- What are the investment objectives of geared funds?
- What are some common uses for geared funds?
- What type of investor uses geared funds?
- How does a geared fund get its target level of exposure?
- Why do geared funds have one-day investment objectives?
- How do geared funds perform when they are held for longer than one day?
- Does daily rebalancing and compounding mean you shouldn't hold geared funds for longer than a day?
- Where can I learn more about geared investing and the concepts mentioned here?
What are the investment objectives of geared funds?
Most leveraged and inverse funds, also called “geared” funds, aim to provide a multiple of the return of an index or other benchmark for a single day, before fees and expenses. Leveraged funds are designed to magnify exposure (e.g., 2x or 3x) to a benchmark each day. Inverse funds are designed to provide short exposure (e.g., -1x or -2x) to a benchmark each day.
What are some common uses for geared funds?
Geared funds are valuable tools that can be used in a variety of ways by knowledgeable investors. Common uses include:
- Pursuing magnified gains (will also magnify losses).
- Getting a target level of exposure for less cash.
- Helping to hedge against expected declines.
- Overweighting (using a leveraged fund) or underweighting (using an inverse fund) exposure to a market segment.
What type of investor uses geared funds?
Geared funds are not for everyone. They are generally riskier than funds without leveraged or inverse exposure. Geared funds are for investors who take the time to fully understand their risks and benefits and the proper ways to use them. These include:
- Financial professional.
- Institutional investors.
- Knowledgeable individual investors.
Shareholders, or their advisors, should be prepared to monitor their geared fund positions closely, as often as daily, and should use them as part of a diversified portfolio.
For more information, read Considerations for Using Geared Funds.
How does a geared fund get its target level of exposure?
Geared funds can invest in a number of different securities and financial instruments, including stocks, bonds, swaps, futures and forwards. ProShares leveraged ETFs have historically held a significant amount of individual stocks or bonds, and have used swaps, futures, forwards and other instruments to achieve the remainder of their target exposure. ProShares inverse ETFs have historically gotten their exposure through swaps, futures and forwards, and have not shorted individual securities.
For more information, read Components of Geared Funds.
Why do geared funds have one-day investment objectives?
It is mathematically impossible to create a fund that makes a continuous offering of its shares and consistently delivers for all its shareholders a stated multiple of a benchmark over time. Geared funds’ one-day investment objective ensures that no matter when an investor decides to invest in a fund, it can be expected to deliver its stated multiple for that trading day. Without this one-day objective, gains and losses might result in compounded returns, which could cause the fund’s exposure to its benchmark to float unpredictably. To maintain their investment objectives, geared funds rebalance their exposure to their underlying benchmarks each day by trimming or adding to their positions.
How do geared funds perform when they are held for longer than one day?
As a result of daily fund rebalancing, an investor holding a geared fund longer-term is unlikely to continue to receive the fund’s multiple times the benchmark’s returns. As long as the fund is held, compounding can cause the investor's exposure to the underlying benchmark to continue to deviate from the fund’s stated objective. In trending periods, compounding can enhance returns, but in volatile periods, compounding may hurt returns. Generally speaking, the greater the multiple or more volatile a fund’s benchmark, the more pronounced the effects can be.
For more information, read Effects of Daily Rebalancing and Compounding on Geared Investing.
Does daily rebalancing and compounding mean you shouldn't hold geared funds for longer than a day?
Although most geared funds have a one-day investment objective, there are several approaches investors can take to use them for longer periods.
- For many investors, the most direct way to mitigate the effect of holding inverse funds over time is to simply limit the holding period. Remember, returns for short periods (that are longer than a day) can still differ in amount and possibly direction from the target return for the same period.
- Investors looking to approximate a fund's multiple for longer than one day may need to rebalance their holdings by increasing or decreasing the investment to maintain a desired exposure. Rebalancing may result in transaction costs and tax consequences. Of course, rebalancing can reduce the negative effects of compounding on performance, but it may reduce the positive effects as well.
- An investor who has a conviction about the volatility and direction of a benchmark may use geared funds to seek to benefit from the effect of the compounding of the daily returns of the fund—for example, when expecting a low-volatility, trending period. However, investors should consider the cost of the investment and how their portfolios will be affected if the investment goes in the opposite direction of what they were expecting.
For more information, read Rebalancing Geared Funds.
Where can I learn more about geared investing and the concepts mentioned here?
For more information on using geared funds, read GEARED INVESTING: An Introduction to Leveraged and Inverse Funds.
Geared (leveraged or short) ProShares ETFs seek returns that are a multiple of (e.g., 2x or -2x) the return of a benchmark (target) for a single day, as measured from one NAV calculation to the next. Due to the compounding of daily returns, holding periods of greater than one day can result in returns that are significantly different than the target return and ProShares' returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period. These effects may be more pronounced in funds with larger or inverse multiples and in funds with volatile benchmarks. Investors should monitor their holdings as frequently as daily. Investors should consult the prospectus for further details on the calculation of the returns and the risks associated with investing in this product.
Carefully consider the investment objectives, risks, charges and expenses of ProShares before investing. This and other information can be found in their summary and full prospectuses. Read them carefully before investing. Separate ProShares Trust II prospectuses are available for Volatility, Commodity, and Currency ProShares.
ProShares are distributed by SEI Investments Distribution Co., which is not affiliated with the funds' advisor or sponsor.
At the forefront of the ETF revolution since 2006
ProShares continues to innovate with products that provide strategic and tactical opportunities for investors to manage risk and enhance returns.