As filed with the Securities and Exchange Commission on March 14, 2024
Registration Nos. 333-89822; 811-21114
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
☒
Pre-Effective Amendment No.
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Post-Effective Amendment No. 298
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and/or
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
☒
Amendment No. 307
☒
(Exact name of Registrant as Specified in Trust Instrument)
7272 Wisconsin Avenue, 21st Floor
Bethesda, MD 20814
(Address of Principal Executive Office) (Zip Code)
Bethesda, MD 20814
(Address of Principal Executive Office) (Zip Code)
(240) 497-6400
(Area Code and Telephone Number)
(Area Code and Telephone Number)
Michael L. Sapir, CEO
ProShare Advisors LLC
7272 Wisconsin Avenue, 21st Floor
Bethesda, MD 20814
(Name and Address of Agent for Service)
ProShare Advisors LLC
7272 Wisconsin Avenue, 21st Floor
Bethesda, MD 20814
(Name and Address of Agent for Service)
with copies to:
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Elizabeth J. Reza, Esq.
c/o Ropes & Gray LLP
Prudential Tower
800 Boylston Street
Boston, MA 02199-3600 |
Richard F. Morris
ProShare Advisors LLC
7272 Wisconsin Avenue, 21st Floor
Bethesda, MD 20814 |
Approximate date of Proposed Public Offering:
It is proposed that this filing will become effective:
☐ immediately upon filing pursuant to paragraph (b)
☒ On March 15, 2024 pursuant to paragraph (b)
☐ 60 days after filing pursuant to paragraph (a)(1)
☐ On [] pursuant to paragraph (a)(1)
☐ 75 days after filing pursuant to paragraph (a)(2)
☐ On pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following:
☐ This post-effective amendment designates a new effective date for a previously filed post-effective amendment.
PROSPECTUS March 15, 2024
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IQQQ |
Nasdaq-100 High Income ETF |
ProShares Nasdaq-100 High Income ETF is listed on The Nasdaq Stock Market (“Exchange”). Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this Prospectus. Any representation to the contrary is a criminal offense.
PROSHARES TRUSTDistributor: SEI Investments Distribution Co.
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Management Fees |
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Other Expenses1 |
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Total Annual Fund Operating Expenses |
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1
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1 Year |
3 Years |
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Nasdaq-100 High Income ETF :: 5PROSHARES.COM
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Please see “Investment Objectives, Principal Investment Strategies and Related Risks” in the Fund’s Prospectus for additional details.
Management
The Fund is advised by ProShare Advisors. Michael Neches, Senior Portfolio Manager, and Devin Sullivan, Portfolio Manager, have jointly and primarily managed the Fund since inception.
Purchase and Sale of Fund Shares
The Fund will issue and redeem shares only to Authorized Participants (typically broker-dealers) in exchange for the deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as Creation Units. Shares of the Fund may only be purchased and sold by retail investors in secondary market transactions through broker-dealers or other financial intermediaries. Shares of the Fund are listed for trading
on a national securities exchange and because shares trade at market prices rather than NAV, shares of the Fund may trade at a price greater than NAV (premium) or less than NAV (discount). In addition to brokerage commissions, investors incur the costs of the difference between the highest price a buyer is willing to pay to purchase shares of the Fund (bid) and the lowest price a seller is willing to accept for shares of the Fund (ask) when buying or selling shares in the secondary market (the “bid-ask spread”). The bid-ask spread varies over time for Fund shares based on trading volume and market liquidity. Recent information, including information about a Fund’s NAV, market price, premiums and discounts, and bid-ask spreads, is included on the Fund’s website (www.proshares.com).
Tax Information
Income and capital gains distributions you receive from the Fund generally are subject to federal income taxes and may also be subject to state and local taxes. The Fund intends to distribute income, if any, monthly, and capital gains, if any, at least annually. In addition, due to the manner in which the Fund implements its investment program, the Fund expects that a substantial portion of its monthly distributions will constitute a return of capital that will have the effect of reducing your cost basis in the Fund’s shares and thereby increasing the amount of capital gain, if any, or decreasing the amount of capital loss, if any, that you will realize when selling Fund shares. The Fund does not guarantee that distributions will always be paid or will be paid at a relatively stable level.
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This section contains additional details about the Fund’s investment objective, principal investment strategies and related risks.
Investment Objective
The Fund seeks investment results, before fees and expenses, that track the performance of the Index. The Fund’s investment objective is non-fundamental, meaning that it may be changed by the Board of Trustees (the “Board”) of ProShares Trust (the “Trust”), without the approval of Fund shareholders. The Fund reserves the right to substitute a different index for the Index without shareholder approval.
Principal Investment Strategies
In seeking to achieve the Fund’s investment objective, ProShare Advisors follows a passive approach to investing that is designed to track the performance of the Index. The Fund attempts to achieve its investment objective by investing (directly or through the use of derivatives) all, or substantially all, of its assets in the component securities of the Index. The Fund employs various investment techniques that ProShare Advisors believes should, in the aggregate, simulate the movement of the Index and provide for distributions similar in amount to the cash received by the Index from dividend and call premium income. The Fund does not sell or invest in covered call options.
ProShare Advisors does not invest the assets of the Fund in securities or financial instruments based on ProShare Advisors’ view of the investment merit of a particular security, or company, other than for cash management purposes, nor does it conduct conventional investment research or analysis (other than in determining counterparty creditworthiness), or forecast market movement or trends, in managing the assets of the Fund. The Fund generally seeks to remain fully invested at all times in instruments that, in combination, provide exposure to the Index without regard to market conditions, trends, direction, or the financial condition of a particular issuer. The Fund’s ability to do so may be affected by certain expenses, transaction costs, and other factors. The Fund may not have exposure to all securities in the Index or similar weightings to that of the Index.
Please see “Principal Investment Strategies” in the Fund’s Summary Prospectus for more detail about the financial instruments in which the Fund invests.
Additional Information Regarding Principal Risks
Like all investments, investing in the Fund entails risks. The factors most likely to have a significant impact on the Fund’s portfolio are called “principal risks.” The principal risks for the Fund are described in the Fund’s Summary Prospectus and additional information regarding certain of these risks, as well as information related to other potential risks to which the Fund may be subjected, is provided below and under the section titled “Other Risks.” The principal risks are intended to provide information about the factors likely to have a significant adverse impact on the Fund’s returns and
consequently the value of an investment in the Fund. The risks are presented in an order intended to facilitate readability and their order does not imply that the realization of one risk is more likely to occur than another risk or likely to have a greater adverse impact than another risk. The Statement of Additional Information (“SAI”) contains additional information about the Fund, investment strategies and related risks. The Fund may be subject to other risks in addition to those identified as principal risks.
•Monthly Distribution Risk – The Fund seeks to make distributions each month of an amount that reflects the dividend and call premium income earned by the Index’s daily covered call strategy (net of Fund expenses). However, there is no guarantee that the Fund will make such distributions and the amount of such distributions, if any, may vary significantly from month to month.
In addition, the Fund intends to make monthly distributions that generally reflect the dividend and call premium income without regard to market conditions. During periods when the value of the long component of the Index is falling, it is possible for the Fund to suffer substantial investment losses and simultaneously experience a significant reduction in assets due to the monthly distribution.
As a result of its monthly distributions and the investment strategy of the Fund, a significant portion of such distributions may be characterized as a return of capital for financial reporting and tax purposes. A return of capital is the portion of the distribution representing the return of your investment in the Fund. For financial reporting purposes, the portion of a distribution that exceeds the Fund’s investment earnings as determined under general accounting methods may be characterized as return of capital. More information about the source of the Fund’s distributions will be available in the Trust’s first report to shareholders that includes the Fund.
A tax return of capital results when a fund distributes more than its taxable income under tax accounting methods. A return of capital is generally tax-free to the extent of a shareholder’s basis in the Fund’s shares and reduces the shareholder’s basis in their shares. A return of capital results in a higher capital gain or lower capital loss when the shares on which the return of capital distribution was received are sold. After a shareholder’s basis in the shares has been reduced to zero, return of capital distributions will be treated as gain from the sale of the shareholder’s shares.
•Risks Associated with the Use of Derivatives — The Fund may obtain exposure through derivatives (including investing in: swap agreements; futures contracts; options on futures contracts, securities, and indexes; forward contracts; and similar instruments). Investing in derivatives may be considered aggressive and may expose the Fund to risks different from, or possibly greater than, the risks associated with investing directly in the reference asset(s) underlying the
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derivative (e.g., the securities contained in the Fund’s index). The use of derivatives may result in larger losses or smaller gains than directly investing in securities. The risks of using derivatives include: 1) the risk that there may be imperfect correlation between the price of the financial instruments and movements in the prices of the reference asset(s); 2) the risk that an instrument is mispriced; 3) credit or counterparty risk on the amount the Fund expects to receive from a counterparty; 4) the risk that securities prices, interest rates and currency markets will move adversely and the Fund will incur significant losses; 5) the risk that the cost of holding a financial instrument might exceed its total return; and 6) the possible absence of a liquid secondary market for a particular instrument and possible exchange imposed price fluctuation limits, either of which may make it difficult or impossible to adjust the Fund’s position in a particular instrument when desired. Each of these factors may prevent the Fund from achieving its investment objective and may increase the volatility (i.e., fluctuations) of the Fund’s returns. Because derivatives often require limited initial investment, the use of derivatives also may expose the Fund to losses in excess of those amounts initially invested.
In addition, the Fund may use a combination of swaps on an underlying index and swaps on an ETF that is designed to track the performance of that index. The performance of an ETF may not track the performance of its underlying index due to embedded costs and other factors. Thus, to the extent the Fund invests in swaps that use an ETF as the reference asset, the Fund may be subject to greater correlation risk and may not achieve as high a degree of correlation with its index as it would if the Fund only used swaps on the underlying index.
•Counterparty Risk — The Fund will be subject to credit risk (i.e., the risk that a counterparty is unwilling or unable to make timely payments or otherwise meet its contractual obligations) with respect to the amount the Fund expects to receive from counterparties to financial instruments (including derivatives and repurchase agreements) entered into by the Fund. The Fund generally structures the agreements such that either party can terminate the contract without penalty prior to the termination date. If a counterparty terminates a contract, the Fund may not be able to invest in other derivatives to achieve the desired exposure, or achieving such exposure may be more expensive. The Fund may be negatively impacted if a counterparty becomes bankrupt or otherwise fails to perform its obligations under such an agreement. The Fund may experience significant delays in obtaining any recovery in a bankruptcy or other reorganization proceeding and the Fund may obtain only limited recovery or may obtain no recovery in such circumstances. In order to attempt to mitigate potential counterparty credit risk, a Fund typically enters into transactions with major financial institutions. The Fund also seeks to mitigate risks by generally requiring that the counterparties agree to post collateral for the
benefit of the Fund, marked to market daily, in an amount approximately equal to what the counterparty owes the Fund, subject to certain minimum thresholds. To the extent any such collateral is insufficient or there are delays in accessing the collateral, the Fund will be exposed to the risks described above, including possible delays in recovering amounts as a result of bankruptcy proceedings.
The counterparty to a cleared swap agreement and/or exchange-traded futures contract is subject to the credit risk of the clearing house and the futures commission merchant (“FCM”) through which it holds its position. Specifically, the FCM or the clearing house could fail to perform its obligations, causing significant losses to the Fund. For example, the Fund could lose margin payments it has deposited with an FCM as well as any gains owed but not paid to the Fund, if the FCM or clearing house becomes insolvent or otherwise fails to perform its obligations. Credit risk of market participants with respect to derivatives that are centrally cleared is concentrated in a few clearing houses and it is not clear how an insolvency proceeding of a clearing house would be conducted and what impact an insolvency of a clearing house would have on the financial system. Under current Commodity Futures Trading Commission (“CFTC”) regulations, a FCM maintains customers’ assets in a bulk segregated account. If a FCM fails to do so, or is unable to satisfy a substantial deficit in a customer account, its other customers may be subject to risk of loss of their funds in the event of that FCM’s bankruptcy. In that event, in the case of futures and options on futures, the FCM’s customers are entitled to recover, even in respect of property specifically traceable to them, only a proportional share of all property available for distribution to all of that FCM’s customers. In addition, if the FCM does not comply with the applicable regulations, or in the event of a fraud or misappropriation of customer assets by the FCM, a Fund could have only an unsecured creditor claim in an insolvency of the FCM with respect to the margin held by the FCM. FCMs are also required to transfer to the clearing house the amount of margin required by the clearing house, which amount is generally held in an omnibus account at the clearing house for all customers of the FCM. In certain cases with respect to cleared swaps, the FCM may also transfer any excess initial margin posted by the Fund to the clearing house. Regulations promulgated by the CFTC require that the FCM notify the clearing house of the excess initial margin provided by the FCM to the clearing house that is attributable to each customer. However, if the FCM does not accurately report the Fund’s initial margin, the Fund is subject to the risk that a clearing house will use the assets attributable to it in the clearing house’s omnibus account to satisfy payment obligations a defaulting customer of the FCM has to the clearing house.
In addition, the Fund may enter into agreements with a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does
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not specifically limit its counterparty risk with respect to any single counterparty. Further, there is a risk that no suitable counterparties are willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its investment objective. Contractual provisions and applicable law may prevent or delay the Fund from exercising its rights to terminate an investment or transaction with a financial institution experiencing financial difficulties, or to realize on collateral, and another institution may be substituted for that financial institution without the consent of the Fund. If the credit rating of a derivatives counterparty declines, the Fund may nonetheless choose or be required to keep existing transactions in place with the counterparty, in which event the Fund would be subject to any increased credit risk associated with those transactions. Also, in the event of a counterparty’s (or its affiliate’s) insolvency, the possibility exists that the Fund’s ability to exercise remedies, such as the termination of transactions, netting of obligations and realization on collateral, could be stayed or eliminated under special resolution regimes adopted in the United States, the European Union, United Kingdom and various other jurisdictions. Such regimes provide government authorities with broad authority to intervene when a financial institution is experiencing financial difficulty. In particular, the regulatory authorities could reduce, eliminate, or convert to equity the liabilities to the Fund of a counterparty who is subject to such proceedings in the European Union or United Kingdom (sometimes referred to as a “bail in”).
•Correlation Risk — There is no guarantee that the Fund will achieve a high degree of correlation with its benchmark. Failure to achieve a high degree of correlation may prevent the Fund from achieving its investment objective, and the percentage change of the Fund’s net asset value (“NAV”) each day may differ, perhaps significantly, from the percentage change of the Fund’s benchmark on such day. This may be due, among other reasons, to the impact of a limited trading market in the underlying component securities on the calculation of the benchmark. A number of other factors may adversely affect the Fund’s correlation with its benchmark, including material over- or underexposure, fees, expenses, transaction costs, financing costs associated with the use of derivatives, income items, valuation methodology, infrequent trading in the securities underlying its benchmark, accounting standards and disruptions or illiquidity in the markets for the financial instruments in which the Fund invests. The Fund may not have investment exposure to all financial instruments in the Index, or its weighting of investment exposure to financial instruments may be different from that of the Index. In addition, the Fund may invest in financial instruments not included in the Index. The Fund may take or refrain from taking positions in order to improve tax efficiency or comply with regulatory restrictions, either of which may negatively affect the Fund’s correlation with its benchmark. The Fund may be subject to large movements of assets into and out of
the Fund, potentially resulting in the Fund being over- or underexposed to its benchmark and may be impacted by index reconstitutions and index rebalancing events. Additionally, the Fund’s underlying holdings or reference assets may trade on markets that may not be open on the same day as the Fund, which may cause a difference between the changes in the daily performance of the Fund and changes in the level of the Index.
•Equity and Market Risk — Equity markets are volatile, and the value of securities, swaps, futures and other instruments correlated with equity markets may fluctuate dramatically from day to day. Equity markets are subject to corporate, political, regulatory, market and economic developments, as well as developments that impact specific economic sectors, industries or segments of the market. Further, stocks in the Index may underperform other equity investments. Volatility in the markets and/or market developments may cause the value of an investment in the Fund to decrease over short or long periods of time.
○Large-Cap Company Investment Risk — Although returns on investments in large-cap companies are often perceived as being less volatile than the returns of companies with smaller market capitalizations, the return on large-cap securities could trail the returns on investments in smaller and mid-sized companies for a number of reasons. For example, large-cap companies may be unable to respond quickly to new competitive challenges, such as changes in technology, and also may not be able to attain the high growth rate of successful smaller companies.
•Industry Concentration Risk — The Index may have a significant portion of its value in issuers in an industry or group of industries. The Fund will allocate its investments to approximately the same extent as the Index. As a result, the Fund may be subject to greater market fluctuations than a fund that is more broadly invested across industries. Financial, economic, business, regulatory conditions, and other developments affecting issuers in a particular industry or group of industries will have a greater effect on the Fund, and if securities of the particular industry or group of industries fall out of favor, the Fund could underperform, or its net asset value may be more volatile than, funds that have greater industry diversification.
•Information Technology Industry Risk — Securities of information technology companies may be subject to greater volatility than stocks of companies in other market sectors. Like other technology companies, information technology companies may be affected by intense competition, obsolescence of existing technology, general economic conditions and government regulation and may have limited product lines, markets, financial resources or personnel. Information technology companies may experience dramatic and often unpredictable changes in growth rates and competition for qualified personnel. These companies also are heavily dependent on patent and intellectual property rights, the loss or impairment of which may adversely
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affect profitability. A small number of companies represent a large portion of the information technology industry as a whole.
•Communication Services Industry Risk — The risk of investments in the industry include: the potential obsolescence of products and services due to increasing competition from the innovation of competitors; increased research and development costs and capital requirements to formulate new products and services that utilize new technology; pricing new and existing products to match or beat industry competitors, shifting demographics and changes to consumer taste, which can negatively impact profitability; and regulation by the Federal Communications Commission, and various state regulatory authorities. Companies in the communication services industry may be more susceptible to cybersecurity issues than companies in other industries, including hacking, theft of proprietary or consumer information, and disruptions in service.
•Money Market Instruments Risk — Money market instruments may be adversely affected by market and economic events. Adverse economic, political or other developments affecting issuers of money market instruments; or defaults by transaction counterparties may also have a negative impact on the performance of such instruments. Each of these could have a negative impact on the performance of the Fund. Money market instruments may include money market funds. To the extent the Fund invests in a money market fund, the Fund will indirectly bear a proportionate share of the money market fund’s fees and expenses.
•Market Price Variance Risk — Individual shares of the Fund can be bought and sold in the secondary market at market prices rather than at NAV. There is no guarantee that an active secondary market will develop for shares of the Fund, which may also cause NAV and market price to vary significantly. The market price of the Fund’s shares will fluctuate in response to changes in the value of the Fund’s holdings, supply and demand for shares and other market factors. ProShare Advisors cannot predict whether shares will trade above, below or at a price equal to the value of the Fund’s holdings. Differences between secondary market prices and the value of the Fund’s holdings may be due largely to supply and demand forces in the secondary market, which may not be the same forces as those influencing prices for securities or financial instruments held by the Fund at a particular time. In addition, there may be times when the market price and the NAV of the Fund’s shares vary significantly, such as during periods of market volatility. Investors purchasing and selling shares in the secondary market may trade shares at a premium or a discount to the Fund’s NAV and may receive less than the value of the Fund’s holdings when they sell those shares.
The Fund may have a limited number of financial institutions that may act as Authorized Participants or market markers. Only Authorized Participants who have entered into agreements with the Fund’s distributor may engage in
creation or redemption transactions directly with the Fund. If some or all of these Authorized Participants exit the business or are unable to process creation and/or redemption orders, and no other Authorized Participant is willing or able to create and redeem Fund shares, shares may trade at a discount to NAV (and may even face trading halts or delisting). Similar effects may result if market makers exit the business or are unable to continue making markets in the shares. Further, while the creation/redemption feature is designed to make it likely that shares normally will trade at prices correlated to the price of the Fund’s portfolio holdings, disruptions to creations and redemptions, including disruptions at market makers, Authorized Participants or market participants, or during periods of significant market volatility, among other factors, may result in market prices that differ significantly from NAV. Investors purchasing and selling shares in the secondary market may not experience investment consistent with those experienced by Authorized Participants creating and redeeming directly with a Fund. The market price of shares, like the price of any exchange-traded security, includes a “bid-ask spread” charged by the exchange specialist, market makers or other participants that trade the particular security. In times of severe market disruption or during after-hours trading, the bid-ask spread often increases significantly. This means that shares may trade at a discount to the value of the Fund’s holdings, and the discount is likely to be greatest when the price of shares is falling fastest, which may be the time that a shareholder most wants to sell their shares. The Fund’s investment results are measured based upon the daily NAV of the Fund.
•Early Close/Late Close/Trading Halt Risk — An exchange or market may close early, close late or issue trading halts on specific securities or financial instruments. As a result, the ability to trade certain securities or financial instruments may be restricted, which may disrupt the Fund’s creation and redemption process, potentially affect the price at which the Fund’s shares trade in the secondary market, and/or result in the Fund being unable to trade certain securities or financial instruments at all. In these circumstances, the Fund may be unable to rebalance its portfolio, may be unable to accurately price its investments and/or may incur substantial trading losses. If trading in the Fund’s shares are halted, investors may be temporarily unable to trade shares of the Fund.
•Tax Risk — In order to qualify for the special tax treatment accorded a regulated investment company (“RIC”) and its shareholders, the Fund must derive at least 90% of its gross income for each taxable year from “qualifying income,” meet certain asset diversification tests at the end of each taxable quarter, and meet annual distribution requirements. The Fund’s pursuit of its investment strategies will potentially be limited by the Fund’s intention to qualify for such treatment and could adversely affect the Fund’s ability to so qualify. The Fund may make certain
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investments, the treatment of which for these purposes is unclear. If, in any year, the Fund were to fail to qualify for the special tax treatment accorded a RIC and its shareholders, and were ineligible to or were not to cure such failure, the Fund would be taxed in the same manner as an ordinary corporation subject to U.S. federal income tax on all its income at the fund level. The resulting taxes could substantially reduce the Fund’s net assets and the amount of income available for distribution. In addition, in order to requalify for taxation as a RIC, the Fund could be required to recognize unrealized gains, pay substantial taxes and interest, and make certain distributions. Please see the section entitled “Taxation” in the Statement of Additional Information for more information.
Other Risks
In addition to the risks noted above, many other factors may also affect the value of an investment in the Fund, such as market conditions, interest rates and other economic, political or financial developments. The impact of these developments on the Fund will depend upon the types of investments in which the Fund invests, the Fund’s level of investment in particular issuers and other factors, including the financial condition, industry, economic sector and location of such issuers. The SAI contains additional information about the Fund, its investment strategies and related risks. The Fund may be subject to other risks in addition to those identified as principal risks.
•Cybersecurity Risk — With the increased use of technologies such as the Internet and the dependence on computer systems to perform necessary business functions, the Fund, Authorized Participants, service providers and the relevant listing exchange are susceptible to operational, information security and related “cyber” risks. In general, cyber incidents can result from deliberate attacks or unintentional events. Cyber attacks include, but are not limited to gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption. Cyber attacks may also be carried out in a manner that does not require gaining unauthorized access, for example, stealing or corrupting data maintained digitally and denial of service attacks on websites. Cybersecurity failures or breaches of the Fund’s third party service providers (including, but not limited to, index providers, the custodian, administrator and transfer agent) or the issuers of securities and/or financial instruments in which the Fund invests, have the ability to cause disruptions and impact business operations, potentially resulting in financial losses, the inability of Fund shareholders to transact business, violations of applicable privacy and other laws. For instance, cyber attacks may interfere with the processing of shareholder transactions, impact the Fund’s ability to calculate its NAV, cause the release of private shareholder information or confidential Fund information, impede trading, cause reputational damage, and subject the Fund to regulatory fines, penalties or financial losses, reimbursement or other
compensation costs, and/or additional compliance costs. In addition, substantial costs may be incurred in order to prevent any cyber incidents in the future. The Fund and its shareholders could be negatively impacted as a result. While the Fund or its service providers may have established business continuity plans and systems designed to guard against such cyber attacks or adverse effects of such attacks, there are inherent limitations in such plans and systems including the possibility that certain risks have not been identified, in large part because different unknown threats may emerge in the future. Similar types of cybersecurity risks also are present for issuers of securities in which the Fund invests, which could result in material adverse consequences for such issuers, and may cause the Fund’s investments in such securities to lose value. In addition, cyber attacks involving a counterparty to the Fund could affect such a counterparty’s ability to meets it obligations to the Fund, which may result in losses to the Fund and its shareholders. ProShare Advisors and the Trust do not control the cybersecurity plans and systems put in place by third party service providers, and such third party service providers may have no or limited indemnification obligations to ProShare Advisors or the Fund.
•Risk of Global Economic Shock — Widespread disease, including public health disruptions, pandemics and epidemics (for example, COVID-19 including its variants), have been and may continue to be highly disruptive to economies and markets. Health crises could exacerbate political, social, and economic risks, and result in breakdowns, delays, shutdowns, social isolation, civil unrest, periods of high unemployment, shortages in and disruptions to the medical care and consumer goods and services industries, and other disruptions to important global, local and regional supply chains, with potential corresponding results on the performance of the Fund and its investments.
Additionally, war, military conflicts, sanctions, acts of terrorism, sustained elevated inflation, supply chain issues or other events could have a significant negative impact on global financial markets and economies. Russia’s military incursions in Ukraine have led to, and may lead to additional sanctions being levied by the United States, European Union and other countries against Russia. The ongoing hostilities between the two countries could result in additional widespread conflict and could have a severe adverse effect on the region and certain markets. Sanctions on Russian exports could have a significant adverse impact on the Russian economy and related markets and could affect the value of the Fund’s investments, even beyond any direct exposure the Fund may have to the region or to adjoining geographic regions. The extent and duration of the military action, sanctions and resulting market disruptions are impossible to predict, but could have a severe adverse effect on the region, including significant negative impacts on the economy and the markets for certain securities and commodities, such as oil and natural gas. How long such tensions and related events will last cannot be predicted. These tensions and any related events could have
Additionally, war, military conflicts, sanctions, acts of terrorism, sustained elevated inflation, supply chain issues or other events could have a significant negative impact on global financial markets and economies. Russia’s military incursions in Ukraine have led to, and may lead to additional sanctions being levied by the United States, European Union and other countries against Russia. The ongoing hostilities between the two countries could result in additional widespread conflict and could have a severe adverse effect on the region and certain markets. Sanctions on Russian exports could have a significant adverse impact on the Russian economy and related markets and could affect the value of the Fund’s investments, even beyond any direct exposure the Fund may have to the region or to adjoining geographic regions. The extent and duration of the military action, sanctions and resulting market disruptions are impossible to predict, but could have a severe adverse effect on the region, including significant negative impacts on the economy and the markets for certain securities and commodities, such as oil and natural gas. How long such tensions and related events will last cannot be predicted. These tensions and any related events could have
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significant impact on the Fund performance and the value of an investment in the Fund.
•Natural Disaster/Epidemic Risk — Natural or environmental disasters, such as earthquakes, fires, floods, hurricanes, tsunamis and other severe weather-related phenomena generally, and widespread disease, including pandemics and epidemics (for example, the novel coronavirus COVID-19), have been and can be highly disruptive to economies and markets and have recently led, and may continue to lead, to increased market volatility and significant market losses. Such natural disaster and health crises could exacerbate political, social, and economic risks, and result in significant breakdowns, delays, shutdowns, social isolation, and other disruptions to important global, local and regional supply chains affected, with potential corresponding results on the operating performance of the Fund and its investments. A climate of uncertainty and panic, including the contagion of infectious viruses or diseases, may adversely affect global, regional, and local economies and reduce the availability of potential investment opportunities, and increases the difficulty of performing due diligence and modeling market conditions, potentially reducing the accuracy of financial projections. Under these circumstances, the Fund may have difficulty achieving its investment objectives which may adversely impact Fund performance. Further, such events can be highly disruptive to economies and markets, significantly disrupt the operations of individual companies (including, but not limited to, the Fund’s investment advisor, third party service providers, and counterparties), sectors, industries, markets, securities and commodity exchanges, currencies, interest and inflation rates, credit ratings, investor sentiment, and other factors affecting the value of the Fund’s investments. These factors can cause substantial market volatility, exchange trading suspensions and closures, changes in the availability of and the margin requirements for certain instruments, and can impact the ability of the Fund to complete redemptions and otherwise affect Fund performance and Fund trading in the secondary market. A widespread crisis would also affect the global economy in ways that cannot necessarily be foreseen. How long such events will last and whether they will continue or recur cannot be predicted. Impacts from these events could have a significant impact on the Fund’s performance, resulting in losses to your investment.
•Operational Risk — The Fund, its service providers, Authorized Participants, and the relevant listing exchange are subject to operational risks arising from, among other things, human error, systems and technology errors and disruptions, failed or inadequate controls, and fraud. These errors may adversely affect the Fund’s operations, including its ability to execute its investment process, calculate or disseminate its NAV or intraday indicative optimized portfolio value in a timely manner, and process creations or redemptions. While the Fund seeks to minimize such events
through controls and oversight, there may still be failures and the Fund may be unable to recover any damages associated with such failures. These failures may have a material adverse effect on the Fund’s returns.
•Portfolio Turnover Risk — The Fund may incur high portfolio turnover to manage the Fund’s investment exposure. Additionally, active market trading of the Fund’s shares may cause more frequent creation or redemption activities that could, in certain circumstances, increase the number of portfolio transactions. High levels of portfolio transactions increase brokerage and other transaction costs and may result in increased taxable capital gains. Each of these factors could have a negative impact on the performance of the Fund.
•Cash Purchases and Redemption Risk — To the extent the Fund effects creations and redemptions in cash rather than in-kind, the Fund may incur certain costs, including transaction costs. The Fund may impose a transaction fee on Authorized Participants in connection with cash purchases and redemptions, however, the transaction fee may not be sufficient to fully offset the related costs. Additionally, cash purchases and redemptions may cause the Fund to recognize taxable gains or losses at disadvantageous times.
•Securities Lending Risk — The Fund may engage in securities lending. Securities lending involves the risk, as with other extensions of credit, that the Fund may lose money because (a) the borrower of the loaned securities fails to return the securities in a timely manner or at all or (b) it loses its rights in the collateral should the borrower fail financially. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities or a decline in the value of any investments made with cash collateral. These events could also trigger adverse tax consequences for the Fund. In determining whether to lend securities, ProShare Advisors or the Fund’s securities lending agent will consider relevant facts and circumstances, including the creditworthiness of the borrower.
•Trading Risks — The shares of the Fund are listed for trading on the listing exchange identified on the cover of this Prospectus, may be listed or traded on U.S. and non-U.S. stock exchanges other than such exchange, and may trade on an electronic communications network. Nevertheless, there can be no assurance that an active trading market for such shares will develop or be maintained. Trading in shares of the Fund on an exchange may be halted due to market conditions or for reasons that, in the view of an exchange, make trading in shares inadvisable. In addition, trading in shares of the Fund on an exchange is subject to trading halts caused by extraordinary market volatility pursuant to exchange “circuit breaker” rules. There can be no assurance that the requirements of the exchange necessary to maintain the listing of the Fund will continue to be met or will remain unchanged or that the shares of the Fund will
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trade with any volume, or at all, on any stock exchange or other venue.
•Valuation Risk — In certain circumstances (e.g., if ProShare Advisors believes market quotations are not reliable, or a trading halt closes an exchange or market early), ProShare Advisors may, pursuant to procedures approved by the Board of Trustees of the Fund, choose to determine a fair value price as the basis for determining the value of such investment for such day. The fair value of an investment determined by ProShare Advisors may be different from other value determinations of the same investment. Portfolio investments that are valued using techniques other than market quotations, including “fair valued” investments, may be subject to greater fluctuation in their value from one day to the next than would be the case if market quotations were used. In addition, there is no assurance that the Fund could sell a portfolio investment for the value established for it at any time, and it is possible that the Fund would incur a loss because a portfolio investment is sold at a discount to its established value.
Additional Securities, Instruments and Strategies
This section describes additional securities, instruments and strategies that may be utilized by the Fund that are not principal investment strategies of the Fund unless otherwise noted in the Fund’s description of principal strategies in the Fund’s Summary Prospectus. Additional Information about the types of investments that the Fund may make is set forth in the SAI.
In certain circumstances, the Fund may gain exposure to only a representative sample of the securities in the index, which exposure is intended to have aggregate characteristics similar to the index. In addition, the Fund may overweight or underweight certain components contained in its underlying index, or invest in investments not contained in the index but that are designed to provide the requisite exposure to the index.
•Securities Lending — The Fund may lend securities to brokers, dealers and financial organizations under guidelines adopted by the Board. The Fund may loan up to one-third of the value of the Fund’s total assets (including the value of any collateral received). Each loan may be secured by collateral in the form of cash, Money Market Instruments or U.S. Government securities.
Precautionary Notes
A Precautionary Note to Retail Investors — The Depository Trust Company (“DTC”), a limited trust company and securities depositary that serves as a national clearinghouse for the settlement of trades for its participating banks and broker-dealers, or its nominee will be the registered owner of all outstanding shares of the Fund. Your ownership of shares will be shown on the records of DTC and the DTC Participant broker through whom you hold the shares. PROSHARES TRUST WILL NOT HAVE ANY RECORD OF YOUR OWNERSHIP. Your account information will be maintained by your broker, who
will provide you with account statements, confirmations of your purchases and sales of shares, and tax information. Your broker also will be responsible for furnishing certain cost basis information and ensuring that you receive shareholder reports and other communications from the Fund whose shares you own. Typically, you will receive other services (e.g., average cost information) only if your broker offers these services.
A Precautionary Note to Purchasers of Creation Units — You should be aware of certain legal risks unique to investors purchasing Creation Units directly from the issuing Fund. Because new shares from the Fund may be issued on an ongoing basis, a “distribution” of that Fund’s shares could be occurring at any time. As a dealer, certain activities on your part could, depending on the circumstances, result in your being deemed a participant in the distribution, in a manner that could render you a statutory underwriter and subject you to the prospectus delivery and liability provisions of the Securities Act of 1933. For example, you could be deemed a statutory underwriter if you purchase Creation Units from an issuing Fund, break them down into the constituent shares, and sell those shares directly to customers, or if you choose to couple the creation of a supply of new shares with an active selling effort involving solicitation of secondary market demand for shares. Whether a person is an underwriter depends upon all of the facts and circumstances pertaining to that person’s activities, and the examples mentioned here should not be considered a complete description of all the activities that could cause you to be deemed an underwriter. Dealers who are not “underwriters,” but are participating in a distribution (as opposed to engaging in ordinary secondary market transactions), and thus dealing with shares as part of an “unsold allotment” within the meaning of Section 4(3)(C) of the Securities Act, will be unable to take advantage of the prospectus delivery exemption provided by Section 4(3) of the Securities Act.
A Precautionary Note to Investment Companies — For purposes of the 1940 Act, the Fund is a registered investment company, and the acquisition of the Fund’s shares by other investment companies is subject to the restrictions of Section 12(d)(1) thereof. Any investment company considering purchasing shares of the Fund in amounts that would cause it to exceed the restrictions of Section 12(d)(1) should contact the Trust. Rule 12d1-4 under the 1940 Act permits investments in acquired funds in excess of the limits of Section 12(d)(1) subject to certain conditions. Among these conditions, prior to a fund acquiring securities of another fund exceeding the limits of Section 12(d)(1), the acquiring fund must enter into a “Fund of Funds Investment Agreement” with the acquired fund setting forth the material terms of the arrangement.
A Precautionary Note Regarding Unusual Circumstances — ProShares Trust can, in its discretion, postpone payment of redemption proceeds for any period during which: (1) the Exchange is closed other than customary weekend and holiday closings; (2) trading on Exchange is restricted; (3) any emergency circumstances exist, as determined by the SEC; (4) the SEC by
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order permits for the protection of shareholders of the Fund; and (5) for up to 14 calendar days for any Fund holding non-U.S. investments during a period of an international local holiday, as further described in the SAI.
The derivatives markets are subject to comprehensive statutes, and regulations, including margin requirements. In addition, certain regulators including the CFTC and the exchanges are authorized to take extraordinary actions in the event of a market emergency, including, for example, in respect of the futures markets, the implementation of higher margin requirements, the establishment of daily price limits and the suspension of trading. The regulation of derivative transactions (including swaps and futures transactions) is an evolving area of law and is subject to modification by government and judicial action. The full impact of derivatives regulations on the Fund is difficult to predict, but could be substantial and adverse.
In particular, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) made broad changes to the OTC derivatives market and granted significant authority to regulators, including the SEC and CFTC to regulate OTC derivatives and market participants. The European Union, the United Kingdom, and some other countries have implemented and continue to implement similar requirements that will affect a Fund when it enters into derivatives transactions with a counterparty organized in those jurisdictions or otherwise subject to applicable derivatives regulations. Global derivatives regulations include clearing, trade execution, margin and reporting requirements.
In addition, the SEC has adopted Rule 18f-4 under the 1940 Act providing for the regulation of registered investment companies’ use of derivatives and certain related instruments. The rule, among other things, limits derivatives exposure through one of two value-at-risk tests and eliminates the asset segregation framework for covering derivatives and certain financial instruments arising from the SEC’s Release 10666 and ensuing staff guidance. Limited derivatives users (as determined by Rule 18f-4) are not, however, subject to the full requirements under the rule.
Regulations can, among other things, adversely affect the value of the investments held by the Fund, restrict the Fund’s ability to engage in derivatives transactions (for example, by making certain derivatives transactions no longer available to that Fund) and/or increase the costs of such derivatives transactions (for example, by increasing margin or capital requirements), which could adversely affect investors. It is also unclear how regulatory changes will affect counterparty risk. In particular, position limits imposed on the Fund or its counterparties may impact that Fund’s ability to invest in a manner that efficiently meets its investment objective, and requirements, including capital and mandatory clearing for certain swaps, may increase the cost of the Fund’s investments and cost of doing business, which could adversely affect investors. Because these requirements are evolving, their ultimate impact remains unclear.
Additional Information on Underlying Index
The brief description of the index provided in the Summary Prospectus for the Fund is supplemented below:
The Index is designed to replicate the performance of an investment strategy that combines a long position in the Nasdaq-100 Index with a short position in Nasdaq-100 Index daily call options. The long component of the Index consists of the equity securities represented in the Nasdaq-100 Index. The Nasdaq-100 Index includes 100 of the largest domestic and international non-financial companies listed on The Nasdaq Stock Market based on market capitalization. The Index reflects companies across major industry groups including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology. Companies selected for inclusion are non-financial companies that meet appropriate trading volumes and other eligibility criteria.
The short component of the Index consists of out-of-the-money Nasdaq-100 Index call options having one day to expiration when sold, except for the third Friday of each month when no new options are traded. The short call option position is reestablished at the end of each day on which options are traded. The options are traded on national securities exchanges.
The options used to effectuate the short component may only be exercised at expiration and are cash-settled. When the option is sold, the seller receives the option premium. At the expiration date, if the price of the Nasdaq-100 Index is above the strike price (“in-the-money”), the option seller must pay the option buyer the difference between the price of the Nasdaq-100 Index and the strike price of the option sold, referred to as the “intrinsic value” of the option. Conversely, if at expiration the price of the Nasdaq-100 Index is at or below the strike price, the option seller is not required to make any payments.
The options have a strike price that is higher than the price of the Nasdaq-100 Index at the time the option is sold. The strike price of the options is determined based on a mathematic formula that takes into consideration the level of the Nasdaq-100 Index and the level of implied volatility. The level of implied volatility is determined by the at-the-money, second-closest to expiration, monthly Nasdaq-100 Index call option. Implied volatility is a measure of the price volatility expected for the underlying asset over the life of an option.
The options included in the Index are valued by the index provider using time-weighted average prices. In general, the value of the Nasdaq-100 Index for purposes of strike selection is based on the average price of the Nasdaq-100 Index measured at 15 second intervals over a 10-minute period beginning at 2 p.m. EST. Similarly, the value of options included in the Index for purposes of end-of-day valuation is generally based on the average price measured at 1 second intervals over a 30 second period beginning immediately prior to close.
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The calculation of the Fund’s monthly distribution is intended to generally reflect the dividends and call premiums earned by the Index as measured by the Daily Income Only Index (the “Income Only Sub-Index”). The Income Only Sub-Index measures the amount of cash received by the Index and consists of the option premiums received along with any dividends received from the long position in the Nasdaq-100 Index.
All limits, weights, and caps for any index described herein are as of the most recent index rebalance or reconstitution date. The index methodology may change at any time and without notice. As a result of changes to the price of index components, corporate actions, and other factors, between such dates the index components may not meet those criteria.
Additional Information About the Index, the Index Providers and the Index Calculation Agent
The Fund operates pursuant to licensing agreements for the use of the relevant index. A brief description of the Fund’s index is included in each Summary Prospectus, as supplemented below:
The Fund is not sponsored, endorsed, sold or promoted by Nasdaq, Inc. or its affiliates (Nasdaq, with its affiliates and third party licensors, are referred to as the “Corporations”). The Corporations have not passed on the legality or suitability of, or the accuracy or adequacy of descriptions and disclosures relating to, the Fund. The Corporations make no representation or warranty, express or implied to the owners of the Fund or any member of the public regarding the advisability of investing in securities generally or in the Fund particularly, or the ability of the Index to track general stock market performance. The Corporations’ only relationship to ProShare Advisors (“Licensee”) is in the licensing of the Nasdaq®, other Nasdaq provided Marks, and certain trade names of the Corporations and the use of the Index which is determined, composed and calculated
by Nasdaq without regard to Licensee or the Fund. Nasdaq has no obligation to take the needs of the Licensee or the owners of the Fund into consideration in determining, composing or calculating the Index. The Corporations are not responsible for and have not participated in the determination of the timing of, prices at, or quantities of the Fund to be issued or in the determination or calculation of the equation by which the Fund is to be converted into cash. The Corporations have no liability in connection with the administration, marketing or trading of the Fund.
THE CORPORATIONS DO NOT GUARANTEE THE ACCURACY AND/OR UNINTERRUPTED CALCULATION OF THE INDEX IT’S DISSEMINATION OR ANY RELATED COMMUNICATION, WHETHER ORAL OR WRITTEN, OR ANY DATA RELATED THEREIN. THE CORPORATIONS MAKE NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE FUNDS, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE INDEX OR ANY DATA INCLUDED THEREIN. THE CORPORATIONS MAKE NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIM ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE INDEX® OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL THE CORPORATIONS HAVE ANY LIABILITY FOR ANY LOST PROFITS OR SPECIAL, INCIDENTAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES, EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
Portfolio Holdings Information
A description of the Trust’s policies and procedures with respect to the disclosure of the Fund’s portfolio holdings is available in the SAI.
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Board of Trustees and Officers
The Board is responsible for the general supervision of the Fund. The officers of the Trust are responsible for the day-to-day operations of the Fund.
Investment Advisor
ProShare Advisors, located at 7272 Wisconsin Avenue, 21st Floor, Bethesda, Maryland 20814, serves as the investment adviser to the Fund and provides investment advice and management services to the Fund. ProShare Advisors oversees the investment and reinvestment of the assets in the Fund. For its investment advisory and management services, the Fund pays ProShare Advisors a fee at an annualized rate of 0.55% of its average daily net assets.
A discussion regarding the basis for the Board approving the investment advisory agreement for the Fund is expected to be included in the Trust’s first report to shareholders that includes the Fund.
Portfolio Management
The following individuals have responsibility for the day-to-day management of the Fund as set forth in the Summary Prospectus relating to the Fund. The Portfolio Managers’ business experience for the past five years is listed below. Additional information about the Portfolio Managers’ compensation, other accounts managed by the Portfolio Managers and their ownership of other investment companies can be found in the SAI.
Michael Neches, ProShare Advisors: Senior Portfolio Manager since November 2010. ProFund Advisors LLC: Senior Portfolio Manager since October 2010. ProShare Capital Management LLC: Senior Portfolio Manager from June 2012 through September 2013.
Devin Sullivan, ProShare Advisors: Portfolio Manager since September 2016 and Associate Portfolio Manager from December 2011 to August 2016. ProFund Advisors: Portfolio Manager since September 2016 and Associate Portfolio Manager from December 2011 to August 2016.
Other Service Providers
SEI Investments Distribution Co. (the “Distributor”), located at One Freedom Valley Drive, Oaks, PA 19456, acts as the distributor and principal underwriter in all fifty states and the District of Columbia. JPMorgan Chase Bank, N.A. (“JPMorgan”), located at One Beacon Street, 19th Floor, Boston, MA 02108, acts as the administrator to the Fund, providing operational and certain administrative services. In addition, JPMorgan acts as the Custodian and Index Receipt Agent. Citi Fund Services Ohio, Inc. (“Citi”), located at 4400 Easton Commons, Suite 200, Columbus, Ohio 43219, provides regulatory administration services to the Trust.
Additional Information
The Trust enters into contractual arrangements with various parties who provide services to the Fund including, ProShare
Advisors, the Fund’s administrator and fund accounting agent, custodian, transfer agent, and distributor. Shareholders are not parties to, or intended (or “third-party”) beneficiaries of, any of those contractual arrangements, and those contractual arrangements are not intended to create in any individual shareholder or group of shareholders any right to enforce them against the service providers or to seek any remedy under them against the service providers, either directly or on behalf of the Trust.
This Prospectus provides information concerning the Trust and the Fund that you should consider in determining whether to purchase shares of the Fund. None of this Prospectus, the SAI or any contract that is an exhibit to the Trust’s registration statement, is intended to, nor does it, give rise to an agreement or contract between the Trust or the Fund and any investor, or give rise to any contract or other rights in any individual shareholder, group of shareholders or other person except as may be otherwise provided by federal or state securities laws.
A shareholder may bring derivative action on behalf of the Trust only if the shareholder or shareholders first make a pre-suit demand upon the Trustees to bring the subject action unless an effort to cause the Trustees to bring such action is excused. A demand on the Trustees shall only be excused if a majority of the Board of Trustees, or a majority of any committee established to consider such action, has a personal financial interest in the action at issue. A Trustee shall not be deemed to have a personal financial interest in an action or otherwise be disqualified from ruling a shareholder demand by virtue of the fact that such Trustee receives remuneration from their service on the Board of Trustees of the Trust or on the boards of one or more investment companies with the same or an affiliated investment advisor or underwriter.
Determination of NAV
The NAV per share of the Fund is computed by dividing the value of the net assets of the Fund (i.e., the value of its total assets less total liabilities) by its total number of shares outstanding. Expenses and fees are accrued daily and taken into account for purposes of determining NAV. The NAV of the Fund is calculated by JPMorgan and is generally determined each business day as of the close of regular trading on the exchange on which the shares of the Fund are listed (typically calculated as of 4:00 p.m. Eastern Time). Securities and other assets are generally valued at their market value using information provided by a pricing service or market quotations. Securities that are listed or traded on a stock exchange or the Nasdaq or National Market System are generally valued at the closing price, if available, on the exchange or market where the security is principally traded (including the Nasdaq Official Closing Price). Short-term securities are generally valued using market prices or at amortized cost. In addition, certain derivatives linked to an index may be valued based on the performance of one or more U.S. ETFs or instruments that reflect the values of the securities in such index, when the level of
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the index is not computed as of the close of the U.S. securities markets. Routine valuation of certain derivatives is performed using procedures approved by the Board.
When a market price is not readily available, securities and other assets are valued at fair value in good faith. The Board has designated ProShare Advisors as “valuation designee” to perform fair value determinations for all of the Funds’ investments for which market quotations are not readily available (or are deemed unreliable). The Board shall oversee ProShare Advisors’ fair value determinations and its performance as valuation designee. The use of a fair valuation methodology may be appropriate if, for example: (i) ProShare Advisors believes market quotations do not accurately reflect fair value of an investment; (ii) ProShare Advisors believes an investment’s value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (for example, a foreign exchange or market); (iii) a trading halt closes an exchange or market early; or (iv) other events result in an exchange or market delaying its normal close. Fair valuation has the risk that the valuation may be higher or lower than the securities might actually command if the Fund sold them. See the SAI for more details.
To the extent the Fund’s portfolio investments trade in markets on days or at times when the Fund is not open for business or when the primary exchange for the shares is not open, the value of the Fund’s assets may vary, shareholders may not be able to purchase or sell Fund shares and Authorized Participants may not be able to create or redeem Creation Units. In addition, certain portfolio investments may not be traded on days or at times the Fund is open for business. In particular, calculation of the NAV of the Fund may not take place contemporaneously with the determination of the prices of foreign securities used in NAV calculations.
Exchanges are open every week, Monday through Friday, except when the following holidays are celebrated: New Year’s Day, Martin Luther King, Jr. Day (the third Monday in January), President’s Day (the third Monday in February), Good Friday, Memorial Day (the last Monday in May), Juneteenth National Independence Day, Independence Day, Labor Day (the first Monday in September), Thanksgiving Day (the fourth Thursday in November) and Christmas Day. An Exchange may close early on the business day before each of these holidays and on the day after Thanksgiving Day. Exchange holiday schedules are subject to change without notice. If the Exchange on which the shares of the Fund are listed closes early, the NAV may be calculated at the close of regular trading or at its normal calculation time. If the exchange or market on which the Fund’s investments are primarily traded closes early, the NAV may be calculated prior to its normal calculation time. Creation/redemption transaction order time cutoffs would also be accelerated.
Distributions
The Fund intends to make distributions each month of an amount that generally reflects the dividend and call premium
income earned by the Index. A significant portion of the monthly distribution may be characterized as return of capital for financial reporting and tax purposes. A distribution or a portion of a distribution may be characterized as investment income or net realized capital gains derived from the Fund’s direct security holdings and derivative instruments. You will receive such earnings as either an income dividend or a capital gains distribution. The Fund intends to declare and distribute net investment income, if any, and net realized capital gains, if any, to its shareholders at least annually. Subject to Board approval, some or all of any distribution may be declared payable in either additional shares of the distributing Fund or in cash.
Distributions may be declared and paid more frequently to comply with the distribution requirements of the Internal Revenue Code or for other reasons.
There is no guarantee that the Fund will make distributions or make distributions at regular intervals.
Dividend Reinvestment Services
As noted above under “Distributions”, the Fund may declare a distribution to be payable in additional shares or cash. Even if the Fund does not declare a distribution to be payable in shares, brokers may make available to their customers who own shares the DTC book-entry dividend reinvestment service. If this service is available and used, dividend distributions will automatically be reinvested in additional whole shares of the same Fund. Without this service, investors would have to take their distributions in cash. To determine whether the dividend reinvestment service is available and whether there is a commission or other charge for using this service, please consult your broker.
Frequent Purchases and Redemptions of Shares
The Board has not adopted a policy of monitoring for frequent purchases and redemptions of shares that appear to attempt to take advantage of potential arbitrage opportunities. The Board believes this is appropriate because ETFs, such as the Fund, are intended to be attractive to arbitrageurs, as trading activity is critical to ensuring that the market price of shares remains at or close to NAV.
Taxes
The following is certain general information about taxation of the Fund:
•The Fund intends to elect and intends to qualify each year for treatment as a “regulated investment company” (“RIC”) for U.S. federal income tax purposes. In order to so qualify, the Fund must meet certain tests with respect to the sources and types of its income, the nature and diversification of its assets, and the timing and amount of its distributions.
•If the Fund qualifies for treatment as a RIC, it is not subject to federal income tax on net investment income and net realized capital gains that the Fund timely distributes to its shareholders. If the Fund were to fail to so qualify, and were
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ineligible to or otherwise did not cure such failure, its taxable income and gains would be subject to tax at the Fund level, and distributions from earnings and profits would be taxable to shareholders as ordinary income.
•Investments by the Fund in options, futures, forward contracts, swap agreements and other derivative financial instruments are subject to numerous special and complex tax rules. These rules could affect the amount, timing or character of the distributions to shareholders by the Fund. In addition, because the application of these rules may be uncertain under current law, an adverse determination or future Internal Revenue Service guidance with respect to these rules may affect whether the Fund has made sufficient distributions, and otherwise satisfied the relevant requirements, to maintain its qualification as a RIC and avoid fund-level tax.
•Investments by the Fund in debt obligations issued or purchased at a discount and certain derivative instruments could cause the Fund to recognize taxable income in excess of the cash generated by such investments, potentially requiring the Fund to dispose of investments (including when otherwise disadvantageous to do so) in order to meet its distribution requirements, and such investments could affect the amount, timing or character of the income distributed to shareholders by the Fund. Investments by the Fund in shares of other investment companies could affect the amount, timing or character of the Fund’s distributions to shareholders relative to the Fund’s distributions had it invested directly in the securities held by the other investment companies.
•In order to qualify for the special tax treatment accorded a RIC and its shareholders, the Fund must derive at least 90% of its gross income for each taxable year from “qualifying income,” meet certain asset diversification tests at the end of each taxable quarter, and meet annual distribution requirements. The Fund’s pursuit of its investment strategies will potentially be limited by the Fund’s intention to qualify for such treatment and could adversely affect the Fund’s ability to so qualify. The Fund can make certain investments, the treatment of which for these purposes is unclear. If, in any year, the Fund were to fail to qualify for the special tax treatment accorded a RIC and its shareholders, and were ineligible to or were not to cure such failure, the Fund would be taxed in the same manner as an ordinary corporation subject to U.S. federal income tax on all its income at the fund level. The resulting taxes could substantially reduce the Fund’s net assets and the amount of income available for distribution. In addition, in order to requalify for taxation as a RIC, the Fund could be required to recognize unrealized gains, pay substantial taxes and interest, and make certain distributions. Please see the Statement of Additional Information for more information.
Taxable investors should be aware of the following basic tax points:
•Distributions are taxable to you for federal income tax purposes whether you receive them in cash or reinvest them in additional shares.
•Distributions declared in October, November or December of one year payable to shareholders of record in such month and paid by the end of January of the following year are taxable for federal income tax purposes as if received on December 31 of the calendar year in which the distributions were declared.
•Any distributions from income or short-term capital gains that you receive generally are taxable to you as ordinary dividends for federal income tax purposes. Ordinary dividends you receive that the Fund reports as “qualified dividend income” may be taxed at the same rates as long-term capital gains applicable to individual investors, but will not be considered long-term capital gains for other federal income tax purposes, including the calculation of net capital losses.
•Any distributions of net long-term capital gains are taxable to you for federal income tax purposes as long-term capital gains includible in net capital gain and taxable to individuals at reduced rates, no matter how long you have owned your Fund shares.
•Distributions from net realized capital gains may vary considerably from year to year as a result of the Fund’s normal investment activities and cash flows.
•The Code generally imposes a 3.8% Medicare contribution tax on the “net investment income” of certain individuals, trusts and estates to the extent their income exceeds certain threshold amounts. For these purposes, “net investment income” generally includes, among other things, (i) distributions paid by the Fund of ordinary dividends and capital gain dividends, and (ii) any net gain from the sale, redemption or exchange of Fund shares. Shareholders are advised to consult their tax advisors regarding the possible implications of this additional tax on their investment in the Fund.
•Distributions in excess of the Fund’s current and accumulated earnings and profits will, as to each shareholder, be treated as a tax-free return of capital to the extent of a shareholder’s basis in his shares of the Fund, and as a capital gain thereafter (if the shareholder holds their shares of the Fund as capital assets).
•An investor that purchases shares just before a distribution should note that the purchase price would reflect the amount of the upcoming distribution. In this case, the investor would be taxed on the entire amount of the distribution received, even though, as an economic matter, the distribution simply constitutes a return of your investment. This is known as “buying a dividend” and generally should be avoided by taxable investors.
•A sale or exchange of Fund shares is a taxable event. Assuming a shareholder holds Fund shares as a capital
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asset, any capital gain or loss realized upon a sale of Fund shares is generally treated as a long-term gain or loss if the shares have been held for more than twelve months. Any capital gain or loss realized upon a sale of Fund shares held for twelve months or less is generally treated as short-term gain or loss. Any capital loss on the sale of shares held for six months or less is treated as long-term capital loss to the extent distributions of long-term capital gain were paid (or treated as paid) with respect to such shares. Any loss realized on a sale will be disallowed to the extent shares of a Fund are acquired, including through reinvestment of dividends, within a 61-day period beginning 30 days before and ending 30 days after the disposition of shares. The ability to deduct capital losses may be limited.
•Dividend and capital gain distributions that you receive, as well as your gains or losses from any sale or exchange of Fund shares, may be subject to state and local income taxes.
•Dividends paid to a shareholder that is not a “United States person” within the meaning of the Code (such a shareholder, a “foreign person”) that the Fund properly reports as capital gain dividends, short-term capital gain dividends or interest-related dividends, each as further defined in the SAI, are not subject to withholding of U.S. federal income tax, provided that certain other requirements are met. The Fund (or intermediary, as applicable) is permitted, but is not required, to report any part of its dividends as are eligible for such treatment. The Fund’s dividends other than those the Fund properly reports as capital gain dividends, short-term capital gain dividends or interest-related dividends generally will be subject to withholding of U.S. federal income tax at a rate of 30% (or lower applicable treaty rate). Special tax considerations may apply to foreign persons investing in the Fund. Please see the SAI for more information.
•The Fund’s income from or the proceeds of dispositions of its non-U.S. investments may be subject to withholding and other taxes imposed by foreign countries, which will reduce the Fund’s return on and taxable distributions in respect of its non-U.S. investments. Tax conventions between certain countries and the United States may reduce or eliminate these taxes. If more than 50% of the value of the Fund’s total assets at the close of a taxable year consists of securities of foreign corporations, the Fund will be eligible to elect to “pass through” to you foreign income taxes that it has paid. If this election is made, you will be required to include your share of those taxes in gross income as a distribution from the Fund and you generally will be allowed to claim a credit (or a deduction, if you itemize deductions) for these amounts on your federal U.S. income tax return, subject to certain limitations.
•By law, a percentage of your distributions and proceeds will generally be withheld if you have not provided a taxpayer
identification number or social security number, have underreported dividend or interest income or have failed to certify to the Fund or its agent that you are not subject to this withholding.
In addition, taxable investors who purchase or redeem Creation Units should be aware of the following:
•A person who exchanges securities for Creation Units generally will recognize a gain or loss equal to the difference between the market value of the Creation Units at the time of the exchange and the exchanger’s aggregate basis in the securities surrendered and any cash amount paid.
•A person who exchanges Creation Units for securities generally will recognize a gain or loss equal to the difference between the exchanger’s basis in the Creation Units and the aggregate market value of the securities received and any cash received. However, all or a portion of any loss a person realizes upon an exchange of Creation Units for securities will be disallowed by the Internal Revenue Service if such person purchases other substantially identical shares of the Fund within 30 days before or after the exchange. In such case, the basis of the newly purchased shares will be adjusted to reflect the disallowed loss.
Note: This Prospectus provides general U.S. federal income tax information only. Your investment in the Fund may have other tax implications. If you are investing through a tax-deferred retirement account, such as an individual retirement account (IRA), special tax rules apply. Please consult your tax advisor for detailed information about the Fund’s tax consequences for you. See “Taxation” in the SAI for more information.
Premium/Discount Information
The Trust’s website (www.proshares.com) has information about the premiums and discounts for the Fund. Premiums or discounts are the differences between the NAV and market price of the Fund on a given day, generally at the time NAV is calculated. A premium is the amount that the Fund is trading above the NAV. A discount is the amount that the Fund is trading below the NAV.
Escheatment
Many states have unclaimed property rules that provide for transfer to the state (also known as “escheatment”) of unclaimed property under various circumstances. These circumstances include inactivity (e.g., no owner-intiated contact for a certain period), returned mail (e.g., when mail sent to a shareholder is returned by the post office as undeliverable), or a combination of both inactivity and returned mail. Unclaimed or inactive accounts may be subject to escheatment laws, and the Fund and the Fund’s transfer agent will not be liable to shareholders and their representatives for good faith compliance with those laws.
MANAGEMENT OF PROSHARES TRUST :: 23
PROSHARES.COM
Distribution (12b-1) Plan
Under a Rule 12b-1 Distribution Plan (the “Plan”) adopted by the Board, the Fund may pay the distributor and financial intermediaries, such as broker-dealers and investment advisors, up to 0.25% on an annualized basis of the average daily net assets of the Fund as reimbursement or compensation for distribution related activities with respect to the Fund.
Because these fees would be paid out of the Fund’s assets on an on-going basis, over time these fees would increase the cost of your investment and may cost you more than paying other types of sales charges. No payments have yet been authorized by the Board, nor are any such expected to be made by the Fund under the Plan during the current fiscal year.
24
PROSHARES.COM
Because the Fund has only recently commenced investment operations, no financial highlights are available for the Fund at this time. In the future, financial highlights will be presented in this section of the Prospectus.
Investment Company Act file number 811-21114
ProShares Trust
7272 Wisconsin Avenue, 21st Floor, Bethesda, MD 20814
866.PRO.5125 866.776.5125
ProShares.com
7272 Wisconsin Avenue, 21st Floor, Bethesda, MD 20814
866.PRO.5125 866.776.5125
ProShares.com
You can find additional information about the Fund in its current SAI, dated March 15, 2024, as may be amended from time to time has been filed electronically with the SEC and which is incorporated by reference into, and are legally a part of, this Prospectus. Copies of the SAI are available, free of charge, online at the Fund’s website (www.proshares.com). You may also request a free copy of the SAI or make inquiries to ProShares Trust by writing us at the address set forth above or calling us toll-free at the telephone number set forth above.
You can find other information about ProShares Trust on the SEC’s website (www.sec.gov) or you can get copies of this information after payment of a duplicating fee via email to publicinfo@sec.gov.
© 2024 ProShare Advisors LLC. All rights reserved.MAR-24
STATEMENT OF ADDITIONAL INFORMATION— March 15, 2024
ProShares Trust
7272 Wisconsin Avenue, 21st Floor, Bethesda, MD 20814 866.PRO.5125 866.776.5125
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Nasdaq-100 High Income
ETF
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IQQQ
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This SAI is not a prospectus. It should be read in conjunction with the Prospectus
of the series of ProShares Trust (the “Trust”) listed above dated March 15, 2024. A copy of the Prospectus is available, without charge, upon request to the address above, by telephone at the number above, or on the Trust’s website at proshares.com.
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Principal U.S. National Stock Exchange
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Fund
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The Nasdaq Stock Market
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Nasdaq-100 High Income ETF
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1
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
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4
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5
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26
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27
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29
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34
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35
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40
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43
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51
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52
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66
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66
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A-1
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B-1
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C-1
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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 many 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, as amended
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1934 Act
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Securities and Exchange Act of 1934, as amended
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1940 Act
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Investment Company Act of 1940, as amended
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Advisor or ProShare Advisors
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ProShare Advisors LLC
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Board of Trustees or Board
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Board of Trustees of ProShares Trust
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CCO
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Chief Compliance Officer
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CFTC
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U.S. Commodity Futures Trading Commission
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Code or Internal Revenue Code
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Internal Revenue Code of 1986, as amended
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CPO
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Commodity Pool Operator
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Distributor or SEI
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SEI Investments Distribution Co.
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ETF
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Exchange traded fund
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Exchange
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The Nasdaq Stock Market
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Fund Complex
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All operational registered investment companies that are
advised by the Advisor or its affiliates
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Independent Trustee(s)
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Trustees who are not “Interested Persons” of ProShare
Advisors or Trust as defined under Section 2(a)(19) of the
1940 Act
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NAV
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Net asset value
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New Fund
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ProShares Nasdaq-100 High Income ETF
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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 Fund
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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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3
GENERAL INFORMATION ABOUT THE TRUST
ProShares Trust (the Trust) is a Delaware statutory trust and is registered with the
SEC as an open-end management investment company under the Investment Company Act of 1940 (the “1940 Act”). The Trust was organized on May 29, 2002 and consists of multiple series.
The Fund’s investment objective is non-fundamental, meaning it may be changed by the Board of Trustees (the “Board”) of the Trust, without the approval of Fund shareholders. The Fund based on an index or benchmark reserves the right to substitute a different index or benchmark for its
current index or benchmark, without the approval of that Fund’s shareholders. Other funds may be added in the future.
The Fund is an exchange-traded fund (“ETF”) and the shares of the Fund (“Shares”) are listed on the Exchange set forth on the cover of this SAI. The Shares trade on the relevant
Exchange at market prices that may differ to some degree from the Shares’ NAVs. The Fund issues and redeems Shares on a continuous basis at NAV in large, specified numbers of Shares called “Creation Units.” Creation Units of the Fund is issued and redeemed in-kind for securities and an amount of cash or entirely in cash,
in each case at the discretion of ProShare Advisors LLC (“ProShare Advisors”). Except when aggregated in Creation Units, Shares cannot be purchased from and are not redeemable securities of the Fund. Retail
investors, therefore, generally will not be able to purchase or redeem the Shares directly. Rather, most
retail investors will purchase and sell Shares in the secondary market with the assistance of a broker.
Reference is made to each Prospectus for a discussion of the investment objectives and policies of the Fund.
The discussion below supplements, and should be read in conjunction with, each Prospectus.
Portfolio management is provided to the Fund by ProShare Advisors, a Maryland limited
liability company with offices at 7272 Wisconsin Avenue, 21st Floor, Bethesda, MD 20814.
The investment restrictions of the Fund 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 Fund not specified as fundamental (including the index of the Fund) may be changed by the Board without
the approval of shareholders.
It is the policy of the Fund to pursue its investment objectives of correlating with
its index regardless of market conditions, to attempt to remain nearly fully invested and not
to take defensive positions.
The investment techniques and strategies discussed below may be used by the Fund if,
in the opinion of ProShare Advisors, the techniques or strategies may be advantageous to
the Fund. The Fund may reduce or eliminate its use of any of these techniques or strategies without changing the Fund’s fundamental policies. There is no assurance that any of the techniques or strategies listed below,
or any of the other methods of investment available to the Fund, will result in the achievement of the Fund’s objectives. Also, there can be no assurance that the Fund will grow to, or maintain, an economically
viable size, and management may determine to liquidate the Fund at a time that may not be opportune
for shareholders.
EXCHANGE LISTING AND TRADING
There can be no assurance that the requirements of an Exchange necessary to maintain
the listing of Shares of the Fund will continue to be met. An Exchange may remove the Fund from listing
under certain circumstances.
As in the case of all equities traded on an Exchange, the brokers’ commission on transactions in the Fund will be based on negotiated commission rates at customary levels for retail customers.
In order to provide current Share pricing information, an Exchange disseminates an
updated Indicative Optimized Portfolio Value (“IOPV”) for the Fund. The Trust is not involved in or responsible for any aspect of the calculation or dissemination of the IOPVs and makes no warranty
as to the accuracy of the IOPVs. IOPVs are expected to be disseminated on a per Fund basis every 15 seconds
during regular trading hours of an Exchange.
4
INVESTMENT POLICIES, TECHNIQUES AND RELATED RISKS
GENERAL
The Fund may consider changing its index at any time, including if, for example: the
current index becomes unavailable; the Board believes that the current index no longer serves the
investment needs of a majority of shareholders or that another index may better serve their needs; or the
financial or economic environment makes it difficult for the Fund’s investment results to correspond sufficiently to its current index. If believed appropriate, the Fund may specify an index for itself that is “leveraged” or proprietary.
There can be no assurance that the Fund or index will achieve its objective. ProShare
Advisors primarily uses a passive or mathematical approach to determine the investments the
Fund makes and techniques it employs. While ProShare Advisors attempts to minimize any “tracking error,” certain factors tend to cause the Fund’s investment results to vary from a perfect correlation to its index, as applicable. See “Special Considerations” below for additional details.
For purposes of this SAI, the word “invest” refers to the Fund directly and indirectly investing in securities or other instruments. Similarly, when used in this SAI, the word “investment” refers to the Fund’s direct and indirect investments in securities and other instruments. For example,
the Fund typically invests indirectly in securities or instruments by using financial instruments with economic
exposure similar to those securities or instruments.
Additional information concerning the Fund, its investment policies and techniques,
and the securities and financial instruments in which it may invest is set forth below.
NAME POLICIES
The Fund is subject to the SEC “names rule” (Rule 35d-1 under the 1940 Act) and has adopted non-fundamental investment policies obligating it to commit, under normal market conditions,
at least 80% of its assets (i.e., net assets plus borrowings for investment purposes), under normal circumstances
in the types of securities suggested by its name and/or investments with similar economic characteristics.
Such direct exposure may be obtained through direct investments/short positions in the securities
and/or through investments with similar economic characteristics. For purposes of each such investment policy, “assets” includes the Fund’s net assets, as well as amounts borrowed for investment purposes, if any. In addition, for purposes of such an investment policy, “assets” includes not only the amount of the Fund’s net assets attributable to investments providing direct 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 cash and cash equivalents that are segregated on the Fund’s books and records or being used as collateral, as required by applicable regulatory guidance, or otherwise available
to cover such investment exposure. The Board has adopted a non-fundamental policy to provide investors with at least 60 days’ notice prior to changes in the Fund’s name policy.
DEBT INSTRUMENTS
Below is a description of various types of money market instruments and other debt
instruments that the Fund may utilize for investment purposes or for liquidity purposes. Other types
of money market instruments and debt instruments may become available that are similar to those described
below and in which the Fund also may invest consistent with their investment goals and policies. The
Fund may also invest in pooled investment vehicles that invest in, and themselves qualify as, money market
instruments.
Money Market Instruments
To seek its investment objective, as a cash reserve, for liquidity purposes the Fund
may invest all or part of its assets in cash or cash equivalents, which include, but are not limited
to, short-term money market instruments, U.S. government securities, floating and variable rate notes, commercial
paper, certificates of deposit, time deposits, bankers’ acceptances or repurchase agreements and other short-term liquid instruments
5
secured by U.S. government securities. The Fund may invest in money market instruments
issued by foreign and domestic governments, financial institutions, corporations and other entities
in the U.S. or in any foreign country. The Fund may also invest in pooled investment vehicles that invest in, and
themselves qualify as, money market instruments.
U.S. Government Securities
The Fund may invest in U.S. government securities in pursuit of their investment objectives
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, which have initial maturities of one year or less; U.S. Treasury
notes, which have initial maturities of one to ten years; and U.S. Treasury bonds, which generally have initial
maturities of greater than ten years. In addition, U.S. government securities include Treasury Inflation-Protected Securities (“TIPS”). TIPS are inflation-protected public obligations of the U.S. Treasury. These securities
are designed to provide inflation protection to investors. TIPS are income generating instruments whose interest
and principal payments are adjusted for inflation—a sustained increase in prices that erodes the purchasing power of money. The inflation adjustment, which is typically applied monthly to the principal of the
bond, follows a designated inflation index such as the Consumer Price Index. A fixed-coupon rate is applied to
the inflation-adjusted principal so that as inflation rises, both the principal value and the interest payments
increase. This can provide investors with a hedge against inflation, as it helps preserve the purchasing
power of an investment. Because of the inflation-adjustment feature, inflation-protected bonds typically have
lower yields than conventional fixed-rate bonds. In addition, TIPS decline in value when real interest
rates rise. However, in certain interest rate environments, such as when real interest rates are rising faster
than nominal interest rates, TIPS may experience greater losses than other fixed income securities with similar
duration.
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 (“Fannie Mae” or “FNMA”), the Government National Mortgage Association (“Ginnie Mae” or “GNMA”), the Small Business Administration, the Federal Farm Credit Administration, Federal Home Loan Banks, Banks for Cooperatives (including
the Central Bank for Cooperatives), Federal Land Banks, 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, the National Credit Union Administration and the
Federal Agricultural Mortgage Corporation. Some obligations issued or guaranteed by U.S. government agencies
and instrumentalities, including, for example, GNMA 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 FNMA, are supported by the discretionary authority of the U.S. government
to purchase certain obligations of the federal agency but are not backed by the full faith and credit
of the U.S. government, 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 and instrumentalities
described above, 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. All U.S. government securities are subject to credit risk.
Yields on U.S. government securities depend 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 the Fund’s portfolio
6
investments in U.S. government securities, while a decline in interest rates would
generally increase the market value of the Fund’s portfolio investments in these securities.
From time to time, uncertainty regarding the status of negotiations in the U.S. government
to increase the statutory debt ceiling could increase the risk that the U.S. government
may default on payments on certain U.S. government securities, cause the credit rating of the U.S. government
to be downgraded, increase volatility in the stock and bond markets, result in higher interest rates,
reduce prices of U.S. Treasury securities, and/or increase the costs of various kinds of debt. If a U.S. government-sponsored
entity is negatively impacted by legislative or regulatory action, is unable to meet its obligations,
or its creditworthiness declines, the performance of a fund that holds securities of the entity may be adversely
impacted.
Floating and Variable Rate Notes
Floating and variable rate notes generally are unsecured obligations issued by financial
institutions and other entities. They typically have a stated maturity of more than one year and
an interest rate that changes either at specific intervals or whenever a benchmark rate changes. The effective
maturity of each floating or variable rate note in the Fund’s portfolio will be based on these periodic adjustments. The interest rate adjustments are designed to help stabilize the note’s price. While this feature helps protect against a decline in the note’s market price when interest rates rise, it lowers the Fund’s income when interest rates fall. Of course, the Fund’s income from its floating and variable rate investments also may increase if interest rates rise.
Commercial Paper
Commercial paper is a short-term unsecured promissory note issued by businesses such
as banks, corporations, finance companies and other issuers generally to finance short-term
credit needs. Issuers may use commercial paper to finance accounts receivable or to meet short-term liabilities.
Commercial paper generally has a fixed maturity of no more than 270 days and may trade on secondary markets after
its issuance.
Mortgage-Backed Securities
A mortgage-backed security is a type of pass-through security, which is a security
representing pooled debt obligations repackaged as interests that pass income through an intermediary
to investors. The Fund may invest in mortgage-backed securities. In the case of mortgage-backed securities,
the ownership interest is in a pool of mortgage loans.
Mortgage-backed securities are most commonly issued or guaranteed by GNMA, FNMA or
the Federal Home Loan Mortgage Corporation (“FHLMC”), but may also be issued or guaranteed by other private issuers. GNMA is a government-owned corporation that is an agency of the U.S. Department
of Housing and Urban Development. It guarantees, with the full faith and credit of the United States,
full and timely payment of all monthly principal and interest on its mortgage-backed securities. FNMA is a
publicly owned, government-sponsored corporation that mostly packages mortgages backed by the Federal
Housing Administration, but also sells some non-governmentally backed mortgages. Pass-through
securities issued by FNMA are guaranteed as to timely payment of principal and interest only by FNMA. The
FHLMC is a publicly chartered agency that buys qualifying residential mortgages from lenders,
re-packages them and provides certain guarantees. The corporation’s stock is owned by savings institutions across the United States and is held in trust by the Federal Home Loan Bank System. Pass-through securities
issued by the FHLMC are guaranteed as to timely payment of principal and interest only by the FHLMC.
Mortgage-backed securities issued by private issuers, whether or not such obligations
are subject to guarantees by the private issuer, may entail greater risk than obligations directly
or indirectly guaranteed by the U.S. government. The average life of a mortgage-backed security is likely to be
substantially shorter than the original maturity of the mortgage pools underlying the securities. Prepayments
of principal by mortgagors and mortgage foreclosures will usually result in the return of the greater part of
principal invested far in advance of the maturity of the mortgages in the pool.
7
Collateralized mortgage obligations (“CMOs”) are debt obligations collateralized by mortgage loans or mortgage pass-through securities (collateral collectively hereinafter referred to as “Mortgage Assets”). Multi-class pass-through securities are interests in a trust composed of Mortgage
Assets and all references in this section to CMOs include multi-class pass-through securities. Principal prepayments
on the Mortgage Assets may cause the CMOs to be retired substantially earlier than their stated maturities
or final distribution dates, resulting in a loss of all or part of the premium if any has been paid. Interest
is paid or accrues on all classes of the CMOs on a monthly, quarterly or semi-annual basis. The principal and
interest payments on the Mortgage Assets may be allocated among the various classes of CMOs in several ways.
Typically, payments of principal, including any prepayments, on the underlying mortgages are applied to
the classes in the order of their respective stated maturities or final distribution dates, so that no payment
of principal is made on CMOs of a class until all CMOs of other classes having earlier stated maturities or final
distribution dates have been paid in full.
Stripped mortgage-backed securities (“SMBS”) are derivative multi-class mortgage securities. The Fund will only invest in SMBS that are obligations backed by the full faith and credit
of the U.S. government. SMBS are usually structured with two classes that receive different proportions of
the interest and principal distributions from a pool of mortgage assets. The Fund will only invest in SMBS whose
mortgage assets are U.S. government obligations. A common type of SMBS will be structured so that one
class receives some of the interest and most of the principal from the mortgage assets, while the other class
receives most of the interest and the remainder of the principal. If the underlying mortgage assets experience
greater than anticipated prepayments of principal, the Fund may fail to fully recoup its initial
investment in these securities. The market value of any class that consists primarily or entirely of principal
payments generally is unusually volatile in response to changes in interest rates.
Investment in mortgage-backed securities poses several risks, including among others,
prepayment, market and credit risk. Prepayment risk reflects the risk that borrowers may prepay
their mortgages faster than expected, thereby affecting the investment’s average life and perhaps its yield. Whether or not a mortgage loan is prepaid is almost entirely controlled by the borrower. Borrowers are most
likely to exercise prepayment options at the time when it is least advantageous to investors, generally
prepaying mortgages as interest rates fall, and slowing payments as interest rates rise. Besides the effect
of prevailing interest rates, the rate of prepayment and refinancing of mortgages may also be affected by appreciation
in home values, ease of the refinancing process and local economic conditions. Market risk reflects
the risk that the price of a security may fluctuate over time. The price of mortgage-backed securities may be particularly
sensitive to prevailing interest rates, the length of time the security is expected to be outstanding,
and the liquidity of the issue. In a period of unstable interest rates, there may be decreased demand for certain
types of mortgage-backed securities, and the Fund invested in such securities wishing to sell them may find
it difficult to find a buyer, which may in turn decrease the price at which they may be sold. Credit risk
reflects the risk that the Fund may not receive all or part of its principal because the issuer or credit enhancer
has defaulted on its obligations. Obligations issued by U.S. government-related entities are guaranteed
as to the payment of principal and interest, but are not backed by the full faith and credit of the U.S.
government. The performance of private label mortgage-backed securities, issued by private institutions, is based
on the financial health of those institutions. With respect to GNMA certificates, although GNMA guarantees timely
payment even if homeowners delay or default, tracking the “pass-through” payments may, at times, be difficult.
Other Fixed Income Securities
The Fund may invest in a wide range of fixed income securities, which may include
foreign sovereign, sub-sovereign and supranational bonds, as well as any other obligations
of any rating or maturity such as foreign and domestic investment grade corporate debt securities and lower-rated
corporate debt securities (commonly known as “junk bonds”). Lower-rated or high yield debt securities include corporate high yield debt securities, zero-coupon securities, payment-in-kind securities, and
STRIPS. Investment grade corporate bonds are those rated BBB or better by Standard & Poor’s Rating Group (“S&P”) or Baa or better by Moody’s Investor Services (“Moody’s”). Securities rated BBB by S&P are considered investment grade,
8
but Moody’s considers securities rated Baa to have speculative characteristics. See Appendix A for a description of corporate bond ratings. The Fund may also invest in unrated securities.
Foreign Sovereign, Sub-Sovereign, Quasi Sovereign and Supranational Securities. The Fund may invest in fixed-rate debt securities issued by: non-U.S. governments (foreign sovereign
bonds); local governments, entities or agencies of a non-U.S. country (foreign sub-sovereign bonds);
corporations with significant government ownership (“Quasi-Sovereigns”); or two or more central governments or institutions (supranational bonds). These types of debt securities are typically general obligations
of the issuer and are typically guaranteed by such issuer. Despite this guarantee, such debt securities
are subject to default, restructuring or changes to the terms of the debt to the detriment of security holders.
Such an event impacting a security held by the Fund would likely have an adverse impact on the Fund’s returns. Also, due to demand from other investors, certain types of these debt securities may be less accessible
to the capital markets and may be difficult for the Fund to source. This may cause the Fund, at times, to pay
a premium to obtain such securities for its own portfolio. For more information related to foreign sovereign,
sub-sovereign and supranational securities, see “Foreign Securities” and “Exposure to Securities or Issuers in Specific Foreign Countries or Regions” above.
Corporate Debt Securities. Corporate debt securities are fixed income securities issued by businesses to finance their operations, although corporate debt instruments may also include
bank loans to companies. Notes, bonds, debentures and commercial paper are the most common types of corporate
debt securities, with the primary difference being their maturities and secured or unsecured status. Commercial
paper has the shortest term and is usually unsecured. The broad category of corporate debt securities
includes debt issued by domestic or foreign companies of all kinds, including those with small-, mid- and
large-capitalizations. Corporate debt may be rated investment-grade or below investment-grade and may carry
variable or floating rates of interest.
Because of the wide range of types and maturities of corporate debt securities, as
well as the range of creditworthiness of its issuers, corporate debt securities have widely varying
potentials for return and risk profiles. For example, commercial paper issued by a large established domestic corporation
that is rated investment-grade may have a modest return on principal, but carries relatively limited
risk. On the other hand, a long-term corporate note issued by a small foreign corporation from an emerging
market country that has not been rated may have the potential for relatively large returns on principal, but
carries a relatively high degree of risk.
Corporate debt securities carry both credit risk and interest rate risk. Credit risk
is the risk that the Fund could lose money if the issuer of a corporate debt security is unable to pay
interest or repay principal when it is due. Some corporate debt securities that are rated below investment-grade
are generally considered speculative because they present a greater risk of loss, including default, than higher
quality debt securities. The credit risk of a particular issuer’s debt security may vary based on its priority for repayment. For example, higher ranking (senior) debt securities have a higher priority than lower
ranking (subordinated) securities. This means that the issuer might not make payments on subordinated securities
while continuing to make payments on senior securities. In addition, in the event of bankruptcy, holders
of higher-ranking senior securities may receive amounts otherwise payable to the holders of more junior securities.
Interest rate risk is the risk that the value of certain corporate debt securities will tend to fall when
interest rates rise. In general, corporate debt securities with longer terms tend to fall more in value when interest
rates rise than corporate debt securities with shorter terms.
Junk Bonds. “Junk Bonds” generally offer a higher current yield than that available for higher-grade issues. However, lower-rated securities involve higher risks, in that they are especially
subject to adverse changes in general economic conditions and in the industries in which the issuers
are engaged, to changes in the financial condition of the issuers and to price fluctuations in response to changes
in interest rates. During periods of economic downturn or rising interest rates, highly leveraged issuers may
experience financial stress that could adversely affect their ability to make payments of interest and principal
and increase the possibility of default. In addition, the market for lower-rated debt securities has expanded rapidly
in recent years, and its growth paralleled a long economic expansion. At times in recent years, the prices
of many lower-rated debt
9
securities declined substantially, reflecting an expectation that many issuers of
such securities might experience financial difficulties. As a result, the yields on lower-rated debt securities
rose dramatically, but the higher yields did not reflect the value of the income stream that holders of such
securities expected. Rather, the risk that holders of such securities could lose a substantial portion of their value as a result of the issuers’ financial restructuring or default. There can be no assurance that such declines will
not recur. The market for lower-rated debt issues generally is thinner and less active than that for higher
quality securities, which may limit the Fund’s ability to sell such securities at fair value in response to changes in the economy or financial markets. Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may also decrease the values and liquidity of lower-rated securities, especially in a thinly
traded market. Changes by recognized rating services in their rating of a fixed income security may affect the
value of these investments. The Fund will not necessarily dispose of a security when its rating is reduced below
the rating it had at the time of purchase. However, ProShare Advisors will monitor the investment to determine
whether continued investment in the security will assist in meeting the Fund’s investment objective.
Covered Bonds. The Fund may invest in covered bonds, which are debt securities issued by banks or other credit institutions that are backed by both the issuing institution and underlying
pool of assets that compose the bond (a “cover pool”). The cover pool for a covered bond is typically composed of residential or commercial mortgage loans or loans to public sector institutions. A covered bond may
lose value if the credit rating of the issuing bank or credit institution is downgraded or the quality of the
assets in the cover pool deteriorates.
Unrated Debt Securities. The Fund may also invest in unrated debt securities. Unrated debt, while not necessarily lower in quality than rated securities, may not have as broad a market.
Because of the size and perceived demand for the issue, among other factors, certain issuers may decide not
to pay the cost of getting a rating for their bonds. The creditworthiness of the issuer, as well as that of any
financial institution or other party responsible for payments on the security, will be analyzed to determine whether
to purchase unrated bonds.
EQUITY SECURITIES
The Fund may invest in equity securities. The market price of securities owned by
the 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 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. A security’s value may also decline due to factors that 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 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 Fund is particularly sensitive to these market risks.
FORWARD CONTRACTS
The Fund may enter into forward contracts to attempt to gain exposure to an index
or asset, or to hedge a position. Forward contracts are two-party contracts pursuant to which one
party agrees to pay the other party a fixed price for an agreed-upon amount of an underlying asset or the
cash value of the underlying asset at an agreed-upon date. Forward contracts that cannot be terminated in the ordinary
course of business within seven days at approximately the amount at which the Fund has valued the asset
may be considered to be illiquid for purposes of the Fund’s illiquid investment limitations. The Fund will not enter into a forward contract unless the Advisor believes that the other party to the transaction is creditworthy.
The counterparty to any forward contract will typically be a major, global financial institution. The
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, the Fund will have contractual remedies pursuant
to the forward
10
contract, but such remedies may be subject to bankruptcy and insolvency laws and proceedings
in the event of the counterparty’s bankruptcy or insolvency, which could affect the Fund’s rights as a creditor and ability to enforce the remedies provided in the applicable contract.
FUTURES CONTRACTS AND RELATED OPTIONS
Futures in General
The Fund may purchase or sell futures contracts and options thereon as a substitute
for a comparable market position in the underlying securities or to satisfy regulatory requirements.
A cash-settled futures contract obligates the seller to deliver (and the purchaser to accept) an amount of
cash equal to a specific dollar amount multiplied by the difference between the final settlement price of a
specific futures contract and the price at which the agreement is made. No physical delivery of the underlying asset
is made.
The Fund generally engages in closing or offsetting transactions before final settlement
of a futures contract 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 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 carried
out 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 carried out at a lower
(higher) price, inclusive of commissions. Investments in commodity-linked futures can be susceptible to negative
prices due to a supply surplus which may be caused by global events, including restrictions or reductions
in global travel. Exposure to such commodity-linked futures may adversely affect the performance of a Fund.
Whether the Fund realizes a gain or loss from futures activities depends generally
upon movements in the underlying currency, commodity, security or index. The extent of the Fund’s loss from an unhedged short position in futures contracts or from writing options on futures contracts is
potentially unlimited, and investors may lose the amount that they invest plus any profits recognized on their
investment. The Fund may engage in related closing transactions with respect to options on futures contracts.
The Fund will engage in transactions in futures contracts and related options that are traded on a U.S. exchange
or board of trade or that have been approved for sale in the U.S. by the Commodity Futures Trading Commission (“CFTC”).
All of the Fund’s transactions in futures and options on futures will be entered into through a futures commission merchant (“FCM”) regulated by the CFTC or under a foreign regulatory regime that has been recognized as equivalent by the CFTC. Under U.S. law, an FCM is the sole type of entity
that may hold collateral in respect of cleared futures (and options thereon) and cleared swaps.
All futures (and options thereon) entered into by the Fund will be cleared by a clearing house that is regulated
by the CFTC or under a foreign regulatory regime that has been recognized as equivalent by the CFTC. A Fund’s FCM may limit the Fund’s ability to invest in certain futures contracts. Such restrictions may adversely affect the Fund’s performance and its ability to achieve its investment objective.
In addition, the CFTC and the exchanges are authorized to take extraordinary actions
in the event of a market emergency, including, for example, the implementation of higher margin requirements,
the establishment of daily price limits and the suspension of trading.
Options on Futures
When the Fund purchases a put or call option on a futures contract, the Fund pays a “premium” (i.e., an amount in addition to the value of the underlying contract in relation to the
exercise price of the option) for the right to sell (in the case of a put) or purchase (in the case of a
call) the underlying futures contract for a specified price upon exercise at any time during the option period.
When the Fund sells (or “writes”) a put or call option on a futures contract, the Fund receives a premium in return for granting to the
11
purchaser of the option the right to sell to or buy from the Fund the underlying futures
contract for a specified price upon exercise at any time during the option period.
Futures Margin Requirements
Upon entering into a futures contract, the Fund will be required to deposit with its
FCM an amount of cash or cash equivalents equal to a small percentage of the contract’s value (these amounts are subject to change by the FCM or clearing house through which the trade is cleared). 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 the 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, the Fund may elect to close its position by taking an opposite position,
which will operate to terminate the Fund’s existing position in the contract. A party to a futures contract is subject to the credit risk of the clearing house and the FCM through which it holds its position. Credit risk
of market participants with respect to futures is concentrated in a few clearing houses, and it is not clear how
an insolvency proceeding of a clearing house would be conducted and what impact an insolvency of a clearing house
would have on the financial system. An FCM is generally obligated to segregate all funds received from
customers with respect to customer futures positions from the FCM’s proprietary assets. However, all funds and other property received by an FCM from its customers are generally held by the FCM on a commingled
basis in an omnibus account, and the FCM may invest those funds in certain instruments permitted under
the applicable regulations. The assets of the Fund might not be fully protected in the event of the bankruptcy of the Fund’s FCM, because the Fund would be limited to recovering only a pro rata share of all
available funds segregated on behalf of the FCM’s customers for a relevant account class. Also, the FCM is required to transfer to the clearing house the amount of margin required by the clearing house for futures positions,
which amounts are generally held in an omnibus account at the clearing house for all customers of the
FCM. If an FCM does not comply with the applicable regulations or its agreement with the Fund, or in the event
of fraud or misappropriation of customer assets by a FCM, the Fund could have only an unsecured
creditor claim in an insolvency of the FCM with respect to the margin held by the FCM.
Correlation Risk
The primary risks associated with the use of futures contracts are imperfect correlation
between movements in the price of the futures and the market value of the underlying assets,
and the possibility of an illiquid market for a futures contract. Although the Fund intends 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 the Fund to substantial losses. If trading is not possible,
or if the 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 exchange with an active
and liquid secondary market.
Speculative Position Limits
The CFTC and futures exchanges have established (and continue to evaluate and revise)
limits (“position limits”) on the maximum net long or net short position which any person, or group of persons acting in concert, may hold or control in particular contracts. In addition, federal
position limits apply to swaps that are economically equivalent to futures contracts that are subject to CFTC-set
speculative limits. All
12
positions owned or controlled by the same person or entity, even if in different accounts,
must be aggregated for purposes of complying with position limits. Thus, even if the Fund does not intend
to exceed applicable position limits, it is possible that different clients managed by the Advisor may
be aggregated for this purpose. Therefore, the trading decisions of the Advisor may have to be modified and positions
held by the Fund may have to be liquidated in order to avoid exceeding such limits. The modification of
investment decisions or the elimination of open positions, if it occurs, may adversely affect the profitability
of the Fund. A violation of position limits could also lead to regulatory action materially adverse to the Fund’s investment strategy.
MASTER LIMITED PARTNERSHIPS
The Fund may invest in master limited partnerships (“MLPs”), which are commonly treated as partnerships for U.S. federal income tax purposes and publicly traded on national
securities exchanges. Such MLPs are limited by the Internal Revenue Code to apply to enterprises that engage
in certain businesses, mostly pertaining to the use of natural resources, such as natural gas extraction
and transportation. Some real estate enterprises may also qualify as MLPs.
Investments in common units of MLPs involve risks that differ from investments in
common stock. Holders of common units of MLPs have the rights typically provided to limited partners
in limited partnerships and, thus, may have limited control and limited voting rights as compared
to holders of a corporation’s common shares. Holders of common units may be subject to conflicts of interest with the MLP’s general partner, including those arising from incentive distribution payments. MLPs
may also have limited financial resources and units may be subject to cash flow and dilution risk. In addition,
investments held by MLPs may be relatively illiquid, limiting the MLPs’ ability to vary their portfolios promptly in response to changes in economic or other conditions. Accordingly, MLPs may be subject to more
erratic price movements because of the underlying assets they hold. Further, the Fund’s investment in MLPs subjects the Fund to the risks associated with the specific industry or industries in which the MLPs invest.
There are also tax risks associated with investments in MLPs. While there are benefits
to MLPs that are treated as partnerships for federal income tax purposes, a change to current tax
law or in the underlying business of a given MLP could result in the MLP being treated as a corporation for
federal income tax purposes. If the MLP were treated as a corporation, the MLP would be required to pay
federal income tax on its taxable income, which would reduce the amount of cash available for distribution
by the MLP. In addition, because MLPs generally conduct business in multiple states, the Fund may be subject
to income or franchise tax in each of the states in which the partnership does business. The additional cost
of preparing and filing the tax returns and paying related taxes may adversely impact the Fund’s return.
Subject to any future regulatory guidance to the contrary, any distribution of income
attributable to qualified publicly traded partnership income from the Fund’s investment in an MLP will ostensibly not qualify for the deduction that would be available to a non-corporate shareholder were the
shareholder to own such MLP directly.
INVESTMENTS IN OTHER INVESTMENT COMPANIES
The Fund may invest in other investment companies, including exchange-traded funds (“ETFs”) and unit investment trusts (“UITs”), to the extent that such an investment would be consistent with the requirements of the 1940 Act. If the 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.
Because most ETFs are investment companies, absent reliance on Rule 12d1-4 under the
1940 Act, the Fund’s investments in such investment companies generally would be limited under applicable federal statutory provisions. Those provisions typically restrict the Fund’s investment in the shares of another investment company to up to 5% of its assets (which may represent no more than 3%
of the securities of such
13
other investment company) and limit aggregate investments in all investment companies
to 10% of assets. The Fund may invest in certain ETFs in excess of the statutory limit in reliance on Rule
12d1-4. Rule 12d1-4 outlines the requirements of Fund of Funds Agreements and specifies the responsibilities
of the Board related to “fund of fund” arrangements.
REAL ESTATE INVESTMENT TRUSTS
The Fund may invest in real estate investment trusts (“REITs”). Equity REITs invest primarily in real property, while mortgage REITs invest in 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. U.S. 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 pass-through of income under the Code and failing to maintain exempt status
under the 1940 Act.
SECURITIES AND INDEX OPTIONS
The Fund may buy and write (sell) options on securities, indexes and other assets
for the purpose of realizing its investment objective. Options may settle in cash or settle by a delivery
of securities or other assets underlying the options.
Physically Settled Options
By buying a call option, the Fund has the right, in return for a premium paid during
the term of the option, to buy the asset underlying the option at the exercise price. By writing (selling)
a call option the Fund becomes obligated during the term of the option to sell the asset underlying the option
at the exercise price if the option is exercised; conversely, by buying a put option, the Fund has the right,
in return for a premium paid during the term of the option, to sell the asset underlying the option at the
exercise price. By writing a put option, the Fund becomes obligated during the term of the option to purchase the
asset underlying the option at the exercise price if the option is exercised.
Cash-Settled Options
Cash-settled options give the holder (purchaser) of an option the right to receive
an amount of cash upon exercise of the option. Receipt of this cash amount will depend upon the value
of the underlying asset (or closing level of the index, as the case may be) 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 level at which the exercise
price of the option is set. The amount of cash received, if any, will be the difference between the value of the underlying
asset (or closing price level of the index, as the case may be) 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.
Exercise of Options
During the term of an option on securities, 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 asset
against payment of the exercise price (or, in certain types of options, make a cash equivalent payment).
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 asset 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.
14
Cleared Options
In the case of cleared options, in order to secure the obligation to deliver the underlying
asset in the case of a call option, the writer of a call option is required to deposit in escrow
the underlying asset or other assets in accordance with the rules of the Options Clearing Corporation (the “OCC”), a clearing agency 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, guarantees performance
by the other side of the transaction. Pursuant to relevant regulatory requirements, the Fund is required
to agree in writing to be bound by the rules of the OCC. The principal reason for the Fund to write call options
on assets held by the Fund is to attempt to realize, through the receipt of premiums, a greater return than
would be realized on the underlying assets alone.
If the 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, the 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 effected. If any call or put option is not exercised or sold,
the option will become worthless on its expiration date. The 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 the 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 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) and those 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.
Options Position Limits
Securities self-regulatory organizations (e.g., the exchanges and FINRA) have established
limitations governing the maximum number of call or put options of certain types that may be bought
or written (sold) by a single investor, whether acting alone or in concert with others. These position
limits may restrict the number of listed options which the Fund may buy or sell. While the Fund is not directly
subject to these rules, as a result of rules applicable to the broker-dealers with whom the Fund transacts
in options, it is required to agree in writing to be bound by relevant position limits.
15
Index Options
Index options are subject to substantial risks, including the risk of imperfect correlation
between the option price and the value of the underlying assets composing the index selected,
the possibility of an illiquid market for the option or the inability of counterparties to perform. Because the value
of an index option depends upon movements in the level of the index rather than the price of a particular
asset, whether the 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 prices for specific underlying assets generally or, in the case of
certain indexes, in an industry or market segment.
SWAPS
General
The Fund may enter into swaps and other derivatives to gain exposure to an underlying
asset without actually purchasing such asset, or to hedge a position including in circumstances
in which direct investment is restricted, impossible, or is otherwise impracticable. Swaps 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 a particular pre-determined interest rate, commodity, security, indexes,
or other assets or measurable indicators. The gross return to be exchanged or “swapped” between the parties is calculated with respect to a “notional amount,” e.g., the return on, or the increase/decrease in, value of a particular dollar amount invested in a “basket” of securities or an ETF representing a particular index or group of securities.
The Fund may enter into swaps to invest in a market without owning or taking physical
custody of securities. For example, in one common type of total return swap, the Fund’s counterparty will agree to pay the Fund the rate at which the specified asset or indicator (e.g., an ETF, or securities comprising a benchmark index, plus the dividends or interest that would have been received on those assets)
increased in value multiplied by the relevant notional amount of the swap. The Fund will agree to pay
to the counterparty an interest fee (based on the notional amount) and the rate at which the specified asset
or indicator decreased in value multiplied by the notional amount of the swap, plus, in certain instances, commissions
or trading spreads on the notional amount.
As a result, the swap has a similar economic effect as if the Fund were to invest
in the assets underlying the swap in an amount equal to the notional amount of the swap. The return
to the Fund on such swap should be the gain or loss on the notional amount plus dividends or interest
on the assets less the interest paid by the Fund on the notional amount. However, unlike cash investments
in the underlying assets, the Fund will not be an owner of the underlying assets and will not have voting or
similar rights in respect of such assets.
As a trading technique, ProShare Advisors may substitute physical securities with
a swap having investment characteristics substantially similar to the underlying securities. The
Fund may also enter into swaps that provide the opposite return of their benchmark or a security. Their operations
are similar to that of the swaps discussed above except that the counterparty pays interest to the Fund on
the notional amount outstanding and that dividends or interest on the underlying instruments reduce the
value of the swap, plus, in certain instances, the Fund will agree to pay to the counterparty commissions or trading
spreads on the notional amount. These amounts are often netted with any unrealized gain or loss to
determine the value of the swap.
The use of swaps is a highly specialized activity which involves investment techniques
and risks in addition to, and in some cases different from, those associated with ordinary portfolio
securities transactions. The primary risks associated with the use of swaps are mispricing or improper valuation,
imperfect correlation between movements in the notional amount and the price of the underlying investments,
and the failure of a counterparty to perform. If a counterparty’s creditworthiness for an over-the-counter swap declines, the value of the swap would likely decline. Moreover, there is no guarantee that the Fund could
eliminate its exposure
16
under an outstanding swap by entering into an offsetting swap with the same or another
party. In addition, the Fund may use a combination of swaps on an underlying index and swaps on an ETF that
is designed to track the performance of that index. The performance of an ETF may deviate from the performance
of its underlying index due to embedded costs and other factors. Thus, to the extent the
Fund invests in swaps that use an ETF as the reference asset, that Fund may be subject to greater correlation
risk and may not achieve as high a degree of correlation with its index as it would if the Fund used only swaps
on the underlying index.
ProShare Advisors, under the supervision of the Board, is responsible for determining
and monitoring the liquidity of the Fund’s transactions in swaps.
Common Types of Swaps
The Fund may enter into any of several types of swaps, including:
Total Return Swaps. Total return swaps may be used either as economically similar substitutes for owning the reference asset specified in the swap, such as the securities that comprise
a given market index, particular securities or commodities, or other assets or indicators. They also may
be used as a means of obtaining exposure in markets where the reference asset is unavailable or it may otherwise
be impossible or impracticable for the Fund to own that asset. “Total return” refers to the payment (or receipt) of the total return on the underlying reference asset, which is then exchanged for the receipt
(or payment) of an interest rate. Total return swaps provide the Fund with the additional flexibility of gaining
exposure to a market or sector index in a potentially more economical way
Interest Rate Swaps. Interest rate swaps, in their most basic form, involve the exchange by the Fund with another party of their respective commitments to pay or receive interest. For
example, the Fund might exchange its right to receive certain floating rate payments in exchange for another party’s right to receive fixed rate payments. Interest rate swaps can take a variety of other forms, such as
agreements to pay the net differences between two different interest indexes or rates. Despite their differences
in form, the function of interest rate swaps is generally the same: to increase or decrease the Fund’s exposure to long- or short-term interest rates. For example, the Fund may enter into an interest rate swap to preserve
a return or spread on a particular investment or a portion of its portfolio or to protect against any increase
in the price of securities the Fund anticipates purchasing at a later date.
Credit Default Swaps (“CDS”): A CDS generally references one or more debt securities or reference entities. The protection “buyer” in a CDS is generally obligated to pay the protection “seller” an upfront or a periodic stream of payments over the term of the contract until a credit event, such
as a default in payments of interest or principal on bonds, has occurred in respect of the reference entity
or assets. If a credit event occurs, the seller generally must pay the buyer: (a) the full notional value of the
swap; or (b) the difference between the notional value of the defaulted reference entity and the recovery price/rate
for the defaulted reference entity. CDS are designed to reflect changes in credit quality, including
events of default.
Other Swaps. Other forms of swaps that the Fund may enter into 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.
Mechanics of the Fund’s Swaps
Payments. Most swaps entered into by the Fund (but generally not CDS) calculate and settle
the obligations of the parties to the agreement on a “net basis” with a single payment. Consequently, the Fund’s current obligations (or rights) under a swap 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”). Other swaps, such as CDS, may require initial premium (discount) payments as well as periodic payments (receipts) related to the interest leg of the swap or to the default
of the reference entity.
17
The Fund’s current obligations under most swaps (e.g., total return swaps, equity/index swaps, interest rate swaps) will be accrued daily (offset against any amounts owed to the
Fund by the counterparty to the swap). However, typically no payments will be made until the settlement date.
Swaps that cannot be terminated in the ordinary course of business within seven days
at approximately the amount the Fund has valued the asset may be considered to be illiquid
for purposes of the Fund’s illiquid investment limitations.
Counterparty Credit Risk. The Fund will not enter into any uncleared swap (i.e., not cleared by a central counterparty) unless ProShare Advisors believes that the other party to the
transaction is creditworthy. The counterparty to an uncleared swap will typically be a major global financial institution.
The Fund will be subject to credit risk with respect to the counterparties with which the Fund enters
into derivatives contracts and other transactions such as repurchase agreements or reverse repurchase agreements. The Fund’s ability to profit from these types of investments and transactions will depend on the willingness
and ability of its counterparty to perform its obligations. If a counterparty fails to meet its contractual
obligations, the Fund may be unable to terminate or realize any gain on the investment or transaction, resulting
in a loss to the Fund. The Fund may experience significant delays in obtaining any recovery in an insolvency,
bankruptcy, or other reorganization proceeding involving its counterparty (including recovery of
any collateral posted by it) and may obtain only a limited recovery or may obtain no recovery in such circumstances.
If the Fund holds collateral posted by its counterparty, it may be delayed or prevented from realizing
on the collateral in the event of a bankruptcy or insolvency proceeding relating to the counterparty. Under
applicable law or contractual provisions, including if the Fund enters into an investment or transaction
with a financial institution and such financial institution (or an affiliate of the financial institution)
experiences financial difficulties, the Fund may in certain situations be prevented or delayed from exercising
its rights to terminate the investment or transaction, or to realize on any collateral, and may result in
the suspension of payment and delivery obligations of the parties under such investment or transactions or in another
institution being substituted for that financial institution without the consent of the Fund. Further,
the Fund may be subject to “bail-in” risk under applicable law whereby, if required by the financial institution’s authority, the financial institution’s liabilities could be written down, eliminated or converted into equity or an alternative instrument of ownership. A bail-in of a financial institution may result in a reduction in value
of some or all of its securities and, if the Fund holds such securities or has entered into a transaction
with such a financial security when a bail-in occurs, such Fund may also be similarly impacted.
Upon entering into a cleared swap, the Fund is required to deposit with its FCM an
amount of cash or cash equivalents equal to a small percentage of the notional amount (this amount
is subject to change by the FCM or clearing house through which the trade is cleared). This amount, known as “initial margin,” is in the nature of a performance bond or good faith deposit on the cleared swap and is
returned to the Fund upon termination of the swap, 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 swap fluctuates, making the long and short position in the swap contract more or less valuable, a process
known as “marking-to-market.” The premium (discount) payments are built into the daily price of the swap and thus are amortized through the variation margin. The variation margin payment also includes
the daily portion of the periodic payment stream.
A party to a cleared swap is subject to the credit risk of the clearing house and
the FCM through which it holds its position. Credit risk of market participants with respect to cleared
swaps is concentrated in a few clearing houses, and it is not clear how an insolvency proceeding of a clearing
house would be conducted and what impact an insolvency of a clearing house would have on the financial system.
An FCM is generally obligated to segregate all funds received from customers with respect to cleared swap
positions from the FCM’s proprietary assets. However, all funds and other property received by an FCM from its customers are generally held by the FCM on a commingled basis in an omnibus account, and the FCM
may invest those funds in certain instruments permitted under the applicable regulations. The assets
of the Fund might not be fully protected in the event of the bankruptcy of the Fund’s FCM, because the Fund would be limited to recovering only a pro rata share of all available funds segregated on behalf of the FCM’s customers for a
18
relevant account class. Also, the FCM is required to transfer to the clearing house
the amount of margin required by the clearing house for cleared swaps positions, which amounts are generally
held in an omnibus account at the clearing house for all customers of the FCM. Regulations promulgated
by the CFTC require that the FCM notify the clearing house of the amount of initial margin provided by
the FCM to the clearing house that is attributable to each customer. However, if the FCM does not provide
accurate reporting, the Fund is subject to the risk that a clearing house will use the Fund’s assets held in an omnibus account at the clearing house to satisfy payment obligations of a defaulting customer of the clearing
member to the clearing house. In addition, if an FCM does not comply with the applicable regulations or its
agreement with the Fund, or in the event of fraud or misappropriation of customer assets by an FCM, the Fund
could have only an unsecured creditor claim in an insolvency of the FCM with respect to the margin held
by the FCM.
Termination and Default Risk. Certain of the Fund’s swap agreements contain termination provisions that, among other things, require the Fund to maintain a pre-determined level of net
assets, and/or provide limits regarding the decline of the Fund’s net asset value over specific periods of time, which may or may not be exclusive of redemptions. If the Fund were to trigger such provisions and have
open derivative positions, at that time counterparties to the swaps could elect to terminate such agreements and
request immediate payment in an amount equal to the net liability positions, if any, under the relevant agreement.
Regulatory Margin
In recent years, regulators across the globe, including the CFTC and the U.S. banking
regulators, have adopted margin requirements applicable to uncleared swaps. Uncleared swaps between
the Fund and its counterparty are required to be marked-to-market on a daily basis, and collateral
is required to be exchanged to account for any changes in the value of such swaps. The rules impose a number of
requirements as to these exchanges of margin, including as to the timing of transfers, the type of collateral
(and valuations for such collateral) and other matters that may be different than what the Fund would agree
with its counterparty in the absence of such regulation. In all events, where the Fund is required to post collateral
to its swap counterparty, such collateral will be posted to an independent bank custodian, where
access to the collateral by the swap counterparty will generally not be permitted unless the relevant Fund is
in default on its obligations to the swap counterparty.
In addition to the variation margin requirements, regulators have adopted “initial” margin requirements applicable to uncleared swaps. Where applicable, these rules require
parties to an uncleared swap to post, to a custodian that is independent from the parties to the swap, collateral (in addition to any “variation margin” collateral noted above) in an amount that is either (i) specified in a schedule in the rules or (ii) calculated by the regulated party in accordance with a model that has been approved by that party’s regulator(s). From time to time, the initial margin rules may apply to certain Funds’ swap trading relationships. In the event that the rules apply to a Fund, they would impose significant
costs on such the Fund’s ability to engage in uncleared swaps and, as such, could adversely affect ProShare Advisors’ ability to manage the Fund, may impair the Fund’s ability to achieve its investment objective and/or may result in reduced returns to the Fund’s investors.
Risks of Government Regulation of Derivatives
It is possible that government regulation of various types of derivative instruments,
including futures and swap agreements, may limit or prevent the Fund from using such instruments as
a part of its investment strategy, and could ultimately prevent the Fund from being able to achieve its investment
objective. It is impossible to predict fully the effects of legislation and regulation in this area,
but the effects could be substantial and adverse.
The regulation of derivatives markets in the U.S., the European Union (“EU”), United Kingdom (“U.K.”) and other jurisdictions is an evolving area of law and continues to be subject to modification by government and judicial action. Legislative and regulatory reforms, including the
Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), have resulted in increased regulation of derivatives, including clearing, margin, trade execution, reporting, recordkeeping
and registration requirements.
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Derivatives regulations could, among other things, restrict the Fund’s ability to engage in swap transactions (for example, by making certain types of swap transactions no longer available to
the Fund) and/or increase the costs of such swap transactions (for example, by increasing margin or capital
requirements), and the Fund may as a result be unable to execute its investment strategies in a manner that ProShare
Advisors might otherwise choose. There is a possibility of future regulatory changes altering, perhaps
to a material extent, the nature of an investment in the Fund or the ability of the Fund to continue to implement
its investment strategies.
Also, as described above, in the event of a counterparty’s (or its affiliate’s) insolvency, the Fund’s ability to exercise remedies could be stayed or eliminated under special resolution
regimes adopted in the United States, the EU, the U.K. and various other jurisdictions. Such regimes provide
government authorities with broad authority to intervene when a financial institution is experiencing financial
difficulty and may prohibit the Fund from exercising termination rights based on the financial institution’s insolvency. In particular, in the EU and the U.K., governmental authorities could reduce, eliminate
or convert to equity the liabilities to the Fund of a counterparty experiencing financial difficulties (sometimes referred to as a “bail in”).
In addition, the SEC has adopted Rule 18f-4 under the 1940 Act providing for the regulation
of registered investment companies’ use of derivatives and certain related instruments (e.g., reverse repurchase agreements). The rule, among other things, limits derivatives exposure through one
of two value-at-risk tests and requires registered investment companies to adopt and implement a derivatives
risk management program. In connection with the adoption of the rule, the SEC eliminated the asset segregation
framework for covering derivatives and certain financial instruments arising from the SEC’s Release 10666 and ensuing staff guidance. Limited derivatives users (as determined by Rule 18f-4) are not, however, subject
to the full requirements under the rule.
These and future rules and regulations could, among other things, further restrict the Fund’s ability to engage in, or increase the cost to the Fund of, derivatives transactions, for example,
by making some types of derivatives no longer available to the Fund, increasing margin or capital requirements,
or otherwise limiting liquidity or increasing transaction costs. The implementation of the clearing requirement
for certain swaps has increased the costs of derivatives transactions for the Fund, since the Fund has to
pay fees to their clearing members and are typically required to post more margin for cleared derivatives than
they have historically posted for bilateral derivatives. The costs of derivatives transactions may increase
further as clearing members raise their fees to cover the costs of additional capital requirements and other regulatory
changes applicable to the clearing members. Certain aspects of these regulations are still being implemented,
so their full impact on the Fund and the financial system are not yet known. While the regulations and central
clearing of some derivatives transactions are designed to reduce systemic risk (i.e., the risk that the interdependence of large derivatives dealers could cause them to suffer liquidity, solvency or other challenges
simultaneously), there is no assurance that the mechanisms imposed under the regulations will achieve that result,
and in the meantime, as noted above, central clearing, minimum margin requirements and related requirements
expose the Fund to different kinds of risks and costs.
Regulations adopted by global prudential regulators that are now in effect require
certain bank-regulated counterparties and certain of their affiliates to include in certain
financial contracts, including many repurchase agreements, terms that delay or restrict the rights of counterparties,
such as the Fund, to terminate such agreements, take foreclosure action, exercise other default rights
or restrict transfers of credit support in the event that the counterparty and/or its affiliates are subject to certain
types of resolution or insolvency proceedings. It is possible that these requirements, as well as potential
additional government regulation and other developments in the market, could adversely affect the Fund’s ability to terminate existing repurchase agreements and purchase and sale contracts or to realize amounts
to be received under such agreements.
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BORROWING
The Fund may borrow money for cash management purposes or investment purposes. Borrowing
for investment is a form of leverage. Leveraging investments, by purchasing securities
with borrowed money, is a speculative technique which increases investment risk, but also increases investment
opportunity. Because substantially all of the Fund’s assets will fluctuate in value, whereas the interest obligations on borrowings may be fixed, the NAV per share of the Fund will fluctuate more when the Fund is leveraging
its 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, the Fund might have to sell portfolio securities to meet interest or principal
payments at a time when investment considerations would not favor such sales. Consistent with the requirements
of the 1940 Act, the 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 the 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 requirement. 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 Fund is authorized to borrow money as a temporary measure for extraordinary or
emergency purposes in amounts not in excess of 5% of the value of the Fund’s total assets. This borrowing is not subject to the foregoing 300% asset coverage requirement. The Fund is authorized to pledge portfolio
securities as ProShare Advisors deems appropriate in connection with any borrowings.
The Fund may also enter into reverse repurchase agreements, which may be viewed as
a form of borrowing, with financial institutions. Subject to applicable law, such agreements
may be subject to the 300% asset coverage requirement applicable to borrowings by the Fund.
CASH RESERVES
In seeking to achieve its investment objective, as a cash reserve, for liquidity purposes,
or as cover for positions it has taken, the Fund may invest all or part of its 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.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with financial institutions in pursuit
of its investment objective, or for liquidity purposes. Under a repurchase agreement, the
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 Fund follows certain procedures designed
to minimize the risks inherent in such agreements. These procedures include effecting repurchase transactions
generally with major global financial institutions. The creditworthiness of each of the firms that
is a party to a repurchase agreement with the Fund will be 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, the 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. The 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 Fund 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
21
than 15% of the Fund’s total net assets. The investments of the Fund in repurchase agreements at times may be substantial when, in the view of ProShare Advisors, liquidity, investment, regulatory,
or other considerations so warrant.
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements as part of its investment strategy,
which may be viewed as a form of borrowing. Reverse repurchase agreements involve sales
by the Fund of portfolio assets for cash concurrently with an agreement by the Fund to repurchase those 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.
SHORT SALES
The Fund may engage in short sales transactions. A short sale is a transaction in
which the Fund sells a security it does not own in anticipation that the market price of that security
will decline. To complete such a transaction, the 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 it receives, 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. The Fund also will incur transaction costs in effecting short sales.
The Fund may make short sales “against the box,” i.e., when a security identical to or convertible or exchangeable into one owned by the Fund is borrowed and sold short.
The 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.
The 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 will be increased, by the amount of the premium,
dividends or interest the Fund may be required to pay, if any, in connection with a short sale.
SECURITIES LENDING
The Fund may lend securities to brokers, dealers and financial organizations in exchange
for collateral in the amount of at least 102% of the value of U.S. dollar-denominated
securities loaned or at least 105% of the value of non-U.S. dollar-denominated securities loaned, marked to market
daily. Each loan will be secured continuously by collateral in the form of cash, Money Market Instruments
or U.S. Government securities. When the Fund lends its securities, it continues to receive payments equal
to the dividends and interest paid on the securities loaned and simultaneously may earn interest on the
reinvestment of the cash collateral. Any cash collateral received by the Fund in connection with these loans
may be reinvested in a variety of short-term investments. The Fund may incur fees and expenses in connection
with the reinvestment of cash collateral. For loans collateralized by cash, borrowers may be entitled to
receive a fee based on the amount of collateral. The Fund is typically compensated by the difference between
the amount earned on the reinvestment of cash collateral and any fees paid to the borrower. Although voting
and other rights attendant to securities on loan pass to the borrower, such loans may be recalled so that the
securities may be voted by the Fund if a material event affecting the Fund’s investment in the securities on loan is to occur. Loans are subject to termination by the Fund or the borrower at any time. Not all Funds may
participate in securities
22
lending at any given time. No securities loan shall be made on behalf of the Fund
if, as a result, the aggregate value of all securities loaned by the particular Fund exceeds one-third of the value of such Fund’s total assets (including the value of the collateral received).
Securities lending involves exposure to certain risks, including “gap” risk (i.e., the risk of a mismatch between the return on cash collateral reinvestments and any fees the Fund
has agreed to pay a borrower), operational risk (i.e., the risk of losses resulting from problems in the settlement and the accounting process), legal, counterparty and credit risk. If a securities lending
counterparty were to default, the Fund would be subject to the risk of a possible delay in receiving collateral or in
recovering the loaned securities, or to a possible loss of rights in the collateral. In the event a borrower does not return the Fund’s securities as agreed, the Fund may experience losses if the proceeds received from
liquidating the collateral do not at least equal the value of the loaned security at the time the collateral is
liquidated, plus the transaction costs incurred in purchasing replacement securities. This event could trigger adverse
tax consequences for the Fund. The investment of cash collateral deposited by the borrower is subject to inherent
market risks such as interest rate risk, credit risk, liquidity risk, and other risks that are present
in the market. The Fund could lose money if its short-term reinvestment of the collateral declines in value over the
period of the loan.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES
The Fund, from time to time, in the ordinary course of business, may (subject in some
cases to certain regulatory requirements) purchase securities on a when-issued or delayed-delivery
basis (i.e., delivery and payment can take place a number of 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 the 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 NAV. At the time of delivery of the securities, the value of the securities may be more or less
than the purchase price.
CYBERSECURITY
With the increased use of technologies such as the Internet and the dependence on
computer systems to perform necessary business functions, the Fund is susceptible to operational and
information security risks. In general, cyber incidents can result from deliberate attacks or unintentional events.
Cyber attacks include, but are not limited to gaining unauthorized access to digital systems for purposes
of misappropriating assets or sensitive information, corrupting data, or causing operational disruption. Cyber attacks
may also be carried out in a manner that does not require gaining unauthorized access, such as causing denial-of-service
attacks on websites. Cyber security failures or breaches of the Fund’s third -party service provider (including, but not limited to, index providers, the administrator and transfer agent) or the issuers
of securities in which the Fund invest, have the ability to cause disruptions and impact business operations, potentially
resulting in financial losses, the inability of Fund shareholders to transact business, violations of applicable
privacy and other laws, regulatory fines, penalties, reputational damage, reimbursement or other compensation
costs, and/or additional compliance costs. In addition, substantial costs may be incurred in order to prevent
any cyber incidents in the future. The Fund and its shareholders could be negatively impacted as a result. While
the Fund has established business continuity plans and systems to prevent such cyber attacks, there are inherent
limitations in such plans and systems including the possibility that certain risks have not been identified.
Furthermore, the Fund cannot control the cyber security plans and systems put in place by issuers in which
the Fund invests.
ILLIQUID SECURITIES
The Fund may purchase illiquid securities, including securities that are not readily
marketable and securities that are not registered (“restricted securities”) under the 1933 Act, but which can be sold to qualified institutional buyers under Rule 144A under the 1933 Act. The Fund will not
invest more than 15% of the Fund’s net assets in illiquid securities. Securities generally will be considered “illiquid” if the Fund reasonably expects the security cannot be sold or disposed of in current market conditions
in seven calendar days or less without the sale or disposition significantly changing the market value
of the security. Under the
23
current guidelines of the staff of the SEC, illiquid securities also are considered
to include, among other securities, purchased OTC 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 the sale of securities that
are not illiquid. Illiquid securities 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 NAV.
The SEC has adopted Rule 22e-4 under the 1940 Act, which requires the Fund to adopt
a liquidity risk management program to assess and manage its liquidity risk. Under its program,
the Fund will be required to classify its investments into specific liquidity categories and monitor
compliance with limits on investments in illiquid securities. The Fund does not expect Rule 22e-4 to have a
significant effect on investment operations. While the liquidity risk management program attempts to assess
and manage liquidity risk, there is no guarantee it will be effective in its operations and it may not
reduce the liquidity risk inherent in the Fund’s investments.
Institutional markets for restricted securities have developed as a result of the
promulgation of Rule 144A under the 1933 Act, which provides a safe harbor from 1933 Act registration
requirements for qualifying sales to institutional investors. When Rule 144A securities present an
attractive investment opportunity and otherwise meet selection criteria, the Fund may make such investments.
Whether or not such securities are illiquid depends on the market that exists for the particular security.
The Board of Trustees has delegated this responsibility for determining the liquidity of Rule 144A restricted
securities that may be invested in by the 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
that when purchased enjoyed a fair degree of marketability may subsequently become illiquid and, accordingly,
a security that was deemed to be liquid at the time of acquisition may subsequently become illiquid. In
such an event, appropriate remedies will be considered in order to minimize the effect on the Fund’s liquidity.
MATCHING FUNDS
The Fund seeks performance that corresponds to the performance of an index. There
is no guarantee or assurance that the methodology used to create any index will result in the Fund
achieving positive returns. Any index may underperform more traditional indices. In turn, the Fund could lose
value while other indices or measures of market performance increase in level or performance. In addition, the
Fund may be subject to the risk that an index provider may not follow its stated methodology for determining
the level of the index and/or achieve the index provider’s intended performance objective.
MANAGEMENT
There may be circumstances outside the control of ProShare Advisors, the Trust, the
Administrator (as defined below), the transfer agent, the Custodian (as defined below), any sub-custodian,
the Distributor (as defined below), and/or the Fund that make it, for all practical purposes, impossible
to re-position such Fund and/or to process a purchase or redemption order. Examples of such circumstances include:
natural disasters; public service disruptions or utility problems such as those caused by fires, floods,
extreme weather conditions, and power outages resulting in telephone, telecopy, and computer failures;
market conditions or activities causing trading halts; systems failures involving computer or other information
systems affecting the aforementioned parties, as well as the DTC, the NSCC, or any other participant in
the purchase process; and similar extraordinary events. Accordingly, while ProShare Advisors has implemented
and tested a business continuity plan that transfers functions of any disrupted facility to another location
and has effected a disaster recovery plan, circumstances, such as those above, may prevent the Fund from being
operated in a manner consistent with its investment objective and/or principal investment strategies.
24
NON-DIVERSIFIED STATUS
The Fund, except for the Diversified Funds, is a “non-diversified” series of the Trust. The 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. Notwithstanding the Fund’s status as a “non-diversified” investment company under the 1940 Act, the Fund intends to qualify as a RIC accorded special tax treatment under the Code, which imposes its own diversification
requirements that are less restrictive than the requirements applicable to the “diversified” investment companies under the 1940 Act. The Fund’s ability to pursue its investment strategy may be limited by that Fund’s intention to qualify as a RIC and its strategy may bear adversely on its ability to so qualify. For more details, see “Taxation” below. With respect to a “non-diversified” Fund, a relatively high percentage of such 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.
MARKET DISRUPTION AND GEOPOLITICAL RISK
War, terrorism, economic uncertainty, and related geopolitical events, such as sanctions,
tariffs, the imposition of exchange controls or other cross-border trade barriers, have led, and
in the future may lead, to increased short-term market volatility and may have adverse long-term effects on U.S.
and world economies and markets generally. For example, the U.S. has imposed economic sanctions, which
consist of asset freezes, restrictions on dealings in debt and equity, and certain industry-specific restrictions.
These sanctions, any additional sanctions or intergovernmental actions, or even the threat of further sanctions,
may result in a decline of the value and liquidity of securities in affected countries, a weakening of the affected countries’ currencies or other adverse consequences to their respective economies. Sanctions
impair the ability of the Fund to buy, sell, receive or deliver those securities and/or assets that are within
the scope of the sanctions.
TRADE DISPUTES
Global economies interdependent on and may be adversely affected by trade disputes
with key trading partners and escalating tariffs imposed on goods and services produced by
such countries. To the extent a country engages in retaliatory tariffs, a company that relies on imported
parts to produce its own goods may experience increased costs of production or reduced profitability, which
may affect consumers, investors and the domestic economy. Trade disputes and retaliatory actions may include
embargoes and other trade limitations, which may trigger a significant reduction in international trade
and impact the global economy. Trade disputes may also lead to increased currency exchange rate volatility,
which can adversely affect the prices of the Fund securities valued in U.S. dollars. The potential threat
of trade disputes may also negatively affect investor confidence in the markets generally and investment growth.
PORTFOLIO TURNOVER
The Fund’s portfolio turnover rate, to a great extent, will depend on the purchase, redemption and exchange activity of the Fund’s investors. The Fund’s portfolio turnover may vary from year to year, as well as within a year. The nature of the Fund may cause the Fund to experience substantial
differences in brokerage commissions from year to 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. High portfolio
turnover and correspondingly greater brokerage commissions depend, to a great extent, on the purchase,
redemption, and exchange activity of the Fund’s investors, as well as the Fund’s investment objective and strategies. Consequently, it is difficult to estimate what the Fund’s actual portfolio turnover rate will be in the future. However, it is expected that the portfolio turnover experienced by the Fund from year
to year, as well as within a year, may be substantial. A higher portfolio turnover rate would likely involve
correspondingly greater brokerage commissions and transaction and other expenses that would be borne
by the Fund. In addition, the Fund’s portfolio turnover level may adversely affect the ability of the Fund to achieve its
25
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, including
swap agreements, options and futures contracts in which the Fund invests, are excluded from the calculation
of Portfolio Turnover Rate for the Fund.
SPECIAL CONSIDERATIONS
To the extent discussed herein and in the Fund’s Prospectus, the Fund presents certain risks, some of which are further described below.
TRACKING AND CORRELATION
Several factors may affect the Fund’s ability to achieve a high degree of correlation with its benchmark. Among these factors are: (i) the Fund’s fees and expenses, including brokerage (which may be increased by high portfolio turnover) and the costs associated with the use of derivatives;
(ii) less than all of the securities underlying the Fund’s benchmark being held by the Fund and/or securities not included in its benchmark being held by the Fund; (iii) an imperfect correlation between the performance
of instruments held by the Fund, such as futures contracts, and the performance of the underlying securities
in a benchmark; (iv) bid-ask spreads (the effect of which may be increased by portfolio turnover); (v)
holding instruments traded in a market that has become illiquid or disrupted; (vi) the Fund’s share prices being rounded to the nearest cent; (vii) changes to the benchmark that are not disseminated in advance; (viii) the need to conform the Fund’s portfolio holdings to comply with investment restrictions or policies or regulatory
or tax law requirements; (ix) limit-up or limit-down trading halts on options or futures contracts which may
prevent the Fund from purchasing or selling options or futures contracts; (x) early and unanticipated closings
of the markets on which the holdings of the Fund trade, resulting in the inability of the Fund to execute
intended portfolio transactions; and (xi) fluctuations in currency exchange rates.
26
INVESTMENT RESTRICTIONS
The Fund has adopted certain investment restrictions as fundamental policies that
cannot be changed without a “vote of a majority of the outstanding voting securities” of the Fund. The phrase “majority of outstanding voting securities” is defined in the 1940 Act as the lesser of: (i) 67% or more of the shares of the Fund present at a duly-called meeting of shareholders, if the holders of more than
50% of the outstanding shares of the Fund are present or represented by proxy; or (ii) more than 50% of the
outstanding shares of the Fund. (All policies of the Fund not specifically identified in this SAI or its Prospectus
as fundamental may be changed without a vote of the shareholders of the Fund.) For purposes of the following
limitations (except for the restriction on concentration), all percentage limitations apply immediately after
a purchase or initial investment.
The 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 SAI, 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 SAI, 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 1933 Act, as amended, in selling portfolio securities.
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 SAI, as they may be amended from time to time.
8.
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 the Fund will concentrate to approximately the same extent that its 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.
For purposes of determining whether the Fund is concentrated in an industry or group of
industries, the Fund may concentrate its investment in the securities of companies engaged in
a single
27
industry or group of industries to approximately the same extent as its benchmark
and in accordance with its investment objective and policies as disclosed in the Prospectus
and SAI.
28
MANAGEMENT OF THE TRUST
THE BOARD OF TRUSTEES AND ITS LEADERSHIP STRUCTURE
The Board has general oversight responsibility with respect to the operation of the
Trust and the Fund. The Board has engaged ProShare Advisors to manage the Fund and is responsible
for overseeing ProShare Advisors and other service providers to the Trust and the Fund in accordance
with the provisions of the federal securities laws.
The Board is currently composed of four Trustees, including three Independent Trustees
who are not “interested persons” of the Fund, as that term is defined in the 1940 Act (each an “Independent Trustee”). In addition to four regularly scheduled meetings per year, the Board periodically meets
in executive session (with and without employees of ProShare Advisors), and holds special meetings, and/or informal
conference calls relating to specific matters that may require discussion or action prior to its next
regular meeting. The Independent Trustees have retained “independent legal counsel” as the term is defined in the 1940 Act.
The Board has appointed Michael L. Sapir to serve as Chairman of the Board. Mr. Sapir
is also the Co-Founder and Chief Executive Officer of ProShare Advisors and, as such, is not an
Independent Trustee. The Chairman’s primary role is to participate in the preparation of the agenda for Board meetings, determine (with the advice of counsel) which matters need to be acted upon by the Board, and
to ensure that the Board obtains all the information necessary to perform its functions and take action. The
Chairman also presides at all meetings of the Board and acts, with the assistance of staff, as a liaison with
service providers, officers, attorneys and the Independent Trustees between meetings. The Chairman performs such
other functions as requested by the Board from time to time. The Board does not have a lead Independent
Trustee.
The Board has determined that its leadership structure is appropriate in light of
the characteristics of the Trust and the Fund. These characteristics include, among other things, the fact
that multiple series are organized under one Trust; all series of the Trust are registered investment companies;
all series of the Trust have common service providers; and that the majority of the series of the Trust are
geared funds, with similar principal investment strategies. As a result, the Board addresses governance and management
issues that are often common to each series of the Trust. In light of these characteristics, the Board
has determined that a four-member Board, including three Independent Trustees, is of an adequate size to
oversee the operations of the Trust, and that, in light of the small size of the Board, a complex Board leadership
structure is not necessary or desirable. The relatively small size of the Board facilitates ready communication
among the Board members, and between the Board and management, both at Board meetings and between
meetings, further leading to the determination that a complex board structure is unnecessary.
In view of the small size of the Board, the Board has concluded that designating one of the three Independent Trustees as the “lead Independent Trustee” would not be likely to meaningfully enhance the effectiveness of the Board. The Board reviews its leadership structure at least annually and believes that its structure
is appropriate to enable the Board to exercise its oversight of the Fund.
The Board oversight of the Trust and the Fund extends to the Trust’s risk management processes. The Board and its Audit Committee consider risk management issues as part of their
responsibilities throughout the year at regular and special meetings. ProShare Advisors and other service
providers prepare regular reports for Board and Audit Committee meetings that address a variety of risk-related
matters, and the Board as a whole or the Audit Committee may also receive special written reports or
presentations on a variety of risk issues at the request of the Board or the Audit Committee. For example,
the portfolio managers of the Fund meet regularly with the Board to discuss portfolio performance, including
investment risk, counterparty risk and the impact on the Fund of investments in particular securities
or derivatives. As noted above, given the relatively small size of the Board, the Board determined it is not
necessary to adopt a complex leadership structure in order for the Board to effectively exercise its risk
oversight function.
The Board has appointed a Chief Compliance Officer (“CCO”) for the Trust (who is also the CCO for ProFund Advisors LLC). The CCO reports directly to the Board and participates in the Board’s meetings. The Independent Trustees meet at least annually in executive session with the CCO, and the Fund’s CCO prepares and presents an annual written compliance report to the Board. The CCO also
provides updates to
29
the Board on the operation of the Trust’s compliance policies and procedures and on how these procedures are designed to mitigate risk. Finally, the CCO and/or other officers or employees of
ProShare Advisors report to the Board in the event that any material risk issues arise.
In addition, the Audit Committee of the Board meets regularly with the Trust’s independent public accounting firm to review reports on, among other things, the Fund’s controls over financial reporting. The Trustees, their birth date, term of office and length of time served, principal business
occupations during the past five years and the number of portfolios in the Fund Complex overseen and other
directorships, if any, held by each Trustee, are shown below. Unless noted otherwise, the address of each
Trustee is: c/o ProShares Trust, 7272 Wisconsin Avenue, 21st Floor, Bethesda, MD 20814.
|
Name and Birth Date
|
Term of Office
and Length of
Time Served
|
Principal Occupation(s)
During
the Past 5 Years
|
Number of
Operational
Portfolios in
Fund Complex*
Overseen by Trustee
|
Other Directorships
Held by Trustee
During
Past 5 Years
|
|
Independent Trustees
|
|
|
|
|
|
William D. Fertig
Birth Date: 9/56
|
Indefinite; June
2011 to present
|
Context Capital
Management
(Alternative Asset
Management): Chief
Investment Officer
(September 2002 to
present).
|
ProShares (127)
ProFunds (116)
|
Context Capital
|
|
Russell S. Reynolds III
Birth Date: 7/57
|
Indefinite;
November 2005 to
present
|
RSR Partners, Inc.
(Retained Executive
Recruitment and
Corporate
Governance
Consulting):
Managing Director
(February 1993 to
present).
|
ProShares (127)
ProFunds (116)
|
RSR Partners, Inc.
|
|
Michael C. Wachs
Birth Date: 10/61
|
Indefinite;
November 2005 to
present
|
Linden Lane Capital
Partners LLC (Real
Estate Investment
and Development):
Managing Principal
(2010 to present).
|
ProShares (127)
ProFunds (116)
|
NAIOP (the
Commercial Real
Estate Development
Association)
|
|
Interested Trustee and Chairman of the Board
|
|
|
||
30
|
Name and Birth Date
|
Term of Office
and Length of
Time Served
|
Principal Occupation(s)
During
the Past 5 Years
|
Number of
Operational
Portfolios in
Fund Complex*
Overseen by Trustee
|
Other Directorships
Held by Trustee
During
Past 5 Years
|
|
Michael L. Sapir**
Birth Date: 5/58
|
Indefinite; 2002 to
present
|
Chairman and Chief
Executive Officer of
ProFund
Advisors LLC
(April 1997 to
present); ProShare
Advisors
(November 2005 to
present); and
ProShare Capital
Management LLC
(July 2008 to
present).
|
ProShares (127)
ProFunds (116)
|
None
|
*
The “Fund Complex” consists of all operational registered investment companies under the 1940 Act that are advised by ProShare Advisors and any registered investment companies that have
an investment adviser that is an affiliated person of ProShare Advisors. Investment companies that
are non-operational (and therefore, not publicly offered) as of the date of this SAI are excluded from
these figures.
**
Mr. Sapir is an “interested person,” as defined by the 1940 Act, because of his ownership interest in ProShare Advisors.
The Board was formed in 2002, prior to the inception of the Trust’s operations. Messrs. Reynolds, Wachs and Sapir were appointed to serve as the Board’s initial trustees prior to the Trust’s operations. Mr. Fertig was added in June 2011. Each Trustee was and is currently believed to possess
the specific experience, qualifications, attributes and skills necessary to serve as a Trustee of the Trust.
In addition to their years of service as Trustees to ProFunds and Access One Trust, and gathering experience with
funds with investment objectives and principal investment strategies similar to series of the Trust, each
individual brings experience and qualifications from other areas. In particular, Mr. Reynolds has significant senior
executive experience in the areas of human resources, recruitment and executive organization; Mr. Wachs has
significant experience in the areas of investment and real estate development; Mr. Sapir has significant experience
in the field of investment management, both as an executive and as an attorney; and Mr. Fertig has
significant experience in the areas of investment and asset management.
COMMITTEES
The Board has established an Audit Committee to assist the Board in performing oversight
responsibilities. The Audit Committee is composed exclusively of Independent Trustees.
Currently, the Audit Committee is composed of Messrs. Reynolds, Wachs and Fertig. Among other things, 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 met five times,
and the Board of Trustees met four times.
31
TRUSTEE OWNERSHIP
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, 2023.
|
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
|
|
|
|
William D. Fertig, Trustee
|
Over $100,000
|
Over $100,000
|
|
Russell S. Reynolds III, Trustee
|
$10,001-$50,000
|
$10,001-$50,000
|
|
Michael C. Wachs, Trustee
|
None
|
$10,001-$50,000
|
|
Interested Trustee
|
|
|
|
Michael L. Sapir, Trustee and Chairman
|
Over $100,000
|
Over $100,000
|
COMPENSATION OF TRUSTEES
Each Independent Trustee is paid a $325,000 annual retainer for service as a Trustee
on the Board and for service as a trustee on the board of other funds in the Fund Complex. Trustees
who are also Officers or affiliated persons receive no remuneration from the Trust for their services as
Trustees. The Officers, other than the CCO, 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 Fund’s expenses, and Trustees are not entitled to benefits upon retirement from the Board of Trustees.
The following table shows aggregate compensation paid to the Trustees for their service
on the Board for the fiscal year ended May 31, 2023.
|
Name
|
Aggregate
Compensation
From Fund
|
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
|
|
|
|
|
|
William D. Fertig, Trustee
|
$0
|
$0
|
$0
|
$325,000
|
|
Russell S. Reynolds, III, Trustee
|
$0
|
$0
|
$0
|
$325,000
|
|
Michael C. Wachs, Trustee
|
$0
|
$0
|
$0
|
$325,000
|
|
Interested Trustee
|
|
|
|
|
|
Michael L. Sapir, Trustee and Chairman
|
$0
|
$0
|
$0
|
$0
|
OFFICERS
The Trust’s executive officers (the “Officers”), their date of birth, 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 officer is: c/o ProShares Trust, 7272 Wisconsin
Avenue, 21st Floor, Bethesda, MD 20814.
32
|
Name and Birth Date
|
Position(s)
Held with
Trust
|
Term of Office
and Length of
Time Served
|
Principal Occupation(s)
During the Past
5 Years
|
|
Todd B. Johnson
Birth Date: 1/64
|
President
|
Indefinite;
January 2014 to
present
|
Chief Investment Officer of ProShare
Advisors (December 2008 to present);
ProFund Advisors LLC (December 2008 to
present); and ProShare Capital
Management LLC (February 2009 to present).
|
|
Maria Clem Sell
3 Canal Plaza, Suite
100 Portland, ME
04101
Birth Date: 2/78
|
Treasurer
|
Indefinite; June
2022 to present
|
Senior Principal Consultant and Fund
Treasurer, ACA Group (2021 to present);
Director, Franklin Templeton Investments
(2014 to 2021).
|
|
Victor M. Frye, Esq.
Birth Date: 10/58
|
Chief
Compliance
Officer and AML
Officer
|
Indefinite;
November 2005
to present
|
Counsel and Chief Compliance Officer of
ProShare Advisors (December 2004 to
present) and ProFund Advisors LLC (October
2002 to present); Secretary of ProFunds
Distributors, Inc. (April 2008 to present);
Chief Compliance Officer of ProFunds
Distributors, Inc. (July 2015 to present).
|
|
Richard F. Morris
Birth Date: 8/67
|
Chief Legal
Officer and
Secretary
|
Indefinite;
December 2015
to present
|
General Counsel of ProShare Advisors;
ProFund Advisors LLC; and ProShare Capital
Management LLC (December 2015 to
present); Chief Legal Officer of ProFunds
Distributors, Inc. (December 2015 to present);
Partner at Morgan Lewis & Bockius, LLP
(October 2012 to November 2015).
|
The Officers, under the supervision of the Board, manage the day-to-day operations
of the Trust. One Trustee and all of the Officers of the Trust are directors, officers or employees
of ProShare Advisors or Foreside Management Services, LLC. The other Trustees are Independent Trustees. The
Trustees and some Officers are also directors and officers of some or all of the other 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.
COMPENSATION OF OFFICERS
The Officers, other than the CCO, receive no compensation directly from the Trust
for performing the duties of their offices.
33
INVESTMENT ADVISOR
ProShare Advisors, located at 7272 Wisconsin Avenue, 21st Floor, Bethesda, MD 20814, serves as the investment adviser to the Fund and provides investment advice and management services
to the Fund. ProShare Advisors is owned by Michael L. Sapir, Louis M. Mayberg and William E. Seale.
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
ProShare Advisors serves as the investment advisor to the Fund pursuant to an investment
advisory and management agreement dated June 23, 2015 (the “Advisory and Management Agreement”). The principal offices of ProShare Advisors are located at 7272 Wisconsin Avenue 21st Floor, Bethesda, MD 20814. ProShare Advisors manages the investment and reinvestment of the Fund’s assets in accordance with its investment objective(s), policies, and limitations, subject to the general supervision and control
of the Board and the Trust’s Officers. ProShare Advisors bears all costs associated with providing these advisory services.
In addition, ProShare Advisors is responsible for substantially all expenses of the
Fund except for: (i) brokerage and other transaction expenses and other fees, charges, taxes, levies
or expenses (such as stamp taxes) incurred in connection with the execution of portfolio transactions or in connection
with creation and redemption transactions (including without limitation any fees, charges, taxes, levies
or expenses related to the purchase or sale of an amount of any currency, or the patriation or repatriation of
any security or other asset, related to the execution of portfolio transactions or any creation or redemption transactions);
(ii) legal fees or expenses in connection with any arbitration, litigation or pending or threatened arbitration
or litigation, including any settlements in connection therewith; (iii) compensation and expenses
of the Independent Trustees; (iv) compensation and expenses of counsel to the Independent Trustees, (v)
compensation and expenses of the Trust’s chief compliance officer and his or her staff; (vi) extraordinary expenses (in each case as determined by a majority of the Independent Trustees); (vii) distribution fees
and expenses paid by the Trust under any distribution plan adopted pursuant to Rule 12b-1 under the 1940 Act;
(viii) interest and taxes of any kind or nature (including, but not limited to, income, excise, transfer and
withholding taxes); (ix) fees and expense related to the provision of securities lending services; and (x) the fee
payable to ProShare Advisors. The internal expenses of pooled investment vehicles in which the Fund may
invest (e.g., acquired fund fees and expenses) are not expenses of such Fund, and are not paid by ProShare
Advisors. The payment or assumption by ProShare Advisors of any expenses of the Fund that ProShare Advisors
is not required by the investment advisory and management agreement to pay or assume shall not obligate
ProShare Advisors to pay or assume the same or any similar expense of such Fund, on any subsequent occasion.
The Advisory and Management Agreement may be terminated with respect to the Fund at
any time, by a vote of the Trustees, by a vote of a majority of the outstanding voting securities
(as defined in the 1940 Act) of that Fund, or by the Advisor, in each case upon sixty days’ prior written notice.
The Fund pays ProShare Advisors a fee at an annualized rate based on its average daily
net assets as set forth below for the investment advisory and management services ProShare Advisors
provides that Fund.
|
Name of Fund
|
Investment Advisory and
Management Fee
|
|
Nasdaq-100 High Income ETF
|
0.55%
|
Fees Paid under the Investment Advisory and Management Agreement
Because the New Fund was not operational at the end of the Trust’s last fiscal year, information on the New Fund is not included in this SAI.
Recoupment
Because the New Fund was not operational at the end of the Trust’s last fiscal year, information on the New Fund is not included in this SAI.
34
PORTFOLIO MANAGEMENT
PORTFOLIO MANAGER 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 for each portfolio
manager 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.
Portfolio Manager Ownership
Listed below for each portfolio manager is a dollar range of securities beneficially
owned in the Fund 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, 2023.
|
Name of Portfolio Manager
|
Dollar Range of
Equity Securities
in the Funds
Managed by the
Portfolio Manager
|
Aggregate Dollar Range
of Equity Securities in
All Registered
Investment Companies in
the ProShares Family
|
|
Michael Neches
|
None
|
$1-$10,000
|
|
Devin Sullivan
|
None
|
None
|
Other Accounts Managed by Portfolio Managers
Portfolio managers are generally responsible for multiple investment company accounts.
As described below, certain inherent conflicts of interest arise from the fact that a
portfolio manager has responsibility for multiple accounts, including conflicts relating to the allocation
of investment opportunities. Listed below for each portfolio manager are the number and type of accounts managed
or overseen by such portfolio manager as of May 31, 2023.
|
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
|
|
Michael Neches
|
158/$58,748,289,629
|
0/$0
|
1/$26,582,994
|
|
Devin Sullivan
|
84/$55,277,877,021
|
0/$0
|
1/$26,582,994
|
Conflicts of Interest
In the course of providing advisory services, ProShare Advisors 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. ProShare Advisors also may recommend the purchase or sale of securities that may also be recommended
by ProFund Advisors LLC, an affiliate of ProShare Advisors.
35
ProShare Advisors, its principals, officers and employees (and members of their families)
and affiliates may participate directly or indirectly as investors in ProShare Advisors’ clients, such as the Fund. Thus ProShare Advisors may recommend to clients the purchase or sale of securities
in which it, or its officers, employees or related persons have a financial interest. ProShare Advisors
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, ProShare Advisors, 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 ProShare
Advisors may buy or sell securities or other instruments that ProShare Advisors has recommended to, or purchased
for, its clients and may engage in transactions for their own accounts in a manner that is inconsistent with ProShare Advisors’ 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. ProShare Advisors 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 ProShare Advisors, (as defined under the 1940 Act and the Investment Advisers Act of 1940 (the “Advisers Act”)), may make security purchases subject to the terms of the ProShare Advisors Code of Ethics that are consistent with the requirements of Rule 17j-1 under
the 1940 Act and Rule 204A-1 under the Advisers Act.
ProShare Advisors 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, ProShare Advisors
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 ProShare Advisors.
Accordingly, should ProShare Advisors or any affiliated person come into possession of material nonpublic
or other confidential information with respect to any company, ProShare Advisors 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.
REGISTRATION AS A COMMODITY POOL OPERATOR
In connection with its management of the Fund, ProShare Advisors has registered as a commodity pool operator (a “CPO”) and the Fund as a commodity pool under the Commodity Exchange Act (the “CEA”). Accordingly, with respect to the Fund, ProShare Advisors is subject to registration and regulation as a CPO under the CEA, and must comply with various regulatory requirements under the CEA and the rules and regulations of the CFTC and the National Futures Association (“NFA”), including disclosure requirements and reporting and recordkeeping requirements. ProShare Advisors is also subject to periodic inspections and audits by the NFA. Compliance with these regulatory requirements could adversely affect the Fund’s total return. In this regard, any further amendment to the CEA or its related regulations that subject ProShare
Advisors or the Fund to additional regulation may have adverse impacts on the Fund’s operations and expenses.
36
OTHER SERVICE PROVIDERS
ADMINISTRATORS AND FUND ACCOUNTING AGENT
JPMorgan, One Beacon Street, 19th Floor, Boston, MA 02108, acts as Administrator to
the Fund pursuant to an administration agreement dated June 16, 2006, as amended from time
to time. The Administrator provides the Fund with all required general administrative services,
including, without limitation, office space, equipment, and personnel; clerical and general back office
services; bookkeeping and internal accounting; the determination of NAVs; and the preparation and filing of
all financial reports, and all other materials, except registration statements and proxy statements, required to
be filed or furnished by the Fund 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 Fund; the 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 Fund under the service agreement. The Fund may also reimburse the Administrator for such out-of-pocket
expenses as incurred by the Administrator in the performance of its duties.
Citi Fund Services Ohio, Inc. (“Citi”), located at 4400 Easton Commons, Suite 200, Columbus, OH 43219, an indirect wholly-owned subsidiary of Citibank N.A., provides regulatory administration
services to the Trust (altogether, the “Regulatory Administrative Services”). For its services, Citi is paid a set fee allocated among the Fund.
Fees Paid under the Administration Agreement and Regulatory Administration Agreement
Because the New Fund was not operational at the end of the Trust’s last fiscal year, information on the New Fund is not included in this SAI.
CUSTODIAN AND INDEX RECEIPT AGENT
JPMorgan Chase Bank, N.A. (“JPMorgan”) also acts as Custodian and Index Receipt Agent to the Fund. JPMorgan is located at 4 MetroTech Center, Brooklyn, NY 11245.
The Custodian is responsible for safeguarding the Fund’s cash and securities, receiving and delivering securities, collecting the Fund’s interest and dividends, and performing certain administrative duties, all as directed by authorized persons. The Custodian is also responsible for the appointment
and oversight of any sub-custodian banks and for providing reports regarding such sub-custodian banks
and clearing agencies.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP (“PwC”) serves as independent registered public accounting firm and provides audit services, tax return preparation and assistance, and audit-related
services in connection with certain SEC filings. PwC’s address is 100 East Pratt Street, Suite 2600, Baltimore, MD 21202.
LEGAL COUNSEL
Ropes & Gray LLP serves as counsel to the Fund. The firm’s address is Prudential Tower, 800 Boylston Street, Boston, MA 02199.
PRINCIPAL FINANCIAL OFFICER/TREASURER SERVICES
The Trust has entered into an agreement with ACA Group (“ACA”), pursuant to which ACA provides the Trust with the services of an individual to serve as the Trust’s Principal Financial Officer and Treasurer. Neither ACA nor the Treasurer have a role in determining the investment
policies of the Trust or Funds, or which securities are to be purchased or sold by the Trust or the Fund. The
Trust pays ACA an annual flat fee of $100,000 per year and an additional annual flat fee of $3,500 per
Fund, and will reimburse ACA for certain out-of-pocket expenses incurred by ACA in providing services to the
Trust. For the fiscal
37
years ended May 31, 2021, May 31, 2022, and May 31, 2023, the Trust paid $387,010,
$386,997, and $372,592, respectively, to ACA for services pursuant to its agreement. ACA is located
at Three Canal Plaza, Suite 100, Portland, ME 04101.
SECURITIES LENDING AGENT
JPMorgan serves as the securities lending agent to the Trust. For the fiscal year
ended May 31, 2023, the income, fees and compensation related to the securities lending activities
of the Fund is set forth below.
Because the New Fund was not operational at the end of the Trust’s last fiscal year, information on the New Fund is not included in this SAI.
The Fund does not pay any separate cash collateral management services fees, administrative
fees, fees for indemnification or other fees not reflected above for securities lending
activities. Earnings from cash collateral investments received by the securities lending agent are included in the
Revenue Split.
DISTRIBUTOR
SEI Investments Distribution Co. (“SEI”) serves as the distributor and principal underwriter in all fifty states and the District of Columbia. SEI is located at One Freedom Valley Drive,
Oaks, PA 19456. The Distributor has no role in determining the investment policies of the Trust or the
Fund, or which securities are to be purchased or sold by the Trust or the Fund. For the fiscal years ended May 31,
2021, May 31, 2022, and May 31, 2023, ProShare Advisors paid $843,974, $1,045,747.26, and $937,549.84,
respectively, to the Distributor as compensation for services.
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 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 and confirmations of acceptance furnished by it. The Distributor is
a broker-dealer registered under the 1934 Act and a member of the Financial Industry Regulatory Authority, Inc.
The Distributor has no role in determining the investment policies of the Fund or which securities are to
be purchased or sold by the Fund.
The Board has approved a Distribution and Service Plan under which the Fund may pay
financial intermediaries such as broker-dealers and investment advisers (“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 the 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.
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. All material amendments of the Distribution and
Service Plan must also be approved by the Board. The Distribution and Service Plan may be terminated at any
time by a majority of the Board or by a vote of a majority of the outstanding Shares, as defined under the 1940
Act, 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 Independent Trustees or by a vote of a majority
of the outstanding Shares, as defined under the 1940 Act, of the affected Fund on not less 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 Board has determined that, in its judgment,
there is a reasonable likelihood that the Distribution and Service Plan will benefit the Fund and holders
of Shares of the Fund. In
38
the Board’s quarterly review of the Distribution and Service Plan and Distribution and Service Agreements, the Trustees 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. There are currently no plans to impose distribution fees.
39
OTHER MATTERS
PAYMENTS TO THIRD PARTIES FROM THE ADVISOR
ProShare Advisors, from its own resources, including profits from advisory fees received
from the Fund, provided such fees are legitimate and not excessive, may make payments to broker-dealers
and other financial institutions for their services and expenses incurred in connection with
the distribution and promotion of the Fund’s Shares. In this regard, ProShare Advisors or an affiliate of ProShare Advisors, may directly or indirectly make cash payments to certain broker-dealers for participating in activities
that are designed to make registered representatives and other professionals more knowledgeable about exchange
traded products, including the Fund, or for other activities, such as participation in marketing activities
and presentations, educational training programs, conferences, the development of technology platforms
and reporting systems.
ProShare Advisors has separate arrangements to make payments, other than for the educational
programs and marketing activities described above, to Charles Schwab & Co., Inc. and
Raymond James Financial Services, Inc. (the “Firms”). Pursuant to the arrangements with the Firms, the Firms agreed to promote certain ProShares ETFs to each Firm’s customers and not to charge certain of their customers any commissions when those customers purchase or sell shares of certain ProShares ETFs.
These payments, which may be significant, are paid by ProShare Advisors from its own resources and not from
the assets of the Fund.
A discussion regarding the basis for the Board of Trustees approving the Investment
Advisory Agreement or Investment Advisory and Management Agreement, as applicable, of the Trust
will be (or is) available in the Trust’s Annual and/or Semi-Annual Report to shareholders.
BOOK ENTRY ONLY SYSTEM
The Depository Trust Company (“DTC”) acts as securities depositary for the Shares. The Shares of the 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 1934 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 NYSE and the Financial Industry Regulatory Authority,
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 DTC 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
40
registered holder 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 Exchange. 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.
CODE OF ETHICS
The Trust, ProShare Advisors and the Distributor each have adopted a consolidated
code of ethics (the “COE”), under Rule 17j-1 of the 1940 Act, which is reasonably designed to ensure that all acts, practices and courses of business engaged in by personnel of the Trust, ProShare Advisors and
the Distributor reflect high standards of conduct and comply with the requirements of the federal securities
laws. There can be no assurance that the COE will be effective in preventing deceptive, manipulative or
fraudulent activities. The COE permits personnel subject to it to invest in securities, including securities
that may be held or purchased by the Fund; however, such transactions are reported on a regular basis by ProShare Advisors’ personnel that are Access Persons. Access Persons, as the term is defined in the COE,
subject to the COE are
41
also required to report transactions in registered open-end investment companies advised
or sub-advised by ProShare Advisors. The COE is on file with the SEC and is available to the public.
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 Fund, pursuant to which the Board of Trustees has delegated
responsibility for voting such proxies to ProShare Advisors subject to the Board’s continuing oversight.
Policies and Procedures
The Advisor’s proxy voting policies and procedures (the “Guidelines”) are reasonably designed to maximize shareholder value and protect shareholder interests when voting proxies. The Advisor’s Brokerage Allocation and Proxy Voting Committee (the “Proxy Committee”) exercises and documents the Advisor’s responsibilities with regard to voting of client proxies. The Proxy Committee is composed
of employees of the Advisor. The Proxy Committee reviews and monitors the effectiveness of the Guidelines.
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. The Proxy Committee reviews and, as necessary, may amend periodically the Guidelines to
address new or revised proxy voting policies or procedures.
Information on how proxies were voted for portfolio securities for the 12-month (or
shorter) period ended June 30 is available without charge, upon request, by calling the Advisor at
888-776-3637 or on the Trust’s website at proshares.com, or on the SEC’s website at http://www.sec.gov. See Appendix C for a copy of the proxy voting policy and procedures.
DISCLOSURE OF PORTFOLIO HOLDINGS
The Trust has adopted a policy regarding the disclosure of information about the Fund’s portfolio holdings, which is reviewed on an annual basis. The Board of Trustees must approve
all material amendments to this policy. Disclosure of the complete holdings of the Fundis required to be made
quarterly within 60 days of the end of the Fund’s fiscal quarter in the Annual Report and Semi-Annual Report to Fund shareholders and in the monthly holdings report on Form N-PORT, with every third month made available
to the public by the SEC 60 days after the end of the Fund’s fiscal quarter. You can find SEC filings on the SEC’s website, www.sec.gov. In addition, the Fund’s portfolio holdings will be publicly disseminated each day the Fund is open for business via the Fund’s website at proshares.com.
The portfolio composition file (“PCF”) and the IOPV file, which contain equivalent portfolio holdings information, will be made available as frequently as daily to the Fund’s service providers to facilitate the provision of services to the Fund and to certain other entities (“Entities”) in connection with the dissemination of information necessary for transactions in Creation Units, as contemplated
by exemptive orders issued by the SEC and other legal and business requirements pursuant to which
the Fund creates and redeems 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 IOPV 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
42
portfolio management, including Authorized Participants, and (ii) to other personnel
of ProShare Advisors and the Fund’s 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 CCO or, 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 ProShare Advisors or the Distributor and such disclosure serves a legitimate business
purpose, and measures discussed in the previous paragraph regarding confidentiality are satisfied. The lag
time 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 CCO is responsible for ensuring that portfolio holdings
disclosures are made in accordance with this Policy.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the general supervision by the Board, ProShare Advisors is responsible
for decisions to buy and sell securities and derivatives for the Fund and the selection of brokers
and dealers to effect transactions. Purchases from dealers serving as market makers may include a dealer’s mark-up or reflect a dealer’s mark-down. 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, along with other fixed income securities transactions, are made on a net basis and
do not typically 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; and transactions involving baskets of equity securities
typically include brokerage commissions. As an alternative to directly purchasing securities, ProShare
Advisors may find efficiencies and cost savings by purchasing futures or using other derivative instruments
like total return swaps or forward contracts. ProShare Advisors may also choose to cross-trade securities
between clients to save costs where allowed under applicable law.
The policy for the Fund regarding purchases and sales of securities 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, the policy
is to pay commissions that are considered fair and reasonable without necessarily determining that the lowest
possible commissions are paid in all circumstances. ProShare Advisors 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 execution 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 execution services received from the broker. Such determinations are
necessarily subjective and imprecise, as in most cases an exact dollar value for those services is not ascertainable.
In addition to commission rates, when selecting a broker for a particular transaction, the ProShare
Advisors considers but is not limited to the following efficiency factors: the broker’s availability, willingness to commit capital, reputation and integrity, facilities reliability, access to research, execution capacity
and responsiveness.
ProShare Advisors may give consideration to placing portfolio transactions with those
brokers and dealers that also furnish research and other execution related 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; information about market conditions generally; equipment that facilitates
and improves trade execution; and appraisals or evaluations of portfolio securities.
For purchases and sales of derivatives (i.e., financial instruments whose value is derived from the value of an underlying asset, interest rate or index) ProShare Advisors evaluates
counterparties on the
43
following factors: reputation and financial strength; execution prices; commission
costs; ability to handle complex orders; ability to give prompt and full execution, including the ability to
handle difficult trades; accuracy of reports and confirmations provided; reliability, type and quality of research
provided; financing costs and other associated costs related to the transaction; and whether the total
cost or proceeds in each transaction is the most favorable under the circumstances.
Consistent with the Fund’s investment objective, ProShare Advisors may enter into guarantee close agreements with certain brokers. In all such cases, the agreement calls for the execution
price at least to match the closing price of the security. In some cases, depending upon the circumstances,
the broker may obtain a price that is better than the closing price and which under the agreement provides
additional benefits to clients. ProShare Advisors will generally distribute such benefits pro rata to applicable
client trades. In addition, ProShare Advisors, any of its affiliates or employees and the Fund have
a policy not to enter into any agreement or other understanding—whether written or oral—under which brokerage transactions or remuneration are directed to a broker to pay for distribution of the Fund’s shares.
BROKERAGE COMMISSIONS
The Fund may experience substantial differences in brokerage commissions from year
to year. High portfolio turnover and correspondingly greater brokerage commissions, to a great extent,
depend on the purchase, redemption, and exchange activity of the Fund’s investors, as well as the Fund’s investment objective and strategies.
Because the New Fund was not operational at the end of the Trust’s last fiscal year, information on the New Fund is not included in this SAI.
SECURITIES OF REGULAR BROKER-DEALERS
The Fund is required to identify any securities of its “regular brokers and dealers” (as such term is defined in the 1940 Act) which they may hold at the close of their most recent fiscal year. “Regular brokers or dealers” of the Trust are the ten brokers or dealers that, during the most recent fiscal year: (i) received the greatest dollar amounts of brokerage commissions from the Trust’s portfolio transactions; (ii) engaged as principal in the largest dollar amounts of portfolio transactions of the Trust; or
(iii) sold the largest dollar amounts of the Trust’s Shares.
Because the New Fund was not operational at the end of the Trust’s last fiscal year, information on the New Fund is not included in this SAI.
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 of Trustees 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 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. Shares have equal voting
rights, except that, in a 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 may be individually
redeemable. The Trust reserves the right to adjust the stock prices of Shares 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.
44
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 the Fund’s 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 the Fund’s 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 where
the Fund would not be able to meet the Trust’s obligations and this risk, thus, should be considered remote.
If the 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.
PURCHASE AND REDEMPTION OF SHARES
The Trust issues and redeems Shares only in aggregations of Creation Units. The Creation
Unit size and the value of a Creation Unit at inception for the Fund is set forth below.
|
Fund Name
|
Creation Unit
Size
|
Value of
Creation Unit at
inception
|
|
Nasdaq-100 High Income ETF
|
10,000
|
$400,0000
|
The Board of Trustees of the Trust reserves the right to declare a split or a consolidation
in the number of Shares outstanding of the Fund, and may make a corresponding change in the
number of Shares constituting a Creation Unit, in the event that the per Share 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 NAV next determined after receipt, on
any Business Day (as defined herein), of an irrevocable order in proper form.
A “Business Day” with respect to the Fund is any day on which the Exchange upon which it is listed 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. 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, defined below,
and the Transaction Fee, described below in “Transaction Fees”. 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 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.
45
As described below, at the discretion of ProShare Advisors, the Fund may, at times,
only accept in-kind purchase orders from Authorized Participants.
Portfolio Deposit
The consideration for purchase of a Creation Unit of the Fund may, at the discretion
of ProShare Advisors, consist of the in-kind deposit of a designated portfolio of securities (“Deposit Securities”) constituting a representation of the index for the Fund, 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
(or in the case of redemptions, the total aggregate market value of the Fund Securities as defined below)
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. ProShare Advisors may restrict purchases of Creation Units to be on an
in-kind basis at any time and without prior notice, in all cases at ProShare Advisors’ discretion.
The Index Receipt Agent makes available through the 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 applicable Fund.
Such Portfolio Deposit is applicable, subject to any adjustments as described below, in order to effect purchases
of Creation Units of Shares of such Fund until the next-announced Portfolio Deposit composition is made
available.
The identity and number of shares of the Deposit Securities required for a Portfolio
Deposit for the 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 applicable Fund.
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, as applicable. 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 Fund, as applicable, or resulting from stock splits and other corporate actions. 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. A Transaction Fee may be assessed on any “cash in lieu” amounts, as further described below under “Transaction Fees.”
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 applicable Fund, 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 the sole discretion of the Trust or ProShare Advisors.
In these circumstances, the initial deposit may have a greater value than the NAV of the Shares on the date
the order is placed in proper form because, 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) up to 115% of the market value
of the undelivered Deposit Securities (the “Additional Cash Deposit”). Additional amounts of cash may 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 up to 115% of the
daily mark-to-market value of the missing Deposit Securities. 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 or any sub-custodian or purchased by the Trust and deposited into the Trust.
In addition, a Transaction Fee, as described below, will be charged in all cases. The delivery of
Shares so purchased will
46
occur no later than the Settlement Date, which is typically the second Business Day
following the day on which the purchase order is deemed received by the Distributor.
Orders must be transmitted by an Authorized Participant by telephone, online portal
or other transmission method acceptable to the Distributor pursuant to procedures set forth
in the Authorized Participant Agreement, as described below, which procedures may change from time to
time without notice at the discretion of the Trust or ProShare Advisors. Economic or market disruptions or
changes, or telephone or other communication failure, may impede the ability to reach the Distributor or an
Authorized Participant.
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
Creation Units of the Fund may, at the discretion of ProShare Advisors, be sold for cash (the “Cash Purchase Amount”) when cash purchases of Creation Units are available or specified for the Fund, they will be effective in essentially the same manner as in kind purchases. Creation Units are
sold at their NAV plus a Transaction Fee, as described below. ProShare Advisors may also restrict purchases
of Creation Units to be on a cash-only basis at any time and without prior notice, in all cases at ProShare Advisors’ discretion.
Purchase and Redemption Cut-Off Times
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. In either case, for a purchase or redemption order involving a Creation Unit to be effectuated at the Fund’s NAV on a particular day, it must be received in proper form by the following cut-off times (which may be earlier if the relevant Exchange or any
relevant bond market closes earlier than normal, such as the day before a holiday). In all cases purchase/redeem
procedures are at the discretion of ProShare Advisors and may be changed without notice.
|
Fund
|
Typical Creation Cut-Off Time (Eastern Time)
|
|
Nasdaq-100 High Income ETF
|
2:00 p.m.
|
Purchases Through 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 Fund’s transfer agent (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.
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. Purchases
(and redemptions) of Creation Units of the Fund 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
47
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, each as applicable and at the discretion of ProShare Advisors, or
of the Cash Purchase Amount together with the applicable Transaction Fee.
Rejection of Purchase Orders
The Trust reserves the right to reject a purchase order transmitted to it by the Distributor
including but not limited to the following: (a) the order is not in proper form; (b) the purchaser
or group of purchasers, upon obtaining the Shares ordered, would own 80% or more of the currently outstanding
Shares of the Fund; (c) the acceptance of the purchase transaction order would, in the opinion of counsel,
be unlawful; or (d) in the event that circumstances outside the control of the Trust, the Distributor and
ProShare Advisors make it impractical to process purchase orders. Examples of such circumstances include acts
of God; public service or utility problems resulting in telephone, telecopy and computer failures; fires, floods
or extreme weather conditions; market conditions or activities causing trading halts; systems failures
involving computer or other information systems affecting the Trust, ProShare Advisors, the Distributor, DTC,
NSCC, the Custodian or sub-custodian or any other participant in the creation process; and similar extraordinary
events.
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 NAV 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.
As described below, at the discretion of ProShare Advisors, the Fund may, at times,
only accept in-kind redemption orders from Authorized Participants.
Redemption in Fund Securities
The Fund may provide redemptions in portfolio securities or cash at ProShare Advisors’ discretion. With respect to the Fund, the Index Receipt Agent 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, at times, may not be identical to Deposit Securities which are applicable to a purchase of Creation
Units. The Fund may also, in its sole discretion, upon request of a shareholder, provide such redeeming shareholder
a portfolio of securities which differs from the exact composition of the Fund Securities but does not differ
in NAV.
The redemption proceeds for a Creation Unit generally consist of Fund Securities,
as announced by the Index Receipt Agent through the NSCC on any Business Day, plus the Balancing Amount.
The redemption Transaction Fee described below is deducted from such redemption proceeds.
48
Redemption in Cash
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 Fund may, in its sole discretion, permit. In either case,
the investor will receive a cash payment equal to the NAV of its Shares based on the NAV 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, to offset the Fund’s brokerage and other transaction costs associated with the disposition of Fund Securities).
For certain redemptions, the proceeds will consist solely of cash in an amount equal
to the NAV of the Shares being redeemed, as next determined after a receipt of a request in proper
form, less the redemption Transaction Fee described below (the “Cash Redemption Amount”).
Suspension or Postponement of Right of Redemption
The Fund may, in its discretion, suspend the right of creation or redemption or may
postpone the redemption or purchase settlement date, (1) for any period during which the Exchange
is closed (other than customary weekend and holiday closings); (2) for any period during which trading on
the 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 securities or determination of its NAV is not reasonably practicable; or (4) in such other circumstance as is permitted by the SEC.
Placement of Redemption Orders Using the Clearing Process
Orders to redeem Creation Units 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 for the Fund must be received by the cut-off times set forth in “Purchase and Redemption Cut-Off Times” above.
All other procedures set forth in the Authorized Participant Agreement must be followed
in order to receive the next determined NAV. The requisite Fund Securities and the Balancing Amount
(minus a redemption Transaction Fee or additional charges for requested cash redemptions) or
the Cash Redemption Amount, as applicable and at the discretion of ProShare Advisors, will be transferred
by the second (2nd) NSCC Business Day following the date on which such request for redemption is deemed
received.
Placement of Redemption Orders Outside the Clearing Process
Orders to redeem Creation Units outside the Clearing Process, including all cash-only
redemptions, must be delivered through a DTC Participant that has executed the Authorized Participant
Agreement. A DTC Participant who wishes to place an order for redemption of Creation Units to be effected
outside the Clearing Process need not be a “participating party” under the Authorized Participant Agreement, but such orders must state that the DTC Participant is not using the Clearing Process and that the redemption
of Creation Units will instead be effected through a transfer of Shares directly through DTC. A redemption
order for the Fund must be received by the cut-off times set forth in “Purchase and Redemption Cut-Off Times” above. 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 second Business Day (T+2)
following such transmittal date. All other procedures set forth in the Authorized Participant Agreement
must be properly followed in order to receive the next determined NAV.
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
and the Balancing Amount (minus a redemption Transaction Fee or additional charges for requested cash redemptions),
which are expected to be delivered within two Business Days, and the Cash Redemption Amount
(by the second Business Day (T+2) following the transmittal date on which such redemption order is
deemed received by the Transfer Agent).
49
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.
Cancellations
In the event an order is cancelled, the Authorized Participant will be responsible
for reimbursing the Fund for all costs associated with cancelling the order, including costs for repositioning
the portfolio, provided the Authorized Participant shall not be responsible for such costs if the order was
cancelled for reasons outside the Authorized Participant’s control or the Authorized Participant was not otherwise responsible or at fault for such cancellation. Upon written notice to the Distributor, such cancelled
order may be resubmitted the following Business Day, with a newly constituted Portfolio Deposit or Fund Securities
to reflect the next calculated NAV.
Transaction Fees
Transaction fees payable to the Trust are imposed to compensate the Trust for the
transfer and other transaction costs of the Fund associated with the issuance and redemption of Creation
Units of Shares. 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 may be applicable to a creation or redemption
transaction. Purchasers of Creation Units of the Funds for cash may also be required to pay an
additional charge to compensate the relevant Fund for brokerage, market impact or other expenses. 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. The maximum Transaction Fee on
purchases and redemptions will be 2.00% of the NAV of any Creation Unit. In all cases, transaction
fees will be limited in accordance with the applicable requirements of SEC Rules and Regulations. The Transaction
Fees charged to the Fund are presented in the Authorized Participant Handbook.
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. 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.
These fees may, in certain circumstances, be paid by ProShare Advisors or otherwise
waived.
Continuous Offering
The method by which Creation Units are created and traded may raise certain issues
under applicable securities laws. Because new Creation Units are issued and sold by the
Trust on an ongoing basis, at any point a “distribution,” as such term is used in the 1933 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 1933 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 1933 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 a person to
be deemed 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 1933 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
50
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 an 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 1933 Act, would be unable to take advantage of the prospectus delivery exemption provided by Section 4(3) of the 1933
Act. Firms that incur a prospectus-delivery obligation with respect to Shares are reminded that under Rule
153 under the 1933 Act, a prospectus delivery obligation under Section 5(b)(2) of the 1933 Act owed to a national
securities exchange member in connection with a sale on the national securities exchange is satisfied if the Fund’s prospectus is made available upon request at the national securities exchange on which the Shares
of such Fund trade. 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 other transactions.
DETERMINATION OF NET ASSET VALUE
The NAV per Share for the 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 and administration fees,
are accrued daily and taken into account for purposes of determining NAV. The NAV calculation time for the
Fund is listed in the chart below (which may be earlier if the relevant Exchange or any relevant bond market
closes early):
|
Fund(s)
|
Typical NAV Calculation Time
Eastern Time
|
|
Nasdaq-100 High Income ETF
|
4.00 p.m.
|
Certain portfolio investments may not be traded on days the Fund is open for business.
Securities (including short-term securities) and other assets are generally valued
at their market value using information provided by a pricing service or market quotations. Short-term securities
are valued on the basis of amortized cost or based on market prices. Futures contracts and options on
securities, indexes and futures contracts are generally valued at their last sale price prior to the time
at which the NAV per share of a class of shares of the Fund is determined. Alternatively, fair valuation procedures
as described below may be applied if deemed more appropriate. Routine valuation of certain other derivatives
is performed using procedures approved by the Board of Trustees.
When ProShare Advisors determines that the price of a security is not readily available
or deems the price unreliable, it may, in good faith, establish a fair value for that security.
The Board has designated ProShares Advisors as “valuation designee” to perform fair value determinations for all of the Funds’ investments for which market quotations are not readily available (or are deemed unreliable).
The Board shall oversee ProShare Advisors’ fair value determinations and its performance as valuation designee. The use of a fair valuation method may be appropriate if, for example, market quotations do not
accurately reflect fair value for an investment, an investment’s value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (for example,
a foreign exchange or market), a trading halt closes an exchange or market early, or other events result
in an exchange or market delaying its normal close.
51
TAXATION
OVERVIEW
Set forth below is a general discussion of certain U.S. federal income tax issues
concerning the Fund and the purchase, ownership, and disposition of the 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, life insurance companies, banks and other financial
institutions, and IRAs and other retirement plans). 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 the Fund’s Shares, as well as the tax consequences arising under the laws of any state, foreign country, or other
taxing jurisdiction.
TAXATION OF THE FUND
The Fund intends to elect and intends to qualify and to be eligible each year to be treated as 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. To qualify for treatment as a
RIC, the 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 derived from interests in “qualified publicly traded partnerships” as described below (the income described in this subparagraph (a), “Qualifying Income”);
(b) diversify its holdings so that, at the end of each quarter of the Fund’s taxable year (or by the end of the 30-day period following the close of such quarter), (i) at least 50% of the
fair market value of the Fund’s assets is represented by cash and cash items (including receivables), U.S. government securities, the securities of other RICs and other securities, with such other securities limited,
in respect of any one issuer, to a value not greater than 5% of the value of the Fund’s total assets and to an amount not greater than 10% of the outstanding voting securities of such issuer, and (ii) not greater than 25% of
the value of its total assets is invested, including through corporations in which the Fund owns a 20% or more voting
stock interest, in (x) the securities (other than U.S. government securities and the securities of other
RICs) of any one issuer or of two or more issuers that the Fund controls and that are engaged in the same, similar
or related trades or businesses, or (y) the securities of one or more qualified publicly traded partnerships
(as defined below); and
(c) distribute with respect to each taxable year at least 90% of the sum of its 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.
In general, for purposes of the 90% gross income requirement described in subparagraph
(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 directly by the RIC. However, 100% of the net income of a RIC derived from an interest in a “qualified publicly traded partnership” (a partnership (x) the interests in which are traded on an established securities market or readily tradable on a secondary market or the substantial equivalent thereof, and (y) that
derives less than 90% of its income from the Qualifying Income described in clause (i) of subparagraph (a) above)
will be treated as Qualifying Income. In general, such entities will be treated as partnerships for federal
income tax purposes because they meet the passive income requirement under Code Section 7704(c)(2). In
addition, although in general the passive loss rules of the Code do not apply to RICs, such rules do apply
to a RIC with respect to
52
items attributable to an interest in a qualified publicly traded partnership. Moreover,
the amounts derived from investments in foreign currency will be treated as Qualifying Income for purposes
of subparagraph (a) above. There is a remote possibility that the Internal Revenue Service (“IRS”) could issue guidance contrary to such treatment with respect to foreign currency gains that are not directly related to a RIC’s principal business of investing in stocks or securities (or options or futures with respect to stocks or
securities), which could affect the Fund’s ability to meet the 90% gross income test and adversely affect the manner in which that Fund is managed.
For purposes of the diversification test described in subparagraph (b) above, the term “outstanding voting securities of such issuer” will include the equity securities of a qualified publicly traded partnership. Also, for purposes of the diversification test in (b) above, the identification of
the issuer (or, in some cases, issuers) of a particular Fund investment can depend on the terms and conditions of
that investment. In some cases, identification of the issuer (or issuers) is uncertain under current law, and
an adverse determination or future guidance by the IRS with respect to issuer identification for a particular
type of investment may adversely affect the Fund’s ability to meet the diversification test in (b) above.
If, in any taxable year, the Fund were to fail to meet the 90% gross income, diversification
or distribution test described above, the Fund could in some cases cure such failure,
including by paying the Fund-level tax, paying interest, making additional distributions, or disposing of
certain assets. If the Fund were ineligible to or did not cure such a failure for any taxable year, or otherwise
failed to qualify as a RIC accorded special tax treatment under the Code, the Fund would be subject to tax on
its taxable income at corporate rates, and all distributions from earnings and profits, including distributions
of net tax-exempt income and net long-term capital gain (if any), may be taxable to shareholders as
dividend income. In such a case, distributions from the Fund would not be deductible by the Fund in computing
its taxable income. In addition, in order to requalify for taxation as a RIC, the Fund may be required to
recognize unrealized gains, pay substantial taxes and interest, and make certain distributions.
As noted above, if the Fund qualifies as a RIC that is accorded special tax treatment,
the Fund will not be subject to federal income tax on income that is distributed in a timely manner
to its shareholders in the form of dividends (including Capital Gain Dividends, as defined below).
The Fund expects to distribute at least annually to its shareholders all or substantially
all of its investment company taxable income (computed without regard to the dividends-paid deduction),
its net tax-exempt income (if any) and its net capital gain (that is, the excess of its net
long-term capital gains over its net short-term capital losses, in each case determined with reference to any loss
carryforwards). Investment company taxable income that is retained by the Fund will be subject to tax at regular
corporate rates. If the Fund retains any net capital gain, it will be subject to tax at regular corporate
rates on the amount retained, but it may designate the retained amount as undistributed capital gains in a notice
mailed within 60 days of the close of the Fund’s taxable year to its shareholders who, in turn, (i) will be required to include in income for federal income tax purposes, as long-term capital gain, their shares of such undistributed
amount, and (ii) will be entitled to credit their proportionate shares of the tax paid by the Fund
on such undistributed amount against their federal income tax liabilities, if any, and to claim refunds on a properly
filed U.S. tax return to the extent the credit exceeds such liabilities. If the Fund makes this designation,
for federal income tax purposes, the tax basis of shares owned by a shareholder of the Fund will be increased
by an amount equal to the difference between the amount of undistributed capital gains included in the shareholder’s gross income under clause (i) of the preceding sentence and the tax deemed paid by the shareholder
under clause (ii) of the preceding sentence. The Fund is not required to, and there can be no assurance that
the Fund will, make this designation if it retains all or a portion of its net capital gain in a taxable year.
In determining its net capital gain, including in connection with determining the
amount available to support a Capital Gain Dividend (as defined below), its taxable income and its earnings
and profits, a RIC generally may elect to treat part or all of any post-October capital loss (defined
as any net capital loss attributable to the portion of the taxable year after October 31 or, if there is no
such loss, the net long-term capital loss or net short-term capital loss attributable to such portion of the taxable
year) or late-year ordinary loss (generally, the sum of (i) net ordinary loss, if any, from the sale, exchange
or other taxable disposition of
53
property, attributable to the portion, if any, of the taxable year after October 31,
and its (ii) other net ordinary loss, if any, attributable to the portion, if any, of the taxable year after December
31) as if incurred in the succeeding taxable year.
Amounts not distributed on a timely basis in accordance with a prescribed formula
are subject to a nondeductible 4% excise tax at the Fund level. To avoid the tax, the Fund must distribute
during each calendar year an amount generally 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 98.2% 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 (or November 30 or December 31 of that year if the Fund is permitted
to elect and so elects), and (3) all such ordinary income and capital gains that were not distributed
in previous years. For purposes of the required excise tax distribution, ordinary gains and losses from the
sale, exchange, or other taxable disposition of property that would be properly taken into account after October
31 (or November 30 or December 31 of that year if the Fund is permitted to elect and so elects) are generally
treated as arising on January 1 of the following calendar year. Also, for these purposes, the Fund will
be treated as having distributed any amount on which it is subject to corporate income tax for the taxable
year ending within the calendar year. The Fund intends generally to make distributions sufficient to avoid
imposition of the excise tax, although the Fund reserves the right to pay an excise tax rather than make an
additional distribution when circumstances warrant (for example, the payment of the excise tax amount is deemed
to be de minimis). In addition, the Fund may receive delayed or corrected tax reporting statements from
its investments that cause the Fund to accrue additional income and gains after the Fund has already made its
excise tax distributions for the year. In such a situation, the Fund may incur an excess tax liability resulting
from such delayed receipt of such tax information statements.
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 is 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.
Capital losses in excess of capital gains (“net capital losses”) are not permitted to be deducted against the Fund’s net investment income. Instead, potentially subject to certain limitations, the Fund may carry net capital losses forward from any taxable year to subsequent taxable years
to offset capital gains, if any, realized during such subsequent taxable years. Distributions from capital gains
are generally made after applying any available capital loss carryforwards. Capital loss carryforwards are
reduced to the extent they offset current-year net realized capital gains, whether the Fund retains or distributes
such gains. Any such capital loss carryforwards will generally retain their character as short-term or
long-term and will be applied first against gains of the same character before offsetting gains of a different character
(e.g., net capital losses resulting from previously realized net long-term losses will first offset any long-term
capital gain, with any remaining amounts available to offset any net short-term capital gain).
TAXATION OF FUND DISTRIBUTIONS
Distributions of investment income are generally taxable to shareholders as ordinary
income. Taxes on distributions of capital gains are determined by how long the Fund owned the investments
that generated them, rather than how long a shareholder has owned his or her shares. In general,
the Fund will recognize long-term capital gain or loss on investments it has owned for more than one year,
and short-term capital gain or loss on investments it has owned for one year or less. Tax rules can alter the Fund’s holding period in investments and thereby affect the tax treatment of gain or loss on such investments.
Distributions of net capital gain—the excess of net long-term capital gain over net short-term capital losses, in each case determined with reference to any loss carryforwards—that are properly reported by the Fund as capital gain dividends (“Capital Gain Dividends”) will be taxable to shareholders as long-term capital gains includible in
54
net capital gain and taxable to individuals at reduced rates. Distributions of net
short-term capital gain (as reduced by any net long-term capital loss for the taxable year) will be taxable to
shareholders as ordinary income.
The Code generally imposes a 3.8% Medicare contribution tax on the net investment
income of certain individuals, trusts, and estates to the extent their income exceeds certain
threshold amounts. For these purposes, “net investment income” generally includes, among other things, (i) distributions paid by the Fund of ordinary dividends and Capital Gain Dividends as described above, and (ii) any
net gain from the sale, redemption or exchange of Fund shares. Shareholders are advised to consult their tax
advisors regarding the possible implications of this additional tax on their investment in the Fund.
Distributions are taxable whether shareholders receive them in cash or reinvest them
in additional shares. Distributions are also taxable to shareholders even if they are paid from
income or gains earned by the Fund before a shareholder’s investment (and thus were included in the price the shareholder paid for the Fund shares). Investors should be careful to consider the tax implications of buying shares
of the Fund just prior to a distribution. The price of shares purchased at this time will include the amount
of the forthcoming distribution, but the distribution will generally be taxable.
A dividend or Capital Gain Dividend with respect to shares of the Fund held by a tax-deferred
or qualified plan, such as an IRA, retirement plan, or corporate pension or profit sharing
plan, generally 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.
Shareholders should consult their tax advisors to determine the suitability of shares of the Fund as an
investment through such plans and the precise effect of an investment on their particular situation.
If the Fund’s distributions exceed its current and accumulated earnings and profits, all or a portion of the distributions made in the same taxable year may be recharacterized as a return
of capital to shareholders to the extent of the shareholder’s cost basis in the Fund. A return of capital distribution will generally not be taxable, but will reduce each shareholder’s cost basis in the Fund and result in a higher reported capital gain or lower reported capital loss when those shares on which the distribution was received
are sold. Distributions in excess of a shareholder’s cost basis will be treated as gain from the sale or exchange of property the tax consequences of which are described under Disposition of Shares.
Shareholders will be notified annually as to the U.S. federal tax status of Fund distributions,
and shareholders receiving distributions in the form of newly issued shares will receive
a report as to the value of the shares received.
QUALIFIED DIVIDEND INCOME
“Qualified dividend income” received by an individual is taxed at the rates applicable to net capital gain. In order for some portion of the dividends received by the Fund shareholder
to be qualified dividend income, the Fund must meet holding period and other requirements with respect to some
portion of the dividend-paying stocks in its portfolio and the shareholder must meet holding period
and other requirements with respect to the Fund’s Shares. A dividend will not be treated as qualified dividend income (at either the Fund or shareholder level) (1) if the dividend is received with respect to any share
of stock held for fewer than 61 days during the 121-day period beginning on the date which is 60 days before
the date on which such share becomes ex-dividend with respect to such dividend (or, in the case of certain
preferred stock, 91 days during the 181-day period beginning 90 days before such date), (2) to the extent that
the recipient is under an obligation (whether pursuant to a short sale or otherwise) to make related payments
with respect to positions in substantially similar or related property, (3) if the recipient elects to have
the dividend income treated as investment income for purposes of the limitation on deductibility of investment interest,
or (4) if the dividend is received from a foreign corporation that is (a) not eligible for the benefits of
a comprehensive income tax treaty with the United States (with the exception of dividends paid on stock of such
a foreign corporation that is readily tradable on an established securities market in the United States) or (b)
treated as a passive foreign investment company. In general, distributions of investment income reported by the
Fund as derived from
55
qualified dividend income will be treated as qualified dividend income in the hands
of a shareholder taxed as an individual, provided the shareholder meets the holding period and other requirements
described above with respect to the Fund’s Shares.
QUALIFIED REIT DIVIDENDS
Distributions by the Fund to its shareholders that the Fund properly reports as “section 199A dividends,” as defined and subject to certain conditions described below, are treated as qualified REIT dividends in the hands of non-corporate shareholders. Non-corporate shareholders are
permitted a federal income tax deduction equal to 20% of qualified REIT dividends received by them, subject
to certain limitations. Very generally, a “section 199A dividend” is any dividend or portion thereof that is attributable to certain dividends received by a RIC from REITs, to the extent such dividends are properly
reported as such by the RIC in a written notice to its shareholders. A section 199A dividend is treated
as a qualified REIT dividend only if the shareholder receiving such dividend holds the dividend-paying
regulated investment company shares for at least 46 days of the 91-day period beginning 45 days before
the shares become ex-dividend, and is not under an obligation to make related payments with respect
to a position in substantially similar or related property. The Fund is permitted to report such part
of its dividends as section 199A dividends as are eligible, but is not required to do so. Distributions of income
or gain attributable to derivatives with respect to REIT securities, including swaps, will not constitute
qualified REIT dividends. Unless later extended or made permanent, this 20% deduction will no longer be available
for taxable years beginning after December 31, 2025.
Subject to any future regulatory guidance to the contrary, any distribution of income
attributable to qualified publicly traded partnership income from the Fund’s investment in an MLP will ostensibly not qualify for the deduction that would be available to a non-corporate shareholder were the
shareholder to own such MLP directly. Furthermore, distributions of income or gain attributable to swaps on
MLP securities will not constitute qualified publicly traded partnership income and will not be eligible for
such deduction.
Dividends-Received Deduction
In general, dividends of net investment income received by corporate shareholders
of the Fund may qualify for the dividends-received deduction generally available to corporations to
the extent of the amount of eligible dividends received by the Fund from domestic corporations for the taxable
year. A dividend received by the Fund will not be treated as a dividend eligible for the dividends-received
deduction (1) if it has been received with respect to any share of stock that the Fund has held for less than 46
days (91 days in the case of certain preferred stock) during the 91-day period beginning on the date which is
45 days before the date on which such share becomes ex-dividend with respect to such dividend (during the 181-day
period beginning 90 days before such date in the case of certain preferred stock) or (2) to the extent
that the Fund is under an obligation (pursuant to a short sale or otherwise) to make related payments with respect
to positions in substantially similar or related property. Moreover, the dividends-received deduction
may otherwise be disallowed or reduced (1) if the corporate shareholder fails to satisfy the foregoing
requirements with respect to its shares of the Fund or (2) by application of various provisions of the Code
(for instance, the dividends-received deduction is reduced in the case of a dividend received on debt-financed
portfolio stock (generally, stock acquired with borrowed funds)).
Repurchase Agreements
Any distribution of income that is attributable to (i) income received by the Fund
in lieu of dividends with respect to securities on loan pursuant to a securities lending transaction
or (ii) dividend income received by the Fund on securities it temporarily purchased from a counterparty pursuant
to a repurchase agreement that is treated for U.S. federal income tax purposes as a loan by the Fund,
will not constitute qualified dividend income to individual shareholders and will not be eligible for
the dividends-received deduction for corporate shareholders.
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DISPOSITION OF SHARES
Upon a sale, exchange or other disposition of shares of the 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 or short-term capital gain or loss depending upon the shareholder’s holding period for the shares. Any loss realized on a sale, exchange or other disposition 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 the Fund’s Shares held by the shareholder for six months or less will be treated for tax 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.
MARKET DISCOUNT
If the Fund purchases in the secondary market a debt security that has a fixed maturity
date of more than one year from its date of issuance at a price lower than the stated redemption
price of such debt security (or, in the case of a debt security issued with “original issue discount” (described below), a price below the debt security’s “revised issue price”), 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 the 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 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. Original issue discount that accrues
on a debt security in a given year generally is treated for federal income tax purposes as interest income
that is included in the Fund’s income and, therefore, subject to the distribution requirements applicable to RICs, even though the Fund may not receive a corresponding amount of cash until a partial or full repayment
or disposition of the debt security.
Some debt securities may be purchased by the Fund 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).
If the Fund holds the foregoing kinds of securities, it may be required to pay out
as an income distribution each year an amount which is greater than the total amount of cash interest
the Fund actually received. Such distributions may be made from the cash assets of the Fund or, if necessary,
by disposition of portfolio securities including at a time when it may not be advantageous to do so.
These dispositions may cause the Fund to realize higher amounts of short-term capital gains (generally taxed
to shareholders at ordinary income tax rates) and, in the event the Fund realizes net capital gains from
such transactions, its shareholders may receive a larger Capital Gain Dividend than if the Fund had not held
such securities.
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OPTIONS, FUTURES, FORWARD CONTRACTS AND SWAPS
The tax treatment of certain contracts (including regulated futures contracts and
non-equity options) entered into by the Fund will be governed by Section 1256 of the Code (“Section 1256 contracts”). Gains (or losses) on these contracts generally are considered to be 60% long-term and 40% short-term
capital gains or losses (“60/40”), although foreign currency gains or losses arising from certain Section 1256 contracts may be treated as ordinary in character (see “Foreign Currency Transactions” below). Also, Section 1256 contracts held by the Fund at the end of each taxable year (and for purposes of the 4% excise
tax, 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 and the resulting gains or losses are treated as ordinary
or 60/40 gains or losses, as appropriate.
The tax treatment of a payment made or received on a swap to which the Fund is a party,
and in particular whether such payment is, in whole or in part, capital or ordinary in character,
will vary depending upon the terms of the particular swap contract.
Transactions in options, futures, forward contracts, swaps and certain positions undertaken
by the Fund may result in “straddles” for federal income tax purposes. The straddle rules may affect the character of gains (or losses) realized by the Fund, and losses 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 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 the 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 Fund is not entirely clear. The straddle
rules may increase the amount of short-term capital gain realized by the 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 the Fund that did not engage in such transactions.
More generally, investments by the Fund in options, futures, forward contracts, swaps
and other derivative financial instruments are subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by the Fund are treated as ordinary or
capital, accelerate the recognition of income or gains to the Fund and defer or possibly prevent the recognition
or use of certain losses by the Fund. The rules could, in turn, affect the amount, timing or character
of the income distributed to shareholders by the Fund. In addition, because the tax rules applicable to such
instruments may be uncertain under current law, an adverse determination or future IRS guidance with
respect to these rules (which determination or guidance could be retroactive) may affect whether the Fund
has made sufficient distributions and otherwise satisfied the relevant requirements to maintain its qualification
as a RIC and avoid the Fund-level tax.
CONSTRUCTIVE SALES
Under certain circumstances, the Fund may recognize gain from a constructive sale
of an “appreciated financial position” it holds if it enters into a short sale, forward contract or other transaction that substantially reduces the risk of loss with respect to the appreciated position. In
that event, the Fund would be treated as if it had sold and immediately repurchased the property and would be taxed
on any gain (but would not recognize any loss) from the constructive sale. The character of gain from a constructive
sale would depend upon the Fund’s holding period in the property. Appropriate adjustments would be made in the amount of any gain or loss subsequently realized on the position to reflect the gain recognized
on the constructive sale. 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
58
of the Code. Constructive sale treatment does not generally apply to a transaction
if such transaction is closed on or before the end of the 30th day after the close of the Fund’s taxable year and the Fund holds the appreciated financial position throughout the 60-day period beginning with the day
such transaction closed. The term “appreciated financial position” excludes any position that is “marked-to-market.”
INVESTMENTS IN EXCHANGE-TRADED FUNDS
The Fund may invest in exchange-traded funds, including exchange-traded funds registered
under the 1940 Act (“Underlying ETFs”). Some such Underlying ETFs will be treated as regulated investment companies for federal income tax purposes (each such Underlying ETF, an “Underlying RIC”). In such cases, the Fund’s income and gains will normally consist, in whole or part, of dividends and other distributions from the Underlying RICs and gains and losses on the disposition of shares of the Underlying
RICs. The amount of income and capital gains realized by the Fund and in turn the Fund’s shareholders in respect of the Fund’s investments in Underlying RICs may be greater than such amounts would have been had
the Fund invested directly in the investments held by the Underlying RICs, rather than in the shares
of the Underlying RICs. Similarly, the character of such income and gains (e.g., long-term capital gain, eligibility for the dividends-received deduction, etc.) will not necessarily be the same as it would have been had the Fund
invested directly in the investments held by the Underlying RICs.
To the extent that an Underlying RIC realizes net losses on its investments for a
given taxable year, the Fund that invests in the Underlying RIC will not be able to benefit from those
losses until and only to the extent that (i) the Underlying RIC realizes gains that it can reduce by those losses,
or (ii) the Fund recognizes its share of those losses when it disposes of shares in the Underlying RIC in a transaction
qualifying for sale or exchange treatment. Moreover, when the Fund makes such a disposition, any loss
it recognizes will be a capital loss. The Fund will not be able to offset any capital losses from its dispositions
of shares of the Underlying RIC against its ordinary income (including distributions deriving from
net short-term capital gains realized by the Underlying RIC). In addition, a portion of such capital loss may be
long-term, which will first offset the Fund’s capital gains, increasing the likelihood that the Fund’s short-term capital gains will be distributed to shareholders as ordinary income.
In the event that the Fund invests in an Underlying RIC that is not publicly offered
within the meaning of the Code, the Fund’s redemption of shares of such Underlying RIC may cause the Fund to be treated as receiving a dividend taxable as ordinary income on the full amount of the
redemption instead of being treated as realizing capital gain (or loss) on the redemption of the shares
of the Underlying RIC.
The Fund may invest in one or more exchange-traded funds that invest in commodities
or options, futures, or forwards with respect to commodities, and are treated as QPTPs for federal
income tax purposes. As noted above, the Fund is limited to investing no more than 25% of the value of
its total assets in the securities of one or more QPTPs. Although income from QPTPs is generally qualifying
income, if an ETF intending to qualify as a QPTP fails to so qualify and is treated as a partnership
for U.S. federal income tax purposes, a portion of its income may not be qualifying income. It is also possible
that an ETF intending to qualify as a QPTP will be treated as a corporation for federal income tax purposes.
In such a case, it will be potentially liable for an entity-level corporate income tax, which will adversely
affect the return thereon. There can be no guarantee that any ETF will be successful in qualifying as a QPTP.
In addition, there is little regulatory guidance concerning the application of the rules governing qualification
as a QPTP, and it is possible that future guidance may adversely affect the qualification of ETFs as QPTPs. The Fund’s ability to pursue an investment strategy that involves investments in QPTPs may be limited by that Fund’s intention to qualify as a RIC, and may bear adversely on that Fund’s ability to so qualify.
The Fund may invest in exchange-traded funds that are organized as commodity trusts.
An exchange-traded commodity trust is a pooled trust that invests in physical commodities,
and issues shares that are traded on a securities exchange. When the pool of physical commodities is fixed,
exchange traded commodity trusts are treated as transparent for U.S. federal income tax purposes,
and thus, the Fund will be treated as holding its share of an exchange traded commodity trust’s assets for purpose of determining whether the Fund meets the 90% gross income test described above. As with other investments
in commodities,
59
investments in exchange traded commodity trusts may generate non-qualifying income
for purposes of this test. As a result, the Fund’s investments in exchange traded commodity trusts can be limited by the Fund’s intention to qualify as a RIC, and can bear adversely on the Fund’s ability to so qualify.
PASSIVE FOREIGN INVESTMENT COMPANIES
The Fund may invest in shares of foreign corporations that are 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. Certain distributions from a PFIC, as well as gain from the sale of PFIC shares, are treated as “excess distributions.” Excess distributions are taxable as ordinary income even though, absent application of the PFIC rules, certain excess distributions might have been classified as capital gains. 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. If the Fund receives an excess distribution with respect to PFIC
stock, the Fund will itself be subject to tax on the portion of an excess distribution that is allocated to prior
taxable years without the ability to reduce such tax by making distributions to Fund shareholders, and an interest factor
will be added to the tax as if the tax had been payable in such prior taxable years.
The Fund may be eligible to elect alternative tax treatment with respect to PFIC shares.
Under an election that currently is available in some circumstances, the Fund generally would
be required to include in its gross income its share of the ordinary income and net capital gains 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. 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 and reported as though they were realized as ordinary
income on the last day of the taxable year. Any mark-to-market losses and any loss from an actual disposition
of PFIC shares would be deductible by the Fund as ordinary losses to the extent of any net mark-to-market
gains included in income in prior years. Making either of these two elections may require the Fund to
liquidate other investments (including when it is not advantageous to do so) to meet its distribution
requirements, which also may accelerate the recognition of gain and affect the Fund’s total return. Dividends paid by PFICs will not be eligible to be treated as “qualified dividend income.” Because it is not always possible to identify a foreign corporation as a PFIC, the Fund may incur the tax and interest charges described above
in some instances.
MORTGAGE POOLING VEHICLES
The Fund may invest directly or indirectly in residual interests in real estate mortgage
conduits (“REMICs”) (including by investing in residual interests in collateralized mortgage obligations (“CMOs”) with respect to which an election to be treated as a REMIC is in effect) or taxable mortgage pools (“TMPs”). Under a Notice issued by the IRS in October 2006 and U.S. Treasury regulations that
have yet to be issued but may apply retroactively, a portion of the Fund’s income (including income allocated to the Fund from a REIT or other pass-through entity) that is attributable to a residual interest in
a REMIC or an equity interest in a TMP (referred to in the Code as an “excess inclusion”) will be subject to federal income tax in all events. This Notice also provides, and the regulations are expected to provide, that excess
inclusion income of a RIC will be allocated to shareholders of the RIC in proportion to the dividends received
by such shareholders, with the same consequences as if the shareholders held the related interest directly. As
a result, the Fund investing in such interests may not be a suitable investment for charitable remainder trusts
(see Unrelated Business Taxable Income, below).
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 UBTI, 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 return and pay tax on such income, and (iii) in the case of a foreign
shareholder (defined
60
below), will not qualify for any reduction in U.S. federal withholding tax. A shareholder
will be subject to income tax on such inclusions without reference to any exemption therefrom otherwise
available under the Code.
UNRELATED BUSINESS TAXABLE INCOME
Under current law, income of a RIC that would be treated as UBTI if earned directly
by a tax-exempt entity generally will not be attributed as UBTI to a tax-exempt entity
that is a shareholder in the RIC. Notwithstanding this “blocking” effect, a tax-exempt shareholder could realize UBTI by virtue of its investment in the Fund if Shares in the Fund constitute debt-financed property in
the hands of the tax-exempt shareholder within the meaning of Code Section 514(b).
A tax-exempt shareholder may also recognize UBTI if the Fund recognizes “excess inclusion income” (as described above) derived from direct or indirect investments in residual interests in REMICs or equity interests in TMPs if the amount of such income recognized by the Fund exceeds the Fund’s investment company taxable income (after taking into account deductions for dividends paid by
the Fund). In addition, special tax consequences apply to charitable remainder trusts (“CRTs”) that invest in RICs that invest directly or indirectly in residual interests in REMICs or equity interests in TMPs. Under legislation
enacted in December 2006, a CRT (as defined in Section 664 of the Code) that realizes any UBTI
for a taxable year must pay an excise tax annually of an amount equal to such UBTI. Under IRS guidance
issued in October 2006, a CRT will not recognize UBTI as a result of investing in the Fund that recognizes “excess inclusion income.” Rather, 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 the Fund that recognizes “excess inclusion income,” then the 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 this IRS guidance remains applicable in light of the December 2006
legislation is unclear. To the extent permitted under the 1940 Act, the 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 the Fund. The Fund has not yet determined whether such an election will be made.
CRTs and other tax-exempt investors are urged to consult their tax advisors concerning
the consequences of investing in the Fund.
BACKUP WITHHOLDING
The Fund may be required to withhold federal income tax (“backup withholding”) from dividends and capital gains distributions paid 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 to the Fund that he or she is not subject to backup withholding.
Any amounts withheld under the backup withholding rules may be credited against the shareholder’s federal income tax liability.
In order for a foreign investor to qualify for exemption from the backup 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 the Fund should consult
their tax advisors in this regard.
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NON-U.S. SHAREHOLDERS
Distributions by the Fund to a shareholder that is not a “United States person” within the meaning of the Code (such a shareholder, a “foreign shareholder”) properly reported by the Fund as (1) Capital Gain Dividends, (2) short-term capital gain dividends, and (3) interest-related dividends,
each as defined and subject to certain conditions described below, generally are not subject to withholding of
U.S. federal income tax.
In general, the Code defines (1) “short-term capital gain dividends” as distributions of net short-term capital gains in excess of net long-term capital losses and (2) “interest-related dividends” as distributions from U.S. source interest income of types similar to those not subject to U.S. federal
income tax if earned directly by an individual foreign shareholder, in each case to the extent such distributions
are properly reported as such by the Fund in a written notice to shareholders.
The exceptions to withholding for Capital Gain Dividends and short-term capital gain
dividends do not apply to (A) distributions to an individual foreign shareholder who is present
in the United States for a period or periods aggregating 183 days or more during the year of the distribution
and (B) distributions attributable to gain that is treated as effectively connected with the conduct by
the foreign shareholder of a trade or business within the United States under special rules regarding the disposition
of U.S. real property interests as described below. The exception to withholding for interest-related dividends
does not apply to distributions to a foreign shareholder (A) that has not provided a satisfactory statement
that the beneficial owner is not a U.S. person, (B) to the extent that the dividend is attributable to
certain interest on an obligation if the foreign shareholder is the issuer or is a 10% shareholder of the
issuer, (C) that is within certain foreign countries that have inadequate information exchange with the United
States, or (D) to the extent the dividend is attributable to interest paid by a person that is a related
person of the foreign shareholder and the foreign shareholder is a controlled foreign corporation. If the
Fund invests in a RIC that pays Capital Gain Dividends, short-term capital gain dividends or interest-related
dividends to the Fund, such distributions retain their character as not subject to withholding if properly reported
when paid by the Fund to foreign shareholders. The Fund is permitted to report such part of its dividends as
interest-related and/or short-term capital gain dividends as are eligible, but is not required to do so.
In order to qualify for the withholding exemptions for Capital Gain Dividends interest-related
and short-term capital gain dividends, a foreign shareholder is required to comply with
applicable certification requirements relating to its non-U.S. status (including, in general, furnishing the
applicable W-8 form or substitute form). In the case of shares held through an intermediary, the intermediary
may withhold even if the Fund reports all or a portion of a payment as an interest-related or short-term capital
gain dividend to shareholders. Foreign shareholders should consult their tax advisors or intermediaries,
as applicable, regarding the application of these rules to their accounts.
Distributions by the Fund to foreign shareholders other than Capital Gain Dividends,
short-term capital gain dividends and interest-related dividends (e.g., dividends attributable to foreign-source dividend and interest income or to short-term capital gains or U.S. source interest income
to which the exception from withholding described above does not apply) are generally subject to withholding of
U.S. federal income tax at a rate of 30% (or lower applicable treaty rate).
If a beneficial owner of Fund shares who or which is a foreign shareholder has a trade
or business in the United States, and income from the Fund is effectively connected with the conduct
by the beneficial owner of that trade or business, such income will be subject to U.S. federal net income
taxation at regular income tax rates and, in the case of a foreign corporation, may also be subject to
a branch profits tax.
In general, a beneficial owner of Fund shares who or which is a foreign shareholder
is not subject to U.S. federal income tax on gains (and is not allowed a deduction for losses) realized
on a sale of shares of the Fund unless (i) such gain is effectively connected with the conduct of a trade or
business carried on by such holder within the United States, (ii) in the case of an individual holder, the holder
is present in the United States for a period or periods aggregating 183 days or more during the year
of the sale and certain
62
other conditions are met, or (iii) the special rules relating to gain attributable to the sale or exchange of “U.S. real property interests” (“USRPIs”) apply to the foreign shareholder’s sale of shares of the Fund (as described below).
If a shareholder is eligible for the benefits of a tax treaty, any effectively connected
income or gain will generally be subject to U.S. federal income tax on a net basis only if it is
also attributable to a permanent establishment maintained by the shareholder in the United States. More generally,
foreign shareholders who are residents in a country with an income tax treaty with the United States may obtain
different tax results than those described herein, and are urged to consult their tax advisors.
Special rules would apply if the Fund were a qualified investment entity (“QIE”) because it is either a “U.S. real property holding corporation” (“USRPHC”) or would be a USRPHC but for the operation of certain exceptions to the definition of USRPIs described below. Very generally, a
USRPHC is a domestic corporation that holds USRPIs the fair market value of which equals or exceeds 50%
of the sum of the fair market values of the corporation’s USRPIs, interests in real property located outside the United States, and other trade or business assets. USRPIs generally are defined as any interest in U.S.
real property and any interest (other than solely as a creditor) in a USRPHC or, very generally, an entity
that has been a USRPHC in the last five years. The Fund that holds, directly or indirectly, significant interests
in REITs may be a USRPHC. Interests in domestically controlled QIEs, including REITs and RICs that are
QIEs, not-greater-than-10% interests in publicly traded classes of stock in REITs and not-greater-than-5% interests
in publicly traded classes of stock in RICs generally are not USRPIs, but these exceptions do
not apply for purposes of determining whether the Fund is a QIE.
If an interest in the Fund were a USRPI, the Fund would be required to withhold U.S.
tax on the proceeds of a share redemption by a greater-than-5% foreign shareholder, in which
case such foreign shareholder generally would also be required to file U.S. tax returns and pay any
additional taxes due in connection with the redemption.
If the Fund were a QIE, under a special “look-through” rule, any distributions by the Fund to a foreign shareholder (including, in certain cases, distributions made by the Fund in
redemption of its shares) attributable directly or indirectly to (i) distributions received by the Fund from
a lower-tier RIC or REIT that the Fund is required to treat as USRPI gain in its hands and (ii) gains realized on
the disposition of USRPIs by the Fund would retain their character as gains realized from USRPIs in the hands of the Fund’s foreign shareholders and would be subject to U.S. tax withholding. In addition, such distributions
could result in the foreign shareholder being required to file a U.S. tax return and pay tax on the distributions
at regular U.S. federal income tax rates. The consequences to a foreign shareholder, including the
rate of such withholding and character of such distributions (e.g., as ordinary income or USRPI gain), would vary depending upon the extent of the foreign shareholder’s current and past ownership of the Fund.
Foreign shareholders of the Fund also may be subject to “wash sale” rules to prevent the avoidance of the tax-filing and -payment obligations discussed above through the sale and repurchase
of Fund Shares.
Foreign shareholders should consult their tax advisors and, if holding Shares through
intermediaries, their intermediaries, concerning the application of these rules to an investment in
the Fund.
CERTAIN ADDITIONAL REPORTING AND WITHHOLDING REQUIREMENTS
Sections 1471-1474 of the Code and the U.S. Treasury and IRS guidance issued thereunder
(collectively, “FATCA”) generally require the Fund to obtain information sufficient to identify the status of each of its shareholders under FATCA or under an applicable intergovernmental agreement (an “IGA”). If a shareholder fails to provide this information or otherwise fails to comply with FATCA
or an IGA, the Fund or its agent may be required to withhold under FATCA at a rate of 30% with respect to
that shareholder on ordinary dividends it pays to such shareholder. The IRS and the U.S. Treasury have
issued proposed regulations providing that these withholding rules will not be applicable to the gross
proceeds of share redemptions or Capital Gain Dividends the Fund pays. If a payment by the Fund is subject
to FATCA withholding, the Fund or its agent is required to withhold even if such payment would
otherwise be exempt
63
from withholding under the rules applicable to foreign shareholders described above
(e.g., short-term capital gain dividends and interest-related dividends).
Each prospective investor is urged to consult its tax advisor regarding the applicability
of FATCA and any other reporting requirements with respect to the prospective investor’s own situation, including investments through an intermediary.
REPORTING REQUIREMENTS REGARDING FOREIGN BANK AND FINANCIAL ACCOUNTS
Shareholders that are U.S. persons and own, directly or indirectly, more than 50%
of the Fund could be required to report annually their “financial interest” in the Fund’s “foreign financial accounts,” if any, on FinCEN Form 114, Report of Foreign Bank and Financial Accounts (“FBAR”). Shareholders should consult a tax advisor, and persons investing in the Fund through an intermediary should contact
their intermediary, regarding the applicability to them of this reporting requirement.
TAX EQUALIZATION
The Fund intends to distribute its net investment income and capital gains to shareholders
at least annually to qualify for treatment as a RIC under the Code. Under current law, provided
the Fund is not treated as a “personal holding company” for U.S. federal income tax purposes, the Fund is permitted to treat on its tax return as dividends paid the portion of redemption proceeds paid to redeeming
shareholders that represents the redeeming shareholders’ portion of the Fund’s accumulated earnings and profits. This practice, called tax “equalization,” reduces the amount of income and/or gains that the Fund is required to distribute as dividends to non-redeeming shareholders. Tax equalization is not available to the Fund treated
as a personal holding company. The amount of any undistributed income and/or gains is reflected in the value of the Fund’s Shares. The total return on a shareholder’s investment will generally not be reduced as a result of the Fund’s use of this practice.
PERSONAL HOLDING COMPANY STATUS
The Fund will be a personal holding company for federal income tax purposes if 50%
or more of the Fund’s shares are owned, at any time during the last half of the Fund’s taxable year, directly or indirectly by five or fewer individuals. For this purpose, the term “individual” includes pension trusts, private foundations and 91 certain other tax-exempt trusts. If the Fund becomes a personal
holding company, it may be subject to a tax of 20% on all its investment income and on any net short-term
gains not distributed to shareholders on or before the fifteenth day of the third month following the close of the Fund’s taxable year. In addition, the Fund’s status as a personal holding company may limit the ability of the Fund to distribute dividends with respect to a taxable year in a manner qualifying for the dividends-paid
deduction subsequent to the end of the taxable year and will prevent the Fund from using tax equalization,
which may result in the Fund paying a fund-level income tax. The Fund intends to distribute all of its income
and gain in timely manner such that it will not be subject to an income tax or an otherwise applicable
personal holding company tax, but there can be no assurance that a Fund will be successful in doing so each
year. There can be no assurance that the Fund is not nor will not become a personal holding company.
TAX SHELTER DISCLOSURE
Under U.S. Treasury regulations, if a shareholder recognizes a loss on a disposition of the Fund’s Shares of $2 million or more for an individual shareholder or $10 million or more
for a corporate shareholder (including, for example, an insurance company holding separate account), the shareholder
must file with the IRS a disclosure statement on Form 8886. Direct shareholders of portfolio securities
are in many cases excepted from this reporting requirement, but, under current guidance, shareholders
of a RIC are not excepted. This filing requirement applies even though, as a practical matter, any such loss
would not, for example, reduce the taxable income of an insurance company. Future guidance may extend the
current exception from this reporting requirement to shareholders of most or all RICs. The fact that a loss
is reportable under these regulations does not affect the legal determination of whether the taxpayer’s treatment of the loss is proper.
64
Shareholders should consult their tax advisors to determine the applicability of these
regulations in light of their individual circumstances.
CREATION AND REDEMPTION OF CREATION UNITS
An Authorized Participant who exchanges securities for Creation Units generally will
recognize a gain or a loss. The gain or loss will be equal to the difference between the market
value of the Creation Units at the time and the sum of the exchanger’s aggregate basis in the securities surrendered plus the amount of cash paid for such Creation Units. An Authorized Participant who redeems Creation
Units will generally recognize a gain or loss equal to the difference between the exchanger’s basis in the Creation Units and the sum of the aggregate market value of any securities received plus the amount of any
cash received for such Creation Units. The IRS, however, may assert that a loss realized upon an exchange
of securities for Creation Units cannot be deducted currently under the rules governing “wash sales,” or on the basis that there has been no significant change in economic position. Any capital gain or loss realized upon
redemption of Creation Units is generally treated as long-term capital gain or loss if the shares have been
held for more than one year and as short-term capital gain or loss if the shares have been held for one year or
less. Authorized Participants that are “dealers in securities” for U.S. federal income tax purposes are subject to different rules with respect to holding, acquiring and disposing of securities, including Creation Units. Any capital
gain or loss realized upon redemption of Creation Units is generally treated as long-term capital gain or
loss if the shares have been held for more than one year and as short-terms capital gain or loss if the shares
have been held for one year or less.
Authorized Participants that are “dealers in securities” for U.S. federal income tax purposes are subject to different rules with respect to holding, acquiring and disposing of securities,
including Creation Units. Persons purchasing or redeeming Creation Units should consult their own tax
advisors with respect to the tax treatment of any creation or redemption transaction.
OTHER TAX INFORMATION
The foregoing discussion is primarily a summary of certain U.S. federal income tax
consequences of investing in the Fund based on the law in effect as of the date of this SAI. The discussion
does not address in detail special tax rules applicable to certain classes of investors, such as, among
others, IRAs and other retirement plans, tax-exempt entities, foreign investors, insurance companies, banks
and other financial institutions, and investors making in-kind contributions to the Fund. Such shareholders
may be subject to U.S. tax rules that differ significantly from those summarized above. You should consult
your tax advisor for more information about your own tax situation, including possible other federal, state,
local and, where applicable, foreign tax consequences of investing in the Fund.
65
OTHER INFORMATION
RATING SERVICES
The ratings of Moody’s Investors Service, Inc., Standard & Poor’s Ratings Group, Fitch Investor Services, and DBRS, Inc. represent their opinions as to the quality of the securities
that they undertake to rate. It should be emphasized, however, that ratings are relative and subjective and are
not absolute standards of quality. A description of the ratings used herein and in the Prospectus is set forth
in Appendix A to this SAI.
FINANCIAL STATEMENTS
The Fund’s fiscal year end is May 31st. Because the Fund had not commenced operations prior to May 31, 2023, no financial statements are available.
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 PROSPECTUS 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.
66
APPENDIX A
DESCRIPTION OF SECURITIES RATINGS
S&P GLOBAL RATINGS (“S&P”)
Long-Term Issue Credit Ratings
AAA – An obligation rated ‘AAA’ has the highest rating assigned by S&P Global Ratings. The obligor’s capacity to meet its financial commitments on the obligation is extremely strong.
AA – An obligation rated ‘AA’ differs from the highest-rated obligations only to a small degree. The obligor’s capacity to meet its financial commitments on the obligation is very strong.
A – An obligation rated ‘A’ is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor’s capacity to meet its financial commitments on the obligation is still strong.
BBB – An obligation rated ’BBB’ exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to weaken the obligor’s capacity to meet its financial commitments on the obligation.
BB;B;CCC;CC; and C – Obligations rated ’BB’, ’B’, ’CCC’, ’CC’, and ’C’ are regarded as having significant speculative characteristics. ’BB’ indicates the least degree of speculation and ’C’ the highest. While such obligations will likely have some quality and protective characteristics, these
may be outweighed by large uncertainties or major exposure to adverse conditions.
BB – An obligation rated ’BB’ is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial,
or economic conditions that could lead to the obligor’s inadequate capacity to meet its financial commitments on the obligation.
B – An obligation rated ’B’ is more vulnerable to nonpayment than obligations rated ’BB’, but the obligor currently has the capacity to meet its financial commitments on the obligation.
Adverse business, financial, or economic conditions will likely impair the obligor’s capacity or willingness to meet its financial commitments on the obligation.
CCC –An obligation rated ’CCC’ is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitments
on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not
likely to have the capacity to meet its financial commitments on the obligation.
CC – An obligation rated ’CC’ is currently highly vulnerable to nonpayment. The ’CC’ rating is used when a default has not yet occurred but S&P Global Ratings expects default to be a
virtual certainty, regardless of the anticipated time to default.
C – An obligation rated ’C’ is currently highly vulnerable to nonpayment, and the obligation is expected to have lower relative seniority or lower ultimate recovery compared with
obligations that are rated higher.
D – An obligation rated ’D’ is in default or in breach of an imputed promise. For non-hybrid capital instruments, the ’D’ rating category is used when payments on an obligation are not made on the date due, unless S&P Global Ratings believes that such payments will be made within the next
five business days in the absence of a stated grace period or within the earlier of the stated grace period
or the next 30 calendar days. The ’D’ rating also will be used upon the filing of a bankruptcy petition or the taking of similar action and where default on an obligation is a virtual certainty, for example due to automatic
stay provisions. A rating on an obligation is lowered to ’D’ if it is subject to a distressed debt restructuring.
A-1
The ratings from ‘AA’ to ‘CCC’ may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.
NR – This indicates that no rating has been requested, that there is insufficient information on which to base a rating, or that S&P Global Ratings does not rate a particular obligation
as a matter of policy.
Municipal Short-Term Note Ratings
SP-1 – Strong capacity to pay principal and interest. An issue determined to possess a very strong capacity to pay debt service is given a plus (+) designation.
SP-2 – Satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes.
SP-3 – Speculative capacity to pay principal and interest.
Short-Term Issue Credit Ratings
A-1 – A short-term obligation rated ’A-1’ is rated in the highest category by S&P Global Ratings. The obligor’s capacity to meet its financial commitments on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligor’s capacity to meet its financial commitments on these obligations is extremely strong.
A-2 – A short-term obligation rated ’A-2’ is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating
categories. However, the obligor’s capacity to meet its financial commitments on the obligation is satisfactory.
A-3 – A short-term obligation rated ’A-3’ exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to weaken an obligor’s capacity to meet its financial commitments on the obligation.
B – A short-term obligation rated ’B’ is regarded as vulnerable and has significant speculative characteristics. The obligor currently has the capacity to meet its financial commitments;
however, it faces major ongoing uncertainties that could lead to the obligor’s inadequate capacity to meet its financial commitments.
C – A short-term obligation rated ’C’ is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its
financial commitments on the obligation.
D – A short-term obligation rated ’D’ is in default or in breach of an imputed promise. For non-hybrid capital instruments, the ’D’ rating category is used when payments on an obligation are not made on the date due, unless S&P Global Ratings believes that such payments will be made
within any stated grace period. However, any stated grace period longer than five business days will be treated
as five business days. The ’D’ rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action and where default on an obligation is a virtual certainty, for example due to automatic
stay provisions. A rating on an obligation is lowered to ’D’ if it is subject to a distressed debt restructuring.
MOODY’S INVESTORS SERVICE (“MOODY’S”)
Long-Term Rating Scale
Aaa – Obligations rated Aaa are judged to be of the highest quality, with minimal risk.
Aa – Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.
A – Obligations rated A are considered upper medium-grade and are subject to low credit risk.
A-2
Baa – Obligations rated Baa are subject to moderate credit risk. They are considered medium-grade and as such may possess speculative characteristics.
Ba – Obligations rated Ba are judged to have speculative elements and are subject to substantial credit risk.
B – Obligations rated B are considered speculative and are subject to high credit risk.
Caa – Obligations rated Caa are judged to be of poor standing and are subject to very high credit risk.
Ca – Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery in principal and interest.
C – Obligations rated C are the lowest-rated class of bonds and are typically in default, with little prospect for recovery of principal and interest.
Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end
of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates
a ranking in the lower end of that generic rating category.
Short-Term Rating Scale
P-1 – Issuers (or supporting institutions) rated Prime-1 have a superior ability to repay short-term debt obligations.
P-2 – Issuers (or supporting institutions) rated Prime-2 have a strong ability to repay short-term debt obligations.
P-3 – Issuers (or supporting institutions) rated Prime-3 have an acceptable ability to repay short-term obligations.
NP – Issuers (or supporting institutions) rated Not Prime do not fall within any of the Prime rating categories.
Municipal Investment Grade Rating Scale
MIG 1 – This designation denotes superior credit quality. Excellent protection is afforded by established cash flows, highly reliable liquidity support, or demonstrated broad-based
access to the market for refinancing.
MIG 2 – This designation denotes strong credit quality. Margins of protection are ample, although not as large as in the preceding group.
MIG 3 – This designation denotes acceptable credit quality. Liquidity and cash-flow protection may be narrow, and market access for refinancing is likely to be less well-established.
SG – This designation denotes speculative-grade credit quality. Debt instruments in this category may lack sufficient margins of protection.
Variable Municipal Investment Grade Rating Scale
VMIG 1 – This designation denotes superior credit quality. Excellent protection is afforded by the superior short-term credit strength of the liquidity provider and structural and legal
protections.
VMIG 2 – This designation denotes strong credit quality. Good protection is afforded by the strong short-term credit strength of the liquidity provider and structural and legal protections.
VMIG 3 – This designation denotes acceptable credit quality. Adequate protection is afforded by the satisfactory short-term credit strength of the liquidity provider and structural and
legal protections.
A-3
SG – This designation denotes speculative-grade credit quality. Demand features rated in this category may be supported by a liquidity provider that does not have a sufficiently
strong short-term rating or may lack the structural or legal protections.
FITCH INVESTOR SERVICES (“FITCH’S)
Issuer Default Ratings
AAA – Highest credit quality. ’AAA’ ratings denote the lowest expectation of default risk. They are assigned only in cases of exceptionally strong capacity for payment of financial commitments.
This capacity is highly unlikely to be adversely affected by foreseeable events.
AA – Very high credit quality. ‘AA’ ratings denote expectations of very low default risk. They indicate very strong capacity for payment of financial commitments. This capacity
is not significantly vulnerable to foreseeable events.
A – High credit quality. ’A’ ratings denote expectations of low default risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be
more vulnerable to adverse business or economic conditions than is the case for higher ratings.
BBB – Good credit quality. ’BBB’ ratings indicate that expectations of default risk are currently low. The capacity for payment of financial commitments is considered adequate, but adverse
business or economic conditions are more likely to impair this capacity.
BB – Speculative. ’BB’ ratings indicate an elevated vulnerability to default risk, particularly in the event of adverse changes in business or economic conditions over time; however, business
or financial flexibility exists that supports the servicing of financial commitments.
B – Highly speculative. ’B’ ratings indicate that material default risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity
for continued payment is vulnerable to deterioration in the business and economic environment.
CCC – Substantial credit risk. Very low margin for safety. Default is a real possibility.
CC – Very high levels of credit risk. Default of some kind appears probable.
C – Near Default. A default or default-like process has begun, or for a closed funding vehicle, payment capacity is irrevocably impaired.
RD – Restricted default. ’RD’ ratings indicate an issuer that in Fitch’s opinion has experienced an uncured payment default or distressed debt exchange on a bond, loan or other material
financial obligation, but has not entered into bankruptcy filings, administration, receivership, liquidation,
or other formal winding-up procedure, and has not otherwise ceased operating.
D – Default. ’D’ ratings indicate an issuer that in Fitch’s opinion has entered into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure or
that has otherwise ceased business and debt is still outstanding.
DBRS, Inc.
Long Term Obligations Scale
AAA – Highest credit quality. The capacity for the payment of financial obligations is exceptionally high and unlikely to be adversely affected by future events.
AA – Superior credit quality. The capacity for the payment of financial obligations is considered high. Credit quality differs from AAA only to a small degree. Unlikely to be significantly
vulnerable to future events.
A-4
A – Good credit quality. The capacity for the payment of financial obligations is substantial, but of lesser credit quality than AA. May be vulnerable to future events, but qualifying
negative factors are considered manageable.
BBB – Adequate credit quality. The capacity for the payment of financial obligations is considered acceptable. May be vulnerable to future events.
BB – Speculative, non-investment grade credit quality. The capacity for the payment of financial obligations is uncertain. Vulnerable to future events.
B – Highly speculative credit quality. There is a high level of uncertainty as to the capacity to meet financial obligations.
CCC/CC/C – Very highly speculative credit quality. In danger of defaulting on financial obligations. There is little difference between these three categories, although CC and C rating
categories are normally applied to obligations that are seen as highly likely to default, or subordinated
to obligations rated in the CCC to B range. Obligations in respect of which default has not technically taken place
but is considered inevitable may be rated in the C category.
D – When the issuer has filed under any applicable bankruptcy, insolvency or winding up statute or there is a failure to satisfy an obligation after the exhaustion of grace periods,
a downgrade to D may occur. DBRS Morningstar may also use SD (Selective Default) in cases where only some securities
are impacted, such as the case of a “distressed exchange”.
Commercial Paper and Short-Term Debt Rating Scale
R-1 (high) – Highest credit quality. The capacity for the payment of short-term financial obligations as they fall due is exceptionally high. Unlikely to be adversely affected by future
events.
R-1 (middle) – Superior credit quality. The capacity for the payment of short-term financial obligations as they fall due is very high. Differs from R-1 (high) by a relatively
modest degree. Unlikely to be significantly vulnerable to future events.
R-1 (low) – Good credit quality. The capacity for the payment of short-term financial obligations as they fall due is substantial. Overall strength is not as favorable as higher rating
categories. May be vulnerable to future events, but qualifying negative factors are considered manageable.
R-2 (high) – Upper end of adequate credit quality. The capacity for the payment of short-term financial obligations as they fall due is acceptable. May be vulnerable to future
events.
R-2 (middle) – Adequate credit quality. The capacity for the payment of short-term financial obligations as they fall due is acceptable. May be vulnerable to future events or
may be exposed to other factors that could reduce credit quality.
R-2 (low) – Lower end of adequate credit quality. The capacity for the payment of short-term financial obligations as they fall due is acceptable. May be vulnerable to future
events. A number of challenges are present that could affect the issuer’s ability to meet such obligations.
R-3 – Lowest end of adequate credit quality. There is capacity for the payment of short-term financial obligations as they fall due. May be vulnerable to future events, and the
certainty of meeting such obligations could be impacted by a variety of developments.
R-4 – Speculative credit quality. The capacity for the payment of short-term financial obligations as they fall due is uncertain.
R-5 – Highly speculative credit quality. There is a high level of uncertainty as to the capacity to meet short-term financial obligations as they fall due.
D – When the issuer has filed under any applicable bankruptcy, insolvency, or winding-up statute, or there is a failure to satisfy an obligation after the exhaustion of grace periods,
a downgrade to D may occur.
A-5
DBRS Morningstar may also use SD (Selective Default) in cases where only some 16 DBRS
Morningstar Product Guide securities are impacted, such as the case of a “distressed exchange.”
A-6
APPENDIX B
PRINCIPAL HOLDERS AND CONTROL PERSONS
From time to time, certain shareholders may own, of record or beneficially, a large
percentage of the shares of the Fund. Accordingly, those shareholders may be able to greatly affect
(if not determine) the outcome of a shareholder vote.
CONTROLLING PERSON INFORMATION
As of the date of this SAI, beneficial ownership information is not available as the
Fund has not commenced operations.
B-1
APPENDIX C
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TITLE:
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Proxy Voting Policies and Procedures
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FOR:
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ProShare Advisors LLC and ProFund Advisors LLC
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DATED:
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March 1, 2008
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AS REVISED:
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May 1, 2015
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C-1
Proxy Voting Policies and Procedures to Maximize Shareholder Value and Protect Shareowner
Interests
It is the policy of ProFund Advisors LLC and ProShare Advisors LLC (collectively, the “Advisor”) to seek to maximize shareholder value and protect shareholder interests when voting proxies on
behalf of clients. The Advisor seeks to achieve this goal by utilizing a set of proxy voting guidelines (the “Guidelines”) maintained and implemented by an independent service provider, Institutional Shareholder Services (“ISS”). The Advisor believes that these Policies and Procedures, including the Guidelines, are reasonably
designed to ensure that proxy matters are conducted in the best interests of clients and in accordance with the Advisor’s fiduciary duties, applicable rules under the Investment Advisers Act of 1940, and, in the case
of its registered fund clients, applicable rules under the Investment Company Act of 1940.
Proxy Voting Guidelines
Proxies generally will be voted in accordance with the ISS Guidelines, an extensive
list of common proxy voting issues and recommended voting actions for such issues based on the overall
goal of achieving maximum shareholder value and protection of shareholder interests. Common issues in
the Guidelines, and factors taken into consideration in voting proxies with respect to these issues, include,
but are not limited to:
•Election of Directors—considering factors such as director qualifications, term of office, age limits.
•Proxy Contests—considering factors such as voting for nominees in contested elections and reimbursement of expenses.
•Election of Auditors—considering factors such as independence and reputation of the auditing firm.
•Proxy Contest Defenses—considering factors such as board structure and cumulative voting.
•Tender Offer Defenses—considering factors such as poison pills (stock purchase rights plans) and fair price provisions.
•Miscellaneous Governance Issues—considering factors such as confidential voting and equal access.
•Capital Structure—considering factors such as common stock authorization and stock distributions.
•Executive and Director Compensation—considering factors such as performance goals and employee stock purchase plans.
•State of Incorporation—considering factors such as state takeover statutes and voting on reincorporation proposals.
•Mergers and Corporate Restructuring—considering factors such as spinoffs and asset sales.
•Mutual Fund Proxy Voting—considering factors such as election of directors and proxy contests.
•Consumer and Public Safety Issues—considering factors such as social and environmental issues as well as labor issues.
A full description of the Guidelines is maintained by the Advisor and the Advisor
has established a committee that monitors the effectiveness of the Guidelines (the “Brokerage Allocation and Proxy Voting Committee” or the “Committee”).
The Advisor reserves the right to modify any of the recommendations set forth in the
Guidelines with respect to any particular issue in the future, in accordance with the Advisor intent to vote
proxies for clients in a manner that the Advisor determines is in the best interests of clients and which seeks
to maximize the value of the client’s investments. The Advisor is not required to vote every proxy in fulfilling its proxy voting obligations. In some cases, the Advisor may determine that it is in the best interests
of a client to refrain from exercising proxy voting rights. For example, the Advisor may determine that the cost
of voting certain proxies exceeds the expected benefit to the client (such as where casting a vote on a foreign
security would require hiring a translator), and may abstain from voting in such cases.
C-2
In cases where the Advisor does not receive a solicitation or enough information with
respect to a proxy vote within a sufficient time (as reasonably determined by the Advisor) prior to the proxy-voting
deadline, the Advisor may be unable to vote. With respect to non- U.S. companies, it is typically
difficult and costly to vote proxies due to local regulations, customs or other requirements or restrictions, and
such circumstances may outweigh any anticipated economic benefit of voting. The major difficulties and costs
may include: (i) appointing a proxy; (ii) obtaining reliable information about the time and location
of a meeting; (iii) obtaining relevant information about voting procedures for foreign shareholders; (iv) restrictions
on trading securities that are subject to proxy votes (share-blocking periods); (v) arranging for a proxy
to vote locally in person; (vi) fees charged by custody banks for providing certain services with regard to voting
proxies; and (vii) foregone income from securities lending programs. The Advisor does not vote proxies
of non-U.S. companies if it determines that the expected costs of voting outweigh any anticipated economic
benefit to the client of voting.
Overview of the Proxy Voting Process
In relying on ISS to vote client proxies, the Advisor will take reasonable steps and
obtain adequate information to verify that ISS has the capacity to provide adequate proxy advice,
is independent of the Advisor, has an adequate conflict of interest policy, and does not have the incentive
to vote proxies in anyone’s interest other than that of the Advisor’s client. In addition, the Committee will monitor for conflicts concerning ISS.
As proxy agent, ISS devotes research for proxies based on the level of complexity
of the proxy materials to be voted. ISS assigns complex issues such as mergers or restructuring to senior analysts.
Recurring issues for which case-by-case analysis is unnecessary are handled by more junior analysts. In
every case, an analyst reviews publicly available information such as SEC filings and recent news reports
and, if necessary, may contact issuers directly. Such discussions with issuers may be handled by telephone
or in a face-to-face meeting. Analysts will seek to speak directly with management when a question is not
answered by publicly available information and such information is needed for an informed recommendation.
As part of ISS’s quality assurance process, every analysis is reviewed by a director of research or a chief policy advisor. Complex issues such as mergers are assigned to senior staff members.
Contested issues are reviewed by research directors. While a senior analyst takes the lead on every proxy
contest, a member of management will frequently conduct additional review by participating in calls with
principals directly involved with the proxy issue.
Generally, proxies are voted in accordance with the voting recommendations as stated
in the Guidelines. ISS will consult the Advisor on non-routine issues. Information about the Guidelines is
available on the ISS web site at: http://www.issgovernance.com/file/policy/2015-us-summary-voting-guidelines-updated.pdf.
Oversight of the Proxy Voting Process
The Advisor has established the Brokerage Allocation and Proxy Voting Committee, in
part, to oversee the proxy voting process. ISS provides the Advisor quarterly reports, which the Advisor
reviews to ensure that client proxies are being voted properly. The Advisor and ISS also perform spot checks
on an intra-quarterly basis. 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 Committee.
Conflicts of Interest
From time to time, proxy issues may pose a material conflict of interest between the
Advisor and its clients. It shall be the duty of the Committee to monitor for and to identify potential conflicts
of interest. The Committee will also determine which conflicts are material (if any). To ensure that
proxy voting decisions are based on the best interests of the client 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 the Guidelines.
If a registered investment company managed by the Advisor owns shares of another investment company
managed by the
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Advisor, “echo voting” is employed to avoid certain potential conflicts of interest. Echo voting means that the Advisor votes the shares of each such underlying investment company in the same proportion
as the vote of all of the other holders of the underlying investment company’s shares.
The Committee will disclose to clients any voting issues that created a conflict of
interest and the manner in which ISS, on behalf of the Advisor, voted such proxies.
Securities Lending Program
The Advisor acknowledges that, when a registered fund client (a “Fund”) lends its portfolio securities, the Fund’s Trustees (who generally have delegated proxy voting responsibility to the Advisor) retain a fiduciary obligation to vote proxies relating to such securities and to recall the securities
in the event of a shareholder vote on a material event affecting the security on the loan. Under the Fund’s securities lending agreements, the Fund generally retains the right to recall a loaned security and to exercise the security’s voting rights. In order to vote the proxies of securities out on loan, the Advisor must recall the securities
prior to the established record date. It is the Advisor’s general policy to use its best efforts to recall securities on loan and to vote proxies relating to such securities if the Advisor determines that such proxies
involve a material event affecting the loaned securities. The Advisor may utilize third party service providers
to assist it in identifying and evaluating whether an event is material.
As noted, in certain cases, the Advisor may determine that voting proxies is not in
the best interest of a client and may refrain from voting if the costs, including the opportunity costs, of voting
would, in the view of the Advisor, exceed the expected benefits of voting to the client. For securities on loan,
the Advisor will balance the revenue-producing value of loans against the difficult-to-assess value of casting
votes. If the Advisor determines that the expected value of casting a vote will be less than the securities
lending income, either because the votes would not have significant economic consequences or because the
outcome of the vote would not be affected by the Advisor’s recalling the loaned securities in order to ensure they are voted (e.g., for an annual shareholder meeting at which purely routine votes are at issue, or if
the relevant Fund owns a de minimus percentage of the outstanding shares at issue). The Advisor intends to
recall securities on loan if it determines that voting the securities is likely to affect materially the value of the Fund’s investment and that it is in the Fund’s best interests to do so.
Availability of Information; Record of Proxy Voting
The Advisor, with the assistance of ISS, shall maintain for a period of at least five
years the following records relating to proxy voting on behalf of clients:
(1) proxy voting policies and procedures;
(2) proxy statements received for clients (unless such statements are available on the SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system);
(3) any documents prepared by the Advisor that were material to making a proxy voting
decision or that memorialized the basis for the decision;
(4) records of votes cast on behalf of clients (which may be maintained by a third
party service provider if the service provider undertakes to provide copies of those records promptly upon request);
and
(5) records of written requests for proxy voting information and written responses
from the Advisor to either a written or oral request.
For the first two years, the Advisor will store such records at its principal office.
Voting records will also be maintained and will be available free of charge by calling the Advisor at 888-776-1972.
The voting record is available on the website of the Securities and Exchange Commission at www.sec.gov.
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Disclosure
The Advisor will inform its clients as to how to obtain information regarding the Advisor’s voting of the clients’ securities. The Advisor will provide its clients with a summary of its proxy voting guidelines, process and policies and will inform its clients as to how they can obtain a copy of the complete
Guidelines upon request. The Advisor will include such information described in the preceding two
sentences in its Form ADV and will provide its existing clients with the above information. The Advisor shall
disclose in the statements of additional information of registered fund clients a summary of procedures which
the Advisor uses to determine how to vote proxies relating to portfolio securities of such clients. The
disclosure will include a description of the procedures used when a vote presents a conflict of interest between
shareholders and the Advisor or an affiliate of the Advisor.
The semi-annual reports of Fund clients shall indicate that the Fund’s proxy voting records are available: (i) by calling a toll-free number; or (ii) on the SEC’s website. If a request for the records is received, the requested description must be sent within three business days by a prompt method of
delivery.
The Advisor, on behalf of the Fund it advises, shall file its proxy voting record
with the SEC on Form N-PX no later than August 31 of each year, for the twelve-month period ending June 30 of
the current year. Such filings shall contain all information required to be disclosed on Form N-PX.
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PART C. OTHER INFORMATION
ProShares Trust
Item 28. Exhibits
(a)
Articles of Incorporation
(b)
By-Laws
(c)
Instruments Defining Rights of Security Holders
Not applicable.
(d)
Investment Advisory Contracts
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(e)
Underwriting Contracts
(f)
Bonus or Profit Sharing Contracts
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Not applicable.
(g)
Custodian Agreements
(d)
(e)
(h)
Other Material Contracts
(1)
(2)
(3)
Advisory and Management Fee Waiver and Reimbursement Agreement between Registrant
and ProShare Advisors LLC, on behalf of ProShares Ether Strategy ETF, ProShares Short
Ether Strategy ETF, ProShares Bitcoin & Ether Strategy ETF and ProShares Bitcoin & Ether Equal Weight
Strategy ETF, and Schedule A, dated as of September 11, 2023. 21
(4)
(5)
(6)
(7)
(8)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
C-1
(19)
(20)
(21)
Fund of Funds Investment Agreement between Registrant, First Trust Exchange-Traded
Fund, First Trust Exchange-Traded Fund II, First Trust Exchange-Traded Fund III, First Trust Exchange-Traded
Fund IV, First Trust Exchange-Traded Fund V, First Trust Exchange-Traded Fund VI, First Trust Exchange-Traded
Fund VII, First Trust Exchange-Traded Fund VIII, First Trust Exchange-Traded AlphaDEX® Fund and First Trust Exchange-Traded AlphaDEX® Fund II, dated January 19, 2022.20
(22)
(23)
(24)
(25)
(26)
(27)
(28)
(29)
(30)
(i)
Legal Opinion for ProShares Nasdaq-100 High Income ETF.23
(j)
Consent of Independent Registered Public Accounting Firm.
Not applicable.
(k)
Omitted Financial Statements
Not applicable.
(l)
Initial Capital Agreements
(1)
(m)
Rule 12b-1 Plan
(n)
Rule 18f-3 Plan
Not applicable.
(o)
Reserved
Not applicable.
(p)
Codes of Ethics
(1)
(q)
Powers of Attorney
C-2
(1)
Filed with Initial Registration Statement on June 5, 2002.
(2)
Previously filed on July 17, 2003 as part of Pre-Effective Amendment No. 2 under the
Securities Act of 1933 and incorporated by reference herein.
(3)
Previously filed on May 22, 2006 as part of Pre-Effective Amendment No. 6 under the
Securities Act of 1933 and incorporated by reference herein.
(4)
Previously filed on June 19, 2006 as part of Pre-Effective Amendment No. 7 under the
Securities Act of 1933 and incorporated by reference herein.
(5)
Previously filed on August 30, 2006 as part of Post-Effective Amendment No. 1 under
the Securities Act of 1933 and incorporated by reference herein.
(6)
Previously filed on December 29, 2006 as part of Post-Effective Amendment No. 2 under
the Securities Act of 1933 and incorporated by reference herein.
(7)
Previously filed on September 28, 2010 as part of Post-Effective Amendment No. 27
under the Securities Act of 1933 and incorporated by reference herein.
(8)
Previously filed on December 30, 2010 as part of Post-Effective Amendment No. 30 under
the Securities Act of 1933 and incorporated by reference herein.
(9)
Previously filed on January 23, 2012 as part of Post-Effective Amendment No. 57 under
the Securities Act of 1933 and incorporated by reference herein.
(10)
Previously filed on December 6, 2012 as part of Post-Effective Amendment No. 77 under
the Securities Act of 1933 and incorporated by reference herein.
(11)
Previously filed on September 22, 2014 as part of Post-Effective Amendment No. 123
under the Securities Act of 1933 and incorporated by reference herein.
(12)
Previously filed on February 12, 2016 as part of Post-Effective Amendment No. 169
under the Securities Act of 1933 and incorporated by reference herein.
(13)
Previously filed on October 2, 2017 as part of Post-Effective Amendment No. 186 under
the Securities Act of 1933 and incorporated by reference herein.
(14)
Previously filed on October 22, 2018 as part of Post-Effective Amendment No. 205 under
the Securities Act of 1933 and incorporated by reference herein.
(15)
Previously filed on September 25, 2019 as part of Post-Effective Amendment No. 208
under the Securities Act of 1933 and incorporated by reference herein.
(16)
Previously filed on October 4, 2019 as part of Post-Effective Amendment No. 213 under
the Securities Act of 1933 and incorporated by reference herein.
(17)
Previously filed on October 15, 2021 as part of Post-Effective Amendment No. 238 under
the Securities Act of 1933 and incorporated by reference herein.
(18)
Previously filed on March 14, 2022 as part of Post-Effective Amendment No. 254 under
the Securities Act of 1933 and incorporated by reference herein.
(19)
Previously filed on June 19, 2022 as part of Post-Effective Amendment No. 264 under
the Securities Act of 1933 and incorporated by reference herein.
(20)
Previously filed on September 27, 2022 as part of Post-Effective Amendment No. 266
under the Securities Act of 1933 and incorporated by reference herein.
(21)
Previously filed on September 26, 2023 as part of Post-Effective Amendment No. 278
under the Securities Act of 1933 and incorporated by reference herein.
(22)
Previously filed on October 13, 2023 as part of Post-Effective Amendment No. 283 under
the Securities Act of 1933 and incorporated by reference herein.
(23)
Filed herein.
Item 29. Persons Controlled By or Under Common Control With Registrant
Provide a list or diagram of all persons directly or indirectly controlled by or under
common control with the Registrant. For any person controlled by another person, disclose the percentage of
voting securities owned by the immediately controlling person or other basis of that person’s control. For each company, also provide the state or other sovereign power under the laws of which the company is organized.
None.
Item 30. Indemnification
State the general effect of any contract, arrangements or statute under which any
director, officer, underwriter or affiliated person of the registrant is insured or indemnified against
any liability incurred in their official capacity, other than insurance provided by any director, officer, affiliated person,
or underwriter for their own protection.
Reference is made to Article Eight of the Registrant’s Amended and Restated Declaration of Trust which is incorporated herein by reference:
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The Registrant (also, the “Trust”) is organized as a Delaware business trust is operated pursuant to an Amended and Restated Declaration of Trust, dated December 13, 2010 (the “Declaration of Trust”), that permits the Registrant to indemnify every person who is, or has been, a Trustee, officer, employee
or agent of the Trust, including persons who serve at the request of the Trust as directors, trustees, officers, employees
or agents of another organization in which the Trust has an interest as a shareholder, creditor or otherwise
(hereinafter referred to as a “Covered Person”), shall be indemnified by the Trust to the fullest extent permitted by law against
liability and against all expenses reasonably incurred or paid by him in connection with any claim, action,
suit or proceeding in which he becomes involved as a party or otherwise by virtue of his being or having been such
a Trustee, director, officer, employee or agent and against amounts paid or incurred by him in settlement thereof.
This indemnification is subject to the following conditions:
No indemnification shall be provided hereunder to a Covered Person:
(a)
For any liability to the Trust or its Shareholders arising out of a final adjudication
by the court of other body before which the proceeding was brought that the Covered Person engaged in willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his
office;
(b)
With respect to any matter as to which the Covered Person shall have been finally
adjudicated not to have acted in good faith in the reasonable belief that his or her action was in the best
interests of the Trust;
(c)
For any criminal proceeding finally adjudicated for which the Covered Person had reasonable
cause to believe that his or her conduct was unlawful; or
(d)
In the event of a settlement of other disposition not involving a final adjudication
(as provided in paragraph (a), (b) or (c) of this Section 8.5.2) and resulting in a payment by a Covered Person,
unless there has been either a determination that such Covered Person did not engage in willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the conduct of this office
by the court or other body approving the settlement or other disposition, or a reasonable determination, based
on a review of readily available facts (as opposed to a full trial-type inquiry), that he or she did not
engage in such conduct, such determination being made by : (i) a vote of a majority of the Disinterested Trustees
(as such term is defined in Section 8.5.5) acting on the matter); or (ii) a writer opinion of independent legal
counsel.
The rights of indemnification under the Declaration of Trust may be insured against
by policies maintained by the Trust, and shall be severable, shall not affect any other rights to which any
Covered Person may now or hereafter be entitled, shall continue as to a person who has ceased to be a Covered Person,
and shall inure to the benefit of the heirs, executors and administrators of such a person. Nothing contained in the
Declaration of Trust shall affect any rights to indemnification to which Trust personnel other than Covered Persons
may be entitled by contract or otherwise under law.
Expenses of preparation and presentation of a defense to any claim, action, suit or
proceeding subject to a claim for indemnification under Section 8.5 of the Declaration of Trust shall be advanced
by the Trust prior to final disposition thereof upon receipt of an undertaking by or on behalf of the recipient
to repay such amount if it is ultimately determined that he or she is not entitled to indemnification under Section
8.5 of the Declaration of Trust, provided that either: Covered Person, unless there has been either a determination
that such Covered Person did not engage in willful misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of this office by the court or other body approving the settlement or other disposition,
or a reasonable determination, based on a review of readily available facts (as opposed to a full trial-type inquiry),
that he or she did not engage in such conduct, such determination being made by : (i) a vote of a majority of the Disinterested
Trustees (as such term is defined in Section 8.5.5) acting on the matter (provided that a majority of Disinterested
Trustees then in office act on the matter); or (ii) a writer opinion of independent legal counsel.
(a)
Such undertaking is secured by a surety bond or some other appropriate security or
the Trust shall be insured against losses arising out of any such advances; or
(b)
A majority of the Disinterested Trustees acting on the matter (provided that a majority
of the Disinterested Trustees then in office act on the matter) or independent legal counsel in a written
opinion shall determine, based upon a review of the readily available facts (as opposed to the facts available
upon a full trial), that there is reason to believe that the recipient ultimately will be found entitled to
indemnification.
As used in Section 8.5 of the Declaration of Trust, the following words shall have
the meanings set forth below:
(c)
A “Disinterested Trustee” is one (i) who is not an Interested Person of the Trust (including anyone, as such
Disinterested Trustees, who has been exempted from being an Interested Person by any
rule, regulation or order of the Commission), and (ii) against whom none of such actions, suits or other
proceedings or another action, suit or other proceeding on the same or similar grounds is then or has been
pending;
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(d)
“Claim,” “action,” “suite” or “proceeding” shall apply to all claims, actions, suits, proceedings (civil, criminal, administrative or other, including appeals), actual or threatened; and
(e)
“Liability” and “expenses” shall include without limitation, attorneys’ and accountants’ fees, costs, judgments, amounts paid in settlement, fines, penalties and other liabilities.
Item 31. Business and Other Connections of Investment Adviser
Describe any other business, profession, vocation or employment of a substantial nature
in which the investment adviser and each director, officer or partner of the investment adviser,
or has been, engaged within the last two fiscal years for his or her own account or in the capacity of director, officer,
employee, partner or trustee (disclose the name and principal business address of any company for which a person
listed above serves in the capacity of director, officer, employee, partner or trustee, and the nature of the
relationship.)
Reference is made to the caption “Management” in the Prospectuses constituting Part A which is incorporated herein by reference and “Management of ProShares Trust” in the Statement of Additional Information constituting Part B which is incorporated herein by reference.
The information as to the directors and officers of ProShare Advisors LLC is set forth
in ProShare Advisors LLC’s Form ADV filed with the Securities and Exchange Commission on April 7, 2005 (Reference No. 5524427696B2B2), as amended, and is incorporated herein by reference.
Item 32. Principal Underwriters
(a)
State the name of each investment company (other than the registrant) for which each
principal underwriter currently distributing securities of the registrant also acts as a principal underwriter,
depositor or investment adviser.
Registrant’s distributor, SEI Investments Distribution Co. (the “Distributor”), acts as distributor for:
Adviser Managed Trust
Bishop Street Funds
Catholic Responsible Investment Funds
Causeway Capital Management Trust
City National Rochdale Funds (f/k/a CNI Charter Funds)
City National Rochdale Select Strategies Fund
City National Rochdale Strategic Credit Fund
Community Capital Trust (f/k/a Community Reinvestment Act Qualified Investment Fund)
Delaware Wilshire Private Markets Fund
Exchange Traded Concepts Trust (f/k/a FaithShares Trust)
Frost Family of Funds
Gallery Trust
Global X Funds
Impact Shares Trust
KraneShares Trust
New Covenant Funds
ProShares Trust II
Quaker Investment Trust
RiverPark Funds Trust
Schwab Strategic Trust
SEI Asset Allocation Trust
SEI Catholic Values Trust
SEI Core Property Fund
SEI Daily Income Trust
SEI Energy Debt Fund LP
SEI Exchange Traded Funds
SEI Global Private Assets VI LP
SEI Hedge Fund SPC
SEI Institutional International Trust
SEI Institutional Managed Trust
SEI Institutional Investments Trust
SEI Offshore Advanced Strategy Series SPC
SEI Offshore Opportunity Fund II Ltd
SEI Special Situations Fund
Bishop Street Funds
Catholic Responsible Investment Funds
Causeway Capital Management Trust
City National Rochdale Funds (f/k/a CNI Charter Funds)
City National Rochdale Select Strategies Fund
City National Rochdale Strategic Credit Fund
Community Capital Trust (f/k/a Community Reinvestment Act Qualified Investment Fund)
Delaware Wilshire Private Markets Fund
Exchange Traded Concepts Trust (f/k/a FaithShares Trust)
Frost Family of Funds
Gallery Trust
Global X Funds
Impact Shares Trust
KraneShares Trust
New Covenant Funds
ProShares Trust II
Quaker Investment Trust
RiverPark Funds Trust
Schwab Strategic Trust
SEI Asset Allocation Trust
SEI Catholic Values Trust
SEI Core Property Fund
SEI Daily Income Trust
SEI Energy Debt Fund LP
SEI Exchange Traded Funds
SEI Global Private Assets VI LP
SEI Hedge Fund SPC
SEI Institutional International Trust
SEI Institutional Managed Trust
SEI Institutional Investments Trust
SEI Offshore Advanced Strategy Series SPC
SEI Offshore Opportunity Fund II Ltd
SEI Special Situations Fund
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SEI Structured Credit Fund, LP
SEI Tax Exempt Trust
SEI Vista Fund Ltd.
Symmetry Panoramic Trust
The Advisors’ Timer Circle Fund
The Advisors’ Timer Circle Fund II
The Advisors’ Timer Circle Fund III
SEI Tax Exempt Trust
SEI Vista Fund Ltd.
Symmetry Panoramic Trust
The Advisors’ Timer Circle Fund
The Advisors’ Timer Circle Fund II
The Advisors’ Timer Circle Fund III
The Distributor provides numerous financial services to investment managers, pension
plan sponsors, and bank trust departments. These services include portfolio evaluation, performance measurement
and consulting services (“Funds Evaluation”) and automated execution, clearing and settlement of securities transactions (“MarketLink”).
(b)
Provide the information required by the following table with respect to each director,
officer or partner of each principal underwriter named in answer to Item 32. Unless otherwise noted, the business
address of each director or officer is One Freedom Valley Drive, Oaks, PA 19456.
|
Name
|
Position and Office with Underwriter
|
Positions and
Offices with
Registrant
|
|
William M. Doran
|
Director
|
None
|
|
Paul F. Klauder
|
Director
|
None
|
|
Wayne M. Withrow
|
Director
|
None
|
|
Kevin P. Barr
|
President & Chief Executive Officer
|
None
|
|
Maxine J. Chou
|
Chief Financial Officer, Chief Operations Officer & Treasurer
|
None
|
|
John C. Munch
|
General Counsel & Secretary
|
None
|
|
Jennifer H. Campisi
|
Chief Compliance Officer, Anti-Money Laundering Officer and Assistant Secretary
|
None
|
|
Donald Duncan
|
Anti-Money Laundering Officer
|
None
|
|
John P. Coary
|
Vice President and Assistant Secretary
|
None
|
|
Jason McGhin
|
Vice President
|
None
|
|
Judith A. Rager
|
Vice President
|
None
|
|
Gary Michael Reese
|
Vice President
|
None
|
|
Robert M. Silvestri
|
Vice President
|
None
|
|
William M. Martin
|
Vice President
|
None
|
|
Christopher Rowan
|
Vice President
|
None
|
Item 33. Location of Accounts and Records
State the names and address of each person maintaining principal possession of each
account, book or other document required to be maintained by Section 31(a) of the 1940 Act [15 u.s.c.
80a-30(a)] and the rules under that section.
The books, accounts and other documents required by Section 31(a) under the Investment
Company Act of 1940, as amended, and the rules promulgated thereunder are maintained in the physical
possession of:
JP Morgan Chase Bank, N.A.
Attn: General Counsel
4 MetroTech Center
Brooklyn, NY 11245
Attn: General Counsel
4 MetroTech Center
Brooklyn, NY 11245
J.P. Morgan Investor Services Co.
70 Fargo Street — Suite 3 East
Boston, MA 02210-1950
Attention: Fund Administration Department
70 Fargo Street — Suite 3 East
Boston, MA 02210-1950
Attention: Fund Administration Department
ProShare Advisors LLC
ProFund Advisors LLC
Attn: General Counsel
7272 Wisconsin Avenue, 21st Floor
Bethesda, MD 20814-6527
ProFund Advisors LLC
Attn: General Counsel
7272 Wisconsin Avenue, 21st Floor
Bethesda, MD 20814-6527
SEI Investments Distribution Co.
Attn: General Counsel
One Freedom Valley Drive
Oaks, Pennsylvania 19456-1100
Attn: General Counsel
One Freedom Valley Drive
Oaks, Pennsylvania 19456-1100
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Citi Fund Services, Ohio, Inc.
One Post Office Square, Suite 3710
Boston, Massachusetts 02199
Attention: Regulatory Administration Department
One Post Office Square, Suite 3710
Boston, Massachusetts 02199
Attention: Regulatory Administration Department
Item 34. Management Services
Provide a summary of the substantive provisions of any management-related service
contract not discussed in Part A or Part B, disclosing the parties to the contract and the total amount paid and by whom, for the fund’s last three fiscal years.
Item 35. Undertakings
Not applicable.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company
Act of 1940, the Registrant certifies that it meets all of the requirements for effectiveness of this
Registration Statement under Rule 485(b) and has duly caused this post-effective amendment (the “Amendment”) to its Registration Statement to be signed on its behalf by the undersigned, thereto duly authorized, in the City of Bethesda
and the State of Maryland on March 14, 2024.
|
ProShares Trust
|
|
|
By:
|
/s/ Todd B. Johnson
|
|
|
Todd B. Johnson President and Principal Executive Officer
|
Pursuant to the requirements of the Securities Act of 1933, this Amendment to the
Registration Statement has been signed below by the following persons in the capacities indicated.
|
Signature
|
Title
|
Date
|
|
/s/ Michael L. Sapir*
Michael L. Sapir
|
Trustee, Chairman
|
March 14, 2024
|
|
/s/ Russell S. Reynolds, III*
Russell S. Reynolds, III
|
Trustee
|
March 14, 2024
|
|
/s/ Michael C. Wachs*
Michael C. Wachs
|
Trustee
|
March 14, 2024
|
|
/s/ William D. Fertig*
William D. Fertig
|
Trustee
|
March 14, 2024
|
|
/s/ Todd B. Johnson
Todd B. Johnson
|
President and Principal Executive Officer
|
March 14, 2024
|
|
/s/ Maria Clem Sell
Maria Clem Sell
|
Treasurer (Principal Financial Officer and Principal
Accounting Officer)
|
March 14, 2024
|
|
* By:/s/ Richard F. Morris
Richard F. Morris
As Attorney-in-fact
Date: March 14, 2024
|
|
|
|
|
|
|
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