
-30%
|
|
-24.4%
|
|
-25.0%
|
|
-26.6%
|
|
-29.3%
|
|
-32.9%
|
|
-37.3%
|
|
-42.3%
|
|
-47.6%
|
|
-53.2%
|
|
20%
|
|
-40%
|
|
-30.6%
|
|
-31.1%
|
|
-32.6%
|
|
-35.1%
|
|
-38.4%
|
|
-42.4%
|
|
-47.0%
|
|
-51.9%
|
|
-57.0%
|
|
25%
|
|
-50%
|
|
-36.0%
|
|
-36.5%
|
|
-37.9%
|
|
-40.2%
|
|
-43.2%
|
|
-46.9%
|
|
-51.1%
|
|
-55.7%
|
|
-60.4%
|
|
30%
|
|
-60%
|
|
-40.8%
|
|
-41.3%
|
|
-42.6%
|
|
-44.7%
|
|
-47.5%
|
|
-50.9%
|
|
-54.8%
|
|
-59.0%
|
|
-63.4%
|
|
35%
|
|
-70%
|
|
-45.1%
|
|
-45.5%
|
|
-46.8%
|
|
-48.7%
|
|
-51.3%
|
|
-54.5%
|
|
-58.1%
|
|
-62.0%
|
|
-66.0%
|
|
40%
|
|
-80%
|
|
-49.0%
|
|
-49.4%
|
|
-50.5%
|
|
-52.3%
|
|
-54.7%
|
|
-57.7%
|
|
-61.1%
|
|
-64.7%
|
|
-68.4%
|
The foregoing tables are intended to isolate the effect of index volatility and index performance on the
return of a leveraged fund. The fund’s actual returns may be significantly greater or less than the returns shown above as a result of any of factors discussed above or under “Correlation Risk” in the Prospectus.
20
Non-Diversified Status
Each Fund is a “non-diversified” series of the Trust. A Fund’s classification as a “non-diversified” investment company means that the proportion of the Fund’s assets that may be invested
in the securities of a single issuer is not limited by the 1940 Act. Each Fund, however, intends to seek to qualify as a “regulated investment company” for purposes of the Code, which imposes diversification requirements on these Funds
that are less restrictive than the requirements applicable to the “diversified” investment companies under the 1940 Act. With respect to a “non-diversified” fund, a relatively high percentage of the Fund’s assets may be
invested in the securities of a limited number of issuers, primarily within the same economic sector. That Fund’s portfolio securities, therefore, may be more susceptible to any single economic, political, or regulatory occurrence than the
portfolio securities of a more diversified investment company.
INVESTMENT RESTRICTIONS
Each Fund has adopted certain investment restrictions as fundamental policies
which cannot be changed without the approval of the holders of a “majority” of the outstanding voting securities of the Fund, as that term is defined in the 1940 Act. As defined in the 1940 Act, the vote of a majority of the outstanding
voting securities means the lesser of: (i) 67% or more of the voting securities of the series present at a meeting of shareholders duly called, if the holders of more than 50% of the outstanding voting securities of the Fund are present or
represented by proxy; or (ii) more than 50% of the outstanding voting securities of the series. (All policies of a Fund not specifically identified in this Statement of Additional Information or the Prospectus as fundamental may be changed
without a vote of the shareholders of the Fund, upon approval of a majority of the Trustees). For purposes of the following limitations, all percentage limitations apply immediately after a purchase or initial investment.
A Fund may not:
|
|
1.
|
Make investments for the purpose of exercising control or management.
|
|
|
2.
|
Purchase or sell real estate, except that, to the extent permitted by applicable law, the Fund may invest in securities directly or indirectly secured by real estate or interests
therein or issued by companies that invest in real estate or interests therein.
|
|
|
3.
|
Make loans to other persons, except that the acquisition of bonds, debentures or other corporate debt securities and investment in government obligations, commercial paper,
pass-through instruments, certificates of deposit, bankers’ acceptances and repurchase agreements and purchase and sale contracts and any similar instruments shall not be deemed to be the making of a loan, and except, further, that the Fund may
lend its portfolio securities, provided that the lending of portfolio securities may be made only in accordance with applicable law and the guidelines set forth in the Prospectus and this Statement of Additional Information, as they may be amended
from time to time.
|
|
|
4.
|
Issue senior securities to the extent such issuance would violate applicable law.
|
|
|
5.
|
Borrow money, except that the Fund (i) may borrow from banks (as defined in the 1940 Act) in amounts up to 33 1/3% of its total assets (including the amount borrowed),
(ii) may, to the extent permitted by applicable law, borrow up to an additional 5% of its total assets for temporary purposes, (iii) may obtain such short-term credit as may be necessary for the clearance of purchases and sales of
portfolio securities, (iv) may purchase securities on margin to the extent permitted by applicable law and (v) may enter into reverse repurchase agreements. The Fund may not pledge its assets other than to secure such borrowings or, to the
extent permitted by the Fund’s investment policies as set forth in the Prospectus and this Statement of Additional Information, as they may be amended from time to time, in connection with hedging transactions, short sales, when-issued and
forward commitment transactions and similar investment strategies.
|
|
|
6.
|
Underwrite securities of other issuers, except insofar as the Fund technically may be deemed an underwriter under the Securities Act, in selling portfolio securities.
|
21
|
|
7.
|
Purchase or sell commodities or contracts on commodities, except to the extent the Fund may do so in accordance with applicable law and the Fund’s Prospectus and Statement of
Additional Information, as they may be amended from time to time.
|
No Fund will concentrate (i.e., hold more than 25% of its
assets in the stocks of a single industry or group of industries) its investments in issuers of one or more particular industries, except that a Fund will concentrate to approximately the same extent that its underlying Index concentrates in the
stocks of such particular industry or industries. For purposes of this limitation, securities of the U.S. government (including its agencies and instrumentalities) and tax-free securities of state or municipal governments and their political
subdivisions (and repurchase agreements collateralized by government securities) are not considered to be issued by members of any industry.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the general supervision by the Trustees, ProShare Advisors
is responsible for decisions to buy and sell securities for each of the Funds, the selection of brokers and dealers to effect the transactions, and the negotiation of brokerage commissions, if any. ProShare Advisors expects that the Funds may
execute brokerage or other agency transactions through registered broker-dealers who receive compensation for their services, in conformity with the 1940 Act, the 1934 Act, and the rules and regulations thereunder. Compensation may also be paid in
connection with riskless principal transactions (in Nasdaq or over-the-counter securities and securities listed on an exchange) and agency Nasdaq or over-the-counter transactions executed with an electronic communications network or an alternative
trading system.
ProShare Advisors may serve as an investment manager to and may place portfolio transactions on behalf of a number of
clients, including other investment companies. It is the practice of ProShare Advisors to cause purchase and sale transactions to be allocated among the Funds and others whose assets ProShare Advisors manages in such manner as ProShare Advisors
deems equitable. The main factors considered by ProShare Advisors in making such allocations among the Funds and other client accounts of ProShare Advisors are the respective investment objectives, the relative size of portfolio holdings of the same
or comparable securities, the availability of cash for investment, the size of investment commitments generally held, and the opinions of the person(s) responsible, if any, for managing the portfolios of the Funds and the other client accounts.
The policy of each Fund regarding purchases and sales of securities for a Fund’s portfolio is that primary consideration will be
given to obtaining the most favorable prices and efficient executions of transactions. Consistent with this policy, when securities transactions are effected on a stock exchange, each Fund’s policy is to pay commissions that are considered fair
and reasonable without necessarily determining that the lowest possible commissions are paid in all circumstances. Each Fund believes that a requirement always to seek the lowest possible commission cost could impede effective portfolio management
and preclude the Fund and ProShare Advisors from obtaining a high quality of brokerage (and potentially research) services. In seeking to determine the reasonableness of brokerage commissions paid in any transaction, ProShare Advisors relies upon
its experience and knowledge regarding commissions generally charged by various brokers and on its judgment in evaluating the brokerage and research services received from the broker effecting the transaction. Such determinations are necessarily
subjective and imprecise, as, in most cases, an exact dollar value for those services is not ascertainable.
Purchases and sales of
U.S. government securities are normally transacted through issuers, underwriters or major dealers in U.S. government securities acting as principals. Such transactions are made on a net basis and do not involve payment of brokerage commissions. The
cost of securities purchased from an underwriter usually includes a commission paid by the issuer to the underwriters; transactions with dealers normally reflect the spread between bid and asked prices.
In seeking to implement a Fund’s policies, ProShare Advisors effects transactions with those brokers and dealers who ProShare Advisors believes
provide the most favorable prices and are capable of providing efficient executions. If ProShare Advisors believes such prices and executions are obtainable from more than one broker or dealer, ProShare Advisors may give consideration to placing
portfolio transactions with those brokers and dealers who also furnish research and other services to the Fund or ProShare Advisors. Such services may include, but are not limited to, any one or more of the following: information as to the
availability of securities for purchase or sale; statistical or factual information or opinions pertaining to investment; wire services; and appraisals or evaluations of
22
portfolio securities. If the broker-dealer providing these additional services is acting as a principal for its own account, no commissions would be payable.
If the broker-dealer is not a principal, a higher commission may be justified, at the determination of ProShare Advisors, for the additional services.
The information and services received by ProShare Advisors from brokers and dealers may be of benefit to ProShare Advisors in the management of accounts of some of ProShare Advisors’ other clients and may not in
all cases benefit a Fund directly. While the receipt of such information and services is useful in varying degrees and would generally reduce the amount of research or services otherwise performed by ProShare Advisors and thereby reduce ProShare
Advisors’ expenses, this information and these services are of indeterminable value and the management fee paid to ProShare Advisors is not reduced by any amount that may be attributable to the value of such information and services.
ProShare Advisors does not consider sales of Trust Shares as a factor in the selection of broker-dealers to execute portfolio
transactions.
The table below sets for the brokerage commissions paid by each Fund for the period noted:
|
|
|
|
|
|
Fund
|
|
Commissions Paid
During Fiscal Year
Ended May 31, 2007
|
|
Ultra S&P500 ProShares
|
|
$
|
32,851
|
|
Ultra MidCap400 ProShares
|
|
$
|
19,388
|
|
Ultra Dow30 ProShares
|
|
$
|
27,058
|
|
Ultra QQQ ProShares
|
|
$
|
70,520
|
|
Short S&P500 ProShares
|
|
$
|
5,744
|
|
Short MidCap400 ProShares
|
|
$
|
4,806
|
|
Short Dow30 ProShares
|
|
$
|
3,002
|
|
Short QQQ ProShares
|
|
$
|
10,386
|
|
UltraShort S&P500 ProShares
|
|
$
|
24,996
|
|
UltraShort MidCap400 ProShares
|
|
$
|
8,124
|
|
UltraShort Dow30 ProShares
|
|
$
|
10,394
|
|
UltraShort QQQ ProShares
|
|
$
|
120,688
|
|
Ultra Russell 2000 ProShares
|
|
$
|
6,468
|
|
Ultra SmallCap600 ProShares
|
|
$
|
2,330
|
|
Ultra Russell 1000 Value ProShares
|
|
$
|
1,248
|
|
Ultra Russell 1000 Growth ProShares
|
|
$
|
1,234
|
|
Ultra Russell MidCap Value ProShares
|
|
$
|
1,242
|
|
Ultra Russell MidCap Growth ProShares
|
|
$
|
1,233
|
|
Ultra Russell 2000 Value ProShares
|
|
$
|
1,267
|
|
Ultra Russell 2000 Growth ProShares
|
|
$
|
1,259
|
|
Ultra Basic Materials ProShares
|
|
$
|
1,374
|
|
Ultra Consumer Goods ProShares
|
|
$
|
1,166
|
|
Ultra Consumer Services ProShares
|
|
$
|
1,728
|
|
Ultra Financials ProShares
|
|
$
|
2,362
|
|
Ultra Health Care ProShares
|
|
$
|
1,187
|
|
Ultra Industrials ProShares
|
|
$
|
1,341
|
|
Ultra Oil & Gas ProShares
|
|
$
|
3,121
|
|
Ultra Real Estate ProShares
|
|
$
|
4,284
|
|
Ultra Semiconductors ProShares
|
|
$
|
1,220
|
|
Ultra Technology ProShares
|
|
$
|
1,835
|
|
Ultra Utilities ProShares
|
|
$
|
1,286
|
|
Short Russell2000 ProShares
|
|
$
|
380
|
|
Short SmallCap600 ProShares
|
|
$
|
0
|
|
UltraShort Russell 2000 ProShares
|
|
$
|
2,712
|
|
UltraShort SmallCap600 ProShares
|
|
$
|
0
|
|
UltraShort Russell 1000 Value ProShares
|
|
$
|
0
|
|
UltraShort Russell 1000 Growth ProShares
|
|
$
|
0
|
|
UltraShort Russell MidCap Value ProShares
|
|
$
|
0
|
|
UltraShort Russell MidCap Growth ProShares
|
|
$
|
0
|
|
UltraShort Russell 2000 Value ProShares
|
|
$
|
0
|
|
UltraShort Russell 2000 Growth ProShares
|
|
$
|
0
|
|
UltraShort Basic Materials ProShares
|
|
$
|
0
|
23
|
|
|
|
|
|
Fund
|
|
Commissions Paid
During Fiscal Year
Ended May 31, 2007
|
|
UltraShort Consumer Goods ProShares
|
|
$
|
0
|
|
UltraShort Consumer Services ProShares
|
|
$
|
0
|
|
UltraShort Financials ProShares
|
|
$
|
0
|
|
UltraShort Health Care ProShares
|
|
$
|
0
|
|
UltraShort Industrials ProShares
|
|
$
|
0
|
|
UltraShort Oil & Gas ProShares
|
|
$
|
0
|
|
UltraShort Real Estate ProShares
|
|
$
|
0
|
|
UltraShort Semiconductors ProShares
|
|
$
|
0
|
|
UltraShort Technology ProShares
|
|
$
|
0
|
|
UltraShort Utilities ProShares
|
|
$
|
0
|
MANAGEMENT OF PROSHARES TRUST
Trustees and Officers
The Trust’s officers, under the supervision of the Board of Trustees, manage the day-to-day operations of the Trust. The Trustees set broad policies
for the Trust and choose its Officers. One Trustee and all of the Officers of the Trust are directors, officers or employees of ProFund Advisors or J.P. Morgan Investor Services Co., except for Simon D. Collier, the Trust’s treasurer, who is a
principal of Foreside Compliance Services, LLC. The other Trustees are Independent Trustees. Trustees and some Officers of the Trust are also directors and Officers of some or all of the funds in the Fund Complex. The Fund Complex includes all funds
advised by ProShare Advisors and any funds that have an investment adviser that is an affiliated person of ProShare Advisors.
The
Trustees, their age, term of office and length of time served, their principal business occupations during the past five years, the number of portfolios in the Fund Complex overseen and other directorships, if any, held by the Trustee, are shown
below. The Officers, their age, term of office and length of time served and their principal business occupations during the past five years, are shown below. Unless noted otherwise, the address of each Trustee and each Officer is: c/o ProShares
Trust, 7501 Wisconsin Avenue, Suite 1000, Bethesda, MD 20814.
|
|
|
|
|
|
|
|
|
|
|
Name, Address, and Age
|
|
Term of Office and
Length of
Time Served
|
|
Principal
Occupation(s)
During Past 5
Years
|
|
Number of Operational
Portfolios in Fund
Complex
Overseen by
Trustee
1
|
|
Other Directorships
Held by Trustee
|
|
|
|
|
|
|
|
Independent Trustees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Russell S. Reynolds, III
Age: 50
|
|
Indefinite; October 1997 to present
|
|
Directorship Search Group, Inc. (Executive Recruitment): President (May 2004 to present); Managing Director (March 1993 to April 2004)
|
|
ProShares (52);
ProFunds (108); Access One Trust
(3)
|
|
Directorship Search Group, Inc.
|
|
|
|
|
|
|
|
Michael C. Wachs
Age: 46
|
|
Indefinite; October 1997 to present
|
|
AMC Delancey Group, Inc. (Real Estate Development): Executive Vice President (January 2001 to Present); Delancey Investment Group, Inc. (Real Estate Development): Vice President (May 1996 to
December 2000)
|
|
ProShares (52);
ProFunds (108); Access One Trust (3)
|
|
AMC Delancey Group, Inc.
|
|
|
|
|
|
|
|
Interested Trustee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael L. Sapir
*
Age: 49
|
|
Indefinite; April 1997 to present
|
|
Chairman and Chief Executive Officer of the Advisor (May 1997 to present)
|
|
ProShares (52);
ProFunds (108); Access One Trust (3)
|
|
None
|
|
1
|
The Fund Complex consists of all funds advised by ProFund Advisors LLC and
ProShare Advisors LLC.
|
|
*
|
Mr. Sapir is an “interested person,” as defined by the 1940 Act, because of his employment with, and ownership interest in, the Advisor.
|
24
|
|
|
|
|
|
|
|
|
Name, Address, and Age
|
|
Position(s) Held
with Trust
|
|
Term of Office and
Length of Time
Served
|
|
Principal Occupation(s) During Past 5 Years
|
|
|
|
|
|
|
Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael L. Sapir
Age: 49
|
|
Chairman
|
|
Indefinite; November 2005 to present
|
|
Chairman and Chief Executive Officer of ProShare Advisors (November 2005 to present) and ProFund Advisors (May 1997 to present).
|
|
|
|
|
|
|
Louis M. Mayberg
Age: 45
|
|
President
|
|
Indefinite; November 2005 to present
|
|
President of ProShare Advisors (November 2005 to present) and ProFund Advisors (May 1997 to present).
|
|
|
|
|
|
|
Victor M. Frye
Age: 49
|
|
Chief Compliance Officer
|
|
Indefinite; November 2005 to present
|
|
Counsel and Chief Compliance Officer of ProFund Advisors (October 2002 to present); Calvert Group, Ltd.: Counsel, Compliance Officer and Assistant Secretary (January 1999 to October
2002).
|
|
|
|
|
|
|
Stephenie E. Adams
Age: 38
|
|
Acting Secretary
|
|
Indefinite; September 2007 to present
|
|
Assistant Vice President, ProFunds Advisors LLC, December 2002 to present; Not employed (November 2002); Vice President, FBR National Bank & Trust, (May 2000 to October 2002); Vice President
and Secretary of FBR Fund for Government Investors, FBR Fund for Tax-Free Investors, Inc., FBR American Gas Index Fund, Inc., and the FBR Rushmore Fund Inc., (October 1995 to October 2002)
|
|
|
|
|
|
|
Simon D. Collier
Two Portland Square, 1
st
Floor
Portland, Maine 04101
Age: 46
|
|
Treasurer
|
|
Indefinite; June 2006
to present
|
|
President, Foreside Financial Group, LLC since April 2005; Chief Operating Officer and Managing Director, Global Fund Services, Citigroup 2003-2005; Managing Director, Global Securities Services
for Investors, Citibank, N.A. 1999-2003.
|
|
|
|
|
|
|
Gregory Pickard
73 Tremont Street
Boston, MA 02108
Age: 42
|
|
Assistant
Secretary
|
|
Indefinite; November 2005 to present
|
|
Vice President and Associate General Counsel of J.P. Morgan Investor Services Co. since July 2001.
|
|
|
|
|
|
|
Gary Casagrande
73 Tremont Street
Boston, MA 02108
Age: 35
|
|
Assistant
Treasurer
|
|
Indefinite; March
2007 to present
|
|
Vice President and Senior Manager in Fund Administration, Treasury and Compliance of J.P. Morgan Investor Services Co. since August 2006. Mr. Casagrande worked as a senior manager in fund
administration at Investors Bank and Trust and as a project and relationship manager within the treasurer’s office at Deutsche Bank from 2000 through 2006.
|
|
|
|
|
|
|
Charles Todd
73 Tremont Street
Boston, MA 02108
Age: 36
|
|
Assistant
Treasurer
|
|
Indefinite; June 2006
to present
|
|
Mr. Todd is a Vice President within the Fund Administration Department of J.P. Morgan Investor Services Co., where he has been employed since June 2000.
|
Listed below for each Trustee is a dollar range of securities beneficially owned in the
Trust, together with the aggregate dollar range of equity securities in all registered investment companies overseen by each Trustee that are in the same family of investment companies as the Trust, as of December 31, 2006.
|
|
|
|
|
|
|
|
|
Name of Trustee
|
|
Dollar Range of
Equity Securities
in the Trust
|
|
Aggregate Dollar Range of Equity
Securities in All Registered Investment
Companies Overseen by Trustee in
Family of Investment
Companies
|
|
Independent Trustees
|
|
|
|
|
|
|
|
Russell S. Reynolds, III
|
|
$
|
0
|
|
$
|
0
|
|
Michael C. Wachs
|
|
$
|
0
|
|
$
|
0
|
|
Interested Trustee
|
|
|
|
|
|
|
|
Michael L. Sapir
|
|
$
|
0
|
|
$
|
10,0001 -$50,000
|
25
Committees
The Board of Trustees of the Trust has an Audit Committee. The Audit Committee is composed entirely of Independent Trustees. Currently, the Audit Committee is composed of Messrs. Wachs and Reynolds. The Audit
Committee makes recommendations to the full Board of Trustees with respect to the engagement of an independent registered public accounting firm and reviews with the independent registered public accounting firm the plan and results of the internal
controls, audit engagement and matters having a material effect on the Trust’s financial operations. During the past fiscal year, the Audit Committee has met once, and the Board has met four times.
Compensation of Trustees and Officers
The Trust
pays each Independent Trustee a $65,000 annual retainer for service as Trustee on the Trust’s board and for service as Trustee for other funds in the ProFunds group of funds, $3,000 for attendance at each quarterly in-person meeting of the
Board of Trustees, $3,000 for attendance at each special meeting of the Board of Trustees, and $1,000 for attendance at telephonic meetings. Trustees who are also Officers or affiliated persons receive no remuneration from the Trust for their
services as Trustees. The Trust’s Officers, other than the Chief Compliance Officer, receive no compensation directly from the Trust for performing the duties of their offices.
The Trust does not accrue pension or retirement benefits as part of the Funds’ expenses, and Trustees of the Trust are not entitled to benefits upon
retirement from the Board of Trustees.
The following table shows aggregate compensation paid to the Trust’s Trustees for the fiscal
year ended May 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name of Person, Position
|
|
Aggregate
Compensation
|
|
Pension or
Retirement
Benefits
Accrued
as Part of
Trust
Expenses
|
|
Estimated
Annual
Benefits
Upon
Retirement
|
|
Total
Compensation
From
Trust
and Fund
Complex
Paid to
Trustees
|
|
Independent Trustees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Russell S. Reynolds, III, Trustee
|
|
$
|
9,855.44
|
|
$
|
0
|
|
$
|
0
|
|
$
|
9,855.44
|
|
Michael C. Wachs, Trustee
|
|
$
|
9,855.44
|
|
$
|
0
|
|
$
|
0
|
|
$
|
9,855.44
|
|
Interested Trustee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael L. Sapir, Trustee and Chairman
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
Control Persons and Principal Holders of Securities
Although the Trust does not have information concerning the beneficial ownership of shares held in the names of DTC participants, as of August 31,
2007, the name and percentage ownership of each DTC participant that owned of record 5% or more of the outstanding shares of a Fund is set forth in the table below:
|
|
|
|
|
|
Fund Name
|
|
Percentage of
Ownership
|
|
|
Short Dow30 ProShares
|
|
|
|
|
Pershing LLC
|
|
5.26
|
%
|
|
Citicorp Securities Services, Inc.
|
|
5.61
|
%
|
|
TD Ameritrade Clearing, Inc.
|
|
6.05
|
%
|
|
Merrill Lynch
|
|
7.30
|
%
|
|
National Financial Services LLC
|
|
12.43
|
%
|
|
Citigroup Global Markets
|
|
12.53
|
%
|
26
|
|
|
|
|
|
Fund Name
|
|
Percentage of
Ownership
|
|
|
Charles Schwab & Co., Inc.
|
|
15.41
|
%
|
|
Short MidCap400 ProShares
|
|
|
|
|
Merrill Lynch
|
|
6.09
|
%
|
|
National Financial Services LLC
|
|
7.07
|
%
|
|
Charles Schwab & Co., Inc.
|
|
12.27
|
%
|
|
Investors Bank & Trust Company
|
|
16.07
|
%
|
|
Citigroup Global Markets
|
|
32.60
|
%*
|
|
Short Russell 2000 ProShares
|
|
|
|
|
TD Ameritrade Clearing, Inc.
|
|
5.04
|
%
|
|
Pershing LLC
|
|
6.86
|
%
|
|
National Financial Services LLC
|
|
12.37
|
%
|
|
Goldman Sachs Execution & Clearing, Inc.
|
|
13.46
|
%
|
|
Charles Schwab & Co., Inc.
|
|
16.65
|
%
|
|
Citigroup Global Markets
|
|
25.10
|
%*
|
|
Short S&P 500 ProShares
|
|
|
|
|
Pershing LLC
|
|
5.19
|
%
|
|
Merrill Lynch
|
|
6.33
|
%
|
|
National Financial Services LLC
|
|
8.86
|
%
|
|
Charles Schwab & Co., Inc.
|
|
14.18
|
%
|
|
Citigroup Global Markets
|
|
18.61
|
%
|
|
Short SmallCap600 ProShares
|
|
|
|
|
Morgan Stanley
|
|
5.41
|
%
|
|
National Financial Services LLC
|
|
8.63
|
%
|
|
Pershing LLC
|
|
10.20
|
%
|
|
Citigroup Global Markets
|
|
10.26
|
%
|
|
Charles Schwab & Co., Inc.
|
|
12.94
|
%
|
|
TD Ameritrade Clearing, Inc.
|
|
16.67
|
%
|
|
Goldman Sachs Execution & Clearing, Inc.
|
|
23.26
|
%
|
|
Ultra Basic Material ProShares
|
|
|
|
|
Pershing LLC
|
|
5.90
|
%
|
|
E*TRADE Securities LLC
|
|
6.15
|
%
|
|
Charles Schwab & Co., Inc.
|
|
10.79
|
%
|
|
National Financial Services LLC
|
|
16.72
|
%
|
|
Merrill Lynch
|
|
36.84
|
%*
|
|
Ultra Consumer Goods ProShares
|
|
|
|
|
UBS Financial Services Inc.
|
|
7.33
|
%
|
|
Goldman Sachs Execution & Clearing, Inc.
|
|
83.50
|
%*
|
|
Ultra Consumer Services ProShares
|
|
|
|
|
UBS Financial Services Inc.
|
|
5.59
|
%
|
|
Bear Stearns Securities Corp.
|
|
7.71
|
%
|
27
|
|
|
|
|
|
Fund Name
|
|
Percentage of
Ownership
|
|
|
The Bank of New York
|
|
7.93
|
%
|
|
Merrill Lynch
|
|
71.08
|
%*
|
|
Ultra Dow30 ProShares
|
|
|
|
|
TD Ameritrade Clearing, Inc.
|
|
5.61
|
%
|
|
Goldman, Sachs & Co.
|
|
6.22
|
%
|
|
E*TRADE Securities LLC
|
|
6.02
|
%
|
|
Pershing LLC
|
|
7.67
|
%
|
|
BNP Paribas Brokerage Services, Inc.
|
|
8.31
|
%
|
|
Charles Schwab & Co., Inc.
|
|
9.79
|
%
|
|
National Financial Services LLC
|
|
17.46
|
%
|
|
Ultra Financial ProShares
|
|
|
|
|
UBS Financial Services Inc.
|
|
5.57
|
%
|
|
Merrill Lynch
|
|
5.59
|
%
|
|
Pershing LLC
|
|
9.00
|
%
|
|
Goldman Sachs Execution & Clearing, Inc.
|
|
10.99
|
%
|
|
National Financial Services LLC
|
|
14.31
|
%
|
|
TD Ameritrade Clearing, Inc.
|
|
19.78
|
%
|
|
Ultra Health Care ProShares
|
|
|
|
|
UBS Financial Services Inc.
|
|
5.86
|
%
|
|
Wells Fargo Investments, LLC
|
|
7.49
|
%
|
|
Pershing LLC
|
|
8.49
|
%
|
|
National Financial Services LLC
|
|
8.51
|
%
|
|
Goldman Sachs Execution & Clearing, Inc.
|
|
49.62
|
%*
|
|
Ultra Industrials ProShares
|
|
|
|
|
TD Ameritrade Clearing, Inc.
|
|
5.13
|
%
|
|
E*TRADE Securities LLC
|
|
5.61
|
%
|
|
UBS Financial Services Inc.
|
|
5.96
|
%
|
|
The Bank of New York
|
|
7.57
|
%
|
|
Merrill Lynch
|
|
8.01
|
%
|
|
Pershing LLC
|
|
10.23
|
%
|
|
National Financial Services LLC
|
|
16.76
|
%
|
|
Charles Schwab & Co., Inc.
|
|
20.52
|
%
|
|
Ultra MidCap400 ProShares
|
|
|
|
|
TD Ameritrade Clearing, Inc.
|
|
6.58
|
%
|
|
Merrill Lynch
|
|
7.26
|
%
|
|
Charles Schwab & Co., Inc.
|
|
10.77
|
%
|
|
National Financial Services LLC
|
|
16.51
|
%
|
|
Citigroup Global Markets
|
|
24.48
|
%
|
|
Ultra Oil & Gas ProShares
|
|
|
|
|
Scottrade Inc.
|
|
6.11
|
%
|
|
TD Ameritrade Clearing, Inc.
|
|
6.68
|
%
|
28
|
|
|
|
|
|
Fund Name
|
|
Percentage of
Ownership
|
|
|
Goldman Sachs Execution & Clearing, Inc.
|
|
6.85
|
%
|
|
Pershing LLC
|
|
7.58
|
%
|
|
E*TRADE Securities LLC
|
|
7.82
|
%
|
|
Charles Schwab & Co., Inc.
|
|
17.56
|
%
|
|
National Financial Services LLC
|
|
23.63
|
%
|
|
Ultra QQQ ProShares
|
|
|
|
|
Pershing LLC
|
|
5.13
|
%
|
|
E*TRADE Securities LLC
|
|
6.75
|
%
|
|
TD Ameritrade Clearing, Inc.
|
|
13.92
|
%
|
|
Charles Schwab & Co., Inc.
|
|
15.53
|
%
|
|
National Financial Services LLC
|
|
16.33
|
%
|
|
Ultra Real Estate ProShares
|
|
|
|
|
Pershing LLC
|
|
5.13
|
%
|
|
Raymond James & Associates, Inc.
|
|
6.09
|
%
|
|
Charles Schwab & Co., Inc.
|
|
6.21
|
%
|
|
Merrill Lynch
|
|
14.34
|
%
|
|
National Financial Services LLC
|
|
17.96
|
%
|
|
TD Ameritrade Clearing, Inc.
|
|
23.14
|
%
|
|
Ultra Russell 1000 Growth ProShares
|
|
|
|
|
Morgan Stanley
|
|
5.05
|
%
|
|
Citigroup Global Markets
|
|
5.15
|
%
|
|
National Financial Services LLC
|
|
5.50
|
%
|
|
RBC Dain Rauscher Incorporated
|
|
6.11
|
%
|
|
LPL Financial Services
|
|
7.14
|
%
|
|
UBS Securities LLC
|
|
8.06
|
%
|
|
E*TRADE Securities LLC
|
|
11.70
|
%
|
|
Charles Schwab & Co., Inc.
|
|
24.26
|
%
|
|
Ultra Russell 1000 Value ProShares
|
|
|
|
|
Citigroup Global Markets
|
|
5.91
|
%
|
|
H&R Block Financial Advisors
|
|
7.05
|
%
|
|
LPL Financial Services
|
|
11.36
|
%
|
|
Charles Schwab & Co., Inc.
|
|
24.46
|
%
|
|
National Financial Services LLC
|
|
25.11
|
%*
|
|
Ultra Russell 2000 Growth ProShares
|
|
|
|
|
TD Ameritrade Clearing, Inc.
|
|
5.09
|
%
|
|
First Clearing, LLC
|
|
5.82
|
%
|
|
National Financial Services LLC
|
|
12.13
|
%
|
|
Charles Schwab & Co., Inc.
|
|
19.28
|
%
|
|
Morgan Keegan & Co., Inc.
|
|
29.57
|
%*
|
29
|
|
|
|
|
|
Fund Name
|
|
Percentage of
Ownership
|
|
|
Ultra Russell 2000 ProShares
|
|
|
|
|
Goldman Sachs Execution & Clearing, Inc.
|
|
5.24
|
%
|
|
E*TRADE Securities LLC
|
|
7.71
|
%
|
|
Charles Schwab & Co., Inc.
|
|
8.82
|
%
|
|
Scottrade Inc.
|
|
9.17
|
%
|
|
TD Ameritrade Clearing, Inc.
|
|
19.41
|
%
|
|
National Financial Services LLC
|
|
29.26
|
%*
|
|
Ultra Russell MidCap Growth ProShares
|
|
|
|
|
E*TRADE Securities LLC
|
|
6.03
|
%
|
|
LPL Financial Services
|
|
6.79
|
%
|
|
First Clearing, LLC
|
|
8.11
|
%
|
|
National Financial Services LLC
|
|
9.38
|
%
|
|
UBS Financial Services Inc.
|
|
11.18
|
%
|
|
Morgan Keegan & Co., Inc.
|
|
38.97
|
%*
|
|
Ultra Russell MidCap Value ProShares
|
|
|
|
|
Charles Schwab & Co., Inc.
|
|
5.62
|
%
|
|
Citigroup Global Markets
|
|
6.51
|
%
|
|
TD Ameritrade Clearing, Inc.
|
|
7.05
|
%
|
|
A.G. Edwards & Sons, Inc.
|
|
7.10
|
%
|
|
H&R Block Financial Advisors
|
|
7.78
|
%
|
|
E*TRADE Securities LLC
|
|
8.02
|
%
|
|
LPL Financial Services
|
|
13.22
|
%
|
|
National Financial Services LLC
|
|
23.14
|
%
|
|
Ultra Russell 2000 Value ProShares
|
|
|
|
|
TD Ameritrade Clearing, Inc.
|
|
7.97
|
%
|
|
RBC Dominion Sercurities
|
|
11.27
|
%
|
|
National Financial Services LLC
|
|
21.84
|
%
|
|
Bear Stearns Securities Corp.
|
|
31.64
|
%*
|
|
Ultra S&P 500 ProShares
|
|
|
|
|
E*TRADE Securities LLC
|
|
5.04
|
%
|
|
Morgan Stanley
|
|
5.04
|
%
|
|
Goldman, Sachs & Co.
|
|
5.59
|
%
|
|
Pershing LLC
|
|
5.10
|
%
|
|
Merrill Lynch
|
|
8.02
|
%
|
|
TD Ameritrade Clearing, Inc.
|
|
8.89
|
%
|
|
Charles Schwab & Co., Inc.
|
|
15.37
|
%
|
|
National Financial Services LLC
|
|
18.67
|
%
|
|
Ultra Semiconductors ProShares
|
|
|
|
|
Morgan Keegan & Co., Inc.
|
|
5.60
|
%
|
|
Charles Schwab & Co., Inc.
|
|
6.26
|
%
|
|
Citigroup Global Markets
|
|
7.26
|
%
|
|
E*TRADE Securities LLC
|
|
7.26
|
%
|
30
|
|
|
|
|
|
Fund Name
|
|
Percentage of
Ownership
|
|
|
National Financial Services LLC
|
|
14.10
|
%
|
|
Goldman Sachs Execution & Clearing, Inc.
|
|
28.95
|
%*
|
|
Ultra SmallCap600 ProShares
|
|
|
|
|
Bear Stearns Securities Corp.
|
|
6.51
|
%
|
|
Pershing LLC
|
|
6.81
|
%
|
|
Merrill Lynch
|
|
8.90
|
%
|
|
Morgan Stanley
|
|
8.93
|
%
|
|
Goldman Sachs Execution & Clearing, Inc.
|
|
12.94
|
%
|
|
National Financial Services LLC
|
|
30.55
|
%*
|
|
Ultra Technology ProShares
|
|
|
|
|
Citigroup Global Markets
|
|
6.12
|
%
|
|
Davenport & Company LLC
|
|
8.57
|
%
|
|
National Financial Services LLC
|
|
10.01
|
%
|
|
TD Ameritrade Clearing, Inc.
|
|
37.66
|
%*
|
|
Ultra Utilities ProShares
|
|
|
|
|
Citigroup Global Markets
|
|
6.50
|
%
|
|
TD Ameritrade Clearing, Inc.
|
|
8.83
|
%
|
|
National Financial Services LLC
|
|
13.71
|
%
|
|
Goldman Sachs Execution & Clearing, Inc.
|
|
43.84
|
%*
|
|
UltraShort 2000 Growth ProShares
|
|
|
|
|
TD Ameritrade Clearing, Inc.
|
|
5.68
|
%
|
|
UBS Financial Services Inc.
|
|
5.69
|
%
|
|
Goldman Sachs Execution & Clearing, Inc.
|
|
7.43
|
%
|
|
Charles Schwab & Co., Inc.
|
|
9.05
|
%
|
|
Citigroup Global Markets
|
|
10.58
|
%
|
|
Merrill Lynch
|
|
10.64
|
%
|
|
National Financial Services LLC
|
|
22.81
|
%
|
|
UltraShort 2000 Value ProShares
|
|
|
|
|
Bear Stearns Securities Corp.
|
|
5.03
|
%
|
|
Charles Schwab & Co., Inc.
|
|
6.51
|
%
|
|
TD Ameritrade Clearing, Inc.
|
|
8.36
|
%
|
|
Citigroup Global Markets
|
|
10.35
|
%
|
|
UBS Financial Services Inc.
|
|
22.86
|
%
|
|
National Financial Services LLC
|
|
25.33
|
%*
|
|
UltraShort Basic Materials ProShares
|
|
|
|
|
A.G. Edwards & Sons, Inc.
|
|
6.05
|
%
|
|
National Financial Services LLC
|
|
8.25
|
%
|
|
Merrill Lynch
|
|
47.60
|
%*
|
|
UltraShort Consumer Goods ProShares
|
|
|
|
|
Charles Schwab & Co., Inc.
|
|
11.04
|
%
|
31
|
|
|
|
|
|
Fund Name
|
|
Percentage of
Ownership
|
|
|
National Financial Services LLC
|
|
13.15
|
%
|
|
Goldman Sachs Execution & Clearing, Inc.
|
|
21.87
|
%
|
|
UltraShort Consumer Services ProShares
|
|
|
|
|
TD Ameritrade Clearing, Inc.
|
|
5.78
|
%
|
|
E*TRADE Securities LLC
|
|
6.23
|
%
|
|
Pershing LLC
|
|
6.99
|
%
|
|
Merrill Lynch
|
|
8.37
|
%
|
|
Charles Schwab & Co., Inc.
|
|
12.68
|
%
|
|
LPL Financial Services
|
|
13.83
|
%
|
|
National Financial Services LLC
|
|
17.04
|
%
|
|
UltraShort Dow30 ProShares
|
|
|
|
|
Merrill Lynch
|
|
6.35
|
%
|
|
Charles Schwab & Co., Inc.
|
|
6.40
|
%
|
|
National Financial Services LLC
|
|
8.84
|
%
|
|
Goldman, Sachs & Co.
|
|
10.15
|
%
|
|
JPMorgan
|
|
16.11
|
%
|
|
UltraShort Financials ProShares
|
|
|
|
|
Pershing LLC
|
|
5.27
|
%
|
|
Charles Schwab & Co., Inc.
|
|
6.11
|
%
|
|
National Financial Services LLC
|
|
8.07
|
%
|
|
Lehman Brothers Prime Brokerage
|
|
35.27
|
%*
|
|
UltraShort Health Care ProShares
|
|
|
|
|
Goldman, Sachs & Co.
|
|
11.21
|
%
|
|
Bear Stearns Securities Corp.
|
|
15.06
|
%
|
|
Goldman Sachs Execution & Clearing, Inc.
|
|
68.67
|
%*
|
|
UltraShort Industrials ProShares
|
|
|
|
|
Scottrade Inc.
|
|
5.32
|
%
|
|
National Financial Services LLC
|
|
6.66
|
%
|
|
Raymond James & Associates, Inc.
|
|
8.23
|
%
|
|
Charles Schwab & Co., Inc.
|
|
9.23
|
%
|
|
Merrill Lynch
|
|
14.53
|
%
|
|
Bear Stearns Securities Corp.
|
|
16.89
|
%
|
|
Citigroup Global Markets
|
|
24.47
|
%
|
|
UltraShort MidCap400 ProShares
|
|
|
|
|
Morgan Stanley
|
|
5.13
|
%
|
|
Pershing LLC
|
|
6.16
|
%
|
|
Goldman, Sachs & Co.
|
|
6.34
|
%
|
|
Citigroup Global Markets
|
|
7.14
|
%
|
|
Merrill Lynch
|
|
8.51
|
%
|
|
Charles Schwab & Co., Inc.
|
|
11.46
|
%
|
|
National Financial Services LLC
|
|
14.54
|
%
|
32
|
|
|
|
|
|
Fund Name
|
|
Percentage of
Ownership
|
|
|
UltraShort Oil & Gas ProShares
|
|
|
|
|
Brown Brothers Harriman & Co.
|
|
5.17
|
%
|
|
TD Ameritrade Clearing, Inc.
|
|
5.73
|
%
|
|
UBS Financial Services Inc.
|
|
5.74
|
%
|
|
A.G. Edwards & Sons, Inc.
|
|
8.08
|
%
|
|
Charles Schwab & Co., Inc.
|
|
8.52
|
%
|
|
Morgan Stanley & Co. Incorporated
|
|
8.65
|
%
|
|
National Financial Services LLC
|
|
14.30
|
%
|
|
UltraShort QQQ ProShares
|
|
|
|
|
JPMorgan
|
|
6.03
|
%
|
|
Merrill Lynch
|
|
6.17
|
%
|
|
TD Ameritrade Clearing, Inc.
|
|
7.02
|
%
|
|
Charles Schwab & Co., Inc.
|
|
10.03
|
%
|
|
National Financial Services LLC
|
|
12.08
|
%
|
|
UltraShort Real Estate ProShares
|
|
|
|
|
E*TRADE Securities LLC
|
|
5.20
|
%
|
|
Pershing LLC
|
|
5.21
|
%
|
|
Merrill Lynch
|
|
8.27
|
%
|
|
TD Ameritrade Clearing, Inc.
|
|
8.27
|
%
|
|
Charles Schwab & Co., Inc.
|
|
11.63
|
%
|
|
National Financial Services LLC
|
|
14.02
|
%
|
|
Morgan Stanley & CO. Incorporated
|
|
19.59
|
%
|
|
UltraShort Russell 1000 Growth ProShares
|
|
|
|
|
Bear Stearns Securities Corp.
|
|
12.99
|
%
|
|
UBS Financial Services Inc.
|
|
30.16
|
%*
|
|
Citigroup Global Markets
|
|
34.73
|
%*
|
|
UltraShort Russell 1000 Value ProShares
|
|
|
|
|
Merrill Lynch
|
|
5.32
|
%
|
|
Citigroup Global Markets
|
|
9.00
|
%
|
|
National Financial Services LLC
|
|
10.26
|
%
|
|
Charles Schwab & Co., Inc.
|
|
11.38
|
%
|
|
Bear Stearns Securities Corp.
|
|
42.22
|
%*
|
|
UltraShort Russell 2000 ProShares
|
|
|
|
|
TD Ameritrade Clearing, Inc.
|
|
5.23
|
%
|
|
UBS Securities LLC
|
|
6.20
|
%
|
|
Morgan Stanley & CO. Incorporated
|
|
7.56
|
%
|
|
Charles Schwab & Co., Inc.
|
|
8.09
|
%
|
|
JPMorgan
|
|
8.17
|
%
|
|
Bear Stearns Securities Corp.
|
|
8.83
|
%
|
|
National Financial Services LLC
|
|
13.25
|
%
|
33
|
|
|
|
|
|
Fund Name
|
|
Percentage of
Ownership
|
|
|
UltraShort Russell MidCap Growth ProShares
|
|
|
|
|
Citigroup Global Markets
|
|
5.71
|
%
|
|
E*TRADE Securities LLC
|
|
5.91
|
%
|
|
Charles Schwab & Co., Inc.
|
|
7.27
|
%
|
|
National Financial Services LLC
|
|
14.09
|
%
|
|
Scottrade Inc.
|
|
14.36
|
%
|
|
Bear Stearns Securities Corp.
|
|
31.44
|
%*
|
|
UltraShort Russell MidCap Value ProShares
|
|
|
|
|
Bear Stearns Securities Corp.
|
|
14.20
|
%
|
|
Citigroup Global Markets
|
|
17.05
|
%
|
|
National Financial Services LLC
|
|
23.17
|
%
|
|
Raymond James & Associates, Inc.
|
|
31.44
|
%*
|
|
UltraShort S&P 500 ProShares
|
|
|
|
|
JPMorgan Chase
|
|
5.22
|
%
|
|
Goldman Sachs International Limited
|
|
5.32
|
%
|
|
Mellon Private Wealth
|
|
7.64
|
%
|
|
National City Bank
|
|
9.41
|
%
|
|
Canaccord Capital Corporation
|
|
12.97
|
%
|
|
UltraShort Semiconductors ProShares
|
|
|
|
|
Pershing LLC
|
|
5.26
|
%
|
|
TD Ameritrade Clearing, Inc.
|
|
8.90
|
%
|
|
National Financial Services LLC
|
|
14.72
|
%
|
|
Goldman Sachs Execution & Clearing, Inc.
|
|
35.12
|
%*
|
|
UltraShort SmallCap600 ProShares
|
|
|
|
|
Charles Schwab & Co., Inc.
|
|
6.16
|
%
|
|
TD Ameritrade Clearing, Inc.
|
|
7.98
|
%
|
|
Goldman Sachs Execution & Clearing, Inc.
|
|
10.92
|
%
|
|
National Financial Services LLC
|
|
12.97
|
%
|
|
Citigroup Global Markets
|
|
15.98
|
%
|
|
UltraShort Technology ProShares
|
|
|
|
|
Scottrade Inc.
|
|
5.66
|
%
|
|
National Financial Services LLC
|
|
12.18
|
%
|
|
Bear Stearns Securities Corp.
|
|
19.60
|
%
|
|
Merrill Lynch
|
|
31.92
|
%*
|
|
UltraShort Utilities ProShares
|
|
|
|
|
Charles Schwab & Co., Inc.
|
|
5.25
|
%
|
|
National Financial Services LLC
|
|
5.45
|
%
|
|
Merrill Lynch
|
|
6.44
|
%
|
|
Citigroup Global Markets
|
|
6.78
|
%
|
|
Pershing LLC
|
|
13.99
|
%
|
|
Goldman Sachs Execution & Clearing, Inc.
|
|
38.49
|
%*
|
34
|
|
|
|
|
|
Fund Name
|
|
Percentage of
Ownership
|
|
|
Short QQQ ProShares
|
|
|
|
|
TD Ameritrade Clearing, Inc.
|
|
9.42
|
%
|
|
Merrill Lynch
|
|
11.64
|
%
|
|
National Financial Services LLC
|
|
12.64
|
%
|
|
Citigroup Global Markets
|
|
14.76
|
%
|
|
Charles Schwab & Co., Inc.
|
|
16.15
|
%
|
|
*
|
A shareholder who beneficially owns, directly or indirectly, more than 25% of the voting securities of a Fund may be deemed a “control person” (as defined in the 1940 Act)
and may be able to determine the outcome of any matter submitted for shareholder consideration with respect to that Fund.
|
INVESTMENT ADVISOR
Portfolio Management
Listed below for each portfolio manager is a dollar range of securities beneficially owned in the Funds managed by the portfolio manager, together with the aggregate dollar range of equity securities in all registered
investment companies in the Fund Complex as of [May 31, 2007].
|
|
|
|
|
Name of Portfolio Manager
|
|
Dollar Range of ProShares
Currently Owned
|
|
William Seale
|
|
none
|
|
George Foster
|
|
none
|
|
Taeyong Lee
|
|
$1 - $10,000
|
|
Michael Neches
|
|
none
|
|
Robert Parker
|
|
$1 - $10,000
|
|
Steven Schoffstall
|
|
none
|
Portfolio Managers’ Compensation
ProShare Advisors believes that its compensation program is competitively positioned to attract and retain high-caliber investment professionals. The
compensation package for portfolio managers consists of a fixed base salary, an annual incentive bonus opportunity and a competitive benefits package. A portfolio manager’s salary compensation is designed to be competitive with the marketplace
and reflect a portfolio manager’s relative experience and contribution to the firm. Fixed base salary compensation is reviewed and adjusted annually to reflect increases in the cost of living and market rates.
The annual incentive bonus opportunity provides cash bonuses based upon the overall firm’s performance and individual contributions. Principal
consideration is given to appropriate risk management, teamwork and investment support activities in determining the annual bonus amount.
Portfolio managers are eligible to participate in the firm’s standard employee benefits programs, which include a competitive 401(k) retirement savings program with employer match, life insurance coverage, and health and welfare
programs.
Other Accounts Managed by Portfolio Managers
Portfolio managers are generally responsible for multiple investment company accounts and, in one case, an unregistered investment company account. Listed below for each portfolio manager are the number and type of
accounts managed or overseen by such portfolio manager as of May 31, 2007.
35
|
|
|
|
|
|
|
|
|
Name of Portfolio Manager
|
|
Number of All Registered
Investment Companies
Managed/Total Assets
|
|
Number of All Other
Pooled Investment
Vehicles Managed/
Total Assets
|
|
Number of All Other
Accounts Managed/
Total Assets
|
|
William Seale
|
|
156
$13,900,210,000
|
|
None
|
|
16
$334,696,000
|
|
George Foster
|
|
104
$7,885,498,340
|
|
None
|
|
14
$102,348,000
|
|
Taeyong Lee
|
|
52
$6,014,719,948
|
|
None
|
|
2
$232,210,374
|
|
Michael Neches
|
|
22
371,672,588
|
|
None
|
|
None
|
|
Robert Parker
|
|
12
$5,231,502,715
|
|
None
|
|
2
$232,210,374
|
|
Steven Schoffstall
|
|
18
$411,544,644
|
|
None
|
|
None
|
In the course of providing advisory services, the Advisor may simultaneously recommend
the sale of a particular security for one account while recommending the purchase of the same security for another account if such recommendations are consistent with each client’s investment strategies. The Advisor also may recommend the
purchase or sale of securities that may also be recommended by ProFund Advisors LLC, an affiliate of the Advisor.
The Advisor, its
principals, officers and employees (and members of their families) and affiliates may participate directly or indirectly as investors in the Advisor’s clients, such as the Funds. Thus the Advisor may recommend to clients the purchase or sale of
securities in which it, or its officers, employee, or related persons have a financial interest. The Advisor may give advice and take actions in the performance of its duties to its clients that differ from the advice given or the timing and nature
of actions taken, with respect to other clients’ accounts and/or employees’ accounts that may invest in some of the same securities recommended to clients.
In addition, the Advisor, its affiliates and principals may trade for their own accounts. Consequently, non-customer and proprietary trades may be executed and cleared through any prime broker or other broker utilized
by clients. It is possible that officers or employees of the Advisor may buy or sell securities or other instruments that the Advisor has recommended to, or purchased for, its clients and may engage in transactions for their own accounts in a manner
that is inconsistent with the Advisor’s recommendations to a client. Personal securities transactions by employees may raise potential conflicts of interest when such persons trade in a security that is owned by, or considered for purchase or
sale for, a client. The Advisor has adopted policies and procedures designed to detect and prevent such conflicts of interest and, when they do arise, to ensure that it effects transactions for clients in a manner that is consistent with its
fiduciary duty to its clients and in accordance with applicable law.
Any Access Person of the Advisor may make security purchases subject
to the terms of the ProShare Advisors Code of Ethics which is consistent with the requirements of Rule 17j-1 under the 1940 Act.
The
Advisor and its affiliated persons may come into possession from time to time of material nonpublic and other confidential information about companies which, if disclosed, might affect an investor’s decision to buy, sell, or hold a security.
Under applicable law, the Advisor and its affiliated persons would be prohibited from improperly disclosing or using this information for their personal benefit or for the benefit of any person, regardless of whether the person is a client of the
Advisor. Accordingly, should the Advisor or any affiliated person come into possession of material nonpublic or other confidential information with respect to any company, the Advisor and its affiliated persons will have no responsibility or
liability for failing to disclose the information to clients as a result of following its policies and procedures designed to comply with applicable law.
Investment Advisory Agreement
Under an investment advisory agreement between ProShare Advisors and the Trust, on behalf
of each Fund, dated December 14, 2005, as amended (“Agreement” or “Advisory Agreement”), each Fund pays ProShare Advisors a fee at an annualized rate, based on its average daily net assets, of 0.75%. ProShare Advisors
manages the investment and the reinvestment of the assets of each of the Funds, in accordance with the investment objectives, policies, and limitations of the Fund, subject to the general supervision and control of the Trustees and the officers of
the Funds. The address of ProShare Advisors is 7501 Wisconsin Avenue, Suite 1000, Bethesda, Maryland 20814. ProShare Advisors bears all costs associated with providing these advisory services. [ProShare Advisors has contractually agreed to waive
investment advisory and management services fees and to reimburse other expenses to
36
the extent total annual operating expenses, as a percentage of average daily net assets, exceed 0.95% through September 30, 2008 for each Fund. After
such date, the expense limitation may be terminated or revised. Amounts waived or reimbursed in a particular fiscal year may be recouped by ProShare Advisors within five years of waiver or reimbursement to the extent that recoupment will not cause a
Fund’s expenses to exceed any expense limitation in place at that time. ProShare Advisors, from its own resources, including profits from advisory fees received from the Funds, also may make payments to broker-dealers and other financial
institutions for their expenses in connection with the distribution of the Funds’ Shares. A discussion regarding the basis for the Board of Trustees approving the investment advisory agreement of the Trust will be (or is) available in the
Trust’s annual and/or semi-annual reports to shareholders. The Investment Advisory fees paid as well as any amounts reimbursed pursuant to the Expense Limitation Agreement for the fiscal year ended May 31, 2007 for each Fund are set forth
below.
|
|
|
|
|
|
|
|
|
Fund
|
|
Investment
Advisory Fees
|
|
Advisory
Reimbursement
|
|
Ultra S&P 500 ProShares
|
|
$
|
935,154
|
|
$
|
200,112
|
|
Ultra QQQ ProShares
|
|
$
|
1,380,371
|
|
$
|
228,566
|
|
Ultra Dow 30 ProShares
|
|
$
|
450,653
|
|
$
|
158,554
|
|
Ultra MidCap 400 ProShares
|
|
$
|
415,238
|
|
$
|
217,801
|
|
Short S&P 500 ProShares
|
|
$
|
801,694
|
|
$
|
134,481
|
|
Short QQQ ProShares
|
|
$
|
662,637
|
|
$
|
164,375
|
|
Short Dow 30 ProShares
|
|
$
|
454,866
|
|
$
|
154,968
|
|
Short MidCap 400 ProShares
|
|
$
|
725,326
|
|
$
|
116,362
|
|
UltraShort S&P 500 ProShares
|
|
$
|
2,504,609
|
|
$
|
48,162
|
|
UltraShort QQQ ProShares
|
|
$
|
5,510,739
|
|
$
|
222,692
|
|
UltraShort Dow 30 ProShares
|
|
$
|
1,125,610
|
|
$
|
145,884
|
|
UltraShort MidCap 400 ProShares
|
|
$
|
741,072
|
|
$
|
96,058
|
|
Ultra Russell 2000 ProShares
|
|
$
|
78,267
|
|
$
|
161,781
|
|
UltraShort Russell 2000 ProShares
|
|
$
|
241,257
|
|
$
|
41,939
|
|
Short Russell 2000 ProShares
|
|
$
|
32,005
|
|
$
|
32,031
|
|
Ultra SmallCap 600 ProShares
|
|
$
|
39,015
|
|
$
|
79,440
|
|
UltraShort SmallCap 600 ProShares
|
|
$
|
43,817
|
|
$
|
37,182
|
|
Short SmallCap 600 ProShares
|
|
$
|
26,802
|
|
$
|
33,570
|
|
Ultra Basic Materials ProShares
|
|
$
|
29,502
|
|
$
|
39,506
|
|
Ultra Consumer Goods ProShares
|
|
$
|
26,781
|
|
$
|
38,119
|
|
Ultra Consumer Services ProShares
|
|
$
|
24,573
|
|
$
|
47,434
|
|
Ultra Financials ProShares
|
|
$
|
30,346
|
|
$
|
53,756
|
|
Ultra Healthcare ProShares
|
|
$
|
26,868
|
|
$
|
37,543
|
|
Ultra Industrials ProShares
|
|
$
|
26,413
|
|
$
|
41,329
|
|
Ultra Oil & Gas ProShares
|
|
$
|
50,570
|
|
$
|
45,444
|
|
Ultra Technology ProShares
|
|
$
|
24,559
|
|
$
|
42,523
|
|
Ultra Utilities ProShares
|
|
$
|
31,025
|
|
$
|
38,375
|
|
Ultra Real Estate ProShares
|
|
$
|
38,428
|
|
$
|
47,203
|
|
Ultra Semiconductors ProShares
|
|
$
|
27,429
|
|
$
|
36,242
|
|
UltraShort Basic Materials ProShares
|
|
$
|
23,062
|
|
$
|
32,123
|
|
UltraShort Consumer Goods ProShares
|
|
$
|
25,628
|
|
$
|
32,621
|
|
UltraShort Consumer Services ProShares
|
|
$
|
24,504
|
|
$
|
32,412
|
|
UltraShort Financials ProShares
|
|
$
|
105,680
|
|
$
|
49,290
|
|
UltraShort Healthcare ProShares
|
|
$
|
25,640
|
|
$
|
32,629
|
|
UltraShort Industrials ProShares
|
|
$
|
23,046
|
|
$
|
32,149
|
|
UltraShort Oil & Gas ProShares
|
|
$
|
46,586
|
|
$
|
39,849
|
|
UltraShort Technology ProShares
|
|
$
|
24,486
|
|
$
|
32,468
|
|
UltraShort Utilities ProShares
|
|
$
|
22,941
|
|
$
|
32,116
|
|
UltraShort Real Estate ProShares
|
|
$
|
131,896
|
|
$
|
51,411
|
|
UltraShort Semiconductors ProShares
|
|
$
|
24,792
|
|
$
|
32,536
|
|
Ultra Russell 1000 Growth ProShares
|
|
$
|
21,276
|
|
$
|
38,222
|
37
|
|
|
|
|
|
|
|
|
Fund
|
|
Investment
Advisory Fees
|
|
Advisory
Reimbursement
|
|
Ultra Russell 1000 Value ProShares
|
|
$
|
21,438
|
|
$
|
37,482
|
|
Ultra Russell Midcap Growth ProShares
|
|
$
|
21,302
|
|
$
|
36,463
|
|
Ultra Russell Midcap Value ProShares
|
|
$
|
21,358
|
|
$
|
35,888
|
|
Ultra Russell 2000 Growth ProShares
|
|
$
|
20,842
|
|
$
|
45,999
|
|
Ultra Russell 2000 Value ProShares
|
|
$
|
20,592
|
|
$
|
46,441
|
|
UltraShort Russell 1000 Growth ProShares
|
|
$
|
14,458
|
|
$
|
27,174
|
|
UltraShort Russell 1000 Value ProShares
|
|
$
|
14,365
|
|
$
|
27,166
|
|
UltraShort Russell Midcap Growth ProShares
|
|
$
|
20,362
|
|
$
|
28,193
|
|
UltraShort Russell Midcap Value ProShares
|
|
$
|
14,397
|
|
$
|
27,187
|
|
UltraShort Russell 2000 Growth ProShares
|
|
$
|
26,286
|
|
$
|
28,943
|
|
UltraShort Russell 2000 Value ProShares
|
|
$
|
17,782
|
|
$
|
27,854
|
Codes of Ethics
The Trust, ProShare Advisors, and the Distributor each have adopted a code of ethics, as required by applicable law, which is designed to prevent affiliated persons of the Trust, ProShare Advisors, and the Distributor
from engaging in deceptive, manipulative, or fraudulent activities in connection with securities held or to be acquired by the Funds (which may also be held by persons subject to a code). There can be no assurance that the codes will be effective in
preventing such activities. The Codes permit personnel subject to them to invest in securities, including securities that may be held or purchased by a Fund. The Codes are on file with the SEC and are available to the public.
DISCLOSURE OF PORTFOLIO HOLDINGS POLICY
The Trust has adopted a policy regarding the disclosure of
information about each Fund’s portfolio holdings, which is reviewed on an annual basis. The Board of Trustees of the Trust must approve all material amendments to this policy. A complete schedule of each Fund’s portfolio holdings as of the
end of each fiscal quarter will be filed with the SEC (and publicly available) within 60 days of the end of such fiscal quarter. In addition, each Fund’s portfolio holdings will be publicly disseminated each day the Funds are open for business
via the Funds’ website at www.proshares.com.
The portfolio composition file (“PCF”) and the IIV file, which contain
equivalent portfolio holdings information, will be made available as frequently as daily to the Funds’ service providers to facilitate the provision of services to the Funds and to certain other entities (“Entities”) in connection
with the dissemination of information necessary for transactions in large blocks of shares (called “Creation Units”), as contemplated by exemptive orders issued by the SEC and other legal and business requirements pursuant to which the
Funds create and redeem shares. Entities are generally limited to National Securities Clearing Corporation (“NSCC”) members and subscribers to various fee-based services, including large institutional investors (“Authorized
Participants”) that have been authorized by the Distributor to purchase and redeem Creation Units and other institutional market participants that provide information services. Each business day, Fund portfolio holdings information will be
provided to the Distributor or other agent for dissemination through the facilities of the NSCC and/or through other fee-based services to NSCC members and/or subscribers to the fee-based services, including Authorized Participants, and to entities
that publish and/or analyze such information in connection with the process of purchasing or redeeming Creation Units or trading shares of Funds in the secondary market.
Daily access to the PCF and IIV file is permitted (i) to certain personnel of those service providers that are involved in portfolio management and providing administrative, operational, or other support to
portfolio management, including Authorized Participants, and (ii) to other personnel of the Advisor and the Funds’ distributor, administrator, custodian and fund accountant who are involved in functions which may require such information
to conduct business in the ordinary course.
Portfolio holdings information may not be provided prior to its public availability
(“Non-Standard Disclosure”) in other circumstances except where appropriate confidentiality arrangements limiting the use of such information are in effect. Non-Standard Disclosure may be authorized by the Trust’s Chief Compliance
Officer or,
38
in his absence, any other authorized officer of the Trust if he determines that such disclosure is in the best interests of the Fund’s shareholders, no
conflict exists between the interests of the Fund’s shareholders and those of the Advisor or Distributor, and such disclosure serves a legitimate business purpose. The length of lag, if any, between the date of the information and the date on
which the information is disclosed shall be determined by the officer authorizing the disclosure.
The Board has adopted a Portfolio
Holdings Disclosure Policy and will review the Policy annually.
OTHER SERVICE PROVIDERS
Administrator, Index Receipt Agent, and Fund Accounting Agent
J.P. Morgan Investor Services Co., 73 Tremont Street, Boston, MA 02108, acts as Administrator to the Funds pursuant to an administration agreement dated December 15,
2005. The Administrator provides the Funds with all required general administrative services, including, without limitation, office space, equipment, and personnel; clerical and general back office services; bookkeeping, internal accounting, and
secretarial services; the determination of net asset values; and the preparation and filing of all reports, registration statements, proxy statements, and all other materials required to be filed or furnished by the Funds under federal and state
securities laws. The Administrator pays all fees and expenses that are directly related to the services provided by the Administrator to the Funds; each Fund reimburses the Administrator for all fees and expenses incurred by the Administrator which
are not directly related to the services the Administrator provides to the Funds under the service agreement. Each Fund may also reimburse the Administrator for such out-of-pocket expenses as incurred by the Administrator in the performance of
its duties. For these services, each Fund paid the Administrator the amounts set forth below for the period indicated.
|
|
|
|
|
|
Fund
|
|
Fiscal Year Ended
May 31, 2007
|
|
Ultra S&P500 ProShares
|
|
$
|
86,313.62
|
|
Ultra MidCap400 ProShares
|
|
$
|
71,261.17
|
|
Ultra Dow30 ProShares
|
|
$
|
71,086.12
|
|
Ultra QQQ ProShares
|
|
$
|
92,832.81
|
|
Short S&P500 ProShares
|
|
$
|
73,803.30
|
|
Short MidCap400 ProShares
|
|
$
|
68,043.02
|
|
Short Dow30 ProShares
|
|
$
|
61,573.48
|
|
Short QQQ ProShares
|
|
$
|
69,101.06
|
|
UltraShort S&P500 ProShares
|
|
$
|
97,222.29
|
|
UltraShort MidCap400 ProShares
|
|
$
|
65,482.73
|
|
UltraShort Dow30 ProShares
|
|
$
|
73,782.04
|
|
UltraShort QQQ ProShares
|
|
$
|
116,837.95
|
|
Ultra Russell 2000 ProShares
|
|
$
|
20,871.55
|
|
Ultra SmallCap600 ProShares
|
|
$
|
10,404.17
|
|
Ultra Russell 1000 Value ProShares
|
|
$
|
5,716.73
|
|
Ultra Russell 1000 Growth ProShares
|
|
$
|
5,673.58
|
|
Ultra Russell MidCap Value ProShares
|
|
$
|
5,695.51
|
|
Ultra Russell MidCap Growth ProShares
|
|
$
|
5,680.60
|
|
Ultra Russell 2000 Value ProShares
|
|
$
|
5,491.14
|
|
Ultra Russell 2000 Growth ProShares
|
|
$
|
5,557.88
|
|
Ultra Basic Materials ProShares
|
|
$
|
7,867.23
|
|
Ultra Consumer Goods ProShares
|
|
$
|
7,141.73
|
|
Ultra Consumer Services ProShares
|
|
$
|
6,552.97
|
|
Ultra Financials ProShares
|
|
$
|
8,092.32
|
|
Ultra Health Care ProShares
|
|
$
|
7,164.87
|
|
Ultra Industrials ProShares
|
|
$
|
7,043.52
|
|
Ultra Oil & Gas ProShares
|
|
$
|
13,485.50
|
|
Ultra Real Estate ProShares
|
|
$
|
10,247.62
|
|
Ultra Semiconductors ProShares
|
|
$
|
7,314.36
|
|
Ultra Technology ProShares
|
|
$
|
6,549.01
|
|
Ultra Utilities ProShares
|
|
$
|
8,273.32
|
|
Short Russell 2000 ProShares
|
|
$
|
6,827.78
|
|
Short SmallCap600 ProShares
|
|
$
|
5,717.85
|
|
UltraShort Russell 2000 ProShares
|
|
$
|
28,704.18
|
|
UltraShort SmallCap600 ProShares
|
|
$
|
9,347.74
|
39
|
|
|
|
|
|
Fund
|
|
Fiscal Year Ended
May 31, 2007
|
|
UltraShort Russell 1000 Value ProShares
|
|
$
|
3,064.64
|
|
UltraShort Russell 1000 Growth ProShares
|
|
$
|
3,084.46
|
|
UltraShort Russell MidCap Value ProShares
|
|
$
|
3,071.31
|
|
UltraShort Russell MidCap Growth ProShares
|
|
$
|
4,343.87
|
|
UltraShort Russell 2000 Value ProShares
|
|
$
|
3,793.61
|
|
UltraShort Russell 2000 Growth ProShares
|
|
$
|
5,607.75
|
|
UltraShort Basic Materials ProShares
|
|
$
|
4,919.94
|
|
UltraShort Consumer Goods ProShares
|
|
$
|
5,467.36
|
|
UltraShort Consumer Services ProShares
|
|
$
|
5,227.62
|
|
UltraShort Financials ProShares
|
|
$
|
20,834.75
|
|
UltraShort Health Care ProShares
|
|
$
|
5,469.95
|
|
UltraShort Industrials ProShares
|
|
$
|
4,916.54
|
|
UltraShort Oil & Gas ProShares
|
|
$
|
9,938.53
|
|
UltraShort Real Estate ProShares
|
|
$
|
22,797.75
|
|
UltraShort Semiconductors ProShares
|
|
$
|
5,289.09
|
|
UltraShort Technology ProShares
|
|
$
|
5,223.79
|
|
UltraShort Utilities ProShares
|
|
$
|
4,894.02
|
ProShare Advisors, pursuant to a separate Management Services Agreement, performs certain
administrative services on behalf of the Funds, such as Negotiate, coordinate and implement the Trust’s contractual obligations with such Service Providers; monitor, oversee and review the performance of such Service Providers to ensure
adherence to applicable contractual obligations and prepare or coordinate reports and presentations to the Board with respect to such Service Providers as requested or as deemed. For these services, the Trust pays to ProShare Advisors a fee at the
annual rate of 0.10% of average daily net assets for all of the Funds. For the most recent fiscal year, each Fund paid ProShare Advisors the amount set for below pursuant to the Management Services Agreement.
|
|
|
|
|
|
Fund
|
|
Fiscal Year Ended
May 31, 2007
|
|
Ultra S&P500 ProShares
|
|
$
|
124,686.35
|
|
Ultra MidCap400 ProShares
|
|
$
|
55,364.73
|
|
Ultra Dow30 ProShares
|
|
$
|
60,086.60
|
|
Ultra QQQ ProShares
|
|
$
|
184,049.14
|
|
Short S&P500 ProShares
|
|
$
|
106,891.89
|
|
Short MidCap400 ProShares
|
|
$
|
96,709.39
|
|
Short Dow30 ProShares
|
|
$
|
60,648.50
|
|
Short QQQ ProShares
|
|
$
|
88,351.00
|
|
UltraShort S&P500 ProShares
|
|
$
|
333,995.86
|
|
UltraShort MidCap400 ProShares
|
|
$
|
98,808.77
|
|
UltraShort Dow30 ProShares
|
|
$
|
150,080.28
|
|
UltraShort QQQ ProShares
|
|
$
|
734,759.79
|
|
Ultra Russell 2000 ProShares
|
|
$
|
10,435.59
|
|
Ultra SmallCap600 ProShares
|
|
$
|
5,202.01
|
|
Ultra Russell 1000 Value ProShares
|
|
$
|
2,858.34
|
|
Ultra Russell 1000 Growth ProShares
|
|
$
|
2,836.71
|
|
Ultra Russell MidCap Value ProShares
|
|
$
|
2,847.66
|
|
Ultra Russell MidCap Growth ProShares
|
|
$
|
2,840.22
|
|
Ultra Russell 2000 Value ProShares
|
|
$
|
2,745.51
|
|
Ultra Russell 2000 Growth ProShares
|
|
$
|
2,778.81
|
|
Ultra Basic Materials ProShares
|
|
$
|
3,933.58
|
|
Ultra Consumer Goods ProShares
|
|
$
|
3,570.88
|
|
Ultra Consumer Services ProShares
|
|
$
|
3,276.46
|
|
Ultra Financials ProShares
|
|
$
|
4,046.11
|
|
Ultra Health Care ProShares
|
|
$
|
3,582.43
|
|
Ultra Industrials ProShares
|
|
$
|
3,521.69
|
|
Ultra Oil & Gas ProShares
|
|
$
|
6,742.60
|
|
Ultra Real Estate ProShares
|
|
$
|
5,123.74
|
|
Ultra Semiconductors ProShares
|
|
$
|
3,657.16
|
|
Ultra Technology ProShares
|
|
$
|
3,274.47
|
|
Ultra Utilities ProShares
|
|
$
|
4,136.66
|
|
Short Russell 2000 ProShares
|
|
$
|
4,267.33
|
|
Short SmallCap600 ProShares
|
|
$
|
3,573.62
|
|
UltraShort Russell 2000 ProShares
|
|
$
|
32,167.33
|
|
UltraShort SmallCap600 ProShares
|
|
$
|
5,842.18
|
40
|
|
|
|
|
|
Fund
|
|
Fiscal Year Ended
May 31, 2007
|
|
UltraShort Russell 1000 Value ProShares
|
|
$
|
1,915.38
|
|
UltraShort Russell 1000 Growth ProShares
|
|
$
|
1,927.70
|
|
UltraShort Russell MidCap Value ProShares
|
|
$
|
1,919.60
|
|
UltraShort Russell MidCap Growth ProShares
|
|
$
|
2,714.87
|
|
UltraShort Russell 2000 Value ProShares
|
|
$
|
2,371.00
|
|
UltraShort Russell 2000 Growth ProShares
|
|
$
|
3,504.78
|
|
UltraShort Basic Materials ProShares
|
|
$
|
3,074.92
|
|
UltraShort Consumer Goods ProShares
|
|
$
|
3,417.06
|
|
UltraShort Consumer Services ProShares
|
|
$
|
3,267.22
|
|
UltraShort Financials ProShares
|
|
$
|
14,090.62
|
|
UltraShort Health Care ProShares
|
|
$
|
3,418.63
|
|
UltraShort Industrials ProShares
|
|
$
|
3,072.75
|
|
UltraShort Oil & Gas ProShares
|
|
$
|
6,211.50
|
|
UltraShort Real Estate ProShares
|
|
|
17,585.96
|
|
UltraShort Semiconductors ProShares
|
|
$
|
3,305.65
|
|
UltraShort Technology ProShares
|
|
$
|
3,264.79
|
|
UltraShort Utilities ProShares
|
|
$
|
3,058.74
|
Custodian
JPMorgan Chase Bank, N.A. acts as custodian to the Funds. JPMorgan Chase Bank is located at 4 MetroTech Center, Brooklyn, NY 11245.
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP (“PWC”) serves as independent
registered public accounting firm to the Funds. PWC provides audit services, tax return preparation and assistance, and consultation in connection with certain SEC filings. PWC’s address is 100 East Broad Street, Suite 2100, Columbus, OH 43215.
For the Funds’ fiscal year ended May 31, 2007, the Funds were audited by another independent registered public accounting firm.
Legal Counsel
Ropes & Gray LLP, One International Place, Boston, MA 02110, serves as counsel to the Funds.
Distributor
SEI Investments Distribution Co.
serves as the distributor and principal underwriter in all fifty states and the District of Columbia. Its address is One Freedom Valley Drive, Oaks, PA. 19456. The Distributor has no role in determining the investment policies of the Trust or any of
the Funds, or which securities are to be purchased or sold by the Trust or any of the Funds. For the fiscal year ended May 31, 2007, ProShare Advisors paid $192,117 to the Distributor as compensation for services.
Principal Financial Officer/Treasurer Services Agreement
The Trust has entered into an agreement with Foreside Compliance Services, LLC (“Foreside”), pursuant to which Foreside provides the Trust with the services of Simon D. Collier to serve as the Trust’s principal financial
officer and Treasurer. The Trust pays Foreside an annual flat fee of $100,000 per year and an additional annual flat fee of $3,500 per Fund, and will reimburse Foreside for certain out-of-pocket expenses incurred by Foreside in providing services to
the Trust. Foreside is located at Two Portland Square, Portland, Maine 04101. For the fiscal year ended May 31, 2007, the Trust paid $164,459.14 to Foreside for services pursuant to its agreement.
Distribution and Service Plan
Shares will be
continuously offered for sale by the Trust through the Distributor only in Creation Units, as described below under “Purchase and Issuance of Shares in Creation Units.” Shares in less than Creation Units are not distributed by the
Distributor. The Distributor also acts as agent for the Trust. The Distributor will deliver a prospectus to persons purchasing Shares in Creation Units and will maintain records of both orders placed with it
41
and confirmations of acceptance furnished by it. The Distributor is a broker-dealer registered under the Securities Exchange Act and a member of the National
Association of Securities Dealers, Inc. The Distributor has no role in determining the investment policies of the Funds or which securities are to be purchased or sold by the Funds.
The Board has approved a Distribution and Service Plan under which each Fund may pay financial intermediaries such as broker-dealers and investment
advisors (“Authorized Firms”) up to 0.25%, on an annualized basis, of average daily net assets of the Fund as reimbursement or compensation for distribution-related activities with respect to the Shares of Fund and shareholder services.
Under the Distribution and Service Plan, the Trust or the Distributor may enter into agreements (“Distribution and Service Agreements”) with Authorized Firms that purchase Shares on behalf of their clients. There are currently no plans to
impose distribution fees.
The Board, including a majority of the Independent Trustees, voted to adopt the Distribution and Service Plan
and Distribution and Service Agreements at a meeting called for the purpose of voting on such Distribution and Service Plan and Distribution and Service Agreements on November 14, 2005. The Distribution and Service Plan and Distribution and
Service Agreements will remain in effect for a period of one year and will continue in effect thereafter only if such continuance is specifically approved annually by a vote of the Trustees in the manner described above. All material amendments of
the Distribution and Service Plan must also be approved by the Trustees in the manner described above. The Distribution and Service Plan may be terminated at any time by a majority of the Trustees as described above or by vote of a majority of the
outstanding Service Shares of the affected Fund. The Distribution and Service Agreements may be terminated at any time, without payment of any penalty, by vote of a majority of the Trustees as described above or by a vote of a majority of the
outstanding Shares of the affected Fund on not more than 60 days’ written notice to any other party to the Distribution and Service Agreements. The Distribution and Service Agreements shall terminate automatically if assigned. The Trustees have
determined that, in their judgment, there is a reasonable likelihood that the Distribution and Service Plan will benefit the Funds and holders of Shares of the Funds. In the Trustees’ quarterly review of the Distribution and Service Plan and
Distribution and Service Agreements, they will consider their continued appropriateness and the level of compensation and/or reimbursement provided therein.
The Distribution and Service Plan is intended to permit the financing of a broad array of distribution-related activities and services, as well as shareholder services, for the benefit of investors. These activities
and services are intended to make the Shares an attractive investment alternative, which may lead to increased assets, increased investment opportunities and diversification, and reduced per share operating expenses.
COSTS AND EXPENSES
Each Fund bears all expenses of its operations other than those assumed by ProShare
Advisors or the Administrator. Fund expenses include: the investment advisory fee; management services fee; administrative and transfer agency fees; custodian and accounting fees and expenses, legal and auditing fees; securities valuation expenses;
fidelity bonds and other insurance premiums; expenses of preparing and printing prospectuses, product descriptions, confirmations, proxy statements, and shareholder reports and notices; registration fees and expenses; proxy and annual meeting
expenses, if any; licensing fees, listing fees, all Federal, state, and local taxes (including, without limitation, stamp, excise, income, and franchise taxes); organizational costs; and Independent Trustees’ fees and expenses.
ADDITIONAL INFORMATION CONCERNING SHARES
Organization and Description of Shares of Beneficial Interest
The Trust is a Delaware statutory trust and registered investment company. The Trust was organized on May 29, 2002, and has authorized capital of
unlimited Shares of beneficial interest of no par value which may be issued in more than one class or series. Currently, the Trust consists of multiple separately managed series. The Board may designate additional series of beneficial interest and
classify Shares of a particular series into one or more classes of that series.
All Shares of the Trust are freely transferable. The
Trust Shares do not have preemptive rights or cumulative voting rights, and none of the Shares have any preference to conversion, exchange, dividends, retirements, liquidation, redemption, or any other feature. Trust Shares have equal voting rights,
except that, in a
42
matter affecting a particular series or class of Shares, only Shares of that series or class may be entitled to vote on the matter. Trust shareholders are
entitled to require the Trust to redeem Creation Units of their Shares. The Declaration of Trust confers upon the Board of Trustees the power, by resolution, to alter the number of Shares constituting a Creation Unit or to specify that Shares of the
Trust may be individually redeemable. The Trust reserves the right to adjust the stock prices of Shares of the Trust to maintain convenient trading ranges for investors. Any such adjustments would be accomplished through stock splits or reverse
stock splits which would have no effect on the net assets of the applicable Fund.
Under Delaware law, the Trust is not required to hold an
annual shareholders meeting if the 1940 Act does not require such a meeting. Generally, there will not be annual meetings of Trust shareholders. Trust shareholders may remove Trustees from office by votes cast at a meeting of Trust shareholders or
by written consent. If requested by shareholders of at least 10% of the outstanding Shares of the Trust, the Trust will call a meeting of Funds’ shareholders for the purpose of voting upon the question of removal of a Trustee of the Trust and
will assist in communications with other Trust shareholders.
The Declaration of Trust of the Trust disclaims liability of the shareholders
or the officers of the Trust for acts or obligations of the Trust which are binding only on the assets and property of the Trust. The Declaration of Trust provides for indemnification of the Trust’s property for all loss and expense of any
Funds shareholder held personally liable for the obligations of the Trust. The risk of a Trust shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which loss of account of shareholder liability is
limited to circumstances in which the Funds itself would not be able to meet the Trust’s obligations and this risk, thus, should be considered remote.
If a Fund does not grow to a size to permit it to be economically viable, the Fund may cease operations. In such an event, investors may be required to liquidate or transfer their investments at an inopportune time.
Book Entry Only System
The Depository
Trust Company (“DTC”) acts as securities depositary for the Shares. The Shares of each Fund are represented by global securities registered in the name of DTC or its nominee and deposited with, or on behalf of, DTC. Except as provided
below, certificates will not be issued for Shares.
DTC has advised the Trust as follows: it is a limited-purpose trust company organized
under the laws of the State of New York, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions
of Section 17A of the Exchange Act. DTC was created to hold securities of its participants (“DTC Participants”) and to facilitate the clearance and settlement of securities transactions among the DTC Participants in such securities
through electronic book-entry changes in accounts of the DTC Participants, thereby eliminating the need for physical movement of securities certificates. DTC Participants include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations, some of whom (and/or their representatives) own DTC. More specifically, DTC is owned by a number of its DTC Participants and by the New York Stock Exchange, Inc., the AMEX and the National Association of
Securities Dealers, Inc. Access to the DTC system is also available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a DTC Participant, either directly or indirectly
(“Indirect Participants”). DTC agrees with and represents to its Participants that it will administer its book-entry system in accordance with its rules and by-laws and requirements of law. Beneficial ownership of Shares is limited to DTC
Participants, Indirect Participants and persons holding interests through DTC Participants and Indirect Participants. Ownership of beneficial interests in Shares (owners of such beneficial interests are referred to herein as “Beneficial
owners”) is shown on, and the transfer of ownership is effected only through, records maintained by DTC (with respect to DTC Participants) and on the records of DTC Participants (with respect to Indirect Participants and Beneficial owners that
are not DTC Participants). Beneficial owners will receive from or through the DTC Participant a written confirmation relating to their purchase of Shares. The laws of some jurisdictions may require that certain purchasers of securities take physical
delivery of such securities in definitive form. Such laws may impair the ability of certain investors to acquire beneficial interests in Shares.
Beneficial owners of Shares are not entitled to have Shares registered in their names, will not receive or be entitled to receive physical delivery of certificates in definitive form and are not considered the registered holder
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thereof. Accordingly, each Beneficial Owner must rely on the procedures of DTC, the DTC Participant and any Indirect Participant through which such
Beneficial Owner holds its interests, to exercise any rights of a holder of Shares. The Trust understands that under existing industry practice, in the event the Trust requests any action of holders of Shares, or a Beneficial Owner desires to take
any action that DTC, as the record owner of all outstanding Shares, is entitled to take, DTC would authorize the DTC Participants to take such action and that the DTC Participants would authorize the Indirect Participants and Beneficial owners
acting through such DTC Participants to take such action and would otherwise act upon the instructions of Beneficial owners owning through them. As described above, the Trust recognizes DTC or its nominee as the owner of all Shares for all purposes.
Conveyance of all notices, statements and other communications to Beneficial owners is effected as follows. Pursuant to the Depositary Agreement between the Trust and DTC, DTC is required to make available to the Trust upon request and for a fee to
be charged to the Trust a listing of Shares holdings of each DTC Participant. The Trust shall inquire of each such DTC Participant as to the number of Beneficial owners holding Shares, directly or indirectly, through such DTC Participant. The Trust
shall provide each such DTC Participant with copies of such notice, statement or other communication, in such form, number and at such place as such DTC Participant may reasonably request, in order that such notice, statement or communication may be
transmitted by such DTC Participant, directly or indirectly, to such Beneficial owners. In addition, the Trust shall pay to each such DTC Participant a fair and reasonable amount as reimbursement for the expenses attendant to such transmittal, all
subject to applicable statutory and regulatory requirements.
Distributions of Shares shall be made to DTC or its nominee, Cede &
Co., as the registered holder of all Shares. DTC or its nominee, upon receipt of any such distributions, shall credit immediately DTC Participants’ accounts with payments in amounts proportionate to their respective beneficial interests in
Shares as shown on the records of DTC or its nominee. Payments by DTC Participants to Indirect Participants and Beneficial owners of Shares held through such DTC Participants will be governed by standing instructions and customary practices, as is
now the case with securities held for the accounts of customers in bearer form or registered in a “street name,” and will be the responsibility of such DTC Participants. The Trust has no responsibility or liability for any aspects of the
records relating to or notices to Beneficial owners, or payments made on account of beneficial ownership interests in such Shares, or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests or for any
other aspect of the relationship between DTC and the DTC Participants or the relationship between such DTC Participants and the Indirect Participants and Beneficial owners owning through such DTC Participants.
DTC may determine to discontinue providing its service with respect to Shares at any time by giving reasonable notice to the Trust and discharging its
responsibilities with respect thereto under applicable law. Under such circumstances, the Trust shall take action either to find a replacement for DTC to perform its functions at a comparable cost or, if such a replacement is unavailable, to issue
and deliver printed certificates representing ownership of Shares, unless the Trust makes other arrangements with respect thereto satisfactory to the AMEX. In addition, certain brokers may make a dividend reinvestment service available to their
clients. Brokers offering such services may require investors to adhere to specific procedures and timetables in order to participate. Investors interested in such a service should contact their broker for availability and other necessary details.
PROXY VOTING POLICY AND PROCEDURES
Background
The Board of Trustees has adopted policies and procedures with respect to voting proxies relating to portfolio securities of the Funds, pursuant to which
the Board has delegated responsibility for voting such proxies to the Advisor subject to the Board’s continuing oversight.
Policies and Procedures
The Advisor’s proxy voting policies and procedures (the “Guidelines”) are designed to maximize shareholder value and
protect shareowner interests when voting proxies. The Advisor’s Proxy Oversight Committee (the “Proxy Committee”) exercises and documents the Advisor’s responsibility with regard to voting of client proxies. The Proxy Committee
is composed of representatives of the Advisor’s Compliance, Legal and Portfolio Management Departments, and chaired by the Advisor’s Chief Compliance Officer. The Proxy Committee reviews and monitors the effectiveness of the Guidelines.
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To assist the Advisor in its responsibility for voting proxies and the overall proxy voting process, the
Advisor has retained Institutional Shareholder Services (“ISS”) as an expert in the proxy voting and corporate governance area. ISS is an independent company that specializes in providing a variety of proxy-related services to
institutional investment managers, plan sponsors, custodians, consultants, and other institutional investors. The services provided by ISS include in-depth research, global issuer analysis, and voting recommendations as well as vote execution,
reporting and record keeping. ISS issues quarterly reports for the Advisor to review to assure proxies are being voted properly. The Advisor and ISS also perform spot checks intra-quarter to match the voting activity with available shareholder
meeting information. ISS’s management meets on a regular basis to discuss its approach to new developments and amendments to existing policies. Information on such developments or amendments in turn is provided to the Proxy Committee. The Proxy
Committee reviews and, as necessary, may amend periodically the Guidelines to address new or revised proxy voting policies or procedures.
The Guidelines are maintained and implemented by ISS and are an extensive list of common proxy voting issues with recommended voting actions based on the overall goal of achieving maximum shareholder value and protection of shareholder
interests. Generally, proxies are voted in accordance with the voting recommendations contained in the Guidelines. If necessary, the Advisor will be consulted by ISS on non-routine issues. Proxy issues identified in the Guidelines include but are
not limited to:
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Election of Directors - considering factors such as director qualifications, term of office, age limits.
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Proxy Contests - considering factors such as voting for nominees in contested elections and reimbursement of expenses.
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Election of Auditors - considering factors such as independence and reputation of the auditing firm.
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Proxy Contest Defenses - considering factors such as board structure and cumulative voting.
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Tender Offer Defenses - considering factors such as poison pills
(stock purchase rights plans)
and fair price provisions.
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Miscellaneous Governance Issues - considering factors such as confidential voting and equal access.
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Capital Structure - considering factors such as common stock authorization and stock distributions.
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Executive and Director Compensation - considering factors such as performance goals and employee stock purchase plans.
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State of Incorporation - considering factors such as state takeover statutes and voting on reincorporation proposals.
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Mergers and Corporate Restructuring - considering factors such as spin-offs and asset sales.
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Mutual Fund Proxy Voting - considering factors such as election of directors and proxy contests.
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Consumer and Public Safety Issues - considering factors such as social and environmental issues as well as labor issues.
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A full description of each guideline and voting policy is maintained by the Advisor, and a complete copy of the Guidelines is available upon request.
Conflicts of Interest
From time to time, proxy
issues may pose a material conflict of interest between Fund shareholders and the Advisor, the underwriter or any affiliates thereof. Due to the limited nature of the Advisor’s activities (
e.g.
, no underwriting business, no publicly
traded affiliates, no investment banking activities, and no research recommendations), conflicts of interest are likely to be infrequent. Nevertheless, it shall be the duty of the Proxy Committee to monitor for potential conflicts of interest. In
the event a conflict of interest arises, the Advisor will direct ISS to use its independent judgment to vote affected proxies in accordance with approved guidelines. The Proxy Committee will disclose to the Board the voting issues that created the
conflict of interest and the manner in which ISS voted such proxies.
Record of Proxy Voting
The Advisor, with the assistance of ISS, shall maintain for a period of at least five years a record of each proxy statement received and materials that
were considered when the proxy was voted during the calendar year.
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Information on how the Funds voted proxies relating to portfolio securities for the 12-month (or shorter) period ended June 30 will be available
(1) without charge, upon request, by calling the Advisor at 1-866-PRO-5125, (2) on the ProShares web site, and (3) on the SEC’s website at http://www.sec.gov.
PURCHASE AND REDEMPTION OF SHARES
The Trust issues and redeems Shares of each Fund only in aggregations of
Creation Units. The number of Shares of a Fund that constitute a Creation Unit for each Fund and the value of such Creation Unit as of each Fund’s inception were 75,000 and $5,250,000, respectively.
See “Purchase and Issuance of Shares in Creation Units” and “Redemption of Shares in Creation Units” below. The Board of Trustees of
the Trust reserves the right to declare a split or a consolidation in the number of Shares outstanding of any Fund of the Trust, and may make a corresponding change in the number of Shares constituting a Creation Unit, in the event that the per
Shares price in the secondary market rises (or declines) to an amount that falls outside the range deemed desirable by the Board.
Purchase and Issuance
of Creation Units
The Trust issues and sells Shares only in Creation Units on a continuous basis through the Distributor, without a
sales load, at their net asset value next determined after receipt, on any Business Day (as defined herein), of an order in proper form.
A
“Business Day” with respect to each Fund is any day on which the New York Stock Exchange is open for business.
Creation Units of
Shares may be purchased only by or through a DTC Participant that has entered into an Authorized Participant Agreement with the Distributor (“Authorized Participant”). Such Authorized Participant will agree pursuant to the terms of such
Authorized Participant Agreement on behalf of itself or any investor on whose behalf it will act, as the case may be, to certain conditions, including that such Authorized Participant will make available an amount of cash sufficient to pay the
Balancing Amount and the transaction fee described below. The Authorized Participant may require the investor to enter into an agreement with such Authorized Participant with respect to certain matters, including payment of the Balancing Amount.
Investors who are not Authorized Participants must make appropriate arrangements with an Authorized Participant. Investors should be aware that their particular broker may not be a DTC Participant or may not have executed an Authorized Participant
Agreement, and that therefore orders to purchase Creation Units of Shares may have to be placed by the investor’s broker through an Authorized Participant. As a result, purchase orders placed through an Authorized Participant may result in
additional charges to such investor. The Trust does not expect to enter into an Authorized Participant Agreement with more than a small number of DTC Participants.
Portfolio Deposit (Ultra ProShares only)
The consideration for purchase of a Creation Unit of Shares of a Ultra ProShares
generally consists of the in-kind deposit of a designated portfolio of equity securities (“Deposit Securities”) constituting a representation of the Underlying Index for the Ultra ProShares, the Balancing Amount, and the appropriate
transaction fee (collectively, the “Portfolio Deposit”). The Balancing Amount will be the amount equal to the differential, if any, between the total aggregate market value of the Deposit Securities and the NAV of the Creation Units being
purchased and will be paid to, or received from, the Trust after the NAV has been calculated.
The Index Receipt Agent makes available
through the National Securities Clearing Corporation (“NSCC”) on each Business Day, either immediately prior to the opening of business on the Exchange or the night before, the list of the names and the required number of shares of each
Deposit Security to be included in the current Portfolio Deposit (based on information at the end of the previous Business Day) for each Ultra ProShares. Such Portfolio Deposit is applicable, subject to any adjustments as described below, in order
to effect purchases of Creation Units of Shares of a given Ultra ProShares until such time as the next-announced Portfolio Deposit composition is made available.
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The identity and number of shares of the Deposit Securities required for a Portfolio Deposit for each
Fund changes as rebalancing adjustments and corporate action events are reflected from time to time by ProShare Advisors with a view to the investment objective of the Ultra ProShares. The composition of the Deposit Securities may also change in
response to adjustments to the weighting or composition of the securities constituting the relevant securities index. In addition, the Trust reserves the right to permit or require the substitution of an amount of cash (i.e., a “cash in
lieu” amount) to be added to the Balancing Amount to replace any Deposit Security which may not be available in sufficient quantity for delivery or for other similar reasons. The adjustments described above will reflect changes, known to
ProShare Advisors on the date of announcement to be in effect by the time of delivery of the Portfolio Deposit, in the composition of the subject index being tracked by the relevant Ultra ProShares, or resulting from stock splits and other corporate
actions.
In addition to the list of names and numbers of securities constituting the current Deposit Securities of a Portfolio Deposit, on
each Business Day, the Balancing Amount effective through and including the previous Business Day, per outstanding Share of each Ultra ProShares, will be made available.
Shares may be issued in advance of receipt by the Trust of all or a portion of the applicable Deposit Securities as described below. In these circumstances, the initial deposit will have a greater value than the NAV
of the Shares on the date the order is placed in proper form since, in addition to the available Deposit Securities, cash must be deposited in an amount equal to the sum of (i) the Balancing Amount, plus (ii) 115% of the market value of
the undelivered Deposit Securities (the “Additional Cash Deposit”). An additional amount of cash shall be required to be deposited with the Trust, pending delivery of the missing Deposit Securities to the extent necessary to maintain the
Additional Cash Deposit with the Trust in an amount at least equal to 115% of the daily marked to market value of the missing Deposit Securities. The Participation Agreement will permit the Trust to buy the missing Deposit Securities any time.
Authorized Participants will be liable to the Trust for the costs incurred by the Trust in connection with any such purchases. These costs will be deemed to include the amount by which the actual purchase price of the Deposit Securities exceeds the
market value of such Deposit Securities on the day the purchase order was deemed received by the Distributor plus the brokerage and related transaction costs associated with such purchases. The Trust will return any unused portion of the Additional
Cash Deposit once all of the missing Deposit Securities have been properly received by the Custodian Bank or purchased by the Trust and deposited into the Trust. In addition, a transaction fee, as listed below, will be charged in all cases. The
delivery of Shares so purchased will occur no later than the third Business Day following the day on which the purchase order is deemed received by the Distributor.
All questions as to the number of shares of each security in the Deposit Securities and the validity, form, eligibility and acceptance for deposit of any securities to be delivered shall be determined by the Trust,
and the Trust’s determination shall be final and binding.
Cash Purchase Amount (Short ProShares only)
Creation Units of the Short ProShares will be sold only for cash (“Cash Purchase Amount”). Creation Units are sold at their net asset value,
plus a transaction fee, as described below.
Purchases through the Clearing Process (Ultra ProShares only)
An Authorized Participant may place an order to purchase (or redeem) Creation Units (i) through the Continuous Net Settlement clearing processes of
NSCC as such processes have been enhanced to effect purchases (and redemptions) of Creation Units, such processes being referred to herein as the “Clearing Process,” or (ii) outside the Clearing Process. To purchase or redeem through
the Clearing Process, an Authorized Participant must be a member of NSCC that is eligible to use the Continuous Net Settlement system. For purchase orders placed through the Clearing Process, the Authorized Participant Agreement authorizes the
Distributor to transmit through the Transfer Agent to NSCC, on behalf of an Authorized Participant, such trade instructions as are necessary to effect the Authorized Participant’s purchase order. Pursuant to such trade instructions to NSCC, the
Authorized Participant agrees to deliver the requisite Deposit Securities and the Balancing Amount to the Trust, together with the Transaction Fee and such additional information as may be required by the Distributor. A purchase order must be
received by the Distributor at 4:00 p.m. New York time if transmitted by mail or by 3:00 p.m. New York time if transmitted by telephone, facsimile or other electronic means permitted under the Participant Agreement in order to receive that
day’s Closing NAV per Share.
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Purchases Outside the Clearing Process
An Authorized Participant that wishes to place an order to purchase Creation Units outside the Clearing Process must state that it is not using the
Clearing Process and that the purchase instead will be effected through a transfer of securities and cash directly through DTC. All purchases of the Short ProShares will be settled outside the Clearing Process. Purchases (and redemptions) of
Creation Units of the Ultra ProShares settled outside the Clearing Process will be subject to a higher Transaction Fee than those settled through the Clearing Process. Purchase orders effected outside the Clearing Process are likely to require
transmittal by the Authorized Participant earlier on the Transmittal Date than orders effected using the Clearing Process. Those persons placing orders outside the Clearing Process should ascertain the deadlines applicable to DTC and the Federal
Reserve Bank wire system by contacting the operations department of the broker or depository institution effectuating such transfer of Deposit Securities and Balancing Amount (for the Ultra ProShares), or of the Cash Purchase Amount (for the Short
ProShares) together with the applicable Transaction Fee.
Rejection of Purchase Orders
The Trust reserves the absolute right to reject a purchase order transmitted to it by the Distributor in respect of any Fund if (a) the purchaser or
group of purchasers, upon obtaining the shares ordered, would own 80% or more of the currently outstanding Shares of any Fund; (b) for the Ultra ProShares only, the Deposit Securities delivered are not as specified by ProShare Advisors and
ProShare Advisors has not consented to acceptance of an in-kind deposit that varies from the designated Deposit Securities; (c) acceptance of the purchase transaction order would have certain adverse tax consequences to the Fund; (d) the
acceptance of the purchase transaction order would, in the opinion of counsel, be unlawful; (e) the acceptance of the purchase transaction order would otherwise, in the discretion of the Trust or ProShare Advisors, have an adverse effect on the
Trust or the rights of beneficial owners; (f) the value of a Cash Purchase Amount, or the value of the Balancing Amount to accompany an in-kind deposit exceed a purchase authorization limit extended to an Authorized Participant by the custodian
and the Authorized Participant has not deposited an amount in excess of such purchase authorization with the custodian prior to 3:00 p.m. on the Transmittal Date; or (g) in the event that circumstances outside the control of the Trust, the
Distributor and ProShare Advisors make it impractical to process purchase orders. The Trust shall notify a prospective purchaser of its rejection of the order of such person. The Trust and the Distributor are under no duty, however, to give
notification of any defects or irregularities in the delivery of purchase transaction orders nor shall either of them incur any liability for the failure to give any such notification.Redemption of Creation Units
Shares may be redeemed only in Creation Units at their net asset value next determined after receipt of a redemption request in proper form by the
Distributor on any Business Day. The Trust will not redeem Shares in amounts less than Creation Units. Beneficial owners also may sell Shares in the secondary market, but must accumulate enough Shares to constitute a Creation Unit in order to have
such Shares redeemed by the Trust. There can be no assurance, however, that there will be sufficient liquidity in the public trading market at any time to permit assembly of a Creation Unit of Shares. Investors should expect to incur brokerage and
other costs in connection with assembling a sufficient number of Shares to constitute a redeemable Creation Unit.
Fund Securities (Ultra ProShares
only)
With respect to each Ultra ProShares, ProShare Advisors makes available through the NSCC immediately prior to the opening of
business on the Exchange on each day that the Exchange is open for business the Portfolio Securities that will be applicable (subject to possible amendment or correction) to redemption requests received in proper form (as defined below) on that day
(“Fund Securities”). These securities may, at times, not be identical to Deposit Securities which are applicable to a purchase of Creation Units.
The redemption proceeds for a Creation Unit generally consist of Fund Securities, as announced by ProShare Advisors through the NSCC on any Business Day, plus the Balancing Amount. The redemption transaction fee
described below is deducted from such redemption proceeds.
Cash Redemption Amount (Short ProShares only)
The redemption proceeds for a Creation Unit of a Short ProShares will consist solely of cash in an amount equal to the net asset value of the Shares being
redeemed, as next determined after a receipt of a request in proper
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form, less the redemption transaction fee described below (“Cash Redemption Amount”).
Placement of Redemption Orders Using Clearing Process
Orders to redeem Creation Units of Funds through the Clearing Process must be delivered through an
Authorized Participant that is a member of NSCC that is eligible to use the Continuous Net Settlement System. A redemption order must be received by the Distributor prior to 4:00 p.m. New York time if transmitted by mail or by 3:00 p.m. New York
time if transmitted by telephone, facsimile or other electronic means permitted under the Participant Agreement in order to receive that day’s closing NAV per share. All other procedures set forth in the Participant Agreement must be followed
in order for you to receive the NAV determined on that day. The requisite Fund Securities and the Balancing Amount (for the Ultra ProShares) or the Cash Redemption Amount (for the Short ProShares) will be transferred by the third (3
rd
) NSCC Business Day following the date on which such request for redemption is deemed received.
Placement of Redemption Orders Outside Clearing Process
Orders to redeem Creation Units of Funds outside the Clearing Process must be delivered through a DTC Participant that has executed the Participant Agreement. A DTC Participant who wishes to place an order for redemption of Creation Units
of a Fund to be effected outside the Clearing Process need not be a Participating Party, but such orders must state that the DTC Participant is not using the Clearing Process and that redemption of Creation Units will instead be effected through
transfer of Shares directly through DTC. A redemption order must be received by the Distributor prior to 4:00 p.m. New York time if transmitted by mail or by 3:00 p.m. New York time if transmitted by telephone, facsimile or other electronic means
permitted under the Participant Agreement in order to receive that day’s closing NAV per share. All other procedures set forth in the Participant Agreement must be followed in order for you to receive the NAV determined on that day. The order
must be accompanied or preceded by the requisite number of Shares of Funds specified in such order, which delivery must be made through DTC to the Custodian by the third Business Day following such Transmittal Date (“DTC Cut-Off Time”);
and (iii) all other procedures set forth in the Participant Agreement must be properly followed.
After the Transfer Agent has deemed
an order for redemption outside the Clearing Process received, the Transfer Agent will initiate procedures to transfer the requisite Fund Securities (for the Ultra ProShares only) which are expected to be delivered within three Business Days and the
Cash Redemption Amount (for all Funds) by the third Business Day following the Transmittal Date on which such redemption order is deemed received by the Transfer Agent.
In certain instances, Authorized Participants may create and redeem Creation Unit aggregations of the same Fund on the same trade date. In this instance, the Trust reserves the right to settle these transactions on a
net basis.
Redemptions in Cash
For
Ultra ProShares, if it is not possible to effect deliveries of the Fund Securities, the Fund may in its discretion exercise its option to redeem such Shares in cash, and the redeeming shareholder will be required to receive its redemption proceeds
in cash. In addition, an investor may request a redemption in cash which the Ultra ProShares may, in its sole discretion, permit. In either case, the investor will receive a cash payment equal to the net asset value of its Shares based on the net
asset value of Shares of the relevant Fund next determined after the redemption request is received in proper form (minus a redemption transaction fee and additional charge for requested cash redemptions specified above, to offset the Fund’s
brokerage and other transaction costs associated with the disposition of Fund Securities). The Fund may also, in its sole discretion, upon request of a shareholder, provide such redeemer a portfolio of securities which differs from the exact
composition of the Fund Securities but does not differ in net asset value.
For Short ProShares, all redemptions will be in cash.
The right of redemption may be suspended or the date of payment postponed with respect to any Fund (1) for any period during which
the New York Stock Exchange is closed (other than customary weekend and holiday closings); (2) for any period during which trading on the New York Stock Exchange is suspended or restricted; (3) for any period during which an emergency
exists as a result of which disposal of the shares of the Fund’s portfolio
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securities or determination of its net asset value is not reasonably practicable; or (4) in such other circumstance as is permitted by the SEC.
Transaction Fees
Transaction fees are
imposed as set forth in the table in the prospectus. Transaction fees payable to the Trust are imposed to compensate the Trust for the transfer and other transaction costs of a Fund associated with the issuance and redemption of Creation Units of
Shares. There is a fixed and a variable component to the total Transaction Fee. A fixed Transaction Fee is applicable to each creation or redemption transaction, regardless of the number of Creation Units purchased or redeemed. In addition, a
variable Transaction Fee equal to a percentage of the value of each Creation Unit purchased or redeemed is applicable to each creation or redemption transaction.
Purchasers of Creation Units of Ultra ProShares for cash are required to pay an additional charge to compensate the relevant Fund for brokerage and market impact expenses relating to investing in portfolios
securities. Where the Trust permits an in-kind purchaser to substitute cash in lieu of depositing a portion of the Deposit Securities, the purchaser will be assessed an additional charge for cash purchases.
Purchasers of Shares in Creation Units are responsible for the costs of transferring the securities constituting the Deposit Securities to the account of
the Trust. The purchase transaction fees for in-kind purchases and cash purchases (when available) are listed in the table below. Investors will also bear the costs of transferring securities from the Fund to their account or on their order.
Investors who use the services of a broker or other such intermediary may be charged a fee for such services.
Determining Net Asset Value
Net asset value per share for each Fund is computed by dividing the value of the net assets of such Fund (i.e., the value of its total
assets less total liabilities) by the total number of Shares outstanding, rounded to the nearest cent. Expenses and fees, including the management, administration and distribution fees, are accrued daily and taken into account for purposes of
determining net asset value. The net asset value of each Fund is determined as of the close of the regular trading session on the New York Stock Exchange, Inc. (“NYSE”) (ordinarily 4:00 p.m., Eastern time) on each day that the NYSE is
open. The Trust may establish additional times for the computation of net asset value of one or more Funds in the future in connection with the possible future trading of Shares of such Funds on one or more foreign exchanges.
Continuous Offering
The method by which Creation
Units of Shares are created and traded may raise certain issues under applicable securities laws. Because new Creation Units of Shares are issued and sold by the Trust on an ongoing basis, at any point a “distribution,” as such term is
used in the Securities Act, may occur. Broker-dealers and other persons are cautioned that some activities on their part may, depending on the circumstances, result in their being deemed participants in a distribution in a manner which could render
them statutory underwriters and subject them to the prospectus delivery and liability provisions of the Securities Act. For example, a broker-dealer firm or its client may be deemed a statutory underwriter if it takes Creation Units after placing an
order with the Distributor, breaks them down into constituent Shares, and sells some or all of the Shares comprising such Creation Units directly to its customers; or if it chooses to couple the creation of a supply of new Shares with an active
selling effort involving solicitation of secondary market demand for Shares. A determination of whether a person is an underwriter for the purposes of the Securities Act depends upon all the facts and circumstances pertaining to that person’s
activities. Thus, the examples mentioned above should not be considered a complete description of all the activities that could lead to a categorization as an underwriter. Broker- dealer firms should also note that dealers who are effecting
transactions in Shares, whether or not participating in the distribution of Shares, are generally required to deliver a prospectus. This is because the prospectus delivery exemption in Section 4(3) of the Securities Act is not available in
respect of such transactions as a result of Section 24(d) of the 1940 Act
.
The Trust has been granted an exemption by the SEC from this prospectus delivery obligation in ordinary secondary market transactions involving Shares under
certain circumstances, on the condition that purchasers of Shares are provided with a product description of the Shares. Broker-dealer firms should note that dealers who are not “underwriters” but are participating in a distribution (as
contrasted to ordinary secondary market transaction), and thus dealing with Shares that are part of an “unsold allotment” within the meaning of section 4(3)(C) of the Securities Act, would be unable
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to take advantage of the prospectus delivery exemption provided by section 4(3) of the Securities Act. Firms that incur a prospectus-delivery obligation with
respect to Shares are reminded that under Securities Act Rule 153 a prospectus delivery obligation under Section 5(b)(2) of the Securities Act owed to a national securities exchange member in connection with a sale on the national securities
exchange is satisfied by the fact that the Fund’s prospectus is available at the national securities exchange on which the Shares of such Fund trade upon request. The prospectus delivery mechanism provided in Rule 153 is only available with
respect to transactions on a national securities exchange and not with respect to “upstairs” transactions.
TAXATION
Overview
Set forth below is a discussion of certain U.S. federal income tax issues concerning the Funds and the purchase, ownership, and disposition of a Fund’s Shares. This discussion does not purport to be complete or to deal with all aspects
of federal income taxation that may be relevant to shareholders in light of their particular circumstances, nor to certain types of shareholders subject to special treatment under the federal income tax laws (for example, banks and life insurance
companies). This discussion is based upon present provisions of the Code, the regulations promulgated thereunder, and judicial and administrative ruling authorities, all of which are subject to change, which change may be retroactive. Prospective
investors should consult their own tax advisors with regard to the federal tax consequences of the purchase, ownership, or disposition of a Fund’s Shares, as well as the tax consequences arising under the laws of any state, foreign country, or
other taxing jurisdiction.
Each of the Funds intends to qualify and elect to be treated each year as a regulated investment company (a
“RIC”) under Subchapter M of the Code. A RIC generally is not subject to federal income tax on income and gains distributed in a timely manner to its shareholders. Accordingly, each Fund generally must, among other things:
(a) derive in each taxable year at least 90% of its gross income from (i) dividends, interest, payments with respect to certain securities loans, and gains from
the sale or other disposition of stock, securities or foreign currencies, or other income (including but not limited to gains from options, futures, or forward contracts) derived with respect to its business of investing in such stock, securities or
currencies; and (ii) net income from interests in “qualified publicly traded partnerships” (as defined below);
(b) diversify its holdings
so that, at the end of each fiscal quarter, (i) at least 50% of the market value of the Fund’s assets is represented by cash and cash items, U.S. government securities, the securities of other regulated investment companies and other
securities, with such other securities limited, in respect of any one issuer, to an amount not greater than 5% of the value of the Fund’s total assets and not more than 10% of the outstanding voting securities of such issuer, and (ii) not
more than 25% of the value of its total assets is invested (x) in the securities of any one issuer (other than U.S. government securities and the securities of other regulated investment companies) of any one issuer or of two or more issuers
which the fund controls and which are engaged in the same, similar, or related trades or businesses, or (y) in the securities of one or more qualified publicly traded partnerships (as defined below); and
(c) distribute at least 90% of the Fund’s investment company taxable income (as that term is defined in the Code without regard to the deduction for dividends
paid—generally, taxable ordinary income and the excess, if any, of net short-term capital gains over net long-term capital losses) and net tax-exempt interest income, for such year. Each Fund intends to distribute substantially all of such
income.
In general, for purposes of the 90% gross income requirement described in paragraph (a) above, income derived from a
partnership will be treated as qualifying income only to the extent such income is attributable to items of income of the partnership which would be qualifying income if realized by the regulated investment company. However, 100% of the net income
of a regulated investment company derived from an interest in a “qualified publicly traded partnership” (defined as a partnership (i) interests in which are traded on an established securities market or readily tradable on a secondary
market or the substantial equivalent thereof and (ii) that derives less than 90% of its income from the qualifying income described in paragraph (a) above) will be treated as qualifying income. In addition, although in general the passive
loss rules of the Code do not apply to regulated investment companies, such rules do apply to a regulated investment company with respect to items attributable to an interest in a qualified publicly traded partnership. Finally, for purposes of
paragraph (b) above, in the case of a Fund’s investments in loan participations, the Fund shall treat both the financial intermediary and the issuer of the
51
underlying obligation as an issuer, and the term “outstanding voting securities of such issuer” will include the equity securities of a qualified
publicly traded partnership.
Amounts not distributed on a timely basis in accordance with a calendar year distribution requirement
are subject to a nondeductible 4% excise tax at the Fund level. To avoid the tax, each Fund must distribute during each calendar year an amount equal to the sum of (1) at least 98% of its ordinary income (not taking into account any capital
gains or losses) for the calendar year, (2) at least 98% of its capital gains in excess of its capital losses (adjusted for certain ordinary losses) for a one-year period generally ending on October 31 of the calendar year, and
(3) all ordinary income and capital gains for previous years that were not distributed during such years. To avoid application of the excise tax, the Funds intend to make distributions in accordance with the calendar year distribution
requirement. A distribution will be treated as paid on December 31 of a calendar year if it is declared by the Fund in October, November or December of that year with a record date in such a month and paid by the Fund during January of the
following year. Such distributions will be taxable to shareholders in the calendar year in which the distributions are declared, rather than the calendar year in which the distributions are received.
Market Discount
If a Fund purchases a debt security
at a price lower than the stated redemption price of such debt security, the excess of the stated redemption price over the purchase price is “market discount”. If the amount of market discount is more than a de minimis amount, a portion
of such market discount must be included as ordinary income (not capital gain) by the Fund in each taxable year in which the Fund owns an interest in such debt security and receives a principal payment on it. In particular, the Fund will be required
to allocate that principal payment first to the portion of the market discount on the debt security that has accrued but has not previously been includable in income. In general, the amount of market discount that must be included for each period is
equal to the lesser of (i) the amount of market discount accruing during such period (plus any accrued market discount for prior periods not previously taken into account) or (ii) the amount of the principal payment with respect to such
period. Generally, market discount accrues on a daily basis for each day the debt security is held by a Fund at a constant rate over the time remaining to the debt security’s maturity or, at the election of the Fund, at a constant yield to
maturity which takes into account the semi-annual compounding of interest. Gain realized on the disposition of a market discount obligation must be recognized as ordinary interest income (not capital gain) to the extent of the “accrued market
discount.”
Original Issue Discount
Certain debt securities acquired by the Funds may be treated as debt securities that were originally issued at a discount. Original issue discount can generally be defined as the difference between the price at which a security was issued
and its stated redemption price at maturity. Although no cash income is actually received by a Fund, original issue discount that accrues on a debt security in a given year generally is treated for federal income tax purposes as interest and,
therefore, such income would be subject to the distribution requirements applicable to regulated investment companies.
Some debt
securities may be purchased by the Funds at a discount that exceeds the original issue discount on such debt securities, if any. This additional discount represents market discount for federal income tax purposes (see above).
Futures and Foreign Currency Forward Contracts
Any
regulated futures contracts and certain options (namely, nonequity options and dealer equity options) in which a Fund may invest may be “section 1256 contracts.” (The Funds do not intend to invest or trade in options.) Gains (or losses) on
these contracts generally are considered to be 60% long-term and 40% short-term capital gains or losses; however foreign currency gains or losses arising from certain section 1256 contracts are ordinary in character. Also, section 1256 contracts
held by a Fund at the end of each taxable year (and on certain other dates prescribed in the Code) are “marked to market” with the result that unrealized gains or losses are treated as though they were realized.
Transactions in futures and forward contracts undertaken by the Funds may result in “straddles” for federal income tax purposes. The straddle
rules may affect the character of gains (or losses) realized by a Fund, and losses
52
realized by the Fund on positions that are part of a straddle may be deferred under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which the losses are realized. In addition, certain carrying charges (including interest expense) associated with positions in a straddle may be required to be capitalized rather than deducted currently.
Certain elections that a Fund may make with respect to its straddle positions may also affect the amount, character and timing of the recognition of gains or losses from the affected positions.
Because only a few regulations implementing the straddle rules have been promulgated, the consequences of such transactions to the Funds are not entirely
clear. The straddle rules may increase the amount of short-term capital gain realized by a Fund, which is taxed as ordinary income when distributed to shareholders. Because application of the straddle rules may affect the character of gains or
losses, defer losses and/or accelerate the recognition of gains or losses from the affected straddle positions, the amount which must be distributed to shareholders as ordinary income or long-term capital gain may be increased or decreased
substantially as compared to a fund that did not engage in such transactions.
Constructive Sales
Recently enacted rules may affect the timing and character of gain if a Fund engages in transactions that reduce or eliminate its risk of loss with
respect to appreciated financial positions. If the Fund enters into certain transactions in property while holding substantially identical property, the Fund would be treated as if it had sold and immediately repurchased the property and would be
taxed on any gain (but not loss) from the constructive sale. The character of gain from a constructive sale would depend upon the Fund’s holding period in the property. Loss from a constructive sale would be recognized when the property was
subsequently disposed of, and its character would depend on the Fund’s holding period and the application of various loss deferral provisions of the Code.
Passive Foreign Investment Companies
The Funds may invest in shares of foreign corporations that may be classified under
the Code as passive foreign investment companies (“PFICs”). In general, a foreign corporation is classified as a PFIC if at least one-half of its assets constitute investment-type assets, or 75% or more of its gross income is
investment-type income. If a Fund receives a so-called “excess distribution” with respect to PFIC stock, the Fund itself may be subject to a tax on a portion of the excess distribution, whether or not the corresponding income is
distributed by the Fund to shareholders. In general, under the PFIC rules, an excess distribution is treated as having been realized ratably over the period during which the Fund held the PFIC shares. Each Fund will itself be subject to tax on the
portion, if any, of an excess distribution that is so allocated to prior Fund taxable years and an interest factor will be added to the tax, as if the tax had been payable in such prior taxable years. Certain distributions from a PFIC as well as
gain from the sale of PFIC shares are treated as excess distributions. Excess distributions are characterized as ordinary income even though, absent application of the PFIC rules, certain excess distributions might have been classified as capital
gains.
The Funds may be eligible to elect alternative tax treatment with respect to PFIC shares. Under an election that currently is
available in some circumstances, a Fund generally would be required to include in its gross income its share of the earnings of a PFIC on a current basis, regardless of whether distributions were received from the PFIC in a given year. If this
election were made, the special rules, discussed above, relating to the taxation of excess distributions, would not apply. In addition, another election would involve marking to market the Fund’s PFIC shares at the end of each taxable year,
with the result that unrealized gains would be treated as though they were realized and reported as ordinary income. Any marked-to-market losses and any loss from an actual disposition of Fund Shares would be deductible as ordinary losses to the
extent of any net marked-to-market gains included in income in prior years.
Real Estate Investment Trusts
The Funds may invest in REITs that hold residual interests in real estate mortgage conduits (“REMICs”). Under Treasury regulations that have not
yet been issued, but may apply retroactively, a portion of a Fund’s income from a REIT that is attributable to the REIT’s residual interest in a REMIC (referred to in the Code as an “excess inclusion”) will be subject to federal
income tax in all events. These regulations are also expected to provide that excess inclusion income of a regulated investment company, such as a Fund, will be allocated to shareholders of the
53
regulated investment company in proportion to the dividends received by such shareholders, with the same consequences as if the shareholders held the related
REMIC residual interest directly. Dividends paid by REITs generally will not be eligible to be treated as “qualified dividend income.”
In general, excess inclusion income allocated to shareholders (i) cannot be offset by net operating losses (subject to a limited exception for certain thrift institutions), (ii) will constitute unrelated
business taxable income (“UBTI”) to entities (including a qualified pension plan, an individual retirement account, a 401(k) plan, a Keogh plan or other tax-exempt entity) subject to tax on unrelated business income, thereby potentially
requiring such an entity that is allocated excess inclusion income, and otherwise might not be required to file a tax return, to file a tax return and pay tax on such income, and (iii) in the case of a non-U.S. shareholder, will not qualify for
any reduction in U.S. federal withholding tax. In addition, if at any time during any taxable year a “disqualified organization” (as defined in the Code) is a record holder of a share in a Fund, then a Fund will be subject to a tax equal
to that portion of its excess inclusion income for the taxable year that is allocable to the disqualified organization, multiplied by the highest federal income tax rate imposed on corporations. To the extent permitted under the 1940 Act, a Fund may
elect to specially allocate any such tax to the applicable disqualified organization, and thus reduce such shareholder’s distributions for the year by the amount of the tax that relates to such shareholder’s interest in a Fund. A Funds
have not yet determined whether such an election will be made.
Under current law, a Fund serves to “block” (that is, prevent the
attribution to shareholders of) UBTI from being realized by tax-exempt shareholders. Notwithstanding this “blocking” effect, a tax-exempt shareholder could realize UBTI by virtue of its investment in a Fund if shares in a Fund constitute
debt-financed property in the hands of the tax-exempt shareholder within the meaning of Code Section 514(b).
In addition, special tax
consequences apply to charitable remainder trusts (“CRTs”) that invest in regulated investment companies that invest directly or indirectly in residual interests in REMICs or in taxable mortgage pools. Under legislation enacted in December
2006, a charitable remainder trust, as defined in section 664 of the Code, that realizes UBTI for a taxable year must pay an excise tax annually of an amount equal to such UBTI. Under IRS guidance issued in November 2006, a CRT will not recognize
UBTI solely as a result of investing in a Fund that recognizes “excess inclusion income” (which is described earlier). Rather, as described above, if at any time during any taxable year a CRT (or one of certain other tax-exempt
shareholders, such as the United States, a state or political subdivision, or an agency or instrumentality thereof, and certain energy cooperatives) is a record holder of a share in a Fund that recognizes “excess inclusion income,” then a
Fund will be subject to a tax on that portion of its “excess inclusion income” for the taxable year that is allocable to such shareholders at the highest federal corporate income tax rate. The extent to which the IRS guidance in respect of
CRTs remains applicable in light of the December 2006 CRT legislation is unclear. To the extent permitted under the 1940 Act, each Fund may elect to specially allocate any such tax to the applicable CRT, or other shareholder, and thus reduce such
shareholder’s distributions for the year by the amount of the tax that relates to such shareholder’s interest in a Fund. CRTs are urged to consult their tax advisors concerning the consequences of investing in a Fund.
Distributions
Distributions of investment company
taxable income are taxable to a U.S. shareholder as ordinary income, whether paid in cash or shares. Dividends paid by a Fund to a corporate shareholder, to the extent such dividends are attributable to dividends received from U.S. corporations by
the Fund, may qualify for the dividends received deduction. However, the revised alternative minimum tax applicable to corporations may deduct the value of the dividends received deduction.
Under recently enacted legislation, ordinary income dividends you receive may be taxed at the same rate as long-term capital gains. However, income
received in the form of ordinary income dividends will not be considered long-term capital gains for other federal income tax purposes, including the calculation of net capital losses. Short-term capital gain distributions will continue to be taxed
at ordinary income rates.
Distributions of net capital gains (the excess of net long-term capital gains over net short-term capital
losses), if any, designated by the Fund as capital gain dividends, whether paid in cash or in Shares, are taxable as gain from the sale or exchange of an asset held for more than one year, regardless of how long the shareholder has held the
Fund’s Shares. If a shareholder holds a Fund’s Shares for six months or less and during that period receives a distribution taxable to the shareholder as long-term capital gain, any loss realized on the sale of the Fund’s Shares
54
will be long-term loss to the extent of such distribution. Capital gains dividends are not eligible for the dividends received deduction.
The amount of an income dividend or capital gains distribution declared by a Fund during October, November or December of a year to shareholder of record
as of a specified date in such a month that is paid during January of the following year will be deemed to be received by shareholders on December 31 of the prior year. Any dividend or distribution paid by a Fund has the effect of reducing the
Fund’s net asset value per share. Investors should be careful to consider the tax effect of buying Shares shortly before a distribution by a Fund. The price of Shares purchased at that time will include the amount of the forthcoming
distribution, but the distribution will be taxable to the shareholder.
Distributions from capital gains by a Fund are generally made
after applying any available capital loss carryforwards. A Fund’s net capital loss carryforwards may be applied against any net realized capital gains in each succeeding year, or until their respective expiration dates, whichever occurs first.
The following Funds had tax basis net capital loss carryforwards as of May 31, 2007.
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Capital loss
Carryforwards
Expiring 10/31/2014
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Short Dow30SM ProShares
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3,884,813
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Short MidCap400 ProShares
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6,889,918
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Short QQQ ProShares
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11,785,145
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Short S&P500 ProShares
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7,147,858
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UltraShort Dow30 ProShares
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8,492,428
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UltraShort MidCap400 ProShares
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12,189,910
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UltraShort QQQ ProShares
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65,260,977
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UltraShort S&P500 ProShares
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24,105,023
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A dividend or capital gains distribution with respect to Shares of a Fund held by a
tax-deferred or qualified plan, such as an IRA, retirement plan or corporate pension or profit sharing plan, will not be taxable to the plan. Distributions from such plans will be taxable to individual participants under applicable tax rules without
regard to the character of the income earned by the qualified plan. You should consult your tax advisor to determine the suitability of a Fund as an investment through such a plan and the tax treatment of distributions (including distributions of
amounts attributable to an investment in a Fund) from such a plan.
Shareholders will be advised annually as to the federal tax status of
dividends and capital gains distribution made by the Funds for the preceding year. Distributions by Funds generally will be subject to state and local taxes.
Shareholders receiving distributions in the form of newly issued Shares will receive a report as to the net asset value of the Shares received. If the net asset value of Shares is reduced below a shareholder’s
cost as a result of a distribution by a Fund, such distribution generally will be taxable even though it represents a return of invested capital.
Funds will not pay interest on uncashed distribution checks.
Disposition of Shares
Upon a redemption, sale or exchange of Shares of a Fund, a shareholder will generally realize a taxable gain or loss depending upon his or her basis in
the Shares. A gain or loss will be treated as capital gain or loss if the Shares are capital assets in the shareholder’s hands and generally will be long-term, mid-term or short-term, depending upon the shareholder’s holding period for the
Shares. Any loss realized on a redemption, sale or exchange will be disallowed to the extent the Shares disposed of are replaced (including through reinvestment of dividends) within a period of 61 days, beginning 30 days before and ending 30 days
after the Shares are disposed of. In such a case the basis of the Shares acquired will be adjusted to reflect the disallowed loss. Any loss realized by a shareholder on the disposition of a Fund’s Shares held by the shareholder for six months
or less will be treated for tax
55
purposes as a long-term capital loss to the extent of any distributions of capital gain dividends received or treated as having been received by the
shareholder with respect to such Shares.
Backup Withholding
Each Fund may be required to withhold federal income tax (“backup withholding”) from dividends paid, capital gains distributions, and redemption proceeds to shareholders. Federal tax will be withheld if
(1) the shareholder fails to furnish the Fund with the shareholder’s correct taxpayer identification number or social security number, (2) the IRS notifies the shareholder or the Fund that the shareholder has failed to report properly
certain interest and dividend income to the IRS and to respond to notices to that effect, or (3) when required to do so, the shareholder fails to certify that he or she is not subject to backup withholding. The back-up withholding tax rate is
28% for amounts paid through 2010. This legislation will expire and the back-up withholding rate will be 31% for amounts paid after December 31, 2010, unless Congress enacts tax legislation providing otherwise. Any amounts withheld may be
credited against the shareholder’s federal income tax liability.
In order for a foreign investor to qualify for exemption from the
back-up withholding tax rates and for reduced withholding tax rates under income tax treaties, the foreign investor must comply with special certification and filing requirements. Foreign investors in a fund should consult their tax advisers in this
regard.
Other Taxation
Distributions may be subject to additional state, local and foreign taxes, depending on each shareholder’s particular situation. Non-U.S. shareholders and certain types of U.S. shareholders subject to special treatment under the U.S.
federal income tax laws (e.g. banks and life insurance companies) may be subject to U.S. tax rules that differ significantly from those summarized above.
Equalization Accounting
Each Fund distributes its net investment income and capital gains to shareholders as dividends
annually to the extent required to qualify as a regulated investment company under the Code and generally to avoid federal income or excise tax. Under current law, each Fund may on its tax return treat as a distribution of investment company taxable
income and net capital gain the portion of redemption proceeds paid to redeeming shareholders that represents the redeeming shareholders’ portion of the Fund’s undistributed investment company taxable income and net capital gain. This
practice, which involves the use of equalization accounting, will have the effect of reducing the amount of income and gains that the Fund is required to distribute as dividends to shareholders in order for the Fund to avoid federal income tax and
excise tax. This practice may also reduce the amount of distributions required to be made to non-redeeming shareholders and the amount of any undistributed income will be reflected in the value of the Fund’s Shares; the total return on a
shareholder’s investment will not be reduced as a result of the Fund’s distribution policy. Investors who purchase Shares shortly before the record date of a distribution will pay the full price for the Shares and then receive some portion
of the price back as a taxable distribution.
OTHER INFORMATION
The Funds are not sponsored,
endorsed, sold or promoted by Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. (“S&P”). S&P makes no representation or warranty, express or implied, to the owners of shares of the Funds or any member
of the public regarding the advisability of investing in securities generally or in the Funds particularly or the ability of the S&P 500
®
Index, S&P SmallCap 600 Index and S&P
MidCap 400 Index (together, “S&P Indexes”) to track general stock market performance. S&P’s only relationship to the Funds (“Licensee”) is the licensing of certain trademarks and S&P trade names. S&P has no
obligation to take the needs of the Licensee or owners of shares of the Funds into consideration in determining, composing or calculating the S&P Indexes. S&P is not responsible for and has not participated in the determination or
calculation of the equation by which the shares of Funds are to be converted into cash. S&P has no obligation or liability in connection with the administration, marketing or trading of Funds.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P INDEXES, RESPECTIVELY, OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY
FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS
56
OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE PRODUCT, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P INDEXES OR ANY DATA
INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTIBILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P INDEXES OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING
ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
The Russell 2000
®
, Russell 1000
®
, Russell Midcap
®
and Russell 2000
®
(the “Russell Indexes”) are trademarks of the Russell Investment Group and/or its affiliates (“Russell”).
RUSSELL DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE RUSSELL INDEXES OR ANY DATA INCLUDED THEREIN AND RUSSELL SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. RUSSELL
MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY PROSHARES TRUST, INVESTORS, FUND SHAREHOLDERS, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE RUSSELL INDEXES OR ANY DATA INCLUDED THEREIN. RUSSELL MAKES NO EXPRESS OR IMPLIED
WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE RUSSELL INDEXES OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL RUSSELL HAVE
ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
“Dow Jones” is a service mark of Dow Jones & Company, Inc. Dow Jones does not:
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Sponsor, endorse, sell or promote the Funds.
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Recommend that any person invest in the Funds or any other securities.
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Have any responsibility or liability for or make any decisions about timing, amount or pricing of the Funds.
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Have any responsibility or liability for the administration, management or marketing of the Funds.
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Consider the needs of the Funds or the owners of the Funds in determining, composing or calculating the Dow Jones indices or have any obligation to do so.
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Dow Jones will not have any liability in connection with the Funds. Specifically, Dow Jones does not make any warranty, express or
implied, and Dow Jones disclaims any warranty about:
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The results to be obtained by the Funds, the owner of the Funds or any other person in connection with the use of the Dow Jones sector indices and the data included
in the Dow Jones indices;
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The accuracy or completeness of the Dow Jones indices and its data;
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The merchantability and the fitness for a particular purpose or use of the Dow Jones indices and its data:
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Dow Jones will have no liability for any errors, omission or interruptions in the Dow Jones indices or its data;
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Under no circumstances will Dow Jones be liable for any lost profits or indirect, punitive, special or consequential damages or losses, even if Dow Jones knows that
they might occur.
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FINANCIAL STATEMENTS
Each of the Funds’ audited Financial Statements, including the Financial
Highlights, appearing in the Annual Report to Shareholders and the report therein of Ernst & Young LLP, as an independent registered public accounting firm, for the fiscal year ended May 31, 2007 are hereby incorporated by reference in
this SAI. The Annual Report to Shareholders is delivered with this SAI to shareholders requesting this SAI.
57
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN
THE PROSPECTUS OR IN THIS STATEMENT OF ADDITIONAL INFORMATION, WHICH THE PROSPECUTS INCORPORATES BY REFERENCE, IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR PRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY PROSHARES TRUST. THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE AN OFFERING BY PROSHARES TRUST IN ANY JURISDICTION IN WHICH SUCH AN OFFERING MAY NOT LAWFULLY BE MADE.
58