485APOS 1 d485apos.htm 485APOS 485APOS
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As filed with the Securities and Exchange Commission on February 28, 2008

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    x

Pre-Effective Amendment No.

Post-Effective Amendment No. 8

and/or

REGISTRATION STATEMENT

UNDER

THE INVESTMENT COMPANY ACT OF 1940    x

Amendment No. 15

 

 

ProShares Trust

(Exact name of Registrant as Specified in Trust Instrument)

 

 

7501 Wisconsin Avenue,

Suite 1000 Bethesda, MD 20814

(Address of Principal Executive Office) (Zip Code)

(240) 497-6400

(Area Code and Telephone Number)

 

 

Michael L. Sapir

Chairman

ProShare Advisors LLC

7501 Wisconsin Avenue, Suite 1000

Bethesda, MD 20814

(Name and Address of Agent for Service)

With a copy to:

John Loder, Esq.

c/o Ropes & Gray LLP

One International Place

Boston, MA 02110

 

 

Approximate date of Proposed Public Offering:

It is proposed that this filing will become effective:

 

¨ immediately upon filing pursuant to paragraph (b)

 

¨ 60 days after filing pursuant to paragraph (a)(1)

 

¨ on (date) pursuant to paragraph (a)(1)

 

x 75 days after filing pursuant to paragraph (a)(2)

 

¨ on (date) 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.

 

 

 


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EXPLANATORY NOTE

This post-effective amendment relates only to the following series of ProShares Trust: Barrons 400, Ultra Russell3000, Ultra DJ Wilshire Total MarketSM, Ultra MSCI EAFE, Ultra MSCI Emerging Markets, Ultra MSCI Japan, Ultra FTSE/Xinhua China 25, UltraShort Russell3000, UltraShort DJ Wilshire Total MarketSM, UltraShort MSCI Australia, UltraShort MSCI Brazil, UltraShort MSCI BRIC, UltraShort MSCI Europe, UltraShort MSCI Latin America, UltraShort MSCI Mexico, UltraShort MSCI Pacific ex-Japan, UltraShort MSCI South Korea, UltraShort MSCI Taiwan and UltraShort S&P Europe 350® ProShares. No information relating to any other series or class of series of ProShares Trust is amended or superseded hereby.


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Ultra ProShares   Short ProShares
Ultra MarketCap   Short MarketCap
ULTRA Russell3000   ULTRASHORT Russell3000
ULTRA DJ Wilshire Total MarketSM   ULTRASHORT DJ Wilshire Total MarketSM
Ultra International   Short International
ULTRA MSCI EAFE   ULTRASHORT MSCI Australia
ULTRA MSCI Emerging Markets   ULTRASHORT MSCI Brazil
ULTRA MSCI Japan   ULTRASHORT MSCI BRIC
ULTRA FTSE/Xinhua China 25   ULTRASHORT MSCI Europe
  ULTRASHORT MSCI Latin America
  ULTRASHORT MSCI Mexico
  ULTRASHORT MSCI Pacific ex-Japan
  ULTRASHORT MSCI South Korea
  ULTRASHORT MSCI Taiwan
  ULTRASHORT S&P Europe 350®

Prospectus

ProShares Trust

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.

[MAY]     , 2008

Distributor: SEI Investments Distribution Co.

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ProShares Trust (“Trust”) is a registered investment company organized as a Delaware business trust that consists of separate exchange-traded funds (each a “Fund”). ProShare Advisors LLC (“ProShare Advisors” or “Advisor”) serves as the investment advisor to each Fund.

The shares of each Fund (“Shares”) are listed on the American Stock Exchange (“Exchange”). Shares trade on the Exchange at market prices that may differ from the indicative intraday value (“IIV”) of the Shares disseminated by the Exchange and may be above, below or equal to the Funds’ end of day net asset value (“NAV”). Each Fund has its own CUSIP number and exchange trading symbol. Each Fund issues and redeems Shares on a continuous basis at NAV in large, specified numbers of Shares called “Creation Units.” Creation Units of the Ultra ProShares are issued and redeemed principally in-kind for securities included in the relevant underlying index and an amount of cash. Creation Units of the Short ProShares are purchased and redeemed in cash.

Except when aggregated in Creation Units, Shares are not redeemable securities of the Funds. Retail investors, therefore, generally will not be able to purchase or redeem Shares directly from or with a Fund. Rather, most retail investors will purchase or sell Shares in the secondary market with the assistance of a broker. Thus, some of the information contained in this prospectus (the “Prospectus”)—such as information about purchasing and redeeming Shares from or with a Fund and all references to the Transaction Fee imposed on purchases and redemptions—is not relevant to retail investors.

 

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Overview of Investment Objectives, Principal Investment Strategies and Risks

   5

Ultra ProShares

   18

Short ProShares

   31

Creation and Redemption

   56

Purchasing Shares Directly From a Fund

   57

Redeeming Shares Directly From a Fund

   58

Transaction Fees on Creation and Redemption Transactions

   59

Distributions

   61

Dividend Reinvestment Services

   61

Determination of NAV

   61

Taxes

   61

Management of ProShares Trust

   64

 

 

 

ProShare Advisors LLC—Investment Advisor

 

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Overview of Investment Objectives,

Principal Investment Strategies

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Overview of Investment Objectives, Principal Investment Strategies and Risks

Investment Objectives and Principal Investment Strategies

Each series of ProShares (“Fund”) is designed to correspond to the performance of a daily benchmark, before fees and expenses, such as the daily price performance, the inverse of the daily price performance, a multiple of the daily price performance, or a multiple of the inverse of the daily price performance, of an index or security. Ultra ProShares are designed to correspond to a multiple of the daily performance of an underlying index. Short ProShares are designed to correspond to the inverse of the daily performance or twice (200%) the inverse of the daily performance of an underlying index. The Funds do not seek to achieve their stated investment objective over a period of time greater than one day because mathematical compounding prevents the Funds from achieving such results. Each Fund’s investment objective is non-fundamental, meaning it may be changed by the Board of Trustees, without the approval of Fund shareholders. Each Fund reserves the right to substitute a different index or security for the index underlying its benchmark.

In seeking to achieve each Fund’s investment objective, ProShare Advisors uses a mathematical approach to investing. Using this approach, ProShare Advisors determines the type, quantity and mix of investment positions that a Fund should hold to approximate the performance of its benchmark. The Funds employ investment techniques that ProShare Advisors believes should simulate the movement of their respective benchmarks.

ProShare Advisors does not invest the assets of the Funds in stocks or financial instruments based on ProShare Advisors’ view of the investment merit of a particular security, instrument, or company, nor does it conduct conventional stock research or analysis, or forecast stock market movement or trends, in managing the assets of the Funds. Each Fund seeks to remain fully invested at all times in securities and/or financial instruments that provide exposure to its underlying index without regard to market conditions, trends or direction. The Funds do not take temporary defensive positions.

A Fund may hold a representative sample of the securities in the underlying index, which has aggregate characteristics similar to those of the underlying index. This “sampling” process typically involves selecting a representative sample of securities in an index principally to enhance liquidity and reduce transaction costs while seeking to maintain high correlation with, and similar aggregate characteristics (e.g., market capitalization and industry weightings) to, the underlying index. In addition, a Fund may obtain exposure to components not included in the underlying index, invest in securities that are not included in the underlying index or may overweight or underweight certain components contained in the underlying index.

Strategies Specific to the Ultra ProShares

Each Ultra ProShares invests in equity securities and/or financial instruments (including derivatives) that ProShare Advisors believes, in combination, should have similar daily price return characteristics as twice (200%) the daily return of its underlying index.

 

 

Equity Securities are securities that include common stock, preferred stock, depositary receipts, convertible securities and rights and warrants. Stocks represent an ownership interest in a corporation.

 

 

Financial Instruments (including derivatives) are investment contracts whose value is derived from the value of an underlying asset, interest rate or index. Each Ultra ProShares may invest in financial instruments as a substitute for investing directly in stocks or bonds in order to gain exposure to its underlying index. Financial Instruments may also be used to produce economically “leveraged” investment results. Use of financial instruments may involve costs, in addition to transaction costs, and suitable in financial instruments may not be available in all circumstances. Financial instruments include:

 

 

Futures Contracts and Options on Futures Contracts Futures or futures contracts are contracts to pay a fixed price for an agreed-upon amount of commodities or securities, or the cash value of the commodities or securities on an agreed-upon date.

 

 

Swap Agreements Swap agreements are two-party contracts entered into primarily by institutional investors for a specified period ranging from a day to more than one year. In a standard “swap” transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross returns to be exchanged or “swapped” between the parties are calculated with respect to a “notional amount,” e.g., the return on or increase in value of a particular dollar amount invested in a “basket” of securities representing a particular index. The Funds are subject to credit or performance risk on the amount each Fund expects to receive from swap agreement counterparties. A swap counterparty default on its payment obligation to a Fund may cause the value of the Fund to decrease.

 

 

Forward Contracts Forward contracts are two-party contracts entered into with dealers or financial institutions for the purchase or sale of a specific quantity of a commodity, security, foreign currency or other financial instrument at a set price, with delivery and settlement at a specified future date. Forwards contracts may also be structured for cash settlement, rather than physical delivery.

 

 

Options on Securities and Stock Indexes and Investments Covering Such Positions Option contracts grant one party a right, for a price, either to buy or sell a security or futures contract at a fixed price during a specified period or on a specified day. Call options give investors the right to buy a stock or futures contract at an agreed-upon price on or before a certain date. A put option gives the investor the right to sell a stock or futures contract at an agreed-upon price on or before a certain date.

 

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Pursuant to an exemptive order received from the U.S. Securities and Exchange Commission’s (“SEC”), each Ultra ProShares has committed to invest between 85% and 100% of its assets in the securities comprising the underlying index. This commitment is in addition to any requirements of the SEC “names rule” (Rule 35d-1 under the Investment Company Act of 1940, as amended (the “1940 Act”)). For those Ultra ProShares subject to the names rule, such Funds commit at least 80% of assets (i.e., net assets plus borrowings for investment purposes), under normal circumstances, to equity securities contained in the underlying index and/or financial instruments with similar economic characteristics.

In addition, each Ultra ProShares may use other securities, financial instruments and techniques in pursuit of its investment objective. Assets of each Ultra ProShares not invested in equity securities or financial instruments may be invested in debt securities and/or money market instruments, including repurchase agreements.

Strategies Specific to the Short ProShares

The Short ProShares invest in financial instruments (including derivatives) that ProShare Advisors believes, in combination, should have similar daily return characteristics as the inverse (opposite) or a multiple of the inverse of the underlying index. These instruments include:

 

 

Financial Instruments (including derivatives) are investment contracts whose value is derived from the value of an underlying asset, interest rate or index and may be used to produce economically “leveraged” investment results. Financial instruments include:

 

 

Futures Contracts and Options on Futures Contracts Futures or futures contracts are contracts to pay a fixed price for an agreed-upon amount of commodities or securities, or the cash value of the commodities or securities on an agreed-upon date.

 

 

Swap Agreements Swap agreements are two-party contracts entered into primarily by institutional investors for a specified period ranging from a day to more than one year. In a standard “swap” transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross returns to be exchanged or “swapped” between the parties are calculated with respect to a “notional amount,” e.g., the return on or increase in value of a particular dollar amount invested in a “basket” of securities representing a particular index. The Funds are subject to credit or performance risk on the amount each Fund expects to receive from swap agreement counterparties. A swap counterparty default on its payment obligation to a Fund may cause the value of the Fund to decrease.

 

 

Forward Contracts Forward contracts are two-party contracts entered into with dealers or financial institutions where a purchase or sale of a specific quantity of a commodity, security, foreign currency or other financial instrument at a set price, with delivery and settlement at a specified future date. Forward contracts may also be structured for cash settlement, rather than physical delivery.

 

 

Options on Securities and Stock Indexes and Investments Covering Such Positions Option contracts grant one party a right, for a price, either to buy or sell a security or futures contract at a fixed price during a specified period or on a specified day. Call options give investors the right to buy a stock at an agreed-upon price on or before a certain date. A put option gives the investor the right to sell a stock at an agreed-upon price on or before a certain date.

In addition, each Short ProShares may use other financial instruments and techniques in pursuit of its investment objective. Assets of the Short ProShares not invested in financial instruments may be invested in debt instruments and/or money market instruments, including repurchase agreements. Short ProShares generally do not invest in equity securities such as common stock. For those Short ProShares subject to the names rule discussed above, such Funds commit at least 80% of assets (i.e., net assets plus borrowings for investment purposes), under normal circumstances, to financial instruments with economic characteristics similar to those of the Funds’ underlying indexes.

Principal Risks

Like all investments, investing in the Funds entails risks. Many factors affect the value of an investment in a Fund. A Fund’s NAV will change daily based on variations in market conditions, interest rates and other economic, political or financial developments. A Fund’s response to these developments will depend upon the types of securities 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 factors most likely to have a significant impact on a Fund’s portfolio are called “principal risks.” The principal risks for each Fund are noted in each Fund description and described below. Some risks apply to all Funds, while others are specific to the investment strategies of certain Funds, as indicated below. The Statement of Additional Information (“SAI”) contains additional information about the Funds, their investment strategies and related risks. Each Fund may be subject to risks in addition to those identified as principal risks.

 

 

Aggressive Investment Technique Risk (All Funds) The Funds use investment techniques that may be considered aggressive, including the use of futures contracts, options on futures contracts, securities and indexes, forward contracts, swap agreements and similar instruments. The Funds’ investment in financial instruments may involve a small investment relative to the amount of investment exposure assumed and may result in losses exceeding the amounts invested. Such instruments,

 

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particularly when used to create leverage, may expose the Funds to potentially dramatic changes (losses or gains) in the value of the instruments and imperfect correlation between the value of the instruments and the security or index. The use of aggressive investment techniques also exposes the Funds to risks different from, or possibly greater than, the risks associated with investing directly in securities contained in an index underlying a Fund’s benchmark, including: 1) the risk that an instrument is mispriced; 2) credit or performance risk on the amount the Fund expects to receive from a counterparty; 3) the risk that securities prices, interest rates and currency markets will move adversely and the Fund will incur significant losses; 4) the risk that there may be imperfect correlation between the price of financial instruments and movements in the prices of the underlying securities; 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 any particular instrument and/or possible exchange-imposed price fluctuation limits, which may make it difficult or impossible to adjust a Fund’s position in a particular financial instrument when desired.

 

 

Concentration Risk (All Funds) A Fund will concentrate its investments in issuers of one or more particular industries to the same extent that its underlying index is so concentrated and to the extent permitted by applicable regulatory guidance. There is a risk that those issuers (or industry sector) will perform poorly and negatively affect a Fund. Concentration risk results from maintaining exposure to issuers conducting business in a specific industry. The risk of concentrating investments in a limited number of issuers in a particular industry is that a Fund will be more susceptible to the risks associated with that industry than a Fund that does not concentrate its investments.

 

 

Correlation Risk (All Funds) A number of factors may affect a Fund’s ability to achieve a high degree of correlation with its benchmark, and there can be no guarantee that a Fund will achieve a high degree of correlation. A failure to achieve a high degree of correlation may prevent a Fund from achieving its investment objective. A number of factors may adversely affect a Fund’s correlation with its benchmark, including fees, expenses, transaction costs, costs associated with the use of leveraged investment techniques, income items and accounting standards. A Fund may not have investment exposure to all securities in its underlying benchmark index, or its weighting of investment exposure to such stocks or industries may be different from that of the index. In addition, a Fund may invest in securities or financial instruments not included in the index underlying its benchmark. A Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to its benchmark. Activities surrounding annual index reconstitutions and other index rebalancing or reconstitution events may hinder the Funds’ ability to meet their daily investment objective on that day. Each Fund seeks to rebalance its portfolio daily to keep leverage consistent with each Fund’s daily investment objective.

Certain Funds are “leveraged” funds in the sense that they have investment objectives to match a multiple of the performance of an index on a given day. These Funds are subject to all of the correlation risks described above. In addition, there is a special form of correlation risk that derives from these Funds’ use of leverage, which is that for periods greater than one day, the use of leverage tends to cause the performance of a Fund to be either greater than or less than the index performance times the stated multiple in the Fund objective, before accounting for fees and fund expenses.

The three graphs at right illustrate this point. Each of the three graphs shows a simulated hypothetical one year performance of an index compared with the performance of a Fund that perfectly achieves its investment objective of twice (200%) the daily index returns. The graphs demonstrate that, for periods greater than one day, a leveraged Fund is likely to underperform or over-perform (but not match) the index performance times the stated multiple in the Fund objective.

To isolate the impact of leverage, these graphs assume a) no dividends paid by the companies included on the index; b) no fund expenses; and c) borrowing/lending rates (to obtain required leverage) of zero percent. If fund expenses were included, the Fund’s performance would be lower than that shown. Each of the graphs also assumes a volatility rate of 15%, which is an approximate average of the five-year historical volatility rate of the S&P 600 Index, S&P MidCap 400 Index, Russell 2000 Index, NASDAQ-100 Index and Dow Jones Industrial Average. An index’s volatility rate is a statistical measure of the magnitude of fluctuations in the returns of an index. Other indexes to which the Funds are benchmarked have different historical volatility rates; certain of the Funds’ historical volatility rates are substantially in excess of 15%.

 

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Please see the SAI for a further discussion of how both index volatility and index performance can affect Fund performance.

 

 

Counterparty Risk (All Funds) A Fund will be subject to credit risk (described below) with respect to the amount it expects to receive from counterparties to financial instruments entered into by the Fund or held by special purpose or structured vehicles. If a counterparty becomes bankrupt or otherwise fails to perform its obligations due to financial difficulties, the value of your investment in a Fund may decline. A Fund may experience significant delays in obtaining any recovery in a bankruptcy or other reorganization proceeding and a Fund may obtain only limited recovery or may obtain no recovery in such circumstances. The Funds typically enter into transactions with counterparties whose credit rating is investment grade, as determined by a nationally recognized statistical rating organization, or, if unrated, judged by ProShare Advisors to be of comparable quality.

 

 

Credit Risk (All Funds) An issuer or guarantor of debt instruments or counterparty to financial instruments may be unable or unwilling to make interest payments and/or repay principal. Changes in an issuer’s financial strength or in an issuer’s or instrument’s credit rating may affect an instrument’s value and, thus, have an impact on Fund performance. As described under “Counterparty Risk” above, the Funds will also be subject to credit risk with respect to the amount a Fund expects to receive from counterparties in financial

 

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instruments transactions. If a counterparty defaults on its payment obligations to a Fund, the value of your investment in a Fund may decline.

 

 

Early Close/Trading Halt Risk (All Funds) An exchange or market may close early or issue trading halts on specific securities, or the ability to buy or sell certain securities may be restricted, which may result in a Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, a Fund may be unable to rebalance its portfolio, accurately price its investments and/or may incur substantial trading losses.

 

 

Equity Risk (All Funds) The equity markets are volatile, and the value of securities, futures, options contracts and other instruments correlated with the equity markets may fluctuate dramatically from day-to-day. This volatility may cause the value of an investment in a Fund to decrease. The Short ProShares respond differently to these risks than funds that are positively correlated to the equity markets, such as the Ultra ProShares.

 

 

Emerging Markets Risk (Ultra MSCI Emerging Markets, Ultra FTSE/Xinhua China 25, UltraShort MSCI Brazil, UltraShort MSCI BRIC, UltraShort MSCI Latin America, UltraShort MSCI Mexico, UltraShort MSCI Pacific ex-Japan, UltraShort MSCI South Korea and UltraShort MSCI Taiwan ProShares) Emerging market securities are subject to risks different from, or greater than, the risks of investing in domestic securities or in companies economically tied to foreign, developed countries. These risks include: smaller market capitalization of securities markets, which may suffer periods of relative illiquidity; significant price volatility; restrictions on foreign investment; possible repatriation of investment income and capital; great social, economic and political uncertainty and instability; more substantial governmental involvement in the economy; less governmental supervision and regulation; differences in auditing and financial reporting standards, which may result in unavailability of material information about issuers; and less developed legal systems. In addition, the risks associated with investing in narrowly defined geographic securities (discussed under “Geographic Concentration Risk”) are generally more pronounced with respect to investments in companies economically tied to emerging market countries.

 

 

Foreign Currency Risk (Short International ProShares and Ultra International ProShares) Investments denominated in foreign currencies are exposed to risk factors in addition to investments denominated in U.S. dollars. The value of an investment denominated in a foreign currency could change significantly as foreign currencies strengthen or weaken relative to the U.S. dollar. Generally, when the U.S. dollar falls in value against a foreign currency, an investment in that country gains value (i.e., a loss to the Short International ProShares) because that currency is worth fewer U.S. dollars. Risks related to foreign currencies also include those related to economic or political developments, market inefficiencies or a higher risk that essential investment information may be incomplete, unavailable or inaccurate. A U.S. dollar investment in Depositary Receipts or Ordinary Shares of foreign issuers traded on U.S. exchanges are subject to foreign currency risk.

 

 

Foreign Investment Risk (Short International ProShares and Ultra International ProShares) Foreign stocks and financial instruments correlated to such stocks may be more volatile than their U.S. counterparts for a variety of reasons, including the effects of economic or political developments, public health and safety issues, demographic changes, market inefficiencies, or a higher risk that essential investment information may be incomplete, unavailable or inaccurate. Additionally, certain countries may lack uniform accounting and disclosure standards, or have standards that differ from U.S. standards. Fluctuations in foreign currencies, may have an impact on the value of securities or financial instruments purchased by a Fund as described under Foreign Currency Risk above.

 

 

Geographic Concentration Risk (Short International ProShares and Ultra International ProShares) Certain Funds that focus their investments in companies economically tied to particular countries or geographic regions may be particularly susceptible to economic, political or regulatory events affecting those countries or regions. In addition, currency devaluations could occur in countries that have not yet experienced currency devaluation to date, or could continue to occur in countries that have already experienced such devaluations. As a result, Funds that focus their investments in companies economically tied to a particular geographic region or country may be more volatile than a more geographically diversified Fund.

 

 

Liquidity Risk (All Funds) In certain circumstances, such as the disruption of the orderly markets for the securities or financial instruments in which a Fund invests, a Fund might not be able to dispose of certain holdings quickly or at prices that represent true market value in the judgment of ProShare Advisors. This may prevent a Fund from limiting losses, realizing gains or from achieving a high correlation or inverse correlation with its underlying index.

 

 

Market Price Variance Risk (All Funds) Individual Shares of a Fund will be listed for trading on the Exchange and can be bought and sold in the secondary market at market prices. The market prices of Shares will fluctuate in response to changes in NAV and supply and demand for Shares. ProShare Advisors cannot predict whether Shares will trade above, below or at their NAV. Differences between secondary market prices and NAV for Shares may be due largely to supply and demand forces in the secondary market, which forces may not be the same as those influencing prices for securities or instruments held by a Fund at a particular time. Given the fact that Shares can be created and redeemed in Creation Units, ProShare Advisors believes that large discounts or premiums to the NAV of Shares should not be sustained. There may, however, be times when the market price and the NAV vary significantly and you may pay more than NAV when buying Shares on the secondary market, and you may receive less than NAV when you sell those Shares. 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, the bid-ask spread often increases significantly. This means that Shares may trade at a discount to NAV, and the discount is likely to be greatest when the price of Shares is falling fastest, which may be the time that you most want to sell your Shares. A Fund’s investment results are measured based upon the daily NAV of the Fund. Investors purchasing and selling Shares in the secondary market may not experience investment results consistent with those experienced by those creating and redeeming directly with a Fund.

 

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Market Risk (All Funds) The Funds are subject to market risks that will affect the value of their Shares, including adverse issuer, political, regulatory, market or economic developments, as well as developments that impact specific economic sectors, industries or segments of the market. Investors in Ultra ProShares should normally lose value on days when its underlying index declines. Investors in Short ProShares should normally lose value on days when its underlying index increases. Each of the Funds seeks to remain fully invested regardless of market conditions.

 

 

Small- and Mid-Cap Company Investment Risk (Ultra Russell3000, Ultra DJ Wilshire Total Market, Ultra MSCI Emerging Markets, UltraShort Russell3000, UltraShort DJ Wilshire Total Market and Short International ProShares) Small- and mid-cap companies may have limited product lines or resources and may be dependant upon a particular market niche and may have greater fluctuations in price than the stocks of large companies. Further, stocks of small- and mid-sized companies could be more difficult to liquidate during market downturns compared to larger, more widely traded companies. In addition, small-cap companies tend to lack the financial and personnel resources to handle economic or industry-wide setbacks and, as a result, such setbacks could have a greater effect on small-cap security prices.

 

 

Non-diversification Risk (All Funds) The Funds are classified as “non-diversified” under the 1940 Act, and each Fund has the ability to invest a relatively high percentage of its investments in the securities of a small number of issuers if there is a small number of issuers in the underlying index or if ProShare Advisors determines that doing so is the most efficient means of meeting its objective. This would make the performance of the Funds more susceptible to a single economic, political or regulatory event than a diversified fund might be.

 

 

Portfolio Turnover Risk (All Funds) Active market trading of Fund Shares may cause more frequent creation or redemption activities and could increase the rate of portfolio turnover. Higher turnover rates may increase brokerage costs and may result in increased taxable capital gains.

 

 

Valuation Time Risk (Short International ProShares and Ultra International ProShares) Except for the Short International ProShares, the Funds value their portfolio as of the close of regular trading on the New York Stock Exchange (“NYSE”) (generally 4:00 p.m. Eastern time). Each Short International ProShares values its portfolio as of the close of regular trading on the NYSE Arca (generally 4:15 p.m. Eastern time). In some cases, foreign securities markets close before the NYSE or NYSE Arca opens or may not be open for business on the same calendar days as the NYSE or NYSE Arca. As a result, the daily performance of a Fund that tracks a foreign market index may vary from the performance of that index.

Additional Securities, Instruments and Strategies

This section describes additional securities, instruments and strategies that may be utilized by a Fund.

 

 

Debt Instruments include bonds and other instruments, such as certificates of deposit, euro time deposits, commercial paper (including asset-backed commercial paper), notes, funding agreements and U.S. Government securities that are used by U.S. and foreign banks, financial institutions, corporations or other entities, to borrow money from investors. Holders of debt instruments have a higher priority claim to assets than do holders of equity securities. Typically, the debt issuer pays the investor a fixed, variable or floating rate of interest and must repay the borrowed amount at maturity. Some debt instruments, such as zero coupon bonds, are sold at a discount from their face values instead of paying interest.

 

 

Depositary Receipts (DRs) include American Depositary Receipts (ADRs), Global Depositary Receipts (GDRs) and New York Shares (NYSs).

 

 

ADRs represent the right to receive securities of foreign issuers deposited in a bank or trust company. ADRs are an alternative to purchasing the underlying securities in their national markets and currencies. Investment in ADRs has certain advantages over direct investment in the underlying foreign securities because: (i) ADRs are U.S. dollar-denominated investments that are easily transferable and for which market quotations are readily available, and (ii) issuers whose securities are represented by ADRs are generally subject to auditing, accounting and financial reporting standards similar to those applied to domestic issuers.

 

 

GDRs are receipts for shares in a foreign-based corporation traded in capital markets around the world. While ADRs permit foreign corporations to offer shares to American citizens, GDRs allow companies in Europe, Asia, the United States and Latin America to offer shares in many markets around the world.

 

 

A NYS is a share of New York registry, representing equity ownership in a non-U.S. company, allowing for a part of the capital of the company to be outstanding in the U.S. and part in the home market. It is issued by a U.S. transfer agent and registrar on behalf of the company and created against the cancellation of the local share by the local registrar. One New York Share is always equal to one ordinary share. New York Share programs are typically managed by the same banks that manage ADRs, as the mechanics of the instrument are very similar. New York Shares are used primarily by Dutch companies.

 

 

Money Market Instruments are short-term debt instruments that have terms-to-maturity of less than 397 days and exhibit high quality credit profiles. Money market instruments include U.S. Government securities and repurchase agreements.

 

 

Repurchase Agreements are contracts in which the seller of securities, usually U.S. Government Securities or other Money Market Instruments, agrees to buy them back at a specified time and price. Repurchase Agreements are primarily used by the Funds as a short-term investment vehicle for cash positions.

 

 

Reverse Repurchase Agreements involve the sale of a security by a Fund to another party (generally a bank or dealer) in return for cash and an agreement by the Fund to buy the security back at a specified price and time. Reverse repurchase agreements may be considered a form of borrowing for some purposes and may create leverage.

 

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Structured Notes are debt obligations that may include components such as swaps, forwards, options, caps or floors. Structured notes may be used to indirectly expose a portfolio to asset classes or markets.

 

 

U.S. Government Securities are issued by the U.S. Government or one of its agencies or instrumentalities. Some, but not all, U.S. Government securities are backed by the full faith and credit of the federal government. Other U.S. Government securities are backed by the issuer’s right to borrow from the U.S. Treasury and some are backed only by the credit of the issuing organization.

Special Risks of Exchange-Traded Funds

Not Individually Redeemable Shares may be redeemed by a Fund at NAV only in large blocks known as Creation Units. You may incur brokerage costs purchasing enough Shares to constitute a Creation Unit.

Trading Issues Trading in Shares on the Exchange may be halted due to market conditions or for reasons that, in the view of the Exchange, make trading in Shares inadvisable. In addition, trading in Shares on the Exchange may be halted due to extraordinary market volatility or other reasons. There can be no assurance that Shares will continue to meet the listing requirements of the Exchange, and the listing requirements may be amended from time to time.

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 each Fund of ProShares Trust. 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 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 may be issued on an ongoing basis, a “distribution” of 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, as amended (“Securities Act”). 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 Investment Company Act of 1940, as amended, each Fund is a registered investment company, and the acquisition of Shares by other investment companies is subject to the restrictions of Section 12(d)(1) thereof (“Section 12(d)(1)”).

The Trust and the Funds have obtained an exemptive order from the SEC allowing, a registered investment company to invest in a Fund beyond the limits of Section 12(d)(1) subject to certain conditions, including that a registered investment company enters into a Participation Agreement with ProShares Trust regarding the terms of the investment. Any investment company considering purchasing Shares of a Fund in amounts that would cause it to exceed the restrictions under Section 12(d)(1) should contact the Trust.

A Precautionary Note Regarding Unusual Circumstances ProShares Trust can postpone payment of redemption proceeds for any period during which (1) the New York Stock Exchange (the “NYSE”) is closed other than customary weekend and holiday closings, (2) trading on the NYSE is restricted, as determined by the SEC, (3) any emergency circumstances exist, as determined by the SEC or (4) the SEC by order permits for the protection of shareholders of a Fund.

Underlying Indexes

The Funds have entered into licensing agreements for the use of the indexes underlying their benchmarks (each, an “Index”). A description of the indexes currently underlying the Funds’ benchmarks follows:

Ultra DJ Wilshire Total Market ProShares and UltraShort DJ Wilshire Total Market ProShares:

The Dow Jones Wilshire 5000 Total MarketSM Index represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The Index includes nearly all common stocks, REITs and limited partnership shares traded primarily on the New York Stock Exchange, NASDAQ or American Stock Exchange. The price of each issue included in the Index is weighted by its relative market capitalization. The Index provides exhaustive coverage of the U.S. equity market by targeting around 100% of free float-adjusted market capitalization in the U.S. As of December 31, 2007, the Index included companies with capitalizations between $1 million and $470 billion. The average capitalization of the companies comprising the Index was approximately $83 billion. The Index was concentrated in the Consumer Non-durables industry group, which comprised 24% of the market capitalization of the Index.

 

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Ultra Russell3000 ProShares and UltraShort Russell3000 ProShares:

The Russell 3000® Index offers investors access to the broad U.S. equity universe representing approximately 98% of the U.S. market. The Index is designed to be a comprehensive representation of the investable U.S. equity market and its segments. It is a free float-adjusted market capitalization-weighted index, and includes only common stocks belonging to corporations incorporated in the U.S. and its territories. The Index provides exhaustive coverage of the U.S. equity market by targeting around 98% of free float-adjusted market capitalization in the U.S. As of December 31, 2007, the Index included companies with capitalizations between $27 million and $512 billion. The average capitalization of the companies comprising the Index was approximately $89 billion. The Index was concentrated in the Financial Services industry group, which comprised 19% of the market capitalization of the Index.

Ultra MSCI EAFE ProShares:

The MSCI® EAFE® Index (Europe, Australasia, Far East) adjusts the market capitalization of index constituents for free float and targets for index inclusion 85% of free float-adjusted market capitalization in each industry group in developed market countries, excluding the US & Canada. As of December 31, 2007, the Index consisted of the following 21 developed market country indexes: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom. The Index included companies with capitalizations between $90 million and $233 billion. The average capitalization of the companies comprising the Index was approximately $11 billion. The Index was concentrated in the Financials industry group, which comprised 27% of the market capitalization of the Index.

Ultra MSCI Emerging Markets ProShares:

The MSCI® Emerging Markets Index adjusts the market capitalization of index constituents for free float and targets for index inclusion 85% of free float-adjusted market capitalization in each industry group in global emerging markets countries. As of December 31, 2007, the Index consisted of the following 25 emerging market country indexes: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey. The Index included companies with capitalizations between $48 million and $133 billion. The average capitalization of the companies comprising the Index was approximately $4 billion. The Index was concentrated in the Financials industry group, which comprised 22% of the market capitalization of the Index.

Ultra MSCI Japan ProShares:

The MSCI® Japan Index adjusts the market capitalization of index constituents for free float and targets for index inclusion 85% of free float-adjusted market capitalization in each industry group in Japan. As of December 31, 2007, the Index included companies with capitalizations between $90 million and $146 billion. The average capitalization of the companies comprising the Index was approximately $7 billion. The Index was concentrated in the Consumer Discretionary industry group, which comprised 20% of the market capitalization of the Index.

Ultra FTSE/Xinhua China 25 ProShares:

The FTSE/Xinhua China 25 Index comprises 25 of the largest and most liquid Chinese stocks listed at the Hong Kong Stock Exchange (HKEX). This free float adjusted index caps the weight of any of constituent stock at 10% to ensure broad representation of the Chinese economy. As of June 30, 2007, the Index included companies with capitalizations between $2 billion and $64 billion. The average capitalization of the companies comprising the Index was approximately $13 billion. As of March 31, 2007, the Index was concentrated in the Financials industry group, which comprised approximately 40.75% of the market capitalization of the Index.

UltraShort MSCI Australia ProShares:

The MSCI® Australia Index is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of the Australian market. To construct the Index, every listed security in the market is identified. Securities are free float-adjusted, classified in accordance with the Global Industry Classification Standard (GICS®), and screened by size, liquidity and minimum free float. The Index is divided into large- and mid-cap segments and provides exhaustive coverage of these size segments by targeting around 85% of free float-adjusted market capitalization in the Australian market. As of December 31, 2007, the Index included companies with capitalizations between $480 million and $118 billion. The average capitalization of the companies comprising the Index was approximately $10 billion. The Index was concentrated in the Financials industry group, which comprised 45% of the market capitalization of the Index.

UltraShort MSCI Brazil ProShares:

The MSCI® Brazil Index is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of the Brazilian market. To construct the Index, every listed security in the market is identified. Securities are free float-adjusted, classified in accordance with the Global Industry Classification Standard (GICS®), and screened by size, liquidity and minimum free float. The Index is divided into large- and mid-cap segments and provide exhaustive coverage of these size segments by targeting around 85% of free float-adjusted market capitalization in the Brazilian market. As of December 31, 2007, the Index included companies with capitalizations between $201 million and $78 billion. The average capitalization of the companies comprising the Index was approximately $7 billion. The Index was concentrated in the Materials industry group, which comprised 30% of the market capitalization of the Index.

UltraShort MSCI BRIC ProShares:

The MSCI® BRIC Equity IndexSM combines, on a market capitalization-weighted basis, the components of the MSCI Brazil, MSCI Russia, MSCI India and MSCI China Indexes. Each of these indexes, in turn, are free float-adjusted market capitalization-weighted indexes that are designed to measure the equity market performance of their respective countries. To construct the indexes, every listed security in the market is identified. Securities are free float-adjusted, classified in accordance with the Global Industry Classification Standard (GICS®), and

 

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screened by size, liquidity and minimum free float. Each index is divided into large- and mid-cap segments and provides exhaustive coverage of these size segments by targeting around 85% of free float-adjusted market capitalization of each country’s market. As of December 31, 2007, the Index included companies located with capitalizations between $167 million and $133 billion. The average capitalization of the companies comprising the Index was approximately $6 billion. The Index was concentrated in the Energy industry group, which comprised 31% of the market capitalization of the Index.

UltraShort MSCI Europe ProShares:

The MSCI® Europe Index is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of the developed markets in Europe. The Index is divided into large- and mid-cap segments and provides exhaustive coverage of these size segments by targeting around 85% of free float-adjusted market capitalization in the region. As of December 31, 2007, the Index consisted of the following 16 developed market countries: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. The Index included companies with capitalizations between $220 million and $233 billion. The average capitalization of the companies comprising the Index was approximately $16 billion. The Index was concentrated in the Financials industry group, which comprised 26% of the market capitalization of the Index.

UltraShort MSCI Latin American ProShares:

The MSCI® EM (Emerging Markets) Latin America Index is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of emerging markets in Latin America. The Index is divided into large- and mid-cap segments and provides exhaustive coverage of these size segments by targeting around 85% of free float-adjusted market capitalization in the region. As of December 31, 2007, the Index consisted of the following six emerging market countries: Argentina, Brazil, Chile, Colombia, Mexico and Peru. The Index included companies with capitalizations between $56 million and $78 billion. The average capitalization of the companies comprising the Index was approximately $5 billion. The Index was concentrated in the Materials industry group, which comprised 27% of the market capitalization of the Index.

UltraShort MSCI Mexico ProShares:

The MSCI® Mexico Index is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of the Mexican market. To construct the Index, every listed security in the market is identified. Securities are free float-adjusted, classified in accordance with the Global Industry Classification Standard (GICS®), and screened by size, liquidity and minimum free float. The Index is divided into large- and mid-cap segments and provide exhaustive coverage of these size segments by targeting around 85% of free float-adjusted market capitalization in the Mexican market. As of December 31, 2007, the Index included companies with capitalizations between $341 million and $56 billion. The average capitalization of the companies comprising the Index was approximately $6 billion. The Index was concentrated in the Telecommunication Services industry group, which comprised 45% of the market capitalization of the Index.

UltraShort MSCI Pacific ex-Japan ProShares:

The MSCI® Pacific ex-Japan Index is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of the developed markets in the Pacific region, excluding Japan. The Index is divided into large- and mid-cap segments and provides exhaustive coverage of these size segments by targeting around 85% of free float-adjusted market capitalization in the region. As of December 31, 2007, the Index consisted of the following four developed market countries: Australia, Hong Kong, New Zealand and Singapore. The Index included companies with capitalizations between $212 million and $118 billion. The average capitalization of the companies comprising the Index was approximately $7 billion. The Index was concentrated in the Financials industry group, which comprised 49% of the market capitalization of the Index.

UltraShort MSCI South Korea ProShares:

The MSCI® South Korea Index is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of the South Korean market. To construct the Index, every listed security in the market is identified. Securities are free float adjusted, classified in accordance with the Global Industry Classification Standard (GICS®), and screened by size, liquidity and minimum free float. The Index is divided into large and mid cap segments and provide exhaustive coverage of these size segments by targeting around 85% of free float-adjusted market capitalization in the South Korean market. As of December 31, 2007, the Index included companies with capitalizations between $232 million and $66 billion. The average capitalization of the companies comprising the Index was approximately $5 billion. The Index was concentrated in the Industrials industry group, which comprised 24% of the market capitalization of the Index.

UltraShort MSCI Taiwan ProShares:

The MSCI® Taiwan Index is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of the Taiwanese market. To construct the Index, every listed security in the market is identified. Securities are free float-adjusted, classified in accordance with the Global Industry Classification Standard (GICS®), and screened by size, liquidity and minimum free float. The Index is divided into large- and mid-cap segments and provide exhaustive coverage of these size segments by targeting around 85% of free float-adjusted market capitalization in the Taiwanese market. As of December 31, 2007, the Index included companies with capitalizations between $154 million and $40 billion. The average capitalization of the companies comprising the Index was approximately $3 billion. The Index was concentrated in the Information Technology industry group, which comprised 59% of the market capitalization of the Index.

 

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UltraShort S&P Europe 350 ProShares:

The S&P Europe 350® Index consists of many of the largest and most liquid stocks from 17 major European markets. These are Austria, Belgium, Denmark, Finland, France, Germany, Great Britain, Greece, Ireland, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden and Switzerland. These countries represent the most liquid and investable markets in Europe. The 350 stocks have been selected on the basis of their size, liquidity, sector representation and country representation. The weight of each country within the Index reflects the weight of the country in the universe of stocks from the seventeen countries. Similarly, the weight of each sector reflects the weight of the particular sector in the universe of stocks from the seventeen countries. The Index is divided into large- and mid-cap segments and provides exhaustive coverage of these size segments by targeting around 70% of free float-adjusted market capitalization in the region. As of December 31, 2007, the Index included companies with capitalizations between $709 million and $232 billion. The average capitalization of the companies comprising the Index was approximately $82 billion. The Index was concentrated in the Financials industry group, which comprised 28% of the market capitalization of the Index.

Information About the Index Licensors

“Standard & Poor’s®,” “S&P®” and “S&P Europe 350” are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by ProShares. ProShares are not sponsored, endorsed, sold or promoted by Standard & Poor’s and Standard & Poor’s does not make any representation regarding the advisability of investing in ProShares.

“Dow Jones” is a service mark of Dow Jones & Company, Inc.

Dow Jones does not:

 

 

Sponsor, endorse, sell or promote any of the ProShares.

 

 

Recommend that any person invest in the ProShares or any other securities.

 

 

Have any responsibility or liability for or make any decisions about timing, amount or pricing of the ProShares.

 

 

Have any responsibility or liability for the administration, management of marketing of the ProShares.

 

 

Consider the needs of the ProShares or the owners of the ProShares in determining, composing or calculating the Dow Jones U.S. Indexes or have any obligation to do so.

Dow Jones will not have any liability in connection with the ProShares. Specifically, Dow Jones does not make any warranty, express or implied, and Dow Jones disclaims any warranty about:

 

 

The results to be obtained by the ProShares, the owner of the ProShares or any other person in connection with the use of the Dow Jones U.S. Indexes and the data included in the Dow Jones U.S. Indexes;

 

 

The accuracy or completeness of the Dow Jones U.S. Indexes and their data; or

 

 

The merchantability and the fitness for a particular purpose or use of the Dow Jones U.S. Indexes and their data.

Dow Jones will have no liability for any errors, omission or interruptions in the Dow Jones U.S. Indexes or their data.

Under no circumstances will Dow Jones be liable for any lost profits or indirect, punitive, special or consequential damages or losses, even if Dow Jones knows that they might occur.

The licensing agreement between ProShares and Dow Jones is solely for their benefit and not for the benefit of the investors in the ProShares or any other third parties.

The Russell 3000® Index (the “Index”) is a trademark of Russell Investment Group (“Russell”) and has been licensed for use by ProShares Trust. The Funds are not sponsored, endorsed, sold or promoted by Russell. Russell makes no representation or warranty, express or implied, to the shareholders of the Funds or any member of the public regarding the advisability of investing in securities generally or in the Funds particularly or the ability of the Index to track general stock market performance or a segment of the same. Russell’s publication of the Index in no way suggests or implies an opinion by Russell as to the advisability of investment in any or all of the securities upon which the Index is based. Russell’s only relationship to ProShares Trust is the licensing of certain trademarks and trade names of Russell and of the Index which is determined, composed and calculated by Russell without regard to ProShares Trust or the Funds. Russell is not responsible for any associated literature or publications and Russell makes no representation or warranty express or implied as to their accuracy or completeness, or otherwise. Russell reserves the right, at any time and without notice, to alter, amend, terminate or in any way change the Index. Russell has no obligation or liability in connection with the administration, marketing or trading of the Funds.

The Ultra and Short International Funds are not sponsored, endorsed, sold or promoted by Morgan Stanley Capital International Inc. (“MSCI”), any of its affiliates, any of its information providers or any other third party involved in, or related to, compiling, computing or creating any MSCI Index (collectively, the “MSCI Parties”). The MSCI Indexes are the exclusive property of MSCI. MSCI and the MSCI Index names are service marks of MSCI or its affiliates and have been licensed for use for certain purposes by ProFunds Trust. None of the MSCI Parties makes any representation or warranty, express or implied, to the issuer or shareholders of these Funds or any other person or entity regarding the advisability of investing in Funds generally or in these Funds particularly or the ability of any MSCI Index to track corresponding stock market performance. MSCI or its affiliates are the licensors of certain trademarks, service marks and trade names and of the MSCI Indexes which are determined, composed and calculated by MSCI without regard to the Funds or the issuer or shareholders of the Funds or any other person or entity into consideration in determining, composing or calculating the MSCI Indexes. None of the MSCI Parties is responsible for or has participated in the determination of the timing of, prices at, or quantities of these Funds to be issued or in the determination or calculation of the equation by or the

 

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consideration into which these Funds are redeemable. Further, none of the MSCI Parties has any obligation or liability to the issuer or owners of these Funds or any other person or entity in connection with the administration, marketing or offering of these Funds.

Although MSCI shall obtain information for inclusion in or for use in the calculation of the MSCI Indexes from sources that MSCI considers reliable, none of the MSCI Parties warrants or guarantees the originality, accuracy and/or the completeness of any MSCI Index or any data included therein. None of the MSCI Parties makes any warranty, express or implied, as to results to be obtained by the issuer of the Funds, shareholders of the Funds, or any other person or entity, from the use of any MSCI Index or any data included therein. None of the MSCI Parties shall have any liability for any errors, omissions or interruptions of or in connection with any MSCI Index or any data included therein. Further, none of the MSCI Index or any data included therein. Further, none of the MSCI Parties makes any express or implied warranties of any kind, and the MSCI Parties hereby expressly disclaim all warranties of merchantability and fitness for a particular purpose, with respect to each MSCI Index and any data included therein. Without limiting any of the foregoing, in no event shall any of the MSCI Parties have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.

No purchaser, seller or holder of this security, product or fund, or any other person or entity, should use or refer to any MSCI trade name, trademark or service mark to sponsor, endorse, market or promote this security without first contacting MSCI to determine whether MSCI’s permission is required. Under no circumstances may any person or entity claim any affiliation with MSCI without the prior written permission of MSCI.

The Funds are not in any way sponsored, endorsed, sold or promoted by FTSE/Xinhua Index Limited (“FXI”), FTSE International Limited (“FTSE”), the London Stock Exchange Plc (the “London Exchange”), The Financial Times Limited (“FT”) or Xinhua Finance Limited (“Xinhua”) (collectively, the “FTSE Licensor Parties”) and none of the FTSE Licensor Parties make any warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of the FTSE/Xinhua China 25 Index and/or the figure at which the said Index stands at any particular time on any particular day or otherwise. The FTSE/Xinhua China 25 Index is compiled and calculated by FTSE on behalf of FXI. None of the FTSE Licensor Parties shall be liable (whether in negligence or otherwise) to any person for any error in the FTSE/Xinhua China 25 Index none of the FTSE Licensor Parties shall be under any obligation to advise any person of any error therein.

“FTSE®” is a trade mark of the Exchange and the FT and is used by FXI under licence. “Xinhua®” is a trade mark of Xinhua and is used by FXI under licence.

Please see the SAI, which sets forth certain additional disclaimers and limitations of liabilities.

 

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Ultra ProShares

Ultra ProShares seek to provide daily investment results, before fees and expenses, that double (200%) the daily performance of their applicable indexes.

LOGO

 

 

An investment in a Fund is not a deposit of a bank, and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Funds are not guaranteed to achieve their investment objectives, and an investment in a Fund could lose money. No single Fund is a complete investment program.

1

A benchmark may be any standard of investment performance to which a Fund seeks to correlate its performance. Ultra ProShares utilize the performance of a multiple of an index as their benchmark. For example, Ultra Russell3000 ProShares have a daily benchmark of twice the daily return of the Russell 3000® Index.

 

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Ultra Russell3000 ProShares

Ticker: [    ]

CUSIP: [    ]

Investment Objective

Ultra Russell3000 ProShares seeks daily investment results, before fees and expenses, that correspond to twice (200%) the daily performance of the Russell 3000 Index.

If Ultra Russell3000 ProShares is successful in meeting its objective, its value, before fees and expenses, should gain approximately twice as much, on a percentage basis, as the Russell 3000 Index when the Index rises on a given day. Conversely, its value (before fees and expenses) should lose approximately twice as much, on a percentage basis, as any decrease in the Index when the Index declines on a given day.

Principal Investment Strategy

The Ultra Russell3000 ProShares’ principal investment strategies include:

 

Investing in equity securities and/or taking positions in financial instruments (including derivatives) that ProShare Advisors believes, in combination, should have similar daily price return characteristics as twice (200%) the Russell 3000 Index. Information about the Index can be found on page 13.

 

Under normal circumstances, committing at least 80% of its net assets, plus any borrowings for investment purposes, to investments that, in combination, have economic characteristics that are similar to those of the Index.

 

Employing leveraged investment techniques and/or sampling techniques in seeking its investment objective.

 

Investing assets not invested in equity securities or financial instruments in debt securities and/or money market instruments.

 

The Fund will concentrate its investments in a particular industry or group of industries to approximately the same extent as the Index is so concentrated.

Principal Risk Considerations

The Ultra Russell3000 ProShares is subject to the following principal risks:

 

Aggressive Investment Technique Risk, Concentration Risk, Correlation Risk, Counterparty Risk, Credit Risk, Early Close/Trading Halt Risk, Equity Risk, Liquidity Risk, Market Price Variance Risk, Market Risk, Non-diversification Risk, Portfolio Turnover Risk and Small- and Mid-Cap Company Investment Risk.

The Ultra Russell3000 ProShares may be subject to risks in addition to those identified as principal risks. The sections titled “Principal Investment Strategies and Risks,” “More on Risks” and “Special Risks of Exchange-Traded Funds” later in this Prospectus and the SAI contain additional information about the Fund and related risks.

Fund Performance

Performance history will be available for the Ultra Russell3000 ProShares after it has been in operation for a full calendar year.

Estimated Fees and Expenses

The following table describes the estimated fees and expenses you may pay when you buy, hold, or sell Creation Units of the Ultra Russell3000 ProShares. Annual fund operating expenses are also estimates. Investors purchasing shares in the secondary market will not pay the shareholder fees shown below directly, but may be subject to costs (including customary brokerage commissions) charged by their broker.

 

Estimated Shareholder Fees (paid directly by Authorized Participants)A
Sales charges (loads)   None
Fixed transaction fee per orderB   $500
Variable transaction fee per Creation UnitC   up to 0.10% of Creation Unit value

Additional transaction charge if not settled through

the Continuous Net Settlement System of the National

Securities Clearing Corporation (NSCC)D

 

up to 3 times the

fixed fee plus up

to 0.10%

 

Estimated Annual Fund Operating Expenses

(as a percentage of average daily net assets)

Investment Advisory Fee

   0.75%        

Distribution and Service (12b-1) feesE

   0.00%        

Other ExpensesF

   [      ]%        
    

Total Annual Fund Operating Expenses

   [      ]%        

Fee Waivers/ReimbursementsG

   -[      ]%        
    

Total Net Annual Fund Operating Expenses

   0.95%
    

 

A

See “Transaction Fees on Creation and Redemption Transactions” at the end of this Prospectus.

B

A fixed transaction fee of $500 will be charged when you create or redeem Creation Units of the Ultra Russell3000 ProShares regardless of the number of shares created or redeemed on the date of the transaction.

C

A variable transaction fee of up to 0.10% of the value of each Creation Unit will be charged to offset costs associated with processing the order.

D

An additional fee of up to 3 times the fixed per order transaction fee plus up to 0.10% of the value of each Creation Unit may be charged if you do not create or redeem shares through the Continuous Net Settlement System of the NSCC, or in circumstances in which cash is substituted for certain securities. Such transactions are allowed at the sole discretion of the Fund.

 

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E

The Fund has adopted a Distribution (12b-1) Plan pursuant to which the Fund may be subject to an annual 12b-1 fee of up to 0.25%. However, no such fee is currently charged to the Fund and no such fees will be charged prior to [                     2009].

F

Based on estimated amounts for the Fund’s current fiscal year. “Other Expenses” include fees paid for management (non-advisory) services (as described under “Management of ProShares Trust” later in this Prospectus), legal and audit fees, printing costs, registration fees, custodial, fund accounting, administration, transfer agency and sub-transfer agency fees and costs associated with independent trustees and certain miscellaneous expenses.

G

ProShare Advisors has contractually agreed to waive Investment Advisory and Management Services Fees and to reimburse Other Expenses to the extent Total Annual Fund Operating Expenses, as a percentage of average daily net assets, exceed 0.95% of average daily net assets from the date the Fund commences operations through that date in 2009. After such date, the expense limitation may be terminated or revised. Amounts waived or reimbursed in a particular fiscal year may be recouped by ProShare Advisors within five years of the waiver or reimbursement to the extent that recoupment will not cause the Fund’s expenses to exceed any expense limitation in place at that time.

Example: The following example is intended to help you compare the estimated cost of investing in shares of the Ultra Russell3000 ProShares with the cost of investing in other funds. Investors should note that the following examples are estimates and are for illustration purposes only and are not meant to suggest actual or expected fees and expenses or returns, all of which may vary. The Fund issues and redeems shares in Creation Units principally on an in-kind basis for portfolio securities included in the Index and cash. Shares are not redeemable in less than Creation Unit aggregations. The example does not include the brokerage commissions that secondary market investors may incur to buy and sell shares.

The following example assumes that you invest $10,000 in the Ultra Russell3000 ProShares for the time periods indicated and sell all of your shares at the end of those periods, but does not include transaction fees on purchases and redemptions of shares. The example also assumes that your investment has a 5% annual return each year and that the Fund’s annual operating expenses remain exactly as described in the fee table. Although your actual costs may be higher or lower, based on the assumptions, your estimated costs would be:

 

   1 Year    3 Years        
  

$[    ]

  

$[    ]            

 

20  Ultra MarketCap ProShares


Table of Contents

Ultra DJ Wilshire Total Market ProShares

Ticker: [    ]

CUSIP: [    ]

Investment Objective

Ultra DJ Wilshire Total Market ProShares seeks daily investment results, before fees and expenses, that correspond to twice (200%) the daily performance of the Dow Jones Wilshire 5000 Total Market Index.

If Ultra DJ Wilshire Total Market ProShares is successful in meeting its objective, its value, before fees and expenses, should gain approximately twice as much, on a percentage basis, as the Dow Jones Wilshire 5000 Total Market Index when the Index rises on a given day. Conversely, its value (before fees and expenses) should lose approximately twice as much, on a percentage basis, as any decrease in the Index when the Index declines on a given day.

Principal Investment Strategy

The Ultra DJ Wilshire Total Market ProShares’ principal investment strategies include:

 

Investing in equity securities and/or taking positions in financial instruments (including derivatives) that ProShare Advisors believes, in combination, should have similar daily price return characteristics as twice (200%) the Dow Jones Wilshire 5000 Total Market Index. Information about the Index can be found on page 12.

 

Under normal circumstances, committing at least 80% of its net assets, plus any borrowings for investment purposes, to investments that, in combination, have economic characteristics that are similar to those of the Index.

 

Employing leveraged investment techniques and/or sampling techniques in seeking its investment objective.

 

Investing assets not invested in equity securities or financial instruments in debt securities and/or money market instruments.

 

The Fund will concentrate its investments in a particular industry or group of industries to approximately the same extent as the Index is so concentrated.

Principal Risk Considerations

The Ultra DJ Wilshire Total Market ProShares is subject to the following principal risks:

 

Aggressive Investment Technique Risk, Concentration Risk, Correlation Risk, Counterparty Risk, Credit Risk, Early Close/Trading Halt Risk, Equity Risk, Liquidity Risk, Market Price Variance Risk, Market Risk, Non-diversification Risk, Portfolio Turnover Risk and Small- and Mid-Cap Company Investment Risk.

The Ultra DJ Wilshire Total Market ProShares may be subject to risks in addition to those identified as principal risks. The sections titled “Principal Investment Strategies and Risks,” “More on Risks” and “Special Risks of Exchange-Traded Funds” later in this Prospectus and the SAI contain additional information about the Fund and related risks.

Fund Performance

Performance history will be available for the Ultra DJ Wilshire Total Market ProShares after it has been in operation for a full calendar year.

Estimated Fees and Expenses

The following table describes the estimated fees and expenses you may pay when you buy, hold, or sell Creation Units of the Ultra DJ Wilshire Total Market ProShares. Annual fund operating expenses are also estimates. Investors purchasing shares in the secondary market will not pay the shareholder fees shown below directly, but may be subject to costs (including customary brokerage commissions) charged by their broker.

 

Estimated Shareholder Fees (paid directly by Authorized Participants)A
Sales charges (loads)   None
Fixed transaction fee per orderB   $500
Variable transaction fee per Creation UnitC   up to 0.10% of Creation Unit value

Additional transaction charge if not settled through

the Continuous Net Settlement System of the National

Securities Clearing Corporation (NSCC)D

 

up to 3 times the

fixed fee plus up

to 0.10%

 

Estimated Annual Fund Operating Expenses

(as a percentage of average daily net assets)

Investment Advisory Fee

   0.75%        

Distribution and Service (12b-1) feesE

   0.00%        

Other ExpensesF

   [      ]%        
    

Total Annual Fund Operating Expenses

   [      ]%        

Fee Waivers/ReimbursementsG

   -[      ]%        
    

Total Net Annual Fund Operating Expenses

   0.95%
    

 

A

See “Transaction Fees on Creation and Redemption Transactions” at the end of this Prospectus.

B

A fixed transaction fee of $500 will be charged when you create or redeem Creation Units of the Ultra Russell3000 ProShares regardless of the number of shares created or redeemed on the date of the transaction.

C

A variable transaction fee of up to 0.10% of the value of each Creation Unit will be charged to offset costs associated with processing the order.

 

Ultra MarketCap ProShares   21


Table of Contents

D

An additional fee of up to 3 times the fixed per order transaction fee plus up to 0.10% of the value of each Creation Unit may be charged if you do not create or redeem shares through the Continuous Net Settlement System of the NSCC, or in circumstances in which cash is substituted for certain securities. Such transactions are allowed at the sole discretion of the Fund.

E

The Fund has adopted a Distribution (12b-1) Plan pursuant to which the Fund may be subject to an annual 12b-1 fee of up to 0.25%. However, no such fee is currently charged to the Fund and no such fees will be charged prior to [                     2009].

F

Based on estimated amounts for the Fund’s current fiscal year. “Other Expenses” include fees paid for management (non-advisory) services (as described under “Management of ProShares Trust” later in this Prospectus), legal and audit fees, printing costs, registration fees, custodial, fund accounting, administration, transfer agency and sub-transfer agency fees and costs associated with independent trustees and certain miscellaneous expenses.

G

ProShare Advisors has contractually agreed to waive Investment Advisory and Management Services Fees and to reimburse Other Expenses to the extent Total Annual Fund Operating Expenses, as a percentage of average daily net assets, exceed 0.95% of average daily net assets from the date the Fund commences operations through that date in 2009. After such date, the expense limitation may be terminated or revised. Amounts waived or reimbursed in a particular fiscal year may be recouped by ProShare Advisors within five years of the waiver or reimbursement to the extent that recoupment will not cause the Fund’s expenses to exceed any expense limitation in place at that time.

Example: The following example is intended to help you compare the estimated cost of investing in shares of the Ultra DJ Wilshire Total Market ProShares with the cost of investing in other funds. Investors should note that the following examples are estimates and are for illustration purposes only and are not meant to suggest actual or expected fees and expenses or returns, all of which may vary. The Fund issues and redeems shares in Creation Units principally on an in-kind basis for portfolio securities included in the Index and cash. Shares are not redeemable in less than Creation Unit aggregations. The example does not include the brokerage commissions that secondary market investors may incur to buy and sell shares.

The following example assumes that you invest $10,000 in the Ultra DJ Wilshire Total Market ProShares for the time periods indicated and sell all of your shares at the end of those periods, but does not include transaction fees on purchases and redemptions of shares. The example also assumes that your investment has a 5% annual return each year and that the Fund’s annual operating expenses remain exactly as described in the fee table. Although your actual costs may be higher or lower, based on the assumptions, your estimated costs would be:

   1 Year    3 Years        
  

$[    ]

  

$[    ]            

 

22  Ultra MarketCap ProShares


Table of Contents

Ultra MSCI EAFE ProShares

Ticker: [    ]

CUSIP: [    ]

Investment Objective

Ultra MSCI EAFE ProShares seeks daily investment results, before fees and expenses, that correspond to twice (200%) the daily performance of the MSCI EAFE Index.

If Ultra MSCI EAFE ProShares is successful in meeting its objective, its value, before fees and expenses, should gain approximately twice as much, on a percentage basis, as the MSCI EAFE Index when the Index rises on a given day. Conversely, its value (before fees and expenses) should lose approximately twice as much, on a percentage basis, as any decrease in the Index when the Index declines on a given day.

Principal Investment Strategy

The Ultra MSCI EAFE ProShares’ principal investment strategies include:

 

Investing in equity securities and/or financial instruments (including derivatives) that ProShare Advisors believes, in combination, should have similar daily price return characteristics as twice (200%) the MSCI EAFE Index. Information about the Index can be found on page 13.

 

Under normal circumstances, committing at least 80% of its net assets, plus any borrowings for investment purposes, to investments that, in combination, have economic characteristics that are similar to those of the Index.

 

Employing leveraged investment techniques and/or sampling techniques in seeking its investment objective.

 

Investing assets not invested in equity securities or financial instruments in debt securities and/or money market instruments.

 

The Fund will concentrate its investments in a particular industry or group of industries to approximately the same extent as the Index is so concentrated.

Principal Risk Considerations

The Ultra MSCI EAFE ProShares is subject to the following principal risks:

 

Aggressive Investment Technique Risk, Concentration Risk, Correlation Risk, Counterparty Risk, Credit Risk, Early Close/Trading Halt Risk, Equity Risk, Foreign Currency Risk, Foreign Investment Risk, Geographic Concentration Risk, Liquidity Risk, Market Price Variance Risk, Market Risk, Non-diversification Risk, Portfolio Turnover Risk and Valuation Time Risk.

The Ultra MSCI EAFE ProShares may be subject to risks in addition to those identified as principal risks. The sections titled “Principal Investment Strategies and Risks,” “More on Risks” and “Special Risks of Exchange-Traded Funds” later in this Prospectus and the SAI contain additional information about the Fund and related risks.

Fund Performance

Performance history will be available for the Ultra MSCI EAFE ProShares after it has been in operation for a full calendar year.

Estimated Fees and Expenses

The following table describes the estimated fees and expenses you may pay when you buy, hold, or sell Creation Units of the Ultra MSCI EAFE ProShares. Annual fund operating expenses are also estimates. Investors purchasing shares in the secondary market will not pay the shareholder fees shown below directly, but may be subject to costs (including customary brokerage commissions) charged by their broker.

 

Estimated Shareholder Fees (paid directly by Authorized Participants)A
Sales charges (loads)   None
Fixed transaction fee per orderB   $500
Variable transaction fee per Creation UnitC   up to 0.10% of Creation Unit value

Additional transaction charge if not settled through

the Continuous Net Settlement System of the National

Securities Clearing Corporation (NSCC)D

 

up to 3 times the

fixed fee plus up

to 0.10%

 

Estimated Annual Fund Operating Expenses

(as a percentage of average daily net assets)

Investment Advisory Fee

   0.75%        

Distribution and Service (12b-1) feesE

   0.00%        

Other ExpensesF

   [      ]%        
    

Total Annual Fund Operating Expenses

   [      ]%        

Fee Waivers/ReimbursementsG

   -[      ]%        
    

Total Net Annual Fund Operating Expenses

   0.95%
    

 

A

See “Transaction Fees on Creation and Redemption Transactions” at the end of this Prospectus.

B

A fixed transaction fee of $500 will be charged when you create or redeem Creation Units of the Ultra Russell3000 ProShares regardless of the number of shares created or redeemed on the date of the transaction.

C

A variable transaction fee of up to 0.10% of the value of each Creation Unit will be charged to offset costs associated with processing the order.

 

Ultra International ProShares  23


Table of Contents

D

An additional fee of up to 3 times the fixed per order transaction fee plus up to 0.10% of the value of each Creation Unit may be charged if you do not create or redeem shares through the Continuous Net Settlement System of the NSCC, or in circumstances in which cash is substituted for certain securities. Such transactions are allowed at the sole discretion of the Fund.

E

The Fund has adopted a Distribution (12b-1) Plan pursuant to which the Fund may be subject to an annual 12b-1 fee of up to 0.25%. However, no such fee is currently charged to the Fund and no such fees will be charged prior to [                     2009].

F

Based on estimated amounts for the Fund’s current fiscal year. “Other Expenses” include fees paid for management (non-advisory) services (as described under “Management of ProShares Trust” later in this Prospectus), legal and audit fees, printing costs, registration fees, custodial, fund accounting, administration, transfer agency and sub-transfer agency fees and costs associated with independent trustees and certain miscellaneous expenses.

G

ProShare Advisors has contractually agreed to waive Investment Advisory and Management Services Fees and to reimburse Other Expenses to the extent Total Annual Fund Operating Expenses, as a percentage of average daily net assets, exceed 0.95% of average daily net assets from the date the Fund commences operations through that date in 2009. After such date, the expense limitation may be terminated or revised. Amounts waived or reimbursed in a particular fiscal year may be recouped by ProShare Advisors within five years of the waiver or reimbursement to the extent that recoupment will not cause the Fund’s expenses to exceed any expense limitation in place at that time.

Example: The following example is intended to help you compare the estimated cost of investing in shares of the Ultra MSCI EAFE ProShares with the cost of investing in other funds. Investors should note that the following examples are estimates and are for illustration purposes only and are not meant to suggest actual or expected fees and expenses or returns, all of which may vary. The Fund issues and redeems shares in Creation Units principally on an in-kind basis for portfolio securities included in the Index and cash. Shares are not redeemable in less than Creation Unit aggregations. The example does not include the brokerage commissions that secondary market investors may incur to buy and sell shares.

The following example assumes that you invest $10,000 in the Ultra MSCI EAFE ProShares for the time periods indicated and sell all of your shares at the end of those periods, but does not include transaction fees on purchases and redemptions of shares. The example also assumes that your investment has a 5% annual return each year and that the Fund’s annual operating expenses remain exactly as described in the fee table. Although your actual costs may be higher or lower, based on the assumptions, your estimated costs would be:

 

   1 Year    3 Years        
  

$[    ]

  

$[    ]            

 

24  Ultra International ProShares


Table of Contents

Ultra MSCI Emerging Markets ProShares

Ticker: [    ]

CUSIP: [    ]

Investment Objective

Ultra MSCI Emerging Markets ProShares seeks daily investment results, before fees and expenses, that correspond to twice (200%) the daily performance of the MSCI Emerging Markets Index.

If Ultra MSCI Emerging Markets ProShares is successful in meeting its objective, its value, before fees and expenses, should gain approximately twice as much, on a percentage basis, as the MSCI Emerging Markets Index when the Index rises on a given day. Conversely, its value (before fees and expenses) should lose approximately twice as much, on a percentage basis, as any decrease in the Index when the Index declines on a given day.

Principal Investment Strategy

The Ultra MSCI Emerging Markets ProShares’ principal investment strategies include:

 

Investing in equity securities and/or taking positions in financial instruments (including derivatives) that ProShare Advisors believes, in combination, should have similar daily price return characteristics as twice (200%) the MSCI Emerging Markets Index. Information about the Index can be found on page 13.

 

Under normal circumstances, committing at least 80% of its net assets, plus any borrowings for investment purposes, to investments that, in combination, have economic characteristics that are similar to those of the Index.

 

Employing leveraged investment techniques and/or sampling techniques in seeking its investment objective.

 

Investing assets not invested in equity securities or financial instruments in debt securities and/or money market instruments.

 

The Fund will concentrate its investments in a particular industry or group of industries to approximately the same extent as the Index is so concentrated.

Principal Risk Considerations

The Ultra MSCI Emerging Markets ProShares is subject to the following principal risks:

 

Aggressive Investment Technique Risk, Concentration Risk, Correlation Risk, Counterparty Risk, Credit Risk, Early Close/Trading Halt Risk, Emerging Market Risk, Equity Risk, Foreign Currency Risk, Foreign Investment Risk, Geographic Concentration Risk, Liquidity Risk, Market Price Variance Risk, Market Risk, Non-diversification Risk, Portfolio Turnover Risk, Small- and Mid-Cap Company Investment Risk and Valuation Time Risk.

The Ultra MSCI Emerging Markets ProShares may be subject to risks in addition to those identified as principal risks. The sections titled “Principal Investment Strategies and Risks,” “More on Risks” and “Special Risks of Exchange-Traded Funds” later in this Prospectus and the SAI contain additional information about the Fund and related risks.

Fund Performance

Performance history will be available for the Ultra MSCI Emerging Markets ProShares after it has been in operation for a full calendar year.

Estimated Fees and Expenses

The following table describes the estimated fees and expenses you may pay when you buy, hold, or sell Creation Units of the Ultra MSCI Emerging Markets ProShares. Annual fund operating expenses are also estimates. Investors purchasing shares in the secondary market will not pay the shareholder fees shown below directly, but may be subject to costs (including customary brokerage commissions) charged by their broker.

 

Estimated Shareholder Fees (paid directly by Authorized Participants)A
Sales charges (loads)   None
Fixed transaction fee per orderB   $500
Variable transaction fee per Creation UnitC   up to 0.10% of Creation Unit value

Additional transaction charge if not settled through

the Continuous Net Settlement System of the National

Securities Clearing Corporation (NSCC)D

 

up to 3 times the

fixed fee plus up

to 0.10%

 

Estimated Annual Fund Operating Expenses

(as a percentage of average daily net assets)

Investment Advisory Fee

   0.75%        

Distribution and Service (12b-1) feesE

   0.00%        

Other ExpensesF

   [      ]%        
    

Total Annual Fund Operating Expenses

   [      ]%        

Fee Waivers/ReimbursementsG

   -[      ]%        
    

Total Net Annual Fund Operating Expenses

   0.95%
    

 

A

See “Transaction Fees on Creation and Redemption Transactions” at the end of this Prospectus.

B

A fixed transaction fee of $500 will be charged when you create or redeem Creation Units of the Ultra Russell3000 ProShares regardless of the number of shares created or redeemed on the date of the transaction.

C

A variable transaction fee of up to 0.10% of the value of each Creation Unit will be charged to offset costs associated with processing the order.

 

Ultra International ProShares  25


Table of Contents

D

An additional fee of up to 3 times the fixed per order transaction fee plus up to 0.10% of the value of each Creation Unit may be charged if you do not create or redeem shares through the Continuous Net Settlement System of the NSCC, or in circumstances in which cash is substituted for certain securities. Such transactions are allowed at the sole discretion of the Fund.

E

The Fund has adopted a Distribution (12b-1) Plan pursuant to which the Fund may be subject to an annual 12b-1 fee of up to 0.25%. However, no such fee is currently charged to the Fund and no such fees will be charged prior to [                     2009].

F

Based on estimated amounts for the Fund’s current fiscal year. “Other Expenses” include fees paid for management (non-advisory) services (as described under “Management of ProShares Trust” later in this Prospectus), legal and audit fees, printing costs, registration fees, custodial, fund accounting, administration, transfer agency and sub-transfer agency fees and costs associated with independent trustees and certain miscellaneous expenses.

G

ProShare Advisors has contractually agreed to waive Investment Advisory and Management Services Fees and to reimburse Other Expenses to the extent Total Annual Fund Operating Expenses, as a percentage of average daily net assets, exceed 0.95% of average daily net assets from the date the Fund commences operations through that date in 2009. After such date, the expense limitation may be terminated or revised. Amounts waived or reimbursed in a particular fiscal year may be recouped by ProShare Advisors within five years of the waiver or reimbursement to the extent that recoupment will not cause the Fund’s expenses to exceed any expense limitation in place at that time.

Example: The following example is intended to help you compare the estimated cost of investing in shares of the Ultra MSCI Emerging Markets ProShares with the cost of investing in other funds. Investors should note that the following examples are estimates and are for illustration purposes only and are not meant to suggest actual or expected fees and expenses or returns, all of which may vary. The Fund issues and redeems shares in Creation Units principally on an in-kind basis for portfolio securities included in the Index and cash. Shares are not redeemable in less than Creation Unit aggregations. The example does not include the brokerage commissions that secondary market investors may incur to buy and sell shares.

The following example assumes that you invest $10,000 in the Ultra MSCI Emerging Markets ProShares for the time periods indicated and sell all of your shares at the end of those periods, but does not include transaction fees on purchases and redemptions of shares. The example also assumes that your investment has a 5% annual return each year and that the Fund’s annual operating expenses remain exactly as described in the fee table. Although your actual costs may be higher or lower, based on the assumptions, your estimated costs would be:

 

   1 Year    3 Years        
  

$[    ]

  

$[    ]            

 

26  Ultra International ProShares


Table of Contents

Ultra MSCI Japan ProShares

Ticker: [    ]

CUSIP: [    ]

Investment Objective

Ultra MSCI Japan ProShares seeks daily investment results, before fees and expenses, that correspond to twice (200%) the daily performance of the MSCI Japan Index.

If Ultra MSCI Japan ProShares is successful in meeting its objective, its value, before fees and expenses, should gain approximately twice as much, on a percentage basis, as the MSCI Japan Index when the Index rises on a given day. Conversely, its value (before fees and expenses) should lose approximately twice as much, on a percentage basis, as any decrease in the Index when the Index declines on a given day.

Because the value of the Index is not computed as of the close of the U.S. securities markets due to differences in trading hours between U.S. and foreign markets, correlation to the Index will be measured by comparing the daily change in the Fund’s net asset value per share to the performance of one or more U.S. exchange-traded securities or instruments that reflect the values of the securities underlying the Index as of the close of the U.S. securities markets.

Principal Investment Strategy

The Ultra MSCI Japan ProShares’ principal investment strategies include:

  Investing in equity securities and/or taking positions in financial instruments (including derivatives) that ProShare Advisors believes, in combination, should have similar daily price return characteristics as twice (200%) the MSCI Japan Index. Information about the Index can be found on page 13.
  Under normal circumstances, committing at least 80% of its net assets, plus any borrowings for investment purposes, to investments that, in combination, have economic characteristics that are similar to those of the Index.
  Employing leveraged investment techniques and/or sampling techniques in seeking its investment objective.
  Investing assets not invested in equity securities or financial instruments in debt securities and/or money market instruments.
  The Fund will concentrate its investments in a particular industry or group of industries to approximately the same extent as the Index is so concentrated.

Principal Risk Considerations

The Ultra MSCI Japan ProShares is subject to the following principal risks:

  Aggressive Investment Technique Risk, Concentration Risk, Correlation Risk, Counterparty Risk, Credit Risk, Early Close/Trading Halt Risk, Equity Risk, Foreign Currency Risk, Foreign Investment Risk, Geographic Concentration Risk, Liquidity Risk, Market Price Variance Risk, Market Risk, Non-diversification Risk, Portfolio Turnover Risk and Valuation Time Risk.

The UltraShort MSCI Japan ProShares’ performance will be affected by political, social and economic conditions in Japan. In addition, while the Fund invests primarily in Japanese securities, the Japanese economy may be affected by Southeast Asian and Chinese consumer demands and the state of Southeast Asian and Chinese economies. Japan’s economy and stock market have in the recent past had a strong correlation with the U.S. economic cycle and U.S. stock markets, and thus Japan’s economy may be affected by economic trouble in the U.S. The Japanese economy and financial markets produced disappointing returns from 1990 to 2003. Over that period, and since then, the Japanese stock market, as measured by the Tokyo Stock Price Index, has been volatile.

The Ultra MSCI Japan ProShares may be subject to risks in addition to those identified as principal risks. The sections titled “Principal Investment Strategies and Risks,” “More on Risks” and “Special Risks of Exchange-Traded Funds” later in this Prospectus and the SAI contain additional information about the Fund and related risks.

Fund Performance

Performance history will be available for the Ultra MSCI Japan ProShares after it has been in operation for a full calendar year.

Estimated Fees and Expenses

The following table describes the estimated fees and expenses you may pay when you buy, hold, or sell Creation Units of the Ultra MSCI Japan ProShares. Annual fund operating expenses are also estimates. Investors purchasing shares in the secondary market will not pay the shareholder fees shown below directly, but may be subject to costs (including customary brokerage commissions) charged by their broker.

 

Estimated Shareholder Fees (paid directly by Authorized Participants)A
Sales charges (loads)   None
Fixed transaction fee per orderB   $500
Variable transaction fee per Creation UnitC   up to 0.10% of Creation Unit value

Additional transaction charge if not settled through

the Continuous Net Settlement System of the National

Securities Clearing Corporation (NSCC)D

 

up to 3 times the

fixed fee plus up

to 0.10%

 

Ultra International ProShares  27


Table of Contents

Estimated Annual Fund Operating Expenses

(as a percentage of average daily net assets)

Investment Advisory Fee

   0.75%        

Distribution and Service (12b-1) feesE

   0.00%        

Other ExpensesF

   [      ]%        
    

Total Annual Fund Operating Expenses

   [      ]%        

Fee Waivers/ReimbursementsG

   -[      ]%        
    

Total Net Annual Fund Operating Expenses

   0.95%
    

 

A

See “Transaction Fees on Creation and Redemption Transactions” at the end of this Prospectus.

B

A fixed transaction fee of $500 will be charged when you create or redeem Creation Units of the Ultra Russell3000 ProShares regardless of the number of shares created or redeemed on the date of the transaction.

C

A variable transaction fee of up to 0.10% of the value of each Creation Unit will be charged to offset costs associated with processing the order.

D

An additional fee of up to 3 times the fixed per order transaction fee plus up to 0.10% of the value of each Creation Unit may be charged if you do not create or redeem shares through the Continuous Net Settlement System of the NSCC, or in circumstances in which cash is substituted for certain securities. Such transactions are allowed at the sole discretion of the Fund.

E

The Fund has adopted a Distribution (12b-1) Plan pursuant to which the Fund may be subject to an annual 12b-1 fee of up to 0.25%. However, no such fee is currently charged to the Fund and no such fees will be charged prior to [                     2009].

F

Based on estimated amounts for the Fund’s current fiscal year. “Other Expenses” include fees paid for management (non-advisory) services (as described under “Management of ProShares Trust” later in this Prospectus), legal and audit fees, printing costs, registration fees, custodial, fund accounting, administration, transfer agency and sub-transfer agency fees and costs associated with independent trustees and certain miscellaneous expenses.

G

ProShare Advisors has contractually agreed to waive Investment Advisory and Management Services Fees and to reimburse Other Expenses to the extent Total Annual Fund Operating Expenses, as a percentage of average daily net assets, exceed 0.95% of average daily net assets from the date the Fund commences operations through that date in 2009. After such date, the expense limitation may be terminated or revised. Amounts waived or reimbursed in a particular fiscal year may be recouped by ProShare Advisors within five years of the waiver or reimbursement to the extent that recoupment will not cause the Fund’s expenses to exceed any expense limitation in place at that time.

Example: The following example is intended to help you compare the estimated cost of investing in shares of the Ultra MSCI Japan ProShares with the cost of investing in other funds. Investors should note that the following examples are estimates and are for illustration purposes only and are not meant to suggest actual or expected fees and expenses or returns, all of which may vary. The Fund issues and redeems shares in Creation Units principally on an in-kind basis for portfolio securities included in the Index and cash. Shares are not redeemable in less than Creation Unit aggregations. The example does not include the brokerage commissions that secondary market investors may incur to buy and sell shares.

The following example assumes that you invest $10,000 in the Ultra MSCI Japan ProShares for the time periods indicated and sell all of your shares at the end of those periods, but does not include transaction fees on purchases and redemptions of shares. The example also assumes that your investment has a 5% annual return each year and that the Fund’s annual operating expenses remain exactly as described in the fee table. Although your actual costs may be higher or lower, based on the assumptions, your estimated costs would be:

 

   1 Year    3 Years        
  

$[    ]

  

$[    ]            

 

28  Ultra International ProShares


Table of Contents

Ultra FTSE/Xinhua China 25 ProShares

Ticker: [    ]

CUSIP: [    ]

Investment Objective

Ultra FTSE/Xinhua China 25 ProShares seeks daily investment results, before fees and expenses, that correspond to twice (200%) the daily performance of the FTSE/Xinhua China 25 Index.

If Ultra FTSE/Xinhua China 25 ProShares is successful in meeting its objective, its value, before fees and expenses, should gain approximately twice as much, on a percentage basis, as the FTSE/Xinhua China 25 Index when the Index rises on a given day. Conversely, its value (before fees and expenses) should lose approximately twice as much, on a percentage basis, as any decrease in the Index when the Index declines on a given day.

Because the value of the Index is not computed as of the close of the U.S. securities markets due to differences in trading hours between U.S. and foreign markets, correlation to the Index will be measured by comparing the daily change in the Fund’s net asset value per share to the performance of one or more U.S. exchange-traded securities or instruments that reflect the values of the securities underlying the Index as of the close of the U.S. securities markets.

Principal Investment Strategy

The Ultra FTSE/Xinhua China 25 ProShares’ principal investment strategies include:

 

Investing in equity securities and/or taking positions in financial instruments (including derivatives) that ProShare Advisors believes, in combination, should have similar daily price return characteristics as twice (200%) the FTSE/Xinhua China 25 Index. Information about the Index can be found on page 13.

 

Under normal circumstances, committing at least 80% of its net assets, plus any borrowings for investment purposes, to investments that, in combination, have economic characteristics that are similar to those of the Index.

 

Employing leveraged investment techniques and/or sampling techniques in seeking its investment objective.

 

Investing assets not invested in equity securities or financial instruments in debt securities and/or money market instruments.

 

The Fund will concentrate its investments in a particular industry or group of industries to approximately the same extent as the Index is so concentrated.

Principal Risk Considerations

The Ultra FTSE/Xinhua China 25 ProShares is subject to the following principal risks:

 

Aggressive Investment Technique Risk, Concentration Risk, Correlation Risk, Counterparty Risk, Credit Risk, Early Close/Trading Halt Risk, Equity Risk, Foreign Currency Risk, Foreign Investment Risk, Geographic Concentration Risk, Liquidity Risk, Market Price Variance Risk, Market Risk, Non-diversification Risk, Portfolio Turnover Risk and Valuation Time Risk.

The UltraShort FTSE/Xinhua China 25 ProShares’ performance will be affected by political, social and economic conditions in China. Investments in companies economically tied to China are subject to political risk, because China is dominated by the one-party rule of the Communist Party. Central governement control increases political and legal uncertainties, currency fluctuations or blockage. In addition, there is the risk that the Chinese government may decide not to continue to support the economic reform programs implemented in 1978 and possibly return to the completely centrally planned economy that existed prior to 1978, and the risk of confiscatory taxation, and nationalization or expropriation of assets. The Chinese securities markets are characterized by a relatively small number of equity issues and relatively low trading volume, resulting in substantially less liquidity and greater price volatility.

The Ultra FTSE/Xinhua China 25 ProShares may be subject to risks in addition to those identified as principal risks. The sections titled “Principal Investment Strategies and Risks,” “More on Risks” and “Special Risks of Exchange-Traded Funds” later in this Prospectus and the SAI contain additional information about the Fund and related risks.

Fund Performance

Performance history will be available for the Ultra FTSE/Xinhua China 25 ProShares after it has been in operation for a full calendar year.

Estimated Fees and Expenses

The following table describes the estimated fees and expenses you may pay when you buy, hold, or sell Creation Units of the Ultra FTSE/Xinhua China 25 ProShares. Annual fund operating expenses are also estimates. Investors purchasing shares in the secondary market will not pay the shareholder fees shown below directly, but may be subject to costs (including customary brokerage commissions) charged by their broker.

 

Estimated Shareholder Fees (paid directly by Authorized Participants)A
Sales charges (loads)   None
Fixed transaction fee per orderB   $500
Variable transaction fee per Creation UnitC   up to 0.10% of Creation Unit value
Additional transaction charge if not settled through   up to 3 times the

 

Ultra International ProShares  29


Table of Contents

the Continuous Net Settlement System of the National

Securities Clearing Corporation (NSCC)D up to 3 times the

  

fixed fee plus up

to 0.10%

 

Estimated Annual Fund Operating Expenses

(as a percentage of average daily net assets)

Investment Advisory Fee

   0.75%        

Distribution and Service (12b-1) feesE

   0.00%        

Other ExpensesF

   [      ]%        
    

Total Annual Fund Operating Expenses

   [      ]%        

Fee Waivers/ReimbursementsG

   -[      ]%        
    

Total Net Annual Fund Operating Expenses

   0.95%        
    

 

A

See “Transaction Fees on Creation and Redemption Transactions” at the end of this Prospectus.

B

A fixed transaction fee of $500 will be charged when you create or redeem Creation Units of the Ultra Russell3000 ProShares regardless of the number of shares created or redeemed on the date of the transaction.

C

A variable transaction fee of up to 0.10% of the value of each Creation Unit will be charged to offset costs associated with processing the order.

D

An additional fee of up to 3 times the fixed per order transaction fee plus up to 0.10% of the value of each Creation Unit may be charged if you do not create or redeem shares through the Continuous Net Settlement System of the NSCC, or in circumstances in which cash is substituted for certain securities. Such transactions are allowed at the sole discretion of the Fund.

E

The Fund has adopted a Distribution (12b-1) Plan pursuant to which the Fund may be subject to an annual 12b-1 fee of up to 0.25%. However, no such fee is currently charged to the Fund and no such fees will be charged prior to [                     2009].

F

Based on estimated amounts for the Fund’s current fiscal year. “Other Expenses” include fees paid for management (non-advisory) services (as described under “Management of ProShares Trust” later in this Prospectus), legal and audit fees, printing costs, registration fees, custodial, fund accounting, administration, transfer agency and sub-transfer agency fees and costs associated with independent trustees and certain miscellaneous expenses.

G

ProShare Advisors has contractually agreed to waive Investment Advisory and Management Services Fees and to reimburse Other Expenses to the extent Total Annual Fund Operating Expenses, as a percentage of average daily net assets, exceed 0.95% of average daily net assets from the date the Fund commences operations through that date in 2009. After such date, the expense limitation may be terminated or revised. Amounts waived or reimbursed in a particular fiscal year may be recouped by ProShare Advisors within five years of the waiver or reimbursement to the extent that recoupment will not cause the Fund’s expenses to exceed any expense limitation in place at that time.

Example: The following example is intended to help you compare the estimated cost of investing in shares of the Ultra FTSE/Xinhua China 25 ProShares with the cost of investing in other funds. Investors should note that the following examples are estimates and are for illustration purposes only and are not meant to suggest actual or expected fees and expenses or returns, all of which may vary. The Fund issues and redeems shares in Creation Units principally on an in-kind basis for portfolio securities included in the Index and cash. Shares are not redeemable in less than Creation Unit aggregations. The example does not include the brokerage commissions that secondary market investors may incur to buy and sell shares.

The following example assumes that you invest $10,000 in the Ultra FTSE/Xinhua China 25 ProShares for the time periods indicated and sell all of your shares at the end of those periods, but does not include transaction fees on purchases and redemptions of shares. The example also assumes that your investment has a 5% annual return each year and that the Fund’s annual operating expenses remain exactly as described in the fee table. Although your actual costs may be higher or lower, based on the assumptions, your estimated costs would be:

 

   1 Year    3 Years        
  

$[    ]

  

$[    ]            

 

30  Ultra International ProShares


Table of Contents

Short ProShares

Short ProShares seek to provide daily investment results, before fees and expenses, that either match (100%) or double (200%) the inverse (opposite) of the daily performance of their applicable indexes.

LOGO

 

 

An investment in a Fund is not a deposit of a bank, and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Funds are not guaranteed to achieve their investment objectives, and an investment in a Fund could lose money. No single Fund is a complete investment program.

1

A benchmark may be any standard of investment performance to which a Fund seeks to correlate its performance. UltraShort ProShares utilize the performance of a multiple of an index as their benchmark. For example, UltraShort Russell3000 ProShares have a daily benchmark of twice the inverse of the daily return of the Russell 3000® Index.

 

31


Table of Contents

UltraShort Russell3000 ProShares

Ticker: [    ]

CUSIP: [    ]

Investment Objective

UltraShort Russell3000 ProShares seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the Russell 3000 Index.

If UltraShort Russell3000 ProShares is successful in meeting its objective, its value, before fees and expenses, should gain approximately twice as much, on a percentage basis, as any decrease in the Russell 3000 Index when the Index declines on a given day. Conversely, its value (before fees and expenses) should lose approximately twice as much, on a percentage basis, as any increase in the Index when the Index rises on a given day.

Principal Investment Strategy

The UltraShort Russell3000 ProShares’ principal investment strategies include:

 

Taking positions in financial instruments (including derivatives) that ProShare Advisors believes, in combination, should have similar daily price return characteristics as twice (200%) the inverse of the Russell 3000 Index. Information about the Index can be found on page 13.

 

Under normal circumstances, committing at least 80% of its net assets, plus any borrowings for investment purposes, to investments that, in combination, have economic characteristics that are similar to those of the Index.

 

Employing leveraged investment techniques and/or sampling techniques in seeking its investment objective.

 

Investing assets not invested in financial instruments in debt securities and/or money market instruments.

 

The Fund will concentrate its investments in a particular industry or group of industries to approximately the same extent as the Index is so concentrated.

Principal Risk Considerations

The UltraShort Russell3000 ProShares is subject to the following principal risks:

 

Aggressive Investment Technique Risk, Concentration Risk, Correlation Risk, Counterparty Risk, Credit Risk, Early Close/Trading Halt Risk, Equity Risk, Liquidity Risk, Market Price Variance Risk, Market Risk, Non-diversification Risk, Portfolio Turnover Risk and Small- and Mid-Cap Company Investment Risk.

The UltraShort Russell3000 ProShares may be subject to risks in addition to those identified as principal risks. The sections titled “Principal Investment Strategies and Risks,” “More on Risks” and “Special Risks of Exchange-Traded Funds” later in this Prospectus and the SAI contain additional information about the Fund and related risks.

Fund Performance

Performance history will be available for the UltraShort Russell3000 ProShares after it has been in operation for a full calendar year.

Estimated Fees and Expenses

The following table describes the estimated fees and expenses you may pay when you buy, hold, or sell Creation Units of the UltraShort Russell3000 ProShares. Annual fund operating expenses are also estimates. Investors purchasing shares in the secondary market will not directly pay the shareholder fees shown below, but may be subject to costs (including customary brokerage commissions) charged by their broker.

 

Estimated Shareholder Fees (paid directly by Authorized Participants)A
Sales charges (loads)   None
Fixed transaction fee per orderB   $500
Variable transaction fee per Creation UnitC   up to 0.10% of Creation Unit value

Estimated Annual Fund Operating Expenses

(as a percentage of average daily net assets)

Investment Advisory Fee

  0.75%        

Distribution and Service (12b-1) feesD

  0.00%        

Other ExpensesE

  [      ]%        
   

Total Annual Fund Operating Expenses

  [      ]%        

Fee Waivers/ReimbursementsF

  -[      ]%        
   

Total Net Annual Fund Operating Expenses

  0.95%
   

 

A

See “Transaction Fees on Creation and Redemption Transactions” at the end of this Prospectus.

B

A fixed transaction fee of $500 will be charged when you create or redeem Creation Units of the UltraShort Russell3000 ProShares regardless of the number of shares created or redeemed on the date of the transaction.

C

A variable transaction fee of up to 0.10% of the value of each Creation Unit will be charged to offset costs associated with processing the order.

D

The Fund has adopted a Distribution (12b-1) Plan pursuant to which the Fund may be subject to an annual 12b-1 fee of up to 0.25%. However, no such fee is currently charged to the Fund and no such fees will be charged prior to [                     2009].

E

Based on estimated amounts for the Fund’s current fiscal year. “Other Expenses” include fees paid for management (non-advisory) services (as described under “Management of ProShares Trust” later in this Prospectus), legal and audit fees, printing costs, registration fees, custodial, fund accounting, administration, transfer agency and sub-transfer agency fees and costs associated with independent trustees and certain miscellaneous expenses.

 

32  Short MarketCap ProShares


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F

ProShare Advisors has contractually agreed to waive Investment Advisory and Management Services Fees and to reimburse Other Expenses to the extent Total Annual Fund Operating Expenses, as a percentage of average daily net assets, exceed 0.95% of average daily net assets from the date the Fund commences operations through that date in 2009. After such date, the expense limitation may be terminated or revised. Amounts waived or reimbursed in a particular fiscal year may be recouped by ProShare Advisors within five years of the waiver or reimbursement to the extent that recoupment will not cause the Fund’s expenses to exceed any expense limitation in place at that time.

Example: The following example is intended to help you compare the estimated cost of investing in shares of the UltraShort Russell3000 ProShares with the cost of investing in other funds. Investors should note that the following examples are estimates and are for illustration purposes only and are not meant to suggest actual or expected fees and expenses or returns, all of which may vary. The Fund issues and redeems shares in Creation Units principally on an in-kind basis for portfolio securities included in the Index and cash. Shares are not redeemable in less than Creation Unit aggregations. The example does not include the brokerage commissions that secondary market investors may incur to buy and sell shares.

The following example assumes that you invest $10,000 in the Fund for the time periods indicated and sell all of your shares at the end of those periods, but does not include transaction fees on purchases and redemptions of shares. The example also assumes that your investment has a 5% annual return each year and that the Fund’s annual operating expenses remain exactly as described in the fee table. Although your actual costs may be higher or lower, based on the assumptions, your estimated costs would be:

 

   1 Year    3 Years        
  

$[    ]

  

$[    ]            

 

Short MarketCap ProShares  33


Table of Contents

UltraShort DJ Wilshire Total Market ProShares

Ticker: [    ]

CUSIP: [    ]

Investment Objective

UltraShort DJ Wilshire Total Market ProShares seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the Dow Jones Wilshire 5000 Total Market Index.

If UltraShort DJ Wilshire Total Market ProShares is successful in meeting its objective, its value, before fees and expenses, should gain approximately twice as much, on a percentage basis, as any decrease in the Dow Jones Wilshire 5000 Total Market Index when the Index declines on a given day. Conversely, its value (before fees and expenses) should lose approximately twice as much, on a percentage basis, as any increase in the Index when the Index rises on a given day.

Principal Investment Strategy

The UltraShort DJ Wilshire Total Market ProShares’ principal investment strategies include:

 

Taking positions in financial instruments (including derivatives) that ProShare Advisors believes, in combination, should have similar daily price return characteristics as twice (200%) the inverse of the Dow Jones Wilshire 5000 Total Market Index. Information about the Index can be found on page 12.

 

Under normal circumstances, committing at least 80% of its net assets, plus any borrowings for investment purposes, to investments that, in combination, have economic characteristics that are similar to those of the Index.

 

Employing leveraged investment techniques and/or sampling techniques in seeking its investment objective.

 

Investing assets not invested in financial instruments in debt securities and/or money market instruments.

 

The Fund will concentrate its investments in a particular industry or group of industries to approximately the same extent as the Index is so concentrated.

Principal Risk Considerations

The UltraShort DJ Wilshire Total Market ProShares is subject to the following principal risks:

 

Aggressive Investment Technique Risk, Concentration Risk, Correlation Risk, Counterparty Risk, Credit Risk, Early Close/Trading Halt Risk, Equity Risk, Liquidity Risk, Market Price Variance Risk, Market Risk, Non-diversification Risk, Portfolio Turnover Risk and Small- and Mid-Cap Company Investment Risk.

The UltraShort DJ Wilshire Total Market ProShares may be subject to risks in addition to those identified as principal risks. The sections titled “Principal Investment Strategies and Risks,” “More on Risks” and “Special Risks of Exchange-Traded Funds” later in this Prospectus and the SAI contain additional information about the Fund and related risks.

Fund Performance

Performance history will be available for the UltraShort DJ Wilshire Total Market ProShares after it has been in operation for a full calendar year.

Estimated Fees and Expenses

The following table describes the estimated fees and expenses you may pay when you buy, hold, or sell Creation Units of the UltraShort DJ Wilshire Total Market ProShares. Annual fund operating expenses are also estimates. Investors purchasing shares in the secondary market will not directly pay the shareholder fees shown below, but may be subject to costs (including customary brokerage commissions) charged by their broker.

 

Estimated Shareholder Fees (paid directly by Authorized Participants)A
Sales charges (loads)   None
Fixed transaction fee per orderB   $500
Variable transaction fee per Creation Unitc   up to 0.10% of Creation Unit value

Estimated Annual Fund Operating Expenses

(as a percentage of average daily net assets)

Investment Advisory Fee

  0.75%        

Distribution and Service (12b-1) feesD

  0.00%        

Other ExpensesE

  [      ]%        
   

Total Annual Fund Operating Expenses

  [      ]%        

Fee Waivers/ReimbursementsF

  -[      ]%        
   

Total Net Annual Fund Operating Expenses

  0.95%
   

 

A

See “Transaction Fees on Creation and Redemption Transactions” at the end of this Prospectus.

B

A fixed transaction fee of $500 will be charged when you create or redeem Creation Units of the UltraShort DJ Wilshire Total Market ProShares regardless of the number of shares created or redeemed on the date of the transaction.

C

A variable transaction fee of up to 0.10% of the value of each Creation Unit will be charged to offset costs associated with processing the order.

D

The Fund has adopted a Distribution (12b-1) Plan pursuant to which the Fund may be subject to an annual 12b-1 fee of up to 0.25%. However, no such fee is currently charged to the Fund and no such fees will be charged prior to [                     2009].

E

Based on estimated amounts for the Fund’s current fiscal year. “Other Expenses” include fees paid for management (non-advisory) services (as described under “Management of ProShares Trust” later in this Prospectus), legal and audit fees, printing costs, registration fees, custodial, fund accounting, administration, transfer agency and sub-transfer agency fees and costs associated with independent trustees and certain miscellaneous expenses.

 

34  Short MarketCap ProShares


Table of Contents

F

ProShare Advisors has contractually agreed to waive Investment Advisory and Management Services Fees and to reimburse Other Expenses to the extent Total Annual Fund Operating Expenses, as a percentage of average daily net assets, exceed 0.95% of average daily net assets from the date the Fund commences operations through that date in 2009. After such date, the expense limitation may be terminated or revised. Amounts waived or reimbursed in a particular fiscal year may be recouped by ProShare Advisors within five years of the waiver or reimbursement to the extent that recoupment will not cause the Fund’s expenses to exceed any expense limitation in place at that time.

Example: The following example is intended to help you compare the estimated cost of investing in shares of the UltraShort DJ Wilshire Total Market ProShares with the cost of investing in other funds. Investors should note that the following examples are estimates and are for illustration purposes only and are not meant to suggest actual or expected fees and expenses or returns, all of which may vary. The Fund issues and redeems shares in Creation Units principally on an in-kind basis for portfolio securities included in the Index and cash. Shares are not redeemable in less than Creation Unit aggregations. The example does not include the brokerage commissions that secondary market investors may incur to buy and sell shares.

The following example assumes that you invest $10,000 in the Fund for the time periods indicated and sell all of your shares at the end of those periods, but does not include transaction fees on purchases and redemptions of shares. The example also assumes that your investment has a 5% annual return each year and that the Fund’s annual operating expenses remain exactly as described in the fee table. Although your actual costs may be higher or lower, based on the assumptions, your estimated costs would be:

 

   1 Year    3 Years        
  

$[    ]

  

$[    ]            

 

Short MarketCap ProShares  35


Table of Contents

UltraShort MSCI Australia ProShares

Ticker: [    ]

CUSIP: [    ]

Investment Objective

UltraShort MSCI Australia ProShares seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the MSCI Australia Index.

If UltraShort MSCI Australia ProShares is successful in meeting its objective, its value, before fees and expenses, should gain approximately twice as much, on a percentage basis, as any decrease in the MSCI Australia Index when the Index declines on a given day. Conversely, its value (before fees and expenses) should lose approximately twice as much, on a percentage basis, as any increase in the Index when the Index rises on a given day.

Principal Investment Strategy

The UltraShort MSCI Australia ProShares’ principal investment strategies include:

 

Taking positions in financial instruments (including derivatives) that ProShare Advisors believes, in combination, should have similar daily price return characteristics as twice (200%) the inverse of the MSCI Australia Index. Information about the Index can be found on page 13.

 

Under normal circumstances, committing at least 80% of its net assets, plus any borrowings for investment purposes, to investments that, in combination, have economic characteristics that are similar to those of the Index.

 

Employing leveraged investment techniques and/or sampling techniques in seeking its investment objective.

 

Investing assets not invested in financial instruments in debt securities and/or money market instruments.

 

The Fund will concentrate its investments in a particular industry or group of industries to approximately the same extent as the Index is so concentrated.

Principal Risk Considerations

The UltraShort MSCI Australia ProShares is subject to the following principal risks:

 

Aggressive Investment Technique Risk, Concentration Risk, Correlation Risk, Counterparty Risk, Credit Risk, Early Close/Trading Halt Risk, Equity Risk, Foreign Currency Risk, Foreign Investment Risk, Geographic Concentration Risk, Liquidity Risk, Market Price Variance Risk, Market Risk, Non-diversification Risk, Portfolio Turnover Risk, Small- and Mid-Cap Investment Company Risk and Valuation Time Risk.

In addition to the risks noted above, the Fund is subject to the risks affecting the Australian economy. Among such risks, the Fund is subject to commodity exposure risk, because the agricultural and mining sectors of Australia’s economy account for the majority of its exports. Therefore, the Australian economy is susceptible to fluctuations in the commodity markets and, in particular, in the price and demand for agricultural products and natural resources. Additionally, the UltraShort MSCI Australia ProShares is subject to risk from reliance on exports, because the Australian economy is dependent on the economies of Asia, Europe and the United States as key trading partners. Changes in spending on Australian products and services by any of these economies or changes in any of these economies may cause a significant impact on the Australian economy.

The UltraShort MSCI Australian ProShares may be subject to risks in addition to those identified as principal risks. The sections titled “Principal Investment Strategies and Risks,” “More on Risks” and “Special Risks of Exchange-Traded Funds” later in this Prospectus and the SAI contain additional information about the Fund and related risks.

Fund Performance

Performance history will be available for the UltraShort MSCI Australia ProShares after it has been in operation for a full calendar year.

Estimated Fees and Expenses

The following table describes the estimated fees and expenses you may pay when you buy, hold, or sell Creation Units of the UltraShort MSCI Australia ProShares. Annual fund operating expenses are also estimates. Investors purchasing shares in the secondary market will not directly pay the shareholder fees shown below, but may be subject to costs (including customary brokerage commissions) charged by their broker.

 

Estimated Shareholder Fees (paid directly by Authorized Participants)A

Sales charges (loads)   None
Fixed transaction fee per orderB   $500
Variable transaction fee per Creation UnitC   up to 0.10% of Creation Unit value

 

36  Short International ProShares


Table of Contents

Estimated Annual Fund Operating Expenses

(as a percentage of average daily net assets)

Investment Advisory Fee

   0.75%        

Distribution and Service (12b-1) feesD

   0.00%        

Other ExpensesE

   [      ]%        
    

Total Annual Fund Operating Expenses

   [      ]%        

Fee Waivers/ReimbursementsF

   -[      ]%        
    

Total Net Annual Fund Operating Expenses

   0.95%
    

 

A

See “Transaction Fees on Creation and Redemption Transactions” at the end of this Prospectus.

B

A fixed transaction fee of $500 will be charged when you create or redeem Creation Units of the UltraShort MSCI Australia ProShares regardless of the number of shares created or redeemed on the date of the transaction.

C

A variable transaction fee of up to 0.10% of the value of each Creation Unit will be charged to offset costs associated with processing the order.

D

The Fund has adopted a Distribution (12b-1) Plan pursuant to which the Fund may be subject to an annual 12b-1 fee of up to 0.25%. However, no such fee is currently charged to the Fund and no such fees will be charged prior to [                 2009].

E

Based on estimated amounts for the Fund’s current fiscal year. “Other Expenses” include fees paid for management (non-advisory) services as described under “Management of ProShares Trust” later in this Prospectus, legal and audit fees, printing costs, registration fees, custodial, fund accounting, administration, transfer agency and sub-transfer agency fees and costs associated with independent trustees and certain miscellaneous expenses.

F

ProShare Advisors has contractually agreed to waive Investment Advisory and Management Services Fees and to reimburse Other Expenses to the extent Total Annual Fund Operating Expenses, as a percentage of average daily net assets, exceed 0.95% of average daily net assets from the date the Fund commences operations through that date in 2009. After such date, the expense limitation may be terminated or revised. Amounts waived or reimbursed in a particular fiscal year may be recouped by ProShare Advisors within five years of the waiver or reimbursement to the extent that recoupment will not cause the Fund’s expenses to exceed any expense limitation in place at that time.

Example: The following example is intended to help you compare the estimated cost of investing in shares of the UltraShort MSCI Australia ProShares with the cost of investing in other funds. Investors should note that the following examples are estimates and are for illustration purposes only and are not meant to suggest actual or expected fees and expenses or returns, all of which may vary. The Fund issues and redeems shares in Creation Units principally on an in-kind basis for portfolio securities included in the Index and cash. Shares are not redeemable in less than Creation Unit aggregations. The example does not include the brokerage commissions that secondary market investors may incur to buy and sell shares.

The following example assumes that you invest $10,000 in the Fund for the time periods indicated and sell all of your shares at the end of those periods, but does not include transaction fees on purchases and redemptions of shares. The example also assumes that your investment has a 5% annual return each year and that the Fund’s annual operating expenses remain exactly as described in the fee table. Although your actual costs may be higher or lower, based on the assumptions, your estimated costs would be:

 

   1 Year    3 Years        
  

$[    ]

  

$[    ]            

 

Short International ProShares  37


Table of Contents

UltraShort MSCI Brazil ProShares

Ticker: [    ]

CUSIP: [    ]

Investment Objective

UltraShort MSCI Brazil ProShares seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the MSCI Brazil Index.

If UltraShort MSCI Brazil ProShares is successful in meeting its objective, its value, before fees and expenses, should gain approximately twice as much, on a percentage basis, as any decrease in the MSCI Brazil Index when the Index declines on a given day. Conversely, its value (before fees and expenses) should lose approximately twice as much, on a percentage basis, as any increase in the Index when the Index rises on a given day.

Principal Investment Strategy

The UltraShort MSCI Brazil ProShares’ principal investment strategies include:

 

Taking positions in financial instruments (including derivatives) that ProShare Advisors believes, in combination, should have similar daily price return characteristics as twice (200%) the inverse of the MSCI Brazil Index. Information about the Index can be found on page 13.

 

Under normal circumstances, committing at least 80% of its net assets, plus any borrowings for investment purposes, to investments that, in combination, have economic characteristics that are similar to those of the Index.

 

Employing leveraged investment techniques and/or sampling techniques in seeking its investment objective.

 

Investing assets not invested in financial instruments in debt securities and/or money market instruments.

 

The Fund will concentrate its investments in a particular industry or group of industries to approximately the same extent as the Index is so concentrated.

Principal Risk Considerations

The UltraShort MSCI Brazil ProShares is subject to the following principal risks:

 

Aggressive Investment Technique Risk, Concentration Risk, Correlation Risk, Counterparty Risk, Credit Risk, Emerging Market Risk, Early Close/Trading Halt Risk, Equity Risk, Foreign Currency Risk, Foreign Investment Risk, Geographic Concentration Risk, Liquidity Risk, Market Price Variance Risk, Market Risk, Non-diversification Risk, Portfolio Turnover Risk, Small- and Mid-Cap Investment Company Risk and Valuation Time Risk.

In addition to the risks noted above, the Fund is subject to risks affecting to Brazilian economy. Investments in companies economically tied to Brazil are subject to commodities market risk because a majority of Brazil’s exports are commodities. The economy may be susceptible to fluctuations in the global commodities markets. Additionally, high inflation rates and government debt, which has been as high as 51% of gross domestic product, have adversely affected the Brazilian economy. Investments in companies economically tied to Brazil are also subject to risk of government intervention, because the Brazilian government controls a number of sectors of the economy and the current privatization program may increase the degree to which the government controls the economy. The privatization program also presents a significant risk to investments in companies economically tied to Brazil, particularly in the energy and telecommunications sectors, which may be subject to expropriation or confiscatory taxation.

The UltraShort MSCI Brazil ProShares may be subject to risks in addition to those identified as principal risks. The sections titled “Principal Investment Strategies and Risks,” “More on Risks” and “Special Risks of Exchange-Traded Funds” later in this Prospectus and the SAI contain additional information about the Fund and related risks.

Fund Performance

Performance history will be available for the UltraShort MSCI Brazil ProShares after it has been in operation for a full calendar year.

Estimated Fees and Expenses

The following table describes the estimated fees and expenses you may pay when you buy, hold, or sell Creation Units of the UltraShort MSCI Brazil ProShares. Annual fund operating expenses are also estimates. Investors purchasing shares in the secondary market will not directly pay the shareholder fees shown below, but may be subject to costs (including customary brokerage commissions) charged by their broker.

 

Estimated Shareholder Fees (paid directly by Authorized Participants)A
Sales charges (loads)   None
Fixed transaction fee per orderB   $500
Variable transaction fee per Creation UnitC   up to 0.10% of Creation Unit value

 

38  Short International ProShares


Table of Contents

Estimated Annual Fund Operating Expenses

(as a percentage of average daily net assets)

Investment Advisory Fee

   0.75%        

Distribution and Service (12b-1) feesD

   0.00%        

Other ExpensesE

   [      ]%        
    

Total Annual Fund Operating Expenses

   [      ]%        

Fee Waivers/ReimbursementsF

   -[      ]%        
    

Total Net Annual Fund Operating Expenses

   0.95%
    

 

A

See “Transaction Fees on Creation and Redemption Transactions” at the end of this Prospectus.

B

A fixed transaction fee of $500 will be charged when you create or redeem Creation Units of the UltraShort MSCI Brazil ProShares regardless of the number of shares created or redeemed on the date of the transaction.

C

A variable transaction fee of up to 0.10% of the value of each Creation Unit will be charged to offset costs associated with processing the order.

D

The Fund has adopted a Distribution (12b-1) Plan pursuant to which the Fund may be subject to an annual 12b-1 fee of up to 0.25%. However, no such fee is currently charged to the Fund and no such fees will be charged prior to [                 2009].

E

Based on estimated amounts for the Fund’s current fiscal year. “Other Expenses” include fees paid for management (non-advisory) services as described under “Management of ProShares Trust” later in this Prospectus, legal and audit fees, printing costs, registration fees, custodial, fund accounting, administration, transfer agency and sub-transfer agency fees and costs associated with independent trustees and certain miscellaneous expenses.

F

ProShare Advisors has contractually agreed to waive Investment Advisory and Management Services Fees and to reimburse Other Expenses to the extent Total Annual Fund Operating Expenses, as a percentage of average daily net assets, exceed 0.95% of average daily net assets from the date the Fund commences operations through that date in 2009. After such date, the expense limitation may be terminated or revised. Amounts waived or reimbursed in a particular fiscal year may be recouped by ProShare Advisors within five years of the waiver or reimbursement to the extent that recoupment will not cause the Fund’s expenses to exceed any expense limitation in place at that time.

Example: The following example is intended to help you compare the estimated cost of investing in shares of the UltraShort MSCI Brazil ProShares with the cost of investing in other funds. Investors should note that the following examples are estimates and are for illustration purposes only and are not meant to suggest actual or expected fees and expenses or returns, all of which may vary. The Fund issues and redeems shares in Creation Units principally on an in-kind basis for portfolio securities included in the Index and cash. Shares are not redeemable in less than Creation Unit aggregations. The example does not include the brokerage commissions that secondary market investors may incur to buy and sell shares.

The following example assumes that you invest $10,000 in the Fund for the time periods indicated and sell all of your shares at the end of those periods, but does not include transaction fees on purchases and redemptions of shares. The example also assumes that your investment has a 5% annual return each year and that the Fund’s annual operating expenses remain exactly as described in the fee table. Although your actual costs may be higher or lower, based on the assumptions, your estimated costs would be:

 

   1 Year    3 Years        
  

$[    ]

  

$[    ]            

 

Short International ProShares   39


Table of Contents

UltraShort MSCI BRIC ProShares

Ticker: [    ]

CUSIP: [    ]

Investment Objective

UltraShort MSCI BRIC ProShares seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the MSCI BRIC Equity Index.

If UltraShort MSCI BRIC ProShares is successful in meeting its objective, its value, before fees and expenses, should gain approximately twice as much, on a percentage basis, as any decrease in the MSCI BRIC Equity Index when the Index declines on a given day. Conversely, its value (before fees and expenses) should lose approximately twice as much, on a percentage basis, as any increase in the Index when the Index rises on a given day.

Principal Investment Strategy

The UltraShort MSCI BRIC ProShares’ principal investment strategies include:

 

Taking positions in financial instruments (including derivatives) that ProShare Advisors believes, in combination, should have similar daily price return characteristics as twice (200%) the inverse of the MSCI BRIC Equity Index. Information about the Index can be found on page 13.

 

Under normal circumstances, committing at least 80% of its net assets, plus any borrowings for investment purposes, to investments that, in combination, have economic characteristics that are similar to those of the Index.

 

Employing leveraged investment techniques and/or sampling techniques in seeking its investment objective.

 

Investing assets not invested in financial instruments in debt securities and/or money market instruments.

 

The Fund will concentrate its investments in a particular industry or group of industries to approximately the same extent as the Index is so concentrated.

Principal Risk Considerations

The UltraShort MSCI BRIC ProShares is subject to the following principal risks:

 

Aggressive Investment Technique Risk, Concentration Risk, Correlation Risk, Counterparty Risk, Credit Risk, Emerging Market Risk, Early Close/Trading Halt Risk, Equity Risk, Foreign Currency Risk, Foreign Investment Risk, Geographic Concentration Risk, Liquidity Risk, Market Price Variance Risk, Market Risk, Non-diversification Risk, Portfolio Turnover Risk, Small- and Mid-Cap Investment Company Risk and Valuation Time Risk.

Investments in companies economically tied to emerging markets, such as the BRIC countries, are subject to additional political, social and economic risk that are particular to each individual country. In addition to the risks noted above, investments in the Fund will be subject to those risks affecting the economies of Brazil, China, India and Russia.

Investments in companies economically tied to Brazil are subject to commodities market risk because a majority of Brazil’s exports are commodities. The Brazilian economy may be susceptible to fluctuations in the global commodities markets. Additionally, high inflation rates and government debt, which has been as high as 51% of gross domestic product, have adversely affected the Brazilian economy. Investments in companies economically tied to Brazil are also subject to risk of government intervention, because the Brazilian government controls a number of sectors of the economy and the current privatization program may increase the degree to which the government controls the economy. The privatization program also presents a significant risk to investments in companies economically tied to Brazil, particularly in the energy and telecommunications sectors, which may be subject to expropriation or confiscatory taxation.

Investments in companies economically tied to China are subject to political risk, because China is dominated by the one-party rule of the Communist Party. Central government control increases political and legal uncertainties, currency fluctuations or blockage. In addition, there is the risk that the Chinese government may decide not to continue to support the economic reform programs implemented in 1978 and possibly return to the completely centrally planned economy that existed prior to 1978, and the risk of confiscatory taxation, and nationalization or expropriation of assets. The Chinese securities markets are characterized by a relatively small number of equity issues and relatively low trading volume, resulting in substantially less liquidity and greater price volatility.

Investments in companies economically tied to India are subject to additional political, social and economic risk, because securities held by foreign investors are subject to stringent regulations, India’s securities markets are less developed and securities may be considerably less liquid than the securities traded in more developed countries’ markets and the Indian economy has experienced high inflation, interest and tax rates in recent years.

Investments in companies economically tied to Russia are subject to commodities market risk, because Russia main exports are commodities, particularly oil, gas, minerals and metals. The government has consolidated its control over certain sectors of the economy, particularly in the commodities sector. If these trends continue, Russia may return to a centrally-controlled economy and political regime, which may present significant risk to investments in companies economically tied to Russia, particularly for foreign investors. In addition, Russian tax, accounting and financial reporting standards are less transparent than investors may experience in other European countries, which may increase risk associated with valuing Russian investments.

The UltraShort MSCI BRIC ProShares may be subject to risks in addition to those identified as principal risks. The sections titled “Principal Investment Strategies and Risks,” “More on Risks” and “Special Risks of Exchange-Traded Funds” later in this Prospectus and the SAI contain additional information about the Fund and related risks.

 

40   Short International ProShares


Table of Contents

Fund Performance

Performance history will be available for the UltraShort MSCI BRIC ProShares after it has been in operation for a full calendar year.

Estimated Fees and Expenses

The following table describes the estimated fees and expenses you may pay when you buy, hold, or sell Creation Units of the UltraShort MSCI BRIC ProShares. Annual fund operating expenses are also estimates. Investors purchasing shares in the secondary market will not directly pay the shareholder fees shown below, but may be subject to costs (including customary brokerage commissions) charged by their broker.

 

Estimated Shareholder Fees (paid directly by Authorized Participants)A
Sales charges (loads)   None
Fixed transaction fee per orderB   $500
Variable transaction fee per Creation UnitC   up to 0.10% of Creation Unit value

 

Estimated Annual Fund Operating Expenses

(as a percentage of average daily net assets)

Investment Advisory Fee

   0.75%        

Distribution and Service (12b-1) feesD

   0.00%        

Other ExpensesE

   [      ]%        
    

Total Annual Fund Operating Expenses

   [      ]%        

Fee Waivers/ReimbursementsF

   -[      ]%        
    

Total Net Annual Fund Operating Expenses

   0.95%
    

 

A

See “Transaction Fees on Creation and Redemption Transactions” at the end of this Prospectus.

B

A fixed transaction fee of $500 will be charged when you create or redeem Creation Units of the UltraShort MSCI BRIC ProShares regardless of the number of shares created or redeemed on the date of the transaction.

C

A variable transaction fee of up to 0.10% of the value of each Creation Unit will be charged to offset costs associated with processing the order.

D

The Fund has adopted a Distribution (12b-1) Plan pursuant to which the Fund may be subject to an annual 12b-1 fee of up to 0.25%. However, no such fee is currently charged to the Fund and no such fees will be charged prior to [                 2009].

E

Based on estimated amounts for the Fund’s current fiscal year. “Other Expenses” include fees paid for management (non-advisory) services as described under “Management of ProShares Trust” later in this Prospectus, legal and audit fees, printing costs, registration fees, custodial, fund accounting, administration, transfer agency and sub-transfer agency fees and costs associated with independent trustees and certain miscellaneous expenses.

F

ProShare Advisors has contractually agreed to waive Investment Advisory and Management Services Fees and to reimburse Other Expenses to the extent Total Annual Fund Operating Expenses, as a percentage of average daily net assets, exceed 0.95% of average daily net assets from the date the Fund commences operations through that date in 2009. After such date, the expense limitation may be terminated or revised. Amounts waived or reimbursed in a particular fiscal year may be recouped by ProShare Advisors within five years of the waiver or reimbursement to the extent that recoupment will not cause the Fund’s expenses to exceed any expense limitation in place at that time.

Example: The following example is intended to help you compare the estimated cost of investing in shares of the UltraShort MSCI BRIC ProShares with the cost of investing in other funds. Investors should note that the following examples are estimates and are for illustration purposes only and are not meant to suggest actual or expected fees and expenses or returns, all of which may vary. The Fund issues and redeems shares in Creation Units principally on an in-kind basis for portfolio securities included in the Index and cash. Shares are not redeemable in less than Creation Unit aggregations. The example does not include the brokerage commissions that secondary market investors may incur to buy and sell shares.

The following example assumes that you invest $10,000 in the Fund for the time periods indicated and sell all of your shares at the end of those periods, but does not include transaction fees on purchases and redemptions of shares. The example also assumes that your investment has a 5% annual return each year and that the Fund’s annual operating expenses remain exactly as described in the fee table. Although your actual costs may be higher or lower, based on the assumptions, your estimated costs would be:

 

   1 Year    3 Years        
  

$[    ]

  

$[    ]            

 

Short International ProShares   41


Table of Contents

UltraShort MSCI Europe ProShares

Ticker: [    ]

CUSIP: [    ]

Investment Objective

UltraShort MSCI Europe ProShares seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the MSCI Europe Index.

If UltraShort MSCI Europe ProShares is successful in meeting its objective, its value, before fees and expenses, should gain approximately twice as much, on a percentage basis, as any decrease in the MSCI Europe Index when the Index declines on a given day. Conversely, its value (before fees and expenses) should lose approximately twice as much, on a percentage basis, as any increase in the Index when the Index rises on a given day.

Principal Investment Strategy

The UltraShort MSCI Europe ProShares’ principal investment strategies include:

 

Taking positions in financial instruments (including derivatives) that ProShare Advisors believes, in combination, should have similar daily price return characteristics as twice (200%) the inverse of the MSCI Europe Index. Information about the Index can be found on page 14.

 

Under normal circumstances, committing at least 80% of its net assets, plus any borrowings for investment purposes, to investments that, in combination, have economic characteristics that are similar to those of the Index.

 

Employing leveraged investment techniques and/or sampling techniques in seeking its investment objective.

 

Investing assets not invested in financial instruments in debt securities and/or money market instruments.

 

The Fund will concentrate its investments in a particular industry or group of industries to approximately the same extent as the Index is so concentrated.

Principal Risk Considerations

The UltraShort MSCI Europe ProShares is subject to the following principal risks:

 

Aggressive Investment Technique Risk, Concentration Risk, Correlation Risk, Counterparty Risk, Credit Risk, Early Close/Trading Halt Risk, Equity Risk, Foreign Currency Risk, Foreign Investment Risk, Geographic Concentration Risk, Liquidity Risk, Market Price Variance Risk, Market Risk, Non-diversification Risk, Portfolio Turnover Risk, Small- and Mid-Cap Investment Company Risk and Valuation Time Risk.

The UltraShort MSCI Europe ProShares may be subject to risks in addition to those identified above, because it is subject to risk affecting issuers economically tied to Europe. European companies could be negatively affected by such factors as regional economic downturns, policies adopted in the European Economic and Monetary Union, or difficulties faced by particular European countries, such as those in Eastern Europe, which are implementing significant free market economic reforms. The sections titled “Principal Investment Strategies and Risks,” “More on Risks” and “Special Risks of Exchange-Traded Funds” later in this Prospectus and the SAI contain additional information about the Fund and related risks.

Fund Performance

Performance history will be available for the UltraShort MSCI Europe ProShares after it has been in operation for a full calendar year.

Estimated Fees and Expenses

The following table describes the estimated fees and expenses you may pay when you buy, hold, or sell Creation Units of the UltraShort MSCI Europe ProShares. Annual fund operating expenses are also estimates. Investors purchasing shares in the secondary market will not directly pay the shareholder fees shown below, but may be subject to costs (including customary brokerage commissions) charged by their broker.

 

Estimated Shareholder Fees (paid directly by Authorized Participants)A
Sales charges (loads)   None
Fixed transaction fee per orderB   $500
Variable transaction fee per Creation UnitC   up to 0.10% of Creation Unit value

 

Estimated Annual Fund Operating Expenses

(as a percentage of average daily net assets)

Investment Advisory Fee

   0.75%        

Distribution and Service (12b-1) feesD

   0.00%        

Other ExpensesE

   [      ]%        
    

Total Annual Fund Operating Expenses

   [      ]%        

Fee Waivers/ReimbursementsF

   -[      ]%        
    

Total Net Annual Fund Operating Expenses

   0.95%
    

 

A

See “Transaction Fees on Creation and Redemption Transactions” at the end of this Prospectus.

 

42   Short International ProShares


Table of Contents

B

A fixed transaction fee of $500 will be charged when you create or redeem Creation Units of the UltraShort MSCI Europe ProShares regardless of the number of shares created or redeemed on the date of the transaction.

C

A variable transaction fee of up to 0.10% of the value of each Creation Unit will be charged to offset costs associated with processing the order.

D

The Fund has adopted a Distribution (12b-1) Plan pursuant to which the Fund may be subject to an annual 12b-1 fee of up to 0.25%. However, no such fee is currently charged to the Fund and no such fees will be charged prior to [                     2009].

E

Based on estimated amounts for the Fund’s current fiscal year. “Other Expenses” include fees paid for management (non-advisory) services (as described under “Management of ProShares Trust” later in this Prospectus), legal and audit fees, printing costs, registration fees, custodial, fund accounting, administration, transfer agency and sub-transfer agency fees and costs associated with independent trustees and certain miscellaneous expenses.

F

ProShare Advisors has contractually agreed to waive Investment Advisory and Management Services Fees and to reimburse Other Expenses to the extent Total Annual Fund Operating Expenses, as a percentage of average daily net assets, exceed 0.95% of average daily net assets from the date the Fund commences operations through that date in 2009. After such date, the expense limitation may be terminated or revised. Amounts waived or reimbursed in a particular fiscal year may be recouped by ProShare Advisors within five years of the waiver or reimbursement to the extent that recoupment will not cause the Fund’s expenses to exceed any expense limitation in place at that time.

Example: The following example is intended to help you compare the estimated cost of investing in shares of the UltraShort MSCI Europe ProShares with the cost of investing in other funds. Investors should note that the following examples are estimates and are for illustration purposes only and are not meant to suggest actual or expected fees and expenses or returns, all of which may vary. The Fund issues and redeems shares in Creation Units principally on an in-kind basis for portfolio securities included in the Index and cash. Shares are not redeemable in less than Creation Unit aggregations. The example does not include the brokerage commissions that secondary market investors may incur to buy and sell shares.

The following example assumes that you invest $10,000 in the Fund for the time periods indicated and sell all of your shares at the end of those periods, but does not include transaction fees on purchases and redemptions of shares. The example also assumes that your investment has a 5% annual return each year and that the Fund’s annual operating expenses remain exactly as described in the fee table. Although your actual costs may be higher or lower, based on the assumptions, your estimated costs would be:

 

   1 Year    3 Years        
  

$[    ]

  

$[    ]            

 

Short International ProShares   43


Table of Contents

UltraShort MSCI Latin America ProShares

Ticker: [    ]

CUSIP: [    ]

Investment Objective

UltraShort MSCI Latin America ProShares seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the MSCI Latin America Index.

If UltraShort MSCI Latin America ProShares is successful in meeting its objective, its value, before fees and expenses, should gain approximately twice as much, on a percentage basis, as any decrease in the MSCI Latin America Index when the Index declines on a given day. Conversely, its value (before fees and expenses) should lose approximately twice as much, on a percentage basis, as any increase in the Index when the Index rises on a given day.

Principal Investment Strategy

The UltraShort MSCI Latin America ProShares’ principal investment strategies include:

 

Taking positions in financial instruments (including derivatives) that ProShare Advisors believes, in combination, should have similar daily price return characteristics as twice (200%) the inverse of the MSCI Latin America Index. Information about the Index can be found on page 14.

 

Under normal circumstances, committing at least 80% of its net assets, plus any borrowings for investment purposes, to investments that, in combination, have economic characteristics that are similar to those of the Index.

 

Employing leveraged investment techniques and/or sampling techniques in seeking its investment objective.

 

Investing assets not invested in financial instruments in debt securities and/or money market instruments.

 

The Fund will concentrate its investments in a particular industry or group of industries to approximately the same extent as the Index is so concentrated.

Principal Risk Considerations

The UltraShort MSCI Latin America ProShares is subject to the following principal risks:

 

Aggressive Investment Technique Risk, Concentration Risk, Correlation Risk, Counterparty Risk, Credit Risk, Emerging Market Risk, Early Close/Trading Halt Risk, Equity Risk, Foreign Currency Risk, Foreign Investment Risk, Geographic Concentration Risk, Liquidity Risk, Market Price Variance Risk, Market Risk, Non-diversification Risk, Portfolio Turnover Risk, Small- and Mid-Cap Company Investment Risk and Valuation Time Risk.

In addition to the risks noted above, the UltraShort MSCI Latin America ProShares is subject to additional risks specific to its investment in companies economically tied to Latin America. Most Latin American countries have experienced severe and persistent levels of inflation (and, in some cases, hyperinflation), which has led to high interest rates, extreme governmental measures to keep inflation in check, and a generally negative effect on economic growth. While inflation has lessened in many countries in recent years, there can be no assurance that it will remain at low levels. In addition, certain Latin American countries have experienced political instability, characterized by political uncertainty, intervention by the military in civilian and economic spheres, and political corruption. Such developments, if they were to reoccur, could reverse favorable trends toward market and economic reform, privatization, and removal of trade barriers, and result in significant disruption in securities markets. A number of Latin American countries are among the largest debtors among developing countries. There have been moratoria on, and rescheduling of, repayment with respect to these debts. Such events can restrict the flexibility of these debtor nations in the international markets and result in the imposition of onerous conditions on their economies.

The UltraShort MSCI Latin America ProShares may be subject to risks in addition to those identified as principal risks. The sections titled “Principal Investment Strategies and Risks,” “More on Risks” and “Special Risks of Exchange-Traded Funds” later in this Prospectus and the SAI contain additional information about the Fund and related risks.

Fund Performance

Performance history will be available for the UltraShort MSCI Latin America ProShares after it has been in operation for a full calendar year.

Estimated Fees and Expenses

The following table describes the estimated fees and expenses you may pay when you buy, hold, or sell Creation Units of the UltraShort MSCI Latin America ProShares. Annual fund operating expenses are also estimates. Investors purchasing shares in the secondary market will not directly pay the shareholder fees shown below, but may be subject to costs (including customary brokerage commissions) charged by their broker.

 

Estimated Shareholder Fees (paid directly by Authorized Participants)A
Sales charges (loads)   None
Fixed transaction fee per orderB   $500
Variable transaction fee per Creation UnitC   up to 0.10% of Creation Unit value

 

44   Short International ProShares


Table of Contents

Estimated Annual Fund Operating Expenses

(as a percentage of average daily net assets)

Investment Advisory Fee

   0.75%        

Distribution and Service (12b-1) feesD

   0.00%        

Other ExpensesE

   [      ]%        
    

Total Annual Fund Operating Expenses

   [      ]%        

Fee Waivers/ReimbursementsF

   -[      ]%        
    

Total Net Annual Fund Operating Expenses

   0.95%
    

 

A

See “Transaction Fees on Creation and Redemption Transactions” at the end of this Prospectus.

B

A fixed transaction fee of $500 will be charged when you create or redeem Creation Units of the UltraShort MSCI Latin America ProShares regardless of the number of shares created or redeemed on the date of the transaction.

C

A variable transaction fee of up to 0.10% of the value of each Creation Unit will be charged to offset costs associated with processing the order.

D

The Fund has adopted a Distribution (12b-1) Plan pursuant to which the Fund may be subject to an annual 12b-1 fee of up to 0.25%. However, no such fee is currently charged to the Fund and no such fees will be charged prior to [                     2009].

E

Based on estimated amounts for the Fund’s current fiscal year. “Other Expenses” include fees paid for management (non-advisory) services as described under “Management of ProShares Trust” later in this Prospectus, legal and audit fees, printing costs, registration fees, custodial, fund accounting, administration, transfer agency and sub-transfer agency fees and costs associated with independent trustees and certain miscellaneous expenses.

F

ProShare Advisors has contractually agreed to waive Investment Advisory and Management Services Fees and to reimburse Other Expenses to the extent Total Annual Fund Operating Expenses, as a percentage of average daily net assets, exceed 0.95% of average daily net assets from the date the Fund commences operations through that date in 2009. After such date, the expense limitation may be terminated or revised. Amounts waived or reimbursed in a particular fiscal year may be recouped by ProShare Advisors within five years of the waiver or reimbursement to the extent that recoupment will not cause the Fund’s expenses to exceed any expense limitation in place at that time.

Example: The following example is intended to help you compare the estimated cost of investing in shares of the UltraShort MSCI Latin America ProShares with the cost of investing in other funds. Investors should note that the following examples are estimates and are for illustration purposes only and are not meant to suggest actual or expected fees and expenses or returns, all of which may vary. The Fund issues and redeems shares in Creation Units principally on an in-kind basis for portfolio securities included in the Index and cash. Shares are not redeemable in less than Creation Unit aggregations. The example does not include the brokerage commissions that secondary market investors may incur to buy and sell shares.

The following example assumes that you invest $10,000 in the Fund for the time periods indicated and sell all of your shares at the end of those periods, but does not include transaction fees on purchases and redemptions of shares. The example also assumes that your investment has a 5% annual return each year and that the Fund’s annual operating expenses remain exactly as described in the fee table. Although your actual costs may be higher or lower, based on the assumptions, your estimated costs would be:

 

   1 Year    3 Years        
  

$[    ]

  

$[    ]            

 

Short International ProShares   45


Table of Contents

UltraShort MSCI Mexico ProShares

Ticker: [    ]

CUSIP: [    ]

Investment Objective

UltraShort MSCI Mexico ProShares seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the MSCI Mexico Index.

If UltraShort MSCI Mexico ProShares is successful in meeting its objective, its value, before fees and expenses, should gain approximately twice as much, on a percentage basis, as any decrease in the MSCI Mexico Index when the Index declines on a given day. Conversely, its value (before fees and expenses) should lose approximately twice as much, on a percentage basis, as any increase in the Index when the Index rises on a given day.

Principal Investment Strategy

The UltraShort MSCI Mexico ProShares’ principal investment strategies include:

 

Taking positions in financial instruments (including derivatives) that ProShare Advisors believes, in combination, should have similar daily price return characteristics as twice (200%) the inverse of the MSCI Mexico Index. Information about the Index can be found on page 14.

 

Under normal circumstances, committing at least 80% of its net assets, plus any borrowings for investment purposes, to investments that, in combination, have economic characteristics that are similar to those of the Index.

 

Employing leveraged investment techniques and/or sampling techniques in seeking its investment objective.

 

Investing assets not invested in financial instruments in debt securities and/or money market instruments.

 

The Fund will concentrate its investments in a particular industry or group of industries to approximately the same extent as the Index is so concentrated.

Principal Risk Considerations

The UltraShort MSCI Mexico ProShares is subject to the following principal risks:

 

Aggressive Investment Technique Risk, Concentration Risk, Correlation Risk, Counterparty Risk, Credit Risk, Emerging Market Risk, Early Close/Trading Halt Risk, Equity Risk, Foreign Currency Risk, Foreign Investment Risk, Geographic Concentration Risk, Liquidity Risk, Market Price Variance Risk, Market Risk, Non-diversification Risk, Portfolio Turnover Risk, Small- and Mid-Cap Company Investment Risk and Valuation Time Risk.

The UltraShort MSCI Mexico ProShares’ performance will be affected by political, social and economic conditions in Mexico. In addition, while the Fund is primarily exposed to risks affecting Mexico, the Mexican economy may be affected by consumer demands in the U.S., as well as Central and South America, and the state of the U.S. and Central and South American economies. Certain structural factors particular to the Mexican economy may adversely affect the Fund’s performance. Mexico has previously experienced political instability, including local insurrections and social upheavals. In 2000, for the first time since Mexico became independent of Spain, the dominant political party lost control of the Mexican national government and certain regional governments in contentious elections. Mexico has also experienced high inflation and significant devaluations of the peso.

The UltraShort MSCI Mexico ProShares may be subject to risks in addition to those identified as principal risks. The sections titled “Principal Investment Strategies and Risks,” “More on Risks” and “Special Risks of Exchange-Traded Funds” later in this Prospectus and the SAI contain additional information about the Fund and related risks.

Fund Performance

Performance history will be available for the UltraShort MSCI Mexico ProShares after it has been in operation for a full calendar year.

Estimated Fees and Expenses

The following table describes the estimated fees and expenses you may pay when you buy, hold, or sell Creation Units of the UltraShort MSCI Mexico ProShares. Annual fund operating expenses are also estimates. Investors purchasing shares in the secondary market will not directly pay the shareholder fees shown below, but may be subject to costs (including customary brokerage commissions) charged by their broker.

 

Estimated Shareholder Fees (paid directly by Authorized Participants)A
Sales charges (loads)   None
Fixed transaction fee per orderB   $500
Variable transaction fee per Creation UnitC   up to 0.10% of Creation Unit value

 

46   Short International ProShares


Table of Contents

Estimated Annual Fund Operating Expenses

(as a percentage of average daily net assets)

Investment Advisory Fee

   0.75%        

Distribution and Service (12b-1) feesD

   0.00%        

Other ExpensesE

   [      ]%        
    

Total Annual Fund Operating Expenses

   [      ]%        

Fee Waivers/ReimbursementsF

   -[      ]%        
    

Total Net Annual Fund Operating Expenses

   0.95%
    

 

A

See “Transaction Fees on Creation and Redemption Transactions” at the end of this Prospectus.

B

A fixed transaction fee of $500 will be charged when you create or redeem Creation Units of the UltraShort MSCI Mexico ProShares regardless of the number of shares created or redeemed on the date of the transaction.

C

A variable transaction fee of up to 0.10% of the value of each Creation Unit will be charged to offset costs associated with processing the order.

D

The Fund has adopted a Distribution (12b-1) Plan pursuant to which the Fund may be subject to an annual 12b-1 fee of up to 0.25%. However, no such fee is currently charged to the Fund and no such fees will be charged prior to [                     2009].

E

Based on estimated amounts for the Fund’s current fiscal year. “Other Expenses” include fees paid for management (non-advisory) services as described under “Management of ProShares Trust” later in this Prospectus, legal and audit fees, printing costs, registration fees, custodial, fund accounting, administration, transfer agency and sub-transfer agency fees and costs associated with independent trustees and certain miscellaneous expenses.

F

ProShare Advisors has contractually agreed to waive Investment Advisory and Management Services Fees and to reimburse Other Expenses to the extent Total Annual Fund Operating Expenses, as a percentage of average daily net assets, exceed 0.95% of average daily net assets from the date the Fund commences operations through that date in 2009. After such date, the expense limitation may be terminated or revised. Amounts waived or reimbursed in a particular fiscal year may be recouped by ProShare Advisors within five years of the waiver or reimbursement to the extent that recoupment will not cause the Fund’s expenses to exceed any expense limitation in place at that time.

Example: The following example is intended to help you compare the estimated cost of investing in shares of the UltraShort MSCI Mexico ProShares with the cost of investing in other funds. Investors should note that the following examples are estimates and are for illustration purposes only and are not meant to suggest actual or expected fees and expenses or returns, all of which may vary. The Fund issues and redeems shares in Creation Units principally on an in-kind basis for portfolio securities included in the Index and cash. Shares are not redeemable in less than Creation Unit aggregations. The example does not include the brokerage commissions that secondary market investors may incur to buy and sell shares.

The following example assumes that you invest $10,000 in the Fund for the time periods indicated and sell all of your shares at the end of those periods, but does not include transaction fees on purchases and redemptions of shares. The example also assumes that your investment has a 5% annual return each year and that the Fund’s annual operating expenses remain exactly as described in the fee table. Although your actual costs may be higher or lower, based on the assumptions, your estimated costs would be:

 

   1 Year    3 Years        
  

$[    ]

  

$[    ]            

 

Short International ProShares   47


Table of Contents

UltraShort MSCI Pacific ex-Japan ProShares

Ticker: [    ]

CUSIP: [    ]

Investment Objective

UltraShort MSCI Pacific ex-Japan ProShares seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the MSCI Pacific ex-Japan Index.

If UltraShort MSCI Pacific ex-Japan ProShares is successful in meeting its objective, its value, before fees and expenses, should gain approximately twice as much, on a percentage basis, as any decrease in the MSCI Pacific ex-Japan Index when the Index declines on a given day. Conversely, its value (before fees and expenses) should lose approximately twice as much, on a percentage basis, as any increase in the Index when the Index rises on a given day.

Principal Investment Strategy

The UltraShort MSCI Pacific ex-Japan ProShares’ principal investment strategies include:

 

Taking positions in financial instruments (including derivatives) that ProShare Advisors believes, in combination, should have similar daily price return characteristics as twice (200%) the inverse of the MSCI Pacific ex-Japan Index. Information about the Index can be found on page 14.

 

Under normal circumstances, committing at least 80% of its net assets, plus any borrowings for investment purposes, to investments that, in combination, have economic characteristics that are similar to those of the Index.

 

Employing leveraged investment techniques and/or sampling techniques in seeking its investment objective.

 

Investing assets not invested in financial instruments in debt securities and/or money market instruments.

 

The Fund will concentrate its investments in a particular industry or group of industries to approximately the same extent as the Index is so concentrated.

Principal Risk Considerations

The UltraShort MSCI Pacific ex-Japan ProShares is subject to the following principal risks:

 

Aggressive Investment Technique Risk, Concentration Risk, Correlation Risk, Counterparty Risk, Credit Risk, Early Close/Trading Halt Risk, Equity Risk, Foreign Currency Risk, Foreign Investment Risk, Geographic Concentration Risk, Liquidity Risk, Market Price Variance Risk, Market Risk, Non-diversification Risk, Portfolio Turnover Risk, Small- and Mid-Cap Investment Company Risk and Valuation Time Risk.

The UltraShort MSCI Pacific ex-Japan ProShares may be subject to additional political, social and economic risks particular to the individual countries that are covered by the MSCI Pacific ex-Japan Index, namely Australia, Hong Kong, New Zealand and Singapore. Many of the Pacific region economies are intertwined and it is not uncommon for many of the countries to be in recessions at the same time. The countries that are covered by the Index are also dependent on the economies of Asia, Europe, and the United States and, in particular, on the price and demand for agricultural products and natural resources. Trade tariffs, other protectionist measures and rising commodity prices have adversely affected these economies in the recent past.

The UltraShort MSCI Pacific ex-Japan ProShares may be subject to risks in addition to those identified as principal risks. The sections titled “Principal Investment Strategies and Risks,” “More on Risks” and “Special Risks of Exchange-Traded Funds” later in this Prospectus and the SAI contain additional information about the Fund and related risks.

Fund Performance

Performance history will be available for the UltraShort MSCI Pacific ex-Japan ProShares after it has been in operation for a full calendar year.

Estimated Fees and Expenses

The following table describes the estimated fees and expenses you may pay when you buy, hold, or sell Creation Units of the UltraShort MSCI Pacific ex-Japan ProShares. Annual fund operating expenses are also estimates. Investors purchasing shares in the secondary market will not directly pay the shareholder fees shown below, but may be subject to costs (including customary brokerage commissions) charged by their broker.

 

Estimated Shareholder Fees (paid directly by Authorized Participants)A
Sales charges (loads)   None
Fixed transaction fee per orderB   $500
Variable transaction fee per Creation UnitC   up to 0.10% of Creation Unit value

 

48   Short International ProShares


Table of Contents

Estimated Annual Fund Operating Expenses

(as a percentage of average daily net assets)

Investment Advisory Fee

   0.75%        

Distribution and Service (12b-1) feesD

   0.00%        

Other ExpensesE

   [      ]%        
    

Total Annual Fund Operating Expenses

   [      ]%        

Fee Waivers/ReimbursementsF

   -[      ]%        
    

Total Net Annual Fund Operating Expenses

   0.95%
    

 

A

See “Transaction Fees on Creation and Redemption Transactions” at the end of this Prospectus.

B

A fixed transaction fee of $500 will be charged when you create or redeem Creation Units of the UltraShort MSCI Pacific ex-Japan ProShares regardless of the number of shares created or redeemed on the date of the transaction.

C

A variable transaction fee of up to 0.10% of the value of each Creation Unit will be charged to offset costs associated with processing the order.

D

The Fund has adopted a Distribution (12b-1) Plan pursuant to which the Fund may be subject to an annual 12b-1 fee of up to 0.25%. However, no such fee is currently charged to the Fund and no such fees will be charged prior to [                     2009].

E

Based on estimated amounts for the Fund’s current fiscal year. “Other Expenses” include fees paid for management (non-advisory) services as described under “Management of ProShares Trust” later in this Prospectus, legal and audit fees, printing costs, registration fees, custodial, fund accounting, administration, transfer agency and sub-transfer agency fees and costs associated with independent trustees and certain miscellaneous expenses.

F

ProShare Advisors has contractually agreed to waive Investment Advisory and Management Services Fees and to reimburse Other Expenses to the extent Total Annual Fund Operating Expenses, as a percentage of average daily net assets, exceed 0.95% of average daily net assets from the date the Fund commences operations through that date in 2009. After such date, the expense limitation may be terminated or revised. Amounts waived or reimbursed in a particular fiscal year may be recouped by ProShare Advisors within five years of the waiver or reimbursement to the extent that recoupment will not cause the Fund’s expenses to exceed any expense limitation in place at that time.

Example: The following example is intended to help you compare the estimated cost of investing in shares of the UltraShort MSCI Pacific ex-Japan ProShares with the cost of investing in other funds. Investors should note that the following examples are estimates and are for illustration purposes only and are not meant to suggest actual or expected fees and expenses or returns, all of which may vary. The Fund issues and redeems shares in Creation Units principally on an in-kind basis for portfolio securities included in the Index and cash. Shares are not redeemable in less than Creation Unit aggregations. The example does not include the brokerage commissions that secondary market investors may incur to buy and sell shares.

The following example assumes that you invest $10,000 in the Fund for the time periods indicated and sell all of your shares at the end of those periods, but does not include transaction fees on purchases and redemptions of shares. The example also assumes that your investment has a 5% annual return each year and that the Fund’s annual operating expenses remain exactly as described in the fee table. Although your actual costs may be higher or lower, based on the assumptions, your estimated costs would be:

 

   1 Year    3 Years        
  

$[    ]

  

$[    ]            

 

Short International ProShares   49


Table of Contents

UltraShort MSCI South Korea ProShares

Ticker: [    ]

CUSIP: [    ]

Investment Objective

UltraShort MSCI South Korea ProShares seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the MSCI South Korea Index.

If UltraShort MSCI South Korea ProShares is successful in meeting its objective, its value, before fees and expenses, should gain approximately twice as much, on a percentage basis, as any decrease in the MSCI South Korea Index when the Index declines on a given day. Conversely, its value (before fees and expenses) should lose approximately twice as much, on a percentage basis, as any increase in the Index when the Index rises on a given day.

Principal Investment Strategy

The UltraShort MSCI South Korea ProShares’ principal investment strategies include:

 

Taking positions in financial instruments (including derivatives) that ProShare Advisors believes, in combination, should have similar daily price return characteristics as twice (200%) the inverse of the MSCI South Korea Index. Information about the Index can be found on page 14.

 

Under normal circumstances, committing at least 80% of its net assets, plus any borrowings for investment purposes, to investments that, in combination, have economic characteristics that are similar to those of the Index.

 

Employing leveraged investment techniques and/or sampling techniques in seeking its investment objective.

 

Investing assets not invested in financial instruments in debt securities and/or money market instruments.

 

The Fund will concentrate its investments in a particular industry or group of industries to approximately the same extent as the Index is so concentrated.

Principal Risk Considerations

The UltraShort MSCI South Korea ProShares is subject to the following principal risks:

 

Aggressive Investment Technique Risk, Concentration Risk, Correlation Risk, Counterparty Risk, Credit Risk, Emerging Market Risk, Early Close/Trading Halt Risk, Equity Risk, Foreign Currency Risk, Foreign Investment Risk, Geographic Concentration Risk, Liquidity Risk, Market Price Variance Risk, Market Risk, Non-diversification Risk, Portfolio Turnover Risk, Small- and Mid-Cap Investment Company Risk and Valuation Time Risk.

The UltraShort MSCI South Korea ProShares’ performance will be affected by political, social and economic conditions in South Korea. Investments in companies economically tied to South Korea are subject to economic risk resulting from South Korea’s dependence on exports to its principal trading partners, primarily China, the U.S. and Japan. In addition, investment in companies economically tied to South Korea are subject to political risk from the decades-old political dispute with North Korea, in which each country claims political control over the entire Korean peninsula and has built up considerable military capabilities along the shared border, known as the Demilitarized Zone.

The UltraShort MSCI South Korea ProShares may be subject to risks in addition to those identified as principal risks. The sections titled “Principal Investment Strategies and Risks,” “More on Risks” and “Special Risks of Exchange-Traded Funds” later in this Prospectus and the SAI contain additional information about the Fund and related risks.

Fund Performance

Performance history will be available for the UltraShort MSCI South Korea ProShares after it has been in operation for a full calendar year.

Estimated Fees and Expenses

The following table describes the estimated fees and expenses you may pay when you buy, hold, or sell Creation Units of the UltraShort MSCI South Korea ProShares. Annual fund operating expenses are also estimates. Investors purchasing shares in the secondary market will not directly pay the shareholder fees shown below, but may be subject to costs (including customary brokerage commissions) charged by their broker.

 

Estimated Shareholder Fees (paid directly by Authorized Participants)A
Sales charges (loads)   None
Fixed transaction fee per orderB   $500
Variable transaction fee per Creation UnitC   up to 0.10% of Creation Unit value

 

50   Short International ProShares


Table of Contents

Estimated Annual Fund Operating Expenses

(as a percentage of average daily net assets)

Investment Advisory Fee

   0.75%        

Distribution and Service (12b-1) feesD

   0.00%        

Other ExpensesE

   [      ]%        
    

Total Annual Fund Operating Expenses

   [      ]%        

Fee Waivers/ReimbursementsF

   -[      ]%        
    

Total Net Annual Fund Operating Expenses

   0.95%
    

 

A

See “Transaction Fees on Creation and Redemption Transactions” at the end of this Prospectus.

B

A fixed transaction fee of $500 will be charged when you create or redeem Creation Units of the UltraShort MSCI South Korea ProShares regardless of the number of shares created or redeemed on the date of the transaction.

C

A variable transaction fee of up to 0.10% of the value of each Creation Unit will be charged to offset costs associated with processing the order.

D

The Fund has adopted a Distribution (12b-1) Plan pursuant to which the Fund may be subject to an annual 12b-1 fee of up to 0.25%. However, no such fee is currently charged to the Fund and no such fees will be charged prior to [                     2009].

E

Based on estimated amounts for the Fund’s current fiscal year. “Other Expenses” include fees paid for management (non-advisory) services as described under “Management of ProShares Trust” later in this Prospectus, legal and audit fees, printing costs, registration fees, custodial, fund accounting, administration, transfer agency and sub-transfer agency fees and costs associated with independent trustees and certain miscellaneous expenses.

F

ProShare Advisors has contractually agreed to waive Investment Advisory and Management Services Fees and to reimburse Other Expenses to the extent Total Annual Fund Operating Expenses, as a percentage of average daily net assets, exceed 0.95% of average daily net assets from the date the Fund commences operations through that date in 2009. After such date, the expense limitation may be terminated or revised. Amounts waived or reimbursed in a particular fiscal year may be recouped by ProShare Advisors within five years of the waiver or reimbursement to the extent that recoupment will not cause the Fund’s expenses to exceed any expense limitation in place at that time.

Example: The following example is intended to help you compare the estimated cost of investing in shares of the UltraShort MSCI South Korea ProShares with the cost of investing in other funds. Investors should note that the following examples are estimates and are for illustration purposes only and are not meant to suggest actual or expected fees and expenses or returns, all of which may vary. The Fund issues and redeems shares in Creation Units principally on an in-kind basis for portfolio securities included in the Index and cash. Shares are not redeemable in less than Creation Unit aggregations. The example does not include the brokerage commissions that secondary market investors may incur to buy and sell shares.

The following example assumes that you invest $10,000 in the Fund for the time periods indicated and sell all of your shares at the end of those periods, but does not include transaction fees on purchases and redemptions of shares. The example also assumes that your investment has a 5% annual return each year and that the Fund’s annual operating expenses remain exactly as described in the fee table. Although your actual costs may be higher or lower, based on the assumptions, your estimated costs would be:

 

   1 Year    3 Years        
  

$[    ]

  

$[    ]            

 

Short International ProShares   51


Table of Contents

UltraShort MSCI Taiwan ProShares

Ticker: [    ]

CUSIP: [    ]

Investment Objective

UltraShort MSCI Taiwan ProShares seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the MSCI Taiwan Index.

If UltraShort MSCI Taiwan ProShares is successful in meeting its objective, its value, before fees and expenses, should gain approximately twice as much, on a percentage basis, as any decrease in the MSCI Taiwan Index when the Index declines on a given day. Conversely, its value (before fees and expenses) should lose approximately twice as much, on a percentage basis, as any increase in the Index when the Index rises on a given day.

Principal Investment Strategy

The UltraShort MSCI Taiwan ProShares’ principal investment strategies include:

 

Taking positions in financial instruments (including derivatives) that ProShare Advisors believes, in combination, should have similar daily price return characteristics as twice (200%) the inverse of the MSCI Taiwan Index. Information about the Index can be found on page 14.

 

Under normal circumstances, committing at least 80% of its net assets, plus any borrowings for investment purposes, to investments that, in combination, have economic characteristics that are similar to those of the Index.

 

Employing leveraged investment techniques and/or sampling techniques in seeking its investment objective.

 

Investing assets not invested in financial instruments in debt securities and/or money market instruments.

 

The Fund will concentrate its investments in a particular industry or group of industries to approximately the same extent as the Index is so concentrated.

Principal Risk Considerations

The UltraShort MSCI Taiwan ProShares is subject to the following principal risks:

 

Aggressive Investment Technique Risk, Concentration Risk, Correlation Risk, Counterparty Risk, Credit Risk, Emerging Market Risk, Early Close/Trading Halt Risk, Equity Risk, Foreign Currency Risk, Foreign Investment Risk, Geographic Concentration Risk, Liquidity Risk, Market Price Variance Risk, Market Risk, Non-diversification Risk, Portfolio Turnover Risk, Small- and Mid-Cap Investment Company Risk and Valuation Time Risk.

The UltraShort MSCI Taiwan ProShares’ performance will be affected by political, social and economic conditions in Taiwan. The Taiwanese economomy may be subject to additional commodity markets risk, because Taiwan is small island lacking in natural resouces. Taiwan is dependent on exports to pay for its imports and, thus, may be subject to risk associated with the economies of its principal trading partners, such as Japan and the U.S. In addition, the Taiwanese economy may be subject to political risk resulting from its precarious relationship with the Chinese government, which considers Taiwan to be part of greater China but does not exercise political control over Taiwan.

The UltraShort MSCI Taiwan ProShares may be subject to risks in addition to those identified as principal risks. The sections titled “Principal Investment Strategies and Risks,” “More on Risks” and “Special Risks of Exchange-Traded Funds” later in this Prospectus and the SAI contain additional information about the Fund and related risks.

Fund Performance

Performance history will be available for the UltraShort MSCI Taiwan ProShares after it has been in operation for a full calendar year.

Estimated Fees and Expenses

The following table describes the estimated fees and expenses you may pay when you buy, hold, or sell Creation Units of the UltraShort MSCI Taiwan ProShares. Annual fund operating expenses are also estimates. Investors purchasing shares in the secondary market will not directly pay the shareholder fees shown below, but may be subject to costs (including customary brokerage commissions) charged by their broker.

 

Estimated Shareholder Fees (paid directly by Authorized Participants)A
Sales charges (loads)   None
Fixed transaction fee per orderB   $500
Variable transaction fee per Creation UnitC   up to 0.10% of Creation Unit value

 

52   Short International ProShares


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Estimated Annual Fund Operating Expenses

(as a percentage of average daily net assets)

Investment Advisory Fee

   0.75%        

Distribution and Service (12b-1) feesD

   0.00%        

Other ExpensesE

   [      ]%        
    

Total Annual Fund Operating Expenses

   [      ]%        

Fee Waivers/ReimbursementsF

   -[      ]%        
    

Total Net Annual Fund Operating Expenses

   0.95%
    

 

A

See “Transaction Fees on Creation and Redemption Transactions” at the end of this Prospectus.

B

A fixed transaction fee of $500 will be charged when you create or redeem Creation Units of the UltraShort MSCI Taiwan ProShares regardless of the number of shares created or redeemed on the date of the transaction.

C

A variable transaction fee of up to 0.10% of the value of each Creation Unit will be charged to offset costs associated with processing the order.

D

The Fund has adopted a Distribution (12b-1) Plan pursuant to which the Fund may be subject to an annual 12b-1 fee of up to 0.25%. However, no such fee is currently charged to the Fund and no such fees will be charged prior to [                     2009].

E

Based on estimated amounts for the Fund’s current fiscal year. “Other Expenses” include fees paid for management (non-advisory) services as described under “Management of ProShares Trust” later in this Prospectus, legal and audit fees, printing costs, registration fees, custodial, fund accounting, administration, transfer agency and sub-transfer agency fees and costs associated with independent trustees and certain miscellaneous expenses.

F

ProShare Advisors has contractually agreed to waive Investment Advisory and Management Services Fees and to reimburse Other Expenses to the extent Total Annual Fund Operating Expenses, as a percentage of average daily net assets, exceed 0.95% of average daily net assets from the date the Fund commences operations through that date in 2009. After such date, the expense limitation may be terminated or revised. Amounts waived or reimbursed in a particular fiscal year may be recouped by ProShare Advisors within five years of the waiver or reimbursement to the extent that recoupment will not cause the Fund’s expenses to exceed any expense limitation in place at that time.

Example: The following example is intended to help you compare the estimated cost of investing in shares of the UltraShort MSCI Taiwan ProShares with the cost of investing in other funds. Investors should note that the following examples are estimates and are for illustration purposes only and are not meant to suggest actual or expected fees and expenses or returns, all of which may vary. The Fund issues and redeems shares in Creation Units principally on an in-kind basis for portfolio securities included in the Index and cash. Shares are not redeemable in less than Creation Unit aggregations. The example does not include the brokerage commissions that secondary market investors may incur to buy and sell shares.

The following example assumes that you invest $10,000 in the Fund for the time periods indicated and sell all of your shares at the end of those periods, but does not include transaction fees on purchases and redemptions of shares. The example also assumes that your investment has a 5% annual return each year and that the Fund’s annual operating expenses remain exactly as described in the fee table. Although your actual costs may be higher or lower, based on the assumptions, your estimated costs would be:

 

   1 Year    3 Years        
  

$[    ]

  

$[    ]            

 

Short International ProShares   53


Table of Contents

UltraShort S&P Europe 350 ProShares

Ticker: [    ]

CUSIP: [    ]

Investment Objective

UltraShort S&P Europe 350 ProShares seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the S&P Europe 350 Index.

If UltraShort S&P Europe 350 ProShares is successful in meeting its objective, its value, before fees and expenses, should gain approximately twice as much, on a percentage basis, as any decrease in the S&P Europe 350 Index when the Index declines on a given day. Conversely, its value (before fees and expenses) should lose approximately twice as much, on a percentage basis, as any increase in the Index when the Index rises on a given day.

Principal Investment Strategy

The UltraShort S&P Europe 350 ProShares’ principal investment strategies include:

 

Taking positions in financial instruments (including derivatives) that ProShare Advisors believes, in combination, should have similar daily price return characteristics as twice (200%) the inverse of the S&P Europe 350 Index. Information about the Index can be found on page 15.

 

Under normal circumstances, committing at least 80% of its net assets, plus any borrowings for investment purposes, to investments that, in combination, have economic characteristics that are similar to those of the Index.

 

Employing leveraged investment techniques and/or sampling techniques in seeking its investment objective.

 

Investing assets not invested in financial instruments in debt securities and/or money market instruments.

 

The Fund will concentrate its investments in a particular industry or group of industries to approximately the same extent as the Index is so concentrated.

Principal Risk Considerations

The UltraShort S&P Europe 350 ProShares is subject to the following principal risks:

 

Aggressive Investment Technique Risk, Concentration Risk, Correlation Risk, Counterparty Risk, Credit Risk, Early Close/Trading Halt Risk, Equity Risk, Foreign Currency Risk, Foreign Investment Risk, Geographic Concentration Risk, Liquidity Risk, Market Price Variance Risk, Market Risk, Non-diversification Risk, Portfolio Turnover Risk, Small- and Mid-Cap Investment Company Risk and Valuation Time Risk.

The UltraShort S&P Europe 350 ProShares may be subject to risks in addition to those identified above, because it is subject to risk affecting issuers economically tied to Europe. European companies could be negatively affected by such factors as regional economic downturns, policies adopted in the European Economic and Monetary Union, or difficulties faced by particular European countries, such as those in Eastern Europe, which are implementing significant free market economic reforms. The sections titled “Principal Investment Strategies and Risks,” “More on Risks” and “Special Risks of Exchange-Traded Funds” later in this Prospectus and the SAI contain additional information about the Fund and related risks.

Fund Performance

Performance history will be available for the UltraShort S&P Europe 350 ProShares after it has been in operation for a full calendar year.

Estimated Fees and Expenses

The following table describes the estimated fees and expenses you may pay when you buy, hold, or sell Creation Units of the UltraShort S&P Europe 350 ProShares. Annual fund operating expenses are also estimates. Investors purchasing shares in the secondary market will not directly pay the shareholder fees shown below, but may be subject to costs (including customary brokerage commissions) charged by their broker.

 

Estimated Shareholder Fees (paid directly by Authorized Participants)A
Sales charges (loads)   None
Fixed transaction fee per orderB   $500
Variable transaction fee per Creation UnitC   up to 0.10% of Creation Unit value

 

Estimated Annual Fund Operating Expenses

(as a percentage of average daily net assets)

Investment Advisory Fee

   0.75%        

Distribution and Service (12b-1) feesD

   0.00%        

Other ExpensesE

   [    ]%        
    

Total Annual Fund Operating Expenses

   [    ]%        

Fee Waivers/ReimbursementsF

   -[    ]%        
    

Total Net Annual Fund Operating Expenses

   0.95%
    

 

A

See “Transaction Fees on Creation and Redemption Transactions” at the end of this Prospectus.

 

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B

A fixed transaction fee of $500 will be charged when you create or redeem Creation Units of the UltraShort S&P Europe 350 ProShares regardless of the number of shares created or redeemed on the date of the transaction.

C

A variable transaction fee of up to 0.10% of the value of each Creation Unit will be charged to offset costs associated with processing the order.

D

The Fund has adopted a Distribution (12b-1) Plan pursuant to which the Fund may be subject to an annual 12b-1 fee of up to 0.25%. However, no such fee is currently charged to the Fund and no such fees will be charged prior to [                     2009].

E

Based on estimated amounts for the Fund’s current fiscal year. “Other Expenses” include fees paid for management (non-advisory) services (as described under “Management of ProShares Trust” later in this Prospectus), legal and audit fees, printing costs, registration fees, custodial, fund accounting, administration, transfer agency and sub-transfer agency fees and costs associated with independent trustees and certain miscellaneous expenses.

F

ProShare Advisors has contractually agreed to waive Investment Advisory and Management Services Fees and to reimburse Other Expenses to the extent Total Annual Fund Operating Expenses, as a percentage of average daily net assets, exceed 0.95% of average daily net assets from the date the Fund commences operations through that date in 2009. After such date, the expense limitation may be terminated or revised. Amounts waived or reimbursed in a particular fiscal year may be recouped by ProShare Advisors within five years of the waiver or reimbursement to the extent that recoupment will not cause the Fund’s expenses to exceed any expense limitation in place at that time.

Example: The following example is intended to help you compare the estimated cost of investing in shares of the UltraShort S&P Europe 350 ProShares with the cost of investing in other funds. Investors should note that the following examples are estimates and are for illustration purposes only and are not meant to suggest actual or expected fees and expenses or returns, all of which may vary. The Fund issues and redeems shares in Creation Units principally on an in-kind basis for portfolio securities included in the Index and cash. Shares are not redeemable in less than Creation Unit aggregations. The example does not include the brokerage commissions that secondary market investors may incur to buy and sell shares.

The following example assumes that you invest $10,000 in the Fund for the time periods indicated and sell all of your shares at the end of those periods, but does not include transaction fees on purchases and redemptions of shares. The example also assumes that your investment has a 5% annual return each year and that the Fund’s annual operating expenses remain exactly as described in the fee table. Although your actual costs may be higher or lower, based on the assumptions, your estimated costs would be:

 

   1 Year    3 Years        
  

  $[    ]

  

  $[    ]            

 

Short International ProShares   55


Table of Contents

Creation and Redemption

of Creation Units

 

56   Creation and Redemption of Creation Units


Table of Contents

Creation and Redemption of Creation Units

Each Fund issues and redeems Shares only in bundles of a specified number of Shares. These bundles are known as “Creation Units.” To purchase or redeem a Creation Unit, you must be an Authorized Participant or you must do so through a broker that is an Authorized Participant. An Authorized Participant is a participant in the Depository Trust Company (“DTC”), a limited trust company and securities depository that serves as a national clearinghouse for the settlement of trades for its participating banks and broker-dealers, that has executed a Participant Agreement with the Funds’ distributor (“Distributor”). Because Creation Units likely will cost millions of dollars, it is expected that only institutional investors will purchase and redeem Shares directly with an issuing Fund.

Retail investors may acquire Shares on the secondary market (i.e., not from the issuing Fund) through a broker. Shares of each Fund are listed on the Exchange and are publicly traded. For information about acquiring Shares through a secondary market purchase, please contact your broker. If you want to sell Shares of a Fund on the secondary market, you must do so through your broker.

When you buy or sell Shares on the secondary market, your broker may charge you a commission or other transaction charges and you may pay some or all of the spread between the bid and the offered price for each purchase or sale transaction. Unless imposed by your broker, there is no minimum dollar amount you must invest and no minimum number of Shares you must buy in the secondary market. In addition, because secondary market transactions occur at market prices, you may pay more than NAV when you buy Shares, and receive less than NAV when you sell those Shares.

The Funds impose no restrictions on the frequency of purchases and redemptions directly with the Funds. In establishing this policy, the Board of Trustees noted that the Funds are expected to be attractive to arbitrageurs (where trading activity is critical to ensuring that Shares trade at or close to net asset value per Share) as well as active institutional and retail investors interested in buying and selling equity market basket index securities on a short-term basis. In addition, the Board considered that, unlike traditional mutual funds, each Fund issues and redeems its Shares at net asset value per Share in Creation Units plus applicable transaction fees and each Fund’s Shares may be purchased and sold on the Exchange at prevailing market prices. Given this structure, the Board determined that the risks of frequent trading were less than in the case of a traditional mutual fund. Nevertheless, to the extent that purchases and redemptions directly with the Funds are effected in cash rather than through a contribution or redemption of portfolio securities, frequent purchases and redemptions could increase the rate of portfolio turnover. A high ratio of portfolio turnover may negatively impact a Fund’s performance by increasing transaction costs. In addition, large movements of cash into or out of the Funds may negatively impact a Fund’s ability to achieve its investment objective or maintain a consistent level of operating expenses.

Purchasing Shares Directly From a Fund

You can purchase Shares directly from a Fund only if you meet the following criteria and comply with purchase transaction procedures specified by the Trust.

Eligible Investors To purchase Shares directly from a Fund, you must be an Authorized Participant or you must purchase through a broker that is an Authorized Participant. Investors should contact the Distributor for the names of Authorized Participants.

Creation Units You must purchase Shares in large blocks, known as “Creation Units.” For each Fund, a Creation Unit is comprised of 75,000 Shares.

For any particular Fund, the number of Shares in a Creation Unit will not change, except in the event of a share split, reverse split or similar revaluation. The Funds will not issue fractional Creation Units. The Funds reserve the right to reject purchase orders in certain circumstances, as described in the SAI.

Procedures Applicable to Purchase of Ultra ProShares

In-kind Deposits To purchase Shares directly from an Ultra ProShares, you must deposit with the Fund a basket of securities and cash. Each business day, prior to the opening of trading on the Exchange, an agent of the Fund (“Index Receipt Agent”) will make available through the NSCC a list of the names and number of shares of each security to be included in that day’s creation basket (“Deposit Securities”). The identity and number of shares of the Deposit Securities required for a Creation Unit changes as rebalancing adjustments and corporate action events are reflected from time to time by ProShare Advisors with a view to the investment objective of the Ultra ProShares. The composition of the Deposit Securities may also change in response to adjustments to the weighting or composition of the securities constituting the relevant securities index. The Fund 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 (defined below) to replace any Deposit Security that may not be available in sufficient quantity for delivery, that may not be eligible for transfer through the Clearing Process (discussed below), or that may not be eligible for trading by an Authorized Participant or the investor for which it is acting.

Balancing Amount In addition to the in-kind deposit of securities, Authorized Participants will either pay to, or receive from an Ultra ProShares an amount of cash referred to as the “Balancing Amount.” The Balancing Amount is the amount equal to the differential, if any, between the market value of the Deposit Securities and the NAV of a Creation Unit. The Fund will publish, on a daily basis, information about the previous day’s Balancing Amount. The Balancing Amount may, at times, represent a significant portion of the aggregate purchase price (or in the case of redemptions, the redemption proceeds). This is because the mark-to-market value of the Financial Instruments held by the Funds will be included in the Balancing Amount (not in the Deposit Basket or Redemption Basket). The Balancing Amount may fluctuate significantly due to the leveraged nature of the Ultra ProShares. You also must pay a Transaction Fee, described below, in cash. For custom orders, “cash in lieu” may be added to the Balancing Amount to replace any Deposit Security that may not be available in sufficient quantity for delivery, that may not be eligible for transfer through the Clearing

 

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Process (discussed below), or that may not be eligible for trading by an Authorized Participant or the investor for which it is acting. The Balancing Amount must be paid to the Trust on the third Business Day following the Transmittal Date.

Placement of Purchase Orders All purchase orders for Shares must be placed by or through an Authorized Participant. Purchase orders will be processed either through a manual clearing process run at the DTC (“Manual Clearing Process”) or through an enhanced clearing process (“Enhanced Clearing Process”) that is available only to those DTC participants that also are participants in the Continuous Net Settlement System of the National Securities Clearing Corporation (“NSCC”). Authorized Participants that do not use the Enhanced Clearing Process will be charged a higher Transaction Fee (discussed below). A purchase order must be received by the Distributor by 4:00 p.m. Eastern time, if transmitted by mail or by 3:00 p.m. Eastern time if transmitted by telephone, facsimile or other electronic means permitted under the Participant Agreement, in order to receive that day’s closing NAV per Share. A custom order may be placed for one or more whole Creation Units of Shares of a Fund and must be received by the Distributor in proper form no later than 3:00 p.m. Eastern time in order to receive that day’s NAV per Share. All other procedures set forth in the Participant Agreement must be followed in order for you to receive the NAV determined on that day.

Shares may be issued in advance of receipt of Deposit Securities subject to various conditions including a requirement to maintain on deposit with the Trust cash in an amount up to 115% of the market value of the missing Deposit Securities. Any such transaction effected with the Trust must be effected using the Manual Clearing Process consistent with the terms of the Authorized Participant Agreement. See the “Summary of Transaction Fees and Charges” below for more information.

Procedures Applicable to Purchase of Short ProShares

The Short ProShares only accept cash to purchase Creation Units. The purchaser must transfer cash in an amount equal to the value of Creation Unit(s) purchased and the applicable Transaction Fee. All purchase orders will be processed through the Manual Clearing Process described above, except that, for the Short International ProShares, purchase orders transmitted by mail must be received by the Distributor by the close of ETF trading on the NYSE Arca (ordinarily 4:15 p.m. Eastern time). The Trust will deliver Shares of the Short ProShares upon payment of cash to the Trust on the third Business Day following the Transmittal Date consistent with the terms of the Authorized Participant Agreement.

Redeeming Shares Directly From a Fund

The redemption process is essentially the reverse of the purchase process described above. To redeem Shares, you must be an Authorized Participant or you must redeem through a broker that is an Authorized Participant, and you must tender Shares in Creation Units.

Redemption Procedures Applicable to Ultra ProShares

Redemption Proceeds Redemption proceeds will be paid in-kind with a basket of securities. In most cases, the basket of securities you receive will be the same as that required of investors purchasing Creation Units on the same day. There will be times, however, when the creation and redemption baskets differ. The composition of the redemption basket will be available through the NSCC. Each Fund reserves the right to honor a redemption request with a non-conforming redemption basket.

Balancing Amount If the NAV of a Creation Unit is higher than the value of the redemption securities, you will receive from the issuing Fund a Balancing Amount in cash. If the NAV of a Creation Unit is lower than the value of the redemption securities, you will be required to pay to the issuing Fund a Balancing Amount in cash. If you are receiving a Balancing Amount, the amount due will be reduced by the amount of the applicable Transaction Fee.

Placement of Redemption Orders As with purchases, redemptions may be processed either through the Manual Clearing Process or the Enhanced Clearing Process. A redemption order must be received by the Distributor prior to 4:00 p.m. Eastern time if transmitted by mail or by 3:00 p.m. Eastern time if transmitted by telephone, facsimile or other electronic means permitted under the Participant Agreement in order to receive that day’s closing NAV per Share. All other procedures set forth in the Participant Agreement must be followed in order for you to receive the NAV determined on that day.

An investor may request a redemption in cash which the Short ProShares may, in its sole discretion, permit. Investors that elect to receive cash in lieu of one or more securities in the redemption basket are subject to an additional charge. Redemptions of Creation Units for cash (when available) and/or outside of the continuous Net Settlement System of the National Securities Clearing Corp. (“NSCC”) also require the payment of an additional charge. See the “Summary of Transaction Fees and Charges” below for more information.

Redemption Procedures Applicable to Short ProShares

Redemption Proceeds Redemption proceeds will be paid in cash.

Placement of Redemption Orders All redemption orders will be processed through the Manual Clearing Process. A redemption order (other than for Short International ProShares) must be received by the Distributor prior to 4:00 p.m. Eastern time if transmitted by mail or by 3:00 p.m. Eastern time if transmitted by telephone, facsimile or other electronic means permitted under the Participation Agreement in order to receive that day’s Closing NAV per Share. A redemption order for Short International ProShares must be received by the Distributor by the close of ETF trading on the NYSE Arca (ordinarily 4:15 pm. Eastern time) if transmitted by mail or 3:00 p.m. Eastern time if transmitted by telephone, facsimile or other electronic means permitted under the Participant Agreement in order to receive that day’s Closing NAV per Share. All other procedures set forth in the Participant Agreement must be followed in order for you to receive the NAV determined on that day.

 

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Transaction Fees on Creation and Redemption Transactions

Each Fund will impose Transaction Fees to offset transfer and other transaction costs associated with the issuance and redemption of Creation Units. There is a fixed and a variable component to the total Transaction Fee on transactions in Creation Units. A fixed Transaction Fee is applicable to each creation and redemption transaction, regardless of the number of Creation Units transacted. A variable Transaction Fee based upon the value of each Creation Unit also is applicable to each creation and redemption transaction. Purchasers and redeemers of Creation Units of Ultra ProShares effected through the Manual Clearing Process are required to pay an additional charge to compensate for brokerage and other expenses. In addition, purchasers of Creation Units are responsible for payment of the costs of transferring the Deposit Securities to the Trust. Redeemers of Creation Units are responsible for the costs of transferring securities from the Trust to their accounts or on their order. Investors who use the services of a broker or other such intermediary may pay additional fees for such services. The following table summarizes the components of the Transaction Fees.

 

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Creation and Redemption of Creation Units

 

ProShares

 

  Fixed Transaction Fee   Maximum Additional
Charge for Cash
Purchases and
Redemptions*
  In-Kind   Cash  
          NSCC            Outside NSCC       Outside NSCC      

 

Ultra Russell3000

 

  $    [    ]    Up to 3 times the NSCC amount   $    [    ]   Up to 10 bps

 

Ultra DJ Wilshire Total Market

 

  $    [    ]    Up to 3 times the NSCC amount   $    [    ]   Up to 10 bps

 

Ultra MSCI EAFE

 

  $    [    ]    Up to 3 times the NSCC amount   $    [    ]   Up to 10 bps

 

Ultra MSCI Emerging Markets

 

  $    [    ]    Up to 3 times the NSCC amount   $    [    ]   Up to 10 bps

 

Ultra MSCI Japan

 

  $    [    ]    Up to 3 times the NSCC amount   $    [    ]   Up to 10 bps

 

Ultra FTSE/Xinhua China 25

 

  $    [    ]    Up to 3 times the NSCC amount   $    [    ]   Up to 10 bps

 

UltraShort DJ Wilshire Total Market

 

  N/A    N/A   $    500   N/A

 

UltraShort Russell3000

 

  N/A    N/A   $    500   N/A

 

UltraShort MSCI Australia

 

  N/A    N/A   $    500   N/A

 

UltraShort MSCI Brazil

 

  N/A    N/A   $    500   N/A

 

UltraShort MSCI BRIC

 

  N/A    N/A   $    500   N/A

 

UltraShort MSCI Europe

 

  N/A    N/A   $    500   N/A

 

UltraShort MSCI Mexico

 

  N/A    N/A   $    500   N/A

 

UltraShort MSCI Latin America

 

  N/A    N/A   $    500   N/A

 

UltraShort MSCI Pacific ex-Japan

 

  N/A    N/A   $    500   N/A

 

UltraShort MSCI South Korea

 

  N/A    N/A   $    500   N/A

 

UltraShort MSCI Taiwan

 

  N/A    N/A   $    500   N/A

 

UltraShort S&P Europe 350

 

  N/A    N/A   $    500   N/A

 

*

As a percentage of the amount invested.

 

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Creation and Redemption of Creation Units

Distributions

As a shareholder, you are entitled to your share of a Fund’s income from interest and dividends, and gains from the sale of investments. You may receive such earnings as either an income dividend or a capital gains distribution. Income dividends primarily come from the dividends that the Fund earns from its holdings and the interest it receives from its money market and bond investments. Capital gains may be realized when the Fund sells securities. Capital gains may be either short-term or long-term, depending on whether the Fund held the securities for one year or less, or more than one year.

Each Fund intends to declare and distribute to its shareholders at least annually virtually all of its net income (interest and dividends, less expenses), if any, as well as net capital gains, if any, realized from the sale of its holdings. Subject to board approval, some or all of any net capital gains distribution may be declared payable in either additional Shares of the respective Fund or in cash. If such a dividend is declared payable in that fashion, holders of Shares will receive additional Shares of the respective Fund unless they elect to receive cash. Dividends may be declared and paid more frequently to comply with the distribution requirements of the Internal Revenue Code or for other reasons.

Dividend Reinvestment Services

As noted above under “Distributions”, a Fund may declare a net capital gain distribution to be payable in additional Shares or cash. Even if the Fund does not declare a dividend to be payable, 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 of both income and capital gains 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.

Determination of NAV

The NAV per Share of each Fund is computed by dividing the value of the net assets of such Fund (i.e., the value of its total assets less total liabilities) by its total number of Shares outstanding. Expenses and fees are accrued daily and taken into account for purposes of determining NAV. The NAV of each Fund other than the Short International ProShares is calculated by J.P. Morgan Investor Services Co. and determined each business day at the close of regular trading on the NYSE (ordinarily 4:00 p.m. Eastern time). The NAV of each Short International ProShares is calculated by J.P. Morgan Investor Services Co. and determined each business day at the close of ETF trading on the NYSE Arca (ordinarily 4:15 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. Certain short-term securities are valued on the basis of amortized cost. When a market price is not readily available, securities and other assets are valued at fair value in good faith under procedures established by, and under the general supervision and responsibility of the Funds’ Board of Trustees. The use of a fair valuation method may be appropriate if, for example: (i) market quotations do not accurately reflect fair value of an investment; (ii) 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. This procedure incurs the unavoidable risk that the valuation may be higher or lower than the securities might actually command if the Funds sold them. See the SAI for more details.

The NYSE is 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), Presidents’ Day (the third Monday in February), Good Friday, Memorial Day (the last Monday in May), July 4th, Labor Day (the first Monday in September), Thanksgiving Day (the fourth Thursday in November) and Christmas Day. The NYSE 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 or market on which a Fund’s investments are primarily traded closes early, the net asset value may be calculated prior to its normal calculation time. Creation/redemption transaction order time cutoffs would also be accelerated.

Taxes

The following is certain general information about taxation of the Funds:

  Each Fund intends to qualify for treatment as a “regulated investment company” for U.S. federal income tax purposes. In order to so qualify, each 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.
  By qualifying for treatment as a regulated investment company, a Fund is not subject to federal income tax on net investment income and capital gains that the Fund timely distributes to its shareholders.
 

Investments by a 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 the amount, timing or character of the income distributed to shareholders by a 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 a Fund has made

 

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sufficient distributions, and otherwise satisfied the relevant requirements, to maintain its qualification as a regulated investment company and avoid a fund-level tax.

Taxable investors should be aware of the following basic tax points:

  Distributions are taxable to you for federal income tax purposes whether or not you reinvest these amounts in additional Shares.
  Distributions declared in October, November or December—if paid to you by the end of the following January—are taxable for federal income tax purposes as if received in December.
  Any dividends and short-term capital gain distributions that you receive are taxable to you as ordinary income for federal income tax purposes. Certain dividends you receive that are designated as attributable to qualified dividend income may be taxed at the same rates as long term capital gains. However, income received in the form of such dividends will not be considered long-term capital gains for other Federal income tax purposes, including the calculation of net capital losses.
  Distributions of net long-term capital gains that are properly designated as capital gain dividends are taxable to you as long-term capital gains for federal income tax purposes, no matter how long you have owned your Shares.
  Capital gains distributions may vary considerably from year to year as a result of the Funds’ normal investment activities and cash flows.
  A sale or exchange of Shares is a taxable event. This means that you may have a capital gain to report as income, or a capital loss to report as a deduction, when you complete your federal income tax return.
  Dividend and capital gains distributions that you receive, as well as your gains or losses from any sale or exchange of Shares, may be subject to foreign, state and local income taxes.
  If you are not a citizen or a permanent resident of the United States, or if you are a foreign entity, any dividends and short term capital gains that you receive will generally be subject to a 30% U.S. withholding tax, unless a lower treaty rate applies.
  Dividends and interest received by a Fund may give rise to withholding and other taxes imposed by foreign countries. Tax conventions between certain countries and the United States may reduce or eliminate such taxes.
  By law, a Fund must withhold a percentage of your distributions and proceeds if you have not provided a correct taxpayer identification number or social security number and made certain certifications. The backup withholding rate is currently 28%. Under current law, the backup withholding rate will increase to 31% for the taxable year 2011 and thereafter.

In addition, taxable investors who purchase or redeem Creation Units should be aware of the following additional basic tax points:

  A person who exchanges equity 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 and the exchanger’s aggregate basis in the securities surrendered and the Balancing Amount paid. However, all or a portion of any loss a person realizes on an exchange of securities for Creation Units will be disallowed by the Internal Revenue Service if such person purchases or receives in redemption other substantially identical securities within 30 days before or after the exchange on the basis that there has been no significant change in economic position. In such case, the basis of the newly purchased or received securities will be adjusted to reflect the disallowed loss.

Investments by a 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 a Fund are treated as ordinary or capital, accelerate the recognition of income or gains to a Fund and defer or possibly prevent the recognition or use of certain losses by a Fund. The rules could, in turn, affect the amount, timing or character of the income distributed to shareholders by a Fund. In addition, because the tax rules applicable to such instruments may be uncertain under current law, an adverse determination or future Internal Revenue Service guidance with respect to these rules may affect whether a Fund has made sufficient distributions, and otherwise satisfied the relevant requirements, to maintain its qualification as a regulated investment company and avoid a fund-level tax.

Note: This Prospectus provides general U.S. federal tax information only. If you are investing through a tax-deferred retirement account, such as an IRA, special tax rules apply. Please consult your tax advisor for detailed information about a Fund’s tax consequences for you. See “Taxation” in the SAI for more information.

 

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Management of ProShares Trust

 

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Management of ProShares Trust

Board of Trustees and Officers

The Board of Trustees of ProShares Trust is responsible for the general supervision of all of the Funds. The officers of ProShares Trust are responsible for the day-to-day operations of the Funds.

Investment Advisor

ProShare Advisors LLC, located at 7501 Wisconsin Avenue, Suite 1000, Bethesda, MD 20814, serves as the investment advisor to all of the Funds and provides investment advice and management services to the Funds. ProShare Advisors oversees the investment and reinvestment of the assets in each Fund. For its investment advisory services, ProShare Advisors is entitled to receive fees equal to 0.75% of the average daily net assets of each Fund. A discussion regarding the basis for the Board of Trustees approving the investment advisory agreement of a Fund will be available in the Fund’s initial shareholder report.

ProShare Advisors is owned by Michael L. Sapir, Louis M. Mayberg and William E. Seale.

Michael L. Sapir, Chairman and Chief Executive Officer of ProShare Advisors LLC since inception and ProFund Advisors LLC since April 1997, formerly served as senior vice president of Padco Advisors, Inc., which advised Rydex® Funds. In addition, Mr. Sapir practiced law, primarily representing financial institutions for over 13 years, most recently as a partner in a Washington, D.C. based law firm. He holds degrees from Georgetown University Law Center (J.D.) and University of Miami (M.B.A. and B.A.)

Louis M. Mayberg, President of ProShare Advisors LLC since inception and ProFund Advisors LLC since April 1997, co-founded National Capital Companies, L.L.C., an investment bank specializing in financial service companies mergers and acquisitions and equity underwritings in 1986, and managed its financial services hedge fund. He holds a Bachelor of Business Administration degree with a major in Finance from George Washington University.

William E. Seale, Ph.D., Chief Economist of ProFund Advisors since 2005, Chief Investment Officer from 2003-2004 and from October 2006-present and Director of Portfolio from 1997-2003. Dr. Seale has more than 30 years of experience in the financial markets. His background includes a five-year presidential appointment as a commissioner of the U.S. Commodity Futures Trading Commission and an appointment as Chairman of the Finance Department at The George Washington University. He earned his degrees at the University of Kentucky.

Portfolio Management

Each Fund is managed by an investment team overseen by William E. Seale, Ph.D., and George O. Foster.

William E. Seale, Ph.D., Chief Investment Officer for ProFund Advisors LLC from 2003-2004 and since October 2006 and Chief Investment Officer for ProShare Advisors LLC since October 2006. Dr. Seale is principally responsible for development and oversight of Portfolio Strategy for the Advisor. More information about Dr. Seale is set forth above.

George O. Foster CFA, ProShare Advisors – Director of Portfolio since Sept. 2007. ProFund Advisors – Director of Portfolio since 2004; Senior Portfolio Manager from 2000 to 2004 and Portfolio Manager from 1999 to 2000. Mr. Foster earned an M.B.A. from The George Washington University and a B.S. in Mechanical Engineering from Clarkson University. Mr. Foster holds the Chartered Financial Analyst (CFA) designation and is a member of the Washington Association of Money Managers.

The following members of the investment team have joint responsibility for the day-to-day management of the Funds:

Howard Rubin CFA, ProShare Advisors – Senior Portfolio Manager since December, 2007. ProFund Advisors – Senior Portfolio Manager since November 2004 and Portfolio Manager from April 2000 through November 2004. Mr. Rubin holds the Chartered Financial Analyst (CFA) designation.

Michael Neches, ProShare Advisors – Associate Portfolio Manager since January 2007; Portfolio Analyst from December 2006 to January 2007. ProFund Advisors – Portfolio Analyst November 2004 to December 2006; Junior Analyst from May 2001 to November 2004; and Portfolio Intern March 2000 to May 2001.

Robert Parker CFA, ProShare Advisors – Associate Portfolio Manager since March 2007. H. Beck, Inc. – Due Diligence Analyst from May 2005 through March 2007. Wachovia Securities – Investment Analyst from April 2004 through January 2005. Ameritas Investment Corp. – Compliance Analyst from May 2002 through October 2003. Mr. Parker holds the Chartered Financial Analyst (CFA) designation.

Steve Schoffstall, ProShare Advisors – Associate Portfolio Manager since September 2007; Portfolio Analyst from May 2007 to September 2007; Junior Portfolio Analyst from December 2006 to May 2007; and Portfolio Operations Specialist from June 2006 to December 2006. ProFund Advisors – Portfolio Group Team Member and ETF Portfolio Operations Specialist from February 2005 to June 2006. Employed in businesses unrelated to the financial services industry from September 2004 through January 2005. Pennsylvania State University – Graduate Student from August 2003 to August 2004.

The SAI provides additional information about the Portfolio Managers’ compensation, accounts managed by each Portfolio Manager and their ownership of the Funds.

Distribution (12b-1) Plan

Under a Rule 12b-1 Distribution Plan (the “Plan”) adopted by the Board of Trustees, each Fund may pay the Funds’ distributor, financial intermediaries, such as broker-dealers, and investment advisers, up to 0.25% on an annualized basis of the average daily net assets of a Fund as reimbursement or compensation for distribution related activities with respect to the Funds.

 

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Portfolio Holdings Information

A description of the Trust’s policies and procedures with respect to the disclosure of the Funds’ portfolio holdings is available in the Funds’ SAI. The top ten holdings of each Fund is posted on a daily basis to the Trust’s website at www.proshares.com.

Other Service Providers

SEI Investments Distribution Co., located at 1 Freedom Valley Drive, Oaks, PA 19456, serves as the Funds’ distributor. JP Morgan Chase Bank, N.A., located at 4 MetroTech Center, Brooklyn, NY 11245, serves as the Funds’ administrator, custodian and index receipt agent.

ProShare Advisors also performs certain administrative services for the Funds under a Management Services Agreement. ProShare Advisors is entitled to receive annual fees equal to 0.10% of the average daily net assets of each Fund for such services.

 

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ProShares®

ProShares Trust

7501 Wisconsin Avenue

Suite 1000

Bethesda, MD 20814

866.PRO.5125

www.proshares.com

FOR MORE INFORMATION

If you’d like more information about ProShares Trust or any of its funds, the following documents are available free upon request:

ANNUAL/SEMIANNUAL REPORTS TO SHAREHOLDERS

Additional information about the issuing Funds’ investments will be available in the Funds’ initial shareholder report. The Funds’ annual report (when available) will include a discussion of the market conditions and investment strategies that significantly affected the Funds’ performance during the prior fiscal year.

STATEMENT OF ADDITIONAL INFORMATION (SAI)

The SAI for the issuing Fund provides additional information about ProShares Trust, the Funds and their Shares. The current annual and semiannual reports (when available) and the SAI are incorporated by reference into (and are thus legally a part of) this Prospectus.

To receive a free copy of the latest annual or semiannual report (when available) or the SAI, or to request additional information about ProShares Trust, the Funds and Shares or to make shareholder inquiries, please use the contact information above.

INFORMATION PROVIDED BY THE SECURITIES AND EXCHANGE COMMISSION (SEC)

You can review and copy information about the issuing Funds (including the SAI) at the SEC’s Public Reference Room in Washington, DC. To find out more about this public service, call the SEC at 202.551.8090. Reports and other information about the Funds are also available on the SEC’s website (www.sec.gov), or you can receive copies of this information, for a fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the Public Reference Section, Securities and Exchange Commission, Washington, DC 20549-0102.

© 2008 ProShare Advisors LLC. All rights reserved.

Investment Company Act file number: 811-21114

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Barrons 400 ProShares                    

 

 

 

 

Prospectus

ProShares Trust

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.

[May]     , 2008

Distributor: SEI Investments Distribution Co.

LOGO

 

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ProShares Trust (“Trust”) is a registered investment company organized as a Delaware business trust that consists of, among other separate exchange-traded funds, the Barrons 400 ProShares (the “Fund”). ProShare Advisors LLC (“ProShare Advisors” or “Advisor”) serves as the investment advisor to the Fund.

The shares of the Fund (“Shares”) are listed on the American Stock Exchange (“Exchange”). Shares trade on the Exchange at market prices that may differ from the indicative intraday value (“IIV”) of the Shares disseminated by the Exchange and may be above, below or equal to the Fund’s end of day net asset value (“NAV”). The Fund has its own CUSIP number and exchange trading symbol. 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 are issued and redeemed principally in-kind for securities included in the relevant underlying index and an amount of cash.

Except when aggregated in Creation Units, Shares are not redeemable securities of the Fund. Retail investors, therefore, generally will not be able to purchase or redeem Shares directly from or with the Fund. Rather, most retail investors will purchase or sell Shares in the secondary market with the assistance of a broker. Thus, some of the information contained in this prospectus (the “Prospectus”)—such as information about purchasing and redeeming Shares from or with the Fund and all references to the Transaction Fee imposed on purchases and redemptions—is not relevant to retail investors.

 

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Overview of Investment Objective, Principal Investment Strategies and Risks

   4

Creation and Redemption of Creation Units

   12

Purchasing Shares Directly From the Fund

   13

Redeeming Shares Directly From the Fund

   14

Transaction Fees on Creation and Redemption Transactions

   14

Distributions

   15

Dividend Reinvestment Services

   15

Determination of NAV

   15

Taxes

   15

Management of ProShares Trust

   18

 

 

LOGO

ProShare Advisors LLC—Investment Advisor

 

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Overview of Investment

Objectives, Principal Investment

Strategies and Risks

 

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Overview of Investment Objectives, Principal Investment Strategies and Risks

Investment Objectives and Principal Investment Strategies

Barrons 400 ProShares (the “Fund”) is designed to correspond to the performance of the Barron’s 400SM Index, before fees and expenses. The Fund does not seek to achieve its stated investment objective over a period of time greater than one day. The Fund’s investment objective is non-fundamental, meaning it may be changed by the Board of Trustees, without the approval of Fund shareholders. The Fund reserves the right to substitute a different index or security for the index underlying its benchmark.

In seeking to achieve the Fund’s investment objective, ProShare Advisors uses a mathematical approach to investing. Using this approach, ProShare Advisors determines the type, quantity and mix of investment positions that the Fund should hold to approximate the performance of its benchmark. The Fund employs investment techniques that ProShare Advisors believes should simulate the movement of its benchmark.

ProShare Advisors does not invest the assets of the Fund in stocks or financial instruments based on ProShare Advisors’ view of the investment merit of a particular security, instrument or company, nor does it conduct conventional stock research or analysis, or forecast stock market movement or trends, in managing the assets of the Fund. The Fund seeks to remain fully invested at all times in securities and/or financial instruments that provide exposure to its underlying index without regard to market conditions, trends or direction. The Fund does not take temporary defensive positions.

The Fund may hold a representative sample of the securities in the underlying index, which has aggregate characteristics similar to those of the underlying index. This “sampling” process typically involves selecting a representative sample of securities in an index principally to enhance liquidity and reduce transaction costs while seeking to maintain high correlation with, and similar aggregate characteristics (e.g., market capitalization and industry weightings) to, the underlying index. In addition, the Fund may obtain exposure to components not included in the underlying index, invest in securities that are not included in the underlying index or may overweight or underweight certain components contained in the underlying index.

Strategies Specific to the Fund

The Fund invests in equity securities and/or financial instruments (including derivatives) that ProShare Advisors believes, in combination, should have similar daily return characteristics as the underlying index. These instruments include:

  Equity Securities are securities that include common stock, preferred stock, depositary receipts, convertible receipts, convertible securities and rights and warrants. Stocks represent an ownership interest in a corporation.
  Financial Instruments (including derivatives) are investment contracts whose value is derived from the value of an underlying asset, interest rate or index and may be used to produce economically “leveraged” investment results. Financial instruments include:
  Futures Contracts and Options on Futures Contracts Futures or futures contracts are contracts to pay a fixed price for an agreed-upon amount of commodities or securities, or the cash value of the commodities or securities, on an agreed-upon date.
  Swap Agreements Swap agreements are two-party contracts entered into primarily by institutional investors for a specified period ranging from a day to more than one year. In a standard “swap” transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross returns to be exchanged or “swapped” between the parties are calculated with respect to a “notional amount,” e.g., the return on or increase in value of a particular dollar amount invested in a “basket” of securities representing a particular index. The Fund is subject to credit or performance risk on the amount the Fund expects to receive from swap agreement counterparties. A swap counterparty default on its payment obligation to the Fund may cause the value of the Fund to decrease.
  Forward Contracts Forward contracts are two-party contracts entered into with dealers or financial institutions where a purchase or sale of a specific quantity of a commodity, security, foreign currency or other financial instrument at a set price, with delivery and settlement at a specified future date. Forward contracts may also be structured for cash settlement, rather than physical delivery.
  Options on Securities and Stock Indexes and Investments Covering Such Positions Option contracts grant one party a right, for a price, either to buy or sell a security or futures contract at a fixed price during a specified period or on a specified day. Call options give investors the right to buy a stock at an agreed-upon price on or before a certain date. A put option gives the investor the right to sell a stock at an agreed-upon price on or before a certain date.

In addition, the Fund may use other securities, financial instruments and techniques in pursuit of its investment objective. Assets of the Fund not invested in equity securities or financial instruments may be invested in debt securities and/or money market instruments, including repurchase agreements. Pursuant to the U.S. Securities and Exchange Commission’s (“SEC”)

 

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“names rule” (Rule 35d-1 under the Investment Company Act of 1940, as amended (the “1940 Act”)), the Fund commits at least 80% of assets (i.e., net assets plus borrowings for investment purposes), under normal circumstances, to equity securities contained in the underlying index and/or financial instruments with similar economic characteristics.

Principal Risks

Like all investments, investing in the Fund entails risks. Many factors affect the value of an investment in the Fund. The Fund’s NAV will change daily based on variations in market conditions, interest rates and other economic, political or financial developments. The Fund’s response to these developments will depend upon the types of securities 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 factors most likely to have a significant impact on the Fund’s portfolio are called “principal risks.” The principal risks for the Fund are noted in the Fund description and described below. The Statement of Additional Information (“SAI”) contains additional information about the Fund, its investment strategies and related risks. The Fund may be subject to risks in addition to those identified as principal risks.

 

  Aggressive Investment Technique Risk The Fund uses investment techniques that may be considered aggressive, including the use of futures contracts, options on futures contracts, securities and indexes, forward contracts, swap agreements and similar instruments. The Fund’s investment in financial instruments may involve a small investment relative to the amount of investment exposure assumed and may result in losses exceeding the amounts invested. Such instruments, particularly when used to create leverage, may expose the Fund to potentially dramatic changes (losses or gains) in the value of the instruments and imperfect correlation between the value of the instruments and the security or index. The use of aggressive investment techniques also exposes the Fund to risks different from, or possibly greater than, the risks associated with investing directly in securities contained in an index underlying the Fund’s benchmark, including: 1) the risk that an instrument is mispriced; 2) credit or performance risk on the amount the Fund expects to receive from a counterparty; 3) the risk that securities prices, interest rates and currency markets will move adversely and the Fund will incur significant losses; 4) the risk that there may be imperfect correlation between the price of financial instruments and movements in the prices of the underlying securities; 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 any particular instrument and/or possible exchange-imposed price fluctuation limits, which may make it difficult or impossible to adjust the Fund’s position in a particular financial instrument when desired.
  Concentration Risk The Fund will concentrate its investments in issuers of one or more particular industries to the same extent that its underlying index is so concentrated and to the extent permitted by applicable regulatory guidance. There is a risk that those issuers (or industry sector) will perform poorly and negatively affect the Fund. Concentration risk results from maintaining exposure to issuers conducting business in a specific industry. The risk of concentrating investments in a limited number of issuers in a particular industry is that the Fund will be more susceptible to the risks associated with that industry than the Fund that does not concentrate its investments.
  Correlation Risk A number of factors may affect the Fund’s ability to achieve a high degree of correlation with its benchmark, and there can be no guarantee that the Fund will achieve a high degree of correlation. A failure to achieve a high degree of correlation may prevent the Fund from achieving its investment objective. A number of factors may adversely affect the Fund’s correlation with its benchmark, including fees, expenses, transaction costs, costs associated with the use of leveraged investment techniques, income items and accounting standards. The Fund may not have investment exposure to all securities in its underlying benchmark index, or its weighting of investment exposure to such stocks or industries may be different from that of the index. In addition, the Fund may invest in securities or financial instruments not included in the index underlying 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 under-exposed to its benchmark. Activities surrounding annual index reconstitutions and other index rebalancing or reconstitution events may hinder the Fund’s ability to meet their daily investment objective on that day. The Fund seeks to rebalance its portfolio daily to keep leverage consistent with the Fund’s daily investment objective.
  Counterparty Risk The Fund will be subject to credit risk (described below) with respect to the amount it expects to receive from counterparties to financial instruments entered into by the Fund or held by special purpose or structured vehicles. If a counterparty becomes bankrupt or otherwise fails to perform its obligations due to financial difficulties, the value of your investment in the Fund may decline. 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. The Fund typically enters into transactions with counterparties whose credit rating is investment grade, as determined by a nationally recognized statistical rating organization, or, if unrated, judged by ProShare Advisors to be of comparable quality.
 

Credit Risk An issuer or guarantor of debt instruments or counterparty to financial instruments may be unable or unwilling to make interest payments and/or repay principal. Changes in an issuer’s financial strength or in an issuer’s

 

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or instrument’s credit rating may affect an instrument’s value and, thus, have an impact on Fund performance. As described under “Counterparty Risk” above, the Fund will also be subject to credit risk with respect to the amount the Fund expects to receive from counterparties in financial instruments transactions. If a counterparty defaults on its payment obligations to the Fund, the value of your investment in the Fund may decline.

  Early Close/Trading Halt Risk An exchange or market may close early or issue trading halts on specific securities, or the ability to buy or sell certain securities may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, accurately price its investments and/or may incur substantial trading losses.
  Equity Risk The equity markets are volatile, and the value of securities, futures, options contracts, and other instruments correlated with the equity markets may fluctuate dramatically from day-to-day. This volatility may cause the value of an investment in the Fund to decrease.
  Liquidity Risk In certain circumstances, such as the disruption of the orderly markets for the securities or financial instruments in which the Fund invests, the Fund might not be able to dispose of certain holdings quickly or at prices that represent true market value in the judgment of ProShare Advisors. This may prevent the Fund from limiting losses, realizing gains or from achieving a high correlation or inverse correlation with its underlying index.
  Market Price Variance Risk Individual Shares of the Fund will be listed for trading on the Exchange and can be bought and sold in the secondary market at market prices. The market prices of Shares will fluctuate in response to changes in NAV and supply and demand for Shares. ProShare Advisors cannot predict whether Shares will trade above, below or at their NAV. Differences between secondary market prices and NAV for Shares may be due largely to supply and demand forces in the secondary market, which forces may not be the same as those influencing prices for securities or instruments held by the Fund at a particular time. Given the fact that Shares can be created and redeemed in Creation Units, ProShare Advisors believes that large discounts or premiums to the NAV of Shares should not be sustained. There may, however, be times when the market price and the NAV vary significantly and you may pay more than NAV when buying Shares on the secondary market, and you may receive less than NAV when you sell those Shares. 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, the bid-ask spread often increases significantly. This means that Shares may trade at a discount to NAV, and the discount is likely to be greatest when the price of Shares is falling fastest, which may be the time that you most want to sell your Shares. The Fund’s investment results are measured based upon the daily NAV of the Fund. Investors purchasing and selling shares in the secondary market may not experience investment results consistent with those experienced by those creating and redeeming directly with the Fund.
  Market Risk The Fund is subject to market risks that will affect the value of its Shares, including adverse issuer, political, regulatory, market or economic developments, as well as developments that impact specific economic sectors, industries or segments of the market. Investors should normally lose value on days when the Fund’s underlying index declines. The Fund seeks to remain fully invested regardless of market conditions.
  Non-diversification Risk The Fund is classified as “non-diversified” under the 1940 Act, and the Fund has the ability to invest a relatively high percentage of its investments in the securities of a small number of issuers if there is a small number of issuers in the underlying index or if ProShare Advisors determines that doing so is the most efficient means of meeting its objective. This would make the performance of the Fund more susceptible to a single economic, political or regulatory event than a diversified fund might be.
  Portfolio Turnover Risk Active market trading of Fund shares may cause more frequent creation or redemption activities and could increase the rate of portfolio turnover. Higher turnover rates may increase brokerage costs and may result in increased taxable capital gains.

Additional Securities, Instruments and Strategies

This section describes additional securities, instruments and strategies that may be utilized by the Fund.

  Debt Instruments include bonds and other instruments, such as certificates of deposit, euro time deposits, commercial paper (including asset-backed commercial paper), notes, funding agreements and U.S. Government securities that are used by U.S. and foreign banks, financial institutions, corporations, or other entities, to borrow money from investors. Holders of debt instruments have a higher priority claim to assets than do holders of equity securities. Typically, the debt issuer pays the investor a fixed, variable or floating rate of interest and must repay the borrowed amount at maturity. Some debt instruments, such as zero coupon bonds, are sold at a discount from their face values instead of paying interest.
  Depositary Receipts (DRs) include American Depositary Receipts (ADRs), Global Depositary Receipts (GDRs), and New York Shares (NYSs).
 

ADRs represent the right to receive securities of foreign issuers deposited in a bank or trust company. ADRs are an alternative to purchasing the underlying securities in their national markets and currencies. Investment in ADRs has certain advantages over direct investment in the underlying foreign securities because: (i) ADRs are U.S. dollar-denominated investments that are easily transferable and for which market quotations are readily available, and

 

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(ii) issuers whose securities are represented by ADRs are generally subject to auditing, accounting and financial reporting standards similar to those applied to domestic issuers.

  GDRs are receipts for shares in a foreign-based corporation traded in capital markets around the world. While ADRs permit foreign corporations to offer shares to American citizens, GDRs allow companies in Europe, Asia, the United States and Latin America to offer shares in many markets around the world.
  A NYS is a share of New York registry, representing equity ownership in a non-U.S. company, allowing for a part of the capital of the company to be outstanding in the U.S. and part in the home market. It is issued by a U.S. transfer agent and registrar on behalf of the company and created against the cancellation of the local share by the local registrar. One New York Share is always equal to one ordinary share. New York Share programs are typically managed by the same banks that manage ADRs, as the mechanics of the instrument are very similar. New York Shares are used primarily by Dutch companies.
  Money Market Instruments are short-term debt instruments that have terms-to-maturity of less than 397 days and exhibit high quality credit profiles. Money market instruments include U.S. Government securities and repurchase agreements.
  Repurchase Agreements are contracts in which the seller of securities, usually U.S. Government Securities or other Money Market Instruments, agrees to buy them back at a specified time and price. Repurchase Agreements are primarily used by the Fund as a short-term investment vehicle for cash positions.
  Reverse Repurchase Agreements involve the sale of a security by the Fund to another party (generally a bank or dealer) in return for cash and an agreement by the Fund to buy the security back at a specified price and time. Reverse repurchase agreements may be considered a form of borrowing for some purposes and may create leverage.
  Structured Notes are debt obligations that may include components such as swaps, forwards, options, caps or floors. Structured notes may be used to indirectly expose a portfolio to asset classes or markets.
  U.S. Government Securities are issued by the U.S. Government or one of its agencies or instrumentalities. Some, but not all, U.S. Government securities are backed by the full faith and credit of the federal government. Other U.S. Government securities are backed by the issuer’s right to borrow from the U.S. Treasury and some are backed only by the credit of the issuing organization.

Special Risks of Exchange-Traded Funds

Not Individually Redeemable Shares may be redeemed by the Fund at NAV only in large blocks known as Creation Units. You may incur brokerage costs purchasing enough Shares to constitute a Creation Unit.

Trading Issues Trading in Shares on the Exchange may be halted due to market conditions or for reasons that, in the view of the Exchange, make trading in Shares inadvisable. In addition, trading in Shares on the Exchange may be halted due to extraordinary market volatility or other reasons. There can be no assurance that Shares will continue to meet the listing requirements of the Exchange, and the listing requirements may be amended from time to time.

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 ensuring that you receive shareholder reports and other communications from the Fund. 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 Fund. Because new Shares may be issued on an ongoing basis, a “distribution” of 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, as amended (“Securities Act”). For example, you could be deemed a statutory underwriter if you purchase Creation Units from the 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.

 

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A Precautionary Note to Investment Companies For purposes of the Investment Company Act of 1940, the Fund is a registered investment company, and the acquisition of Shares by other investment companies is subject to the restrictions of Section 12(d)(1) thereof.

The Trust and the Fund have obtained an exemptive order from the SEC allowing a registered investment company to invest in the Fund beyond the limits of Section 12(d)(1) subject to certain conditions, including that a registered investment company enters into a Participation Agreement with ProShares Trust regarding the terms of the investment. Any investment company considering purchasing Shares of the Fund in amounts that would cause it to exceed the restrictions under Section 12(d)(1) should contact the Trust.

A Precautionary Note Regarding Unusual Circumstances ProShares Trust can postpone payment of redemption proceeds for any period during which (1) the New York Stock Exchange (the “NYSE”) is closed other than customary weekend and holiday closings, (2) trading on the NYSE is restricted, as determined by the SEC, (3) any emergency circumstances exist, as determined by the SEC, or (4) the SEC by order permits for the protection of shareholders of the Fund.

Underlying Index

The Barron’s 400SM Index measures the performance of a diversified group of U.S. companies selected in part based on fundamentals-related rules-based criteria. The Index includes companies that have scored highest according to fundamentals-related rankings calculated by MarketGrader.com. Additional rules-based screening provides for sector and market cap diversification. The Index consists of 400 equally weighted companies, selected from the universe of companies in the Dow Jones Wilshire 5000. All selections must have a minimum float-adjusted market cap of $250 million. At least 25% of all selections must have a market cap above $3 billion. The number of selections in the same industry sector cannot exceed 20% of the Index (80 companies). No real estate investment trusts are eligible for Index selection, all Index selections must have reported quarterly or annual results within the last six months, and all selections must have a minimum 3-month average daily trading dollar value of $2 million. As of December 31, 2007, the Index included companies with capitalizations between $117 million and $263 billion. The average capitalization of the companies comprising the Index was approximately $13 billion. The Index was concentrated in the Financials industry group, which comprised 20% of the market capitalization of the Index.

 

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Barrons 400 ProShares

Ticker:

CUSIP:

Investment Objective

The Fund seeks daily investment results, before fees and expenses, that correspond to the daily performance of the Barron’s 400SM Index.

If the Fund is successful in meeting its objective, its value (before fees and expenses) should gain approximately the same, on a percentage basis, as the Barron’s 400SM Index when the Index rises on a given day. Conversely, its value (before fees and expenses) should lose approximately the same, on a percentage basis, as any decrease in the Index when the Index declines on a given day.

Principal Investment Strategies

The Fund’s principal investment strategies include:

 

Investing in equity securities and/or taking positions in financial instruments (including derivatives) that ProShare Advisors believes, in combination, should have similar daily price return characteristics as the Barron’s 400SM Index. Information about the Index can be found on page [9].

  Committing at least 80% of its net assets, plus any borrowings for investment purposes, to investments that, in combination, have economic characteristics that are similar to those of the Index.
  Employing leveraged investment techniques in seeking its investment objective.
  Investing assets not invested in financial instruments in debt securities and/or money market instruments.
  The Fund will concentrate its investments in a particular industry or group of industries to approximately the same extent as the Index is so concentrated.

Principal Risks

The Fund is subject to the following principal risks:

  Aggressive Investment Technique Risk, Concentration Risk, Correlation Risk, Counterparty Risk, Credit Risk, Early Close/Trading Halt Risk, Equity Risk, Liquidity Risk, Market Price Variance Risk, Market Risk, Non-diversification Risk and Portfolio Turnover Risk.

The Fund may be subject to risks in addition to those identified as principal risks. The sections titled “Principal Risks” and “Special Risks of Exchange-Traded Funds” in this Prospectus and the SAI contain additional information about the Fund and related risks.

Fund Performance

Performance history will be available for the Fund after it has been in operation for a full calendar year.

Fees and Expenses

The following table describes the estimated fees and expenses you may pay when you buy, hold, or sell Creation Units of the Fund. Annual fund operating expenses are based on annualized expenses for the Fund’s most recent fiscal year. Investors purchasing shares in the secondary market will not pay the shareholder fees shown below directly, but may be subject to costs (including customary brokerage commissions) charged by their broker.

 

Estimated Shareholder Fees (paid directly by Authorized Participants)A
Sales charges (loads)    None
Fixed transaction fee per orderB    $500
Variable transaction fee per Creation UnitC    up to 0.10% of Creation Unit value
Additional transaction charge if not settled through the Continuous Net Settlement System of the National Securities Clearing Corporation (NSCC) D   

Up to 3 times the fixed fee plus up

to 0.10% of Creation Unit value

 

Estimated Annual Fund Operating Expenses

(as a percentage of average daily net assets)

Investment Advisory Fee

   0.75%        

Distribution and Service (12b-1) feesE

   0.00%        

Other ExpensesF

   0.47%        
    

Total Annual Fund Operating Expenses

   1.22%        

Fee Waivers/ReimbursementsG

   -0.27%        
    

Total Net Annual Fund Operating Expenses

   0.95%
    

 

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A

See “Transaction Fees on Creation and Redemption Transactions” at the end of this Prospectus.

B

A fixed transaction fee of $500 will be charged when you create or redeem Creation Units of the Fund regardless of the number of shares created or redeemed on the date of the transaction.

C

A variable transaction fee of up to 0.10% of the value of each Creation Unit will be charged to offset costs associated with processing the order.

D

An additional fee of up to 3 times the fixed per order transaction fee plus up to 0.10% of the value of each Creation Unit may be charged if you do not create or redeem shares through the Continuous Net Settlement System of the NSCC, or in circumstances in which cash is substituted for certain securities. Such transactions are allowed at the sole discretion of the Fund.

E

The Fund has adopted a Distribution (12b-1) Plan pursuant to which the Fund may be subject to an annual 12b-1 fee of up to 0.25%. However, no such fee is currently charged to the Fund and no such fees will be charged prior to [                     2009].

F

Based on estimated amounts for the Fund’s current fiscal year. “Other Expenses” include fees paid for management (non-advisory) services (as described under “Management of ProShares Trust” later in this Prospectus), legal and audit fees, printing costs, registration fees, custodial, fund accounting, administration, transfer agency and sub-transfer agency fees and costs associated with independent trustees and certain miscellaneous expenses.

G

ProShare Advisors has contractually agreed to waive Investment Advisory and Management Services Fees and to reimburse Other Expenses to the extent Total Annual Fund Operating Expenses, as a percentage of average daily net assets, exceed 0.95% of average daily net assets from the date the Fund commences operations through that date in 2009. After such date, the expense limitation may be terminated or revised. Amounts waived or reimbursed in a particular fiscal year may be recouped by ProShare Advisors within five years of the waiver or reimbursement to the extent that recoupment will not cause the Fund’s expenses to exceed any expense limitation in place at that time.

Example: The following example is intended to help you compare the estimated cost of investing in shares of the Fund with the cost of investing in other funds. Investors should note that the following examples are estimates and are for illustration purposes only and are not meant to suggest actual or expected fees and expenses or returns, all of which may vary. The Fund issues and redeems shares in Creation Units principally on an in-kind basis for portfolio securities included in the Index and cash. shares are not redeemable in less than Creation Unit aggregations. The example does not include the brokerage commissions that secondary market investors may incur to buy and sell shares.

The following example assumes that you invest $10,000 in the Fund for the time periods indicated and sell all of your shares at the end of those periods, but does not include transaction fees on purchases and redemptions of shares. The example also assumes that your investment has a 5% annual return each year and that the Fund’s annual operating expenses remain exactly as described in the fee table. Although your actual costs may be higher or lower, based on the assumptions, your estimated costs would be:

 

   1 Year    3 Years        
   $[    ]    $[    ]            

 

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Creation and Redemption of Creation Units

 

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Creation and Redemption of Creation Units

The Fund issues and redeems Shares only in bundles of a specified number of Shares. These bundles are known as “Creation Units.” To purchase or redeem a Creation Unit, you must be an Authorized Participant or you must do so through a broker that is an Authorized Participant. An Authorized Participant is a participant in the Depository Trust Company (“DTC”), a limited trust company and securities depository that serves as a national clearinghouse for the settlement of trades for its participating banks and broker-dealers, that has executed a Participant Agreement with the Fund’s distributor (“Distributor”). Because Creation Units likely will cost millions of dollars, it is expected that only institutional investors will purchase and redeem Shares directly with an issuing Fund.

Retail investors may acquire Shares on the secondary market (i.e., not from the Fund) through a broker. Shares of the Fund are listed on the Exchange and are publicly traded. For information about acquiring Shares through a secondary market purchase, please contact your broker. If you want to sell Shares of the Fund on the secondary market, you must do so through your broker.

When you buy or sell Shares on the secondary market, your broker may charge you a commission or other transaction charges and you may pay some or all of the spread between the bid and the offered price for each purchase or sale transaction. Unless imposed by your broker, there is no minimum dollar amount you must invest and no minimum number of Shares you must buy in the secondary market. In addition, because secondary market transactions occur at market prices, you may pay more than NAV when you buy Shares, and receive less than NAV when you sell those Shares.

The Fund imposes no restrictions on the frequency of purchases and redemptions directly with the Fund. In establishing this policy, the Board of Trustees noted that the Fund is expected to be attractive to arbitrageurs (where trading activity is critical to ensuring that Shares trade at or close to net asset value per share) as well as active institutional and retail investors interested in buying and selling equity market basket index securities on a short-term basis. In addition, the Board considered that, unlike traditional mutual funds, the Fund issues and redeems its Shares at net asset value per share in Creation Units plus applicable transaction fees and the Fund’s Shares may be purchased and sold on the Exchange at prevailing market prices. Given this structure, the Board determined that the risks of frequent trading were less than in the case of a traditional mutual fund. Nevertheless, to the extent that purchases and redemptions directly with the Fund are effected in cash rather than through a contribution or redemption of portfolio securities, frequent purchases and redemptions could increase the rate of portfolio turnover. A high ratio of portfolio turnover may negatively impact the Fund’s performance by increasing transaction costs. In addition, large movements of cash into or out of the Fund may negatively impact the Fund’s ability to achieve its investment objective or maintain a consistent level of operating expenses.

Purchasing Shares Directly From the Fund

You can purchase Shares directly from the Fund only if you meet the following criteria and comply with purchase transaction procedures specified by the Trust.

Eligible Investors To purchase Shares directly from the Fund, you must be an Authorized Participant or you must purchase through a broker that is an Authorized Participant. Investors should contact the Distributor for the names of Authorized Participants.

Creation Units You must purchase Shares in large blocks, known as “Creation Units.” A Creation Unit is comprised of 75,000 Shares. The number of Shares in a Creation Unit will not change, except in the event of a share split, reverse split or similar revaluation. The Fund will not issue fractional Creation Units. The Fund reserves the right to reject purchase orders in certain circumstances, as described in the SAI.

Procedures for Purchase of Fund Shares

In-kind Deposits To purchase Shares directly from the Fund, you must deposit with the Fund a basket of securities and cash. Each business day, prior to the opening of trading on the Exchange, an agent of the Fund (“Index Receipt Agent”) will make available through the NSCC a list of the names and number of shares of each security to be included in that day’s creation basket (“Deposit Securities”). The identity and number of shares of the Deposit Securities required for a Creation Unit 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 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. The Fund 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 (defined below) to replace any Deposit Security that may not be available in sufficient quantity for delivery or that may not be eligible for transfer through the Clearing Process (discussed below), or that may not be eligible for trading by an Authorized Participant or the investor for which it is acting.

Balancing Amount In addition to the in-kind deposit of securities, Authorized Participants will either pay to, or receive from the Fund an amount of cash referred to as the “Balancing Amount.” The Balancing Amount is the amount equal to the differential, if any, between the market value of the Deposit Securities and the NAV of a Creation Unit. The Fund will

 

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publish, on a daily basis, information about the previous day’s Balancing Amount. The Balancing Amount may, at times, represent a significant portion of the aggregate purchase price (or in the case of redemptions, the redemption proceeds). This is because the mark-to-market value of the Financial Instruments held by the Fund will be included in the Balancing Amount (not in the Deposit Basket or Redemption Basket). The Balancing Amount may fluctuate significantly due to the leveraged nature of the Fund. You also must pay a Transaction Fee, described below, in cash. For custom orders, “cash in lieu” may be added to the Balancing Amount to replace any Deposit Security that may not be available in sufficient quantity for delivery or that may not be eligible for transfer through the Clearing Process (discussed below), or that may not be eligible for trading by an Authorized Participant or the investor for which it is acting. The Balancing Amount must be paid to the Trust on the third Business Day following the Transmittal Date.

Placement of Purchase Orders All purchase orders for Shares must be placed by or through an Authorized Participant. Purchase orders will be processed either through a manual clearing process run at the DTC (“Manual Clearing Process”) or through an enhanced clearing process (“Enhanced Clearing Process”) that is available only to those DTC participants that also are participants in the Continuous Net Settlement System of the National Securities Clearing Corporation (“NSCC”). Authorized Participants that do not use the Enhanced Clearing Process will be charged a higher Transaction Fee (discussed below). A purchase order must be received by the Distributor by 4:00 p.m. Eastern time, if transmitted by mail or by 3:00 p.m. Eastern time if transmitted by telephone, facsimile or other electronic means permitted under the Participant Agreement, in order to receive that day’s closing NAV per Share. A custom order may be placed for one or more whole Creation Units of Shares of the Fund and must be received by the Distributor in proper form no later than 3:00 p.m. Eastern time in order to receive that day’s NAV per Share. All other procedures set forth in the Participant Agreement must be followed in order for you to receive the NAV determined on that day.

Shares may be issued in advance of receipt of Deposit Securities subject to various conditions including a requirement to maintain on deposit with the Trust cash in an amount up to 115% of the market value of the missing Deposit Securities. Any such transaction effected with the Trust must be effected using the Manual Clearing Process consistent with the terms of the Authorized Participant Agreement. See the “Summary of Transaction Fees and Charges” below for more information.

Redeeming Shares Directly From the Fund

The redemption process is essentially the reverse of the purchase process described above. To redeem Shares, you must be an Authorized Participant or you must redeem through a broker that is an Authorized Participant, and you must tender Shares in Creation Units.

Redemption Procedures

Redemption Proceeds Redemption proceeds will be paid in-kind with a basket of securities. In most cases, the basket of securities you receive will be the same as that required of investors purchasing Creation Units on the same day. There will be times, however, when the creation and redemption baskets differ. The composition of the redemption basket will be available through the NSCC. The Fund reserves the right to honor a redemption request with a non-conforming redemption basket.

Balancing Amount If the NAV of a Creation Unit is higher than the value of the redemption securities, you will receive from the Fund a Balancing Amount in cash. If the NAV of a Creation Unit is lower than the value of the redemption securities, you will be required to pay to the Fund a Balancing Amount in cash. If you are receiving a Balancing Amount, the amount due will be reduced by the amount of the applicable Transaction Fee.

Placement of Redemption Orders As with purchases, redemptions may be processed either through the Manual Clearing Process or the Enhanced Clearing Process. A redemption order must be received by the Distributor prior to 4:00 p.m. Eastern time if transmitted by mail or by 3:00 p.m. Eastern time if transmitted by telephone, facsimile or other electronic means permitted under the Participant Agreement in order to receive that day’s closing NAV per Share. All other procedures set forth in the Participant Agreement must be followed in order for you to receive the NAV determined on that day.

An investor may request a redemption in cash which the Fund may, in its sole discretion, permit. Investors that elect to receive cash in lieu of one or more securities in the redemption basket are subject to an additional charge. Redemptions of Creation Units for cash (when available) and/or outside of the continuous Net Settlement System of the National Securities Clearing Corp. (“NSCC”) also require the payment of an additional charge. See the “Summary of Transaction Fees and Charges” below for more information.

Transaction Fees on Creation and Redemption Transactions

The Fund will impose Transaction Fees to offset transfer and other transaction costs associated with the issuance and redemption of Creation Units. There is a fixed and a variable component to the total Transaction Fee on transactions in Creation Units. A fixed Transaction Fee is applicable to each creation and redemption transaction, regardless of the number of Creation Units transacted. A variable Transaction Fee based upon the value of each Creation Unit also is applicable to each creation and redemption transaction. Purchasers and redeemers of Creation Units of the Fund effected through the Manual Clearing Process are required to pay an additional charge to compensate for brokerage and other expenses. In addition, purchasers of Creation Units are responsible for payment of the costs of transferring the Deposit Securities to the Trust. Redeemers of Creation Units are responsible for the costs of transferring securities from the Trust to their accounts or on their

 

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order. Investors who use the services of a broker or other such intermediary may pay additional fees for such services. The following table summarizes the components of the Transaction Fees.

 

ProShares      

   Fixed Transaction Fee        Maximum Additional     Charge for Cash Purchases and Redemptions*
  

In-Kind      

 

  

Cash

 

  
           NSCC                Outside NSCC            Outside NSCC         
Barrons 400 ProShares    $[    ]    $[    ]    $                         500    $[    ]

 

* As a percentage of the amount invested.

Distributions

As a shareholder, you are entitled to your share of the Fund’s income from interest and dividends, and gains from the sale of investments. You may receive such earnings as either an income dividend or a capital gains distribution. Income dividends primarily come from the dividends that the Fund earns from its holdings and the interest it receives from its money market and bond investments. Capital gains may be realized when the Fund sells securities. Capital gains may be either short-term or long-term, depending on whether the Fund held the securities for one year or less, or more than one year.

The Fund intends to declare and distribute to its shareholders at least annually virtually all of its net income (interest and dividends, less expenses), if any, as well as net capital gains, if any, realized from the sale of its holdings. Subject to board approval, some or all of any net capital gains distribution may be declared payable in either additional Shares of the Fund or in cash. If such a dividend is declared payable in that fashion, holders of Shares will receive additional Shares of the Fund unless they elect to receive cash. Dividends may be declared and paid more frequently to comply with the distribution requirements of the Internal Revenue Code or for other reasons.

Dividend Reinvestment Services

As noted above under “Distributions”, the Fund may declare a net capital gain distribution to be payable in additional Shares or cash. Even if the Fund does not declare a dividend to be payable, 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 of both income and capital gains will automatically be reinvested in additional whole Shares of the 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.

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 the J.P. Morgan Investor Services Co. and determined each business day at the close of regular trading of the NYSE (ordinarily 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. Certain short-term securities are valued on the basis of amortized cost. When a market price is not readily available, securities and other assets are valued at fair value in good faith under procedures established by, and under the general supervision and responsibility of the Fund’s Board of Trustees. The use of a fair valuation method may be appropriate if, for example: (i) market quotations do not accurately reflect fair value of an investment; (ii) 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. This procedure incurs the unavoidable 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.

The NYSE is 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), Presidents’ Day (the third Monday in February), Good Friday, Memorial Day (the last Monday in May), July 4th, Labor Day (the first Monday in September), Thanksgiving Day (the fourth Thursday in November) and Christmas Day. The NYSE 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 or market on which the Fund’s investments are primarily traded closes early, the net asset value may be calculated prior to its normal calculation time. Creation/redemption transaction order time cutoffs would also be accelerated.

Taxes

The following is certain general information about taxation of the Fund:

  The Fund intends to qualify for treatment as a “regulated investment company” 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.

 

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  By qualifying for treatment as a regulated investment company, the Fund is not subject to federal income tax on net investment income and capital gains that the Fund timely distributes to its shareholders.

 

  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 the amount, timing or character of the income distributed 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 regulated investment company and avoid a fund-level tax.

Taxable investors should be aware of the following basic tax points:

  Distributions are taxable to you for federal income tax purposes whether or not you reinvest these amounts in additional Shares.
  Distributions declared in October, November or December—if paid to you by the end of the following January—are taxable for federal income tax purposes as if received in December.
  Any dividends and short-term capital gain distributions that you receive are taxable to you as ordinary income for federal income tax purposes. Certain dividends you receive that are designated as attributable to qualified dividend income may be taxed at the same rates as long term capital gains. However, income received in the form of such dividends will not be considered long-term capital gains for other Federal income tax purposes, including the calculation of net capital losses.
  Distributions of net long-term capital gains that are properly designated as capital gain dividends are taxable to you as long-term capital gains for federal income tax purposes, no matter how long you have owned your Shares.
  Capital gains distributions may vary considerably from year to year as a result of the Fund’s normal investment activities and cash flows.
  A sale or exchange of Shares is a taxable event. This means that you may have a capital gain to report as income, or a capital loss to report as a deduction, when you complete your federal income tax return.
  Dividend and capital gains distributions that you receive, as well as your gains or losses from any sale or exchange of Shares, may be subject to foreign, state and local income taxes.
  If you are not a citizen or a permanent resident of the United States, or if you are a foreign entity, any dividends and short term capital gains that you receive will generally be subject to a 30% U.S. withholding tax, unless a lower treaty rate applies.
  Dividends and interest received by the Fund may give rise to withholding and other taxes imposed by foreign countries. Tax conventions between certain countries and the United States may reduce or eliminate such taxes.
  By law, the Fund must withhold a percentage of your distributions and proceeds if you have not provided a correct taxpayer identification number or social security number and made certain certifications. The backup withholding rate is currently 28%. Under current law, the backup withholding rate will increase to 31% for the taxable year 2011 and thereafter.

In addition, taxable investors who purchase or redeem Creation Units should be aware of the following additional basic tax points:

  A person who exchanges equity 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 and the exchanger’s aggregate basis in the securities surrendered and the Balancing Amount paid. However, all or a portion of any loss a person realizes on an exchange of securities for Creation Units will be disallowed by the Internal Revenue Service if such person purchases or receives in redemption other substantially identical securities within 30 days before or after the exchange on the basis that there has been no significant change in economic position. In such case, the basis of the newly purchased or received securities will be adjusted to reflect the disallowed loss.
  A person who exchanges Creation Units for equity 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 a Fund within 30 days before or after the exchange on the basis that there has been no significant change in economic position. 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 tax information only. If you are investing through a tax-deferred retirement account, such as an 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.

 

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Management of ProShares Trust

 

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Management of ProShares Trust

Board of Trustees and Officers

The Board of Trustees of ProShares Trust is responsible for the general supervision of the Fund. The officers of ProShares Trust are responsible for the day-to-day operations of the Fund.

Investment Advisor

ProShare Advisors LLC, located at 7501 Wisconsin Avenue, Suite 1000, Bethesda, MD 20814, serves as the investment advisor 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 services, ProShare Advisors is entitled to receive fees equal to 0.75% of the average daily net assets of the Fund. A discussion regarding the basis for the Board of Trustees approving the investment advisory agreement of the Fund will be available in the Fund’s initial shareholder report.

ProShare Advisors is owned by Michael L. Sapir, Louis M. Mayberg and William E. Seale.

Michael L. Sapir, Chairman and Chief Executive Officer of ProShare Advisors LLC since inception and ProFund Advisors LLC since April 1997, formerly served as senior vice president of Padco Advisors, Inc., which advised Rydex® Funds. In addition, Mr. Sapir practiced law, primarily representing financial institutions for over 13 years, most recently as a partner in a Washington, D.C. based law firm. He holds degrees from Georgetown University Law Center (J.D.) and University of Miami (M.B.A. and B.A.).

Louis M. Mayberg, President of ProShare Advisors LLC since inception and ProFund Advisors LLC since April 1997, co-founded National Capital Companies, L.L.C., an investment bank specializing in financial service companies mergers and acquisitions and equity underwritings in 1986, and managed its financial services hedge fund. He holds a Bachelor of Business Administration degree with a major in Finance from George Washington University.

William E. Seale, Ph.D., Chief Economist of ProFund Advisors since 2005, Chief Investment Officer from 2003-2004 and from October 2006-present and Director of Portfolio from 1997-2003. Dr. Seale has more than 30 years of experience in the financial markets. His background includes a five-year presidential appointment as a commissioner of the U.S. Commodity Futures Trading Commission and an appointment as Chairman of the Finance Department at The George Washington University. He earned his degrees at the University of Kentucky.

Portfolio Management

The Fund is managed by an investment team overseen by William E. Seale, Ph.D., and George O. Foster.

William E. Seale, Ph.D., Chief Investment Officer for ProFund Advisors LLC from 2003-2004 and since October 2006 and Chief Investment Officer for ProShare Advisors LLC since October 2006. Dr. Seale is principally responsible for development and oversight of Portfolio Strategy for the Advisor. More information about Dr. Seale is set forth above.

George O. Foster CFA, ProShare Advisors – Director of Portfolio since Sept. 2007. ProFund Advisors – Director of Portfolio since 2004; Senior Portfolio Manager from 2000 to 2004; and Portfolio Manager from 1999 to 2000. Mr. Foster earned an M.B.A. from The George Washington University and a B.S. in Mechanical Engineering from Clarkson University. Mr. Foster holds the Chartered Financial Analyst (CFA) designation and is a member of the Washington Association of Money Managers.

The following members of the investment team have joint responsibility for the day-to-day management of the Fund:

Howard Rubin CFA, ProShare Advisors – Senior Portfolio Manager since December, 2007. ProFund Advisors – Senior Portfolio Manager since November 2004 and Portfolio Manager from April 2000 through November 2004. Mr. Rubin holds the Chartered Financial Analyst (CFA) designation.

Michael Neches, ProShare Advisors – Associate Portfolio Manager since January 2007; Portfolio Analyst from December 2006 to January 2007. ProFund Advisors – Portfolio Analyst from November 2004 to December 2006; Junior Analyst from May 2001 to November 2004; and Portfolio Intern from March 2000 to May 2001.

Robert Parker CFA, ProShare Advisors – Associate Portfolio Manager since March 2007. H. Beck, Inc. – Due Diligence Analyst from May 2005 through March 2007. Wachovia Securities – Investment Analyst from April 2004 through January 2005. Ameritas Investment Corp. – Compliance Analyst from May 2002 through October 2003. Mr. Parker holds the Chartered Financial Analyst (CFA) designation.

Steve Schoffstall, ProShare Advisors – Associate Portfolio Manager since September 2007; Portfolio Analyst from May 2007 to September 2007; Junior Portfolio Analyst from December 2006 to May 2007; and Portfolio Operations Specialist from June 2006 to December 2006. ProFund Advisors – Portfolio Group Team Member and ETF Portfolio Operations Specialist from February 2005 to June 2006. Employed in businesses unrelated to the financial services industry from September 2004 through January 2005. Pennsylvania State University – Graduate Student from August 2003 to August 2004.

The SAI provides additional information about the Portfolio Managers’ compensation, accounts managed by each Portfolio Manager and their ownership of the Fund and the other funds of ProShares Trust.

Distribution (12b-1) Plan

Under a Rule 12b-1 Distribution Plan (the “Plan”) adopted by the Board of Trustees, the Fund may pay the Fund’s distributor, financial intermediaries, such as broker-dealers and investment advisers, up to 0.25% on an annualized basis of

 

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the average daily net assets of the Fund as reimbursement or compensation for distribution related activities with respect to the Fund. For the prior fiscal year, no payments were made by the Fund under the Plan.

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 Fund’s SAI. The top ten holdings of the Fund is posted on a daily basis to the Trust’s website at www.proshares.com.

Other Service Providers

SEI Investments Distribution Co., located at 1 Freedom Valley Drive, Oaks, PA 19456, serves as the Fund’s distributor. JP Morgan Chase Bank, N.A., located at 4 MetroTech Center, Brooklyn, NY 11245, serves as the Fund’s administrator, custodian and index receipt agent.

ProShare Advisors also performs certain administrative services for the Fund under a Management Services Agreement. ProShare Advisors is entitled to receive annual fees equal to 0.10% of the average daily net assets of the Fund for such services.

 

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ProShares®

Mailing Address

ProShares Trust

7501 Wisconsin Avenue

Suite 1000

Bethesda, MD 20814

Telephone

866-PRO-5125

Website

www.proshares.com

FOR MORE INFORMATION

If you’d like more information about ProShares Trust or any of its funds, the following documents are available free upon request.

ANNUAL/SEMIANNUAL REPORTS TO SHAREHOLDERS

Additional information about the Fund’s investments will be available in the Fund’s initial shareholder report. In the Fund’s annual report (when available), you will find a discussion of the market conditions and investment strategies that significantly affected the Fund’s performance during the prior fiscal year.

STATEMENT OF ADDITIONAL INFORMATION (SAI)

The SAI for the Fund provides additional information about ProShares Trust, the Fund and the Shares. The current annual and semiannual reports (when available) and the SAI are incorporated by reference into (and are thus legally a part of) this Prospectus.

To receive a free copy of the latest annual or semiannual report (when available) or the SAI, or to request additional information about ProShares Trust, the Fund and the Shares or to make shareholder inquiries, please use the contact information above.

INFORMATION PROVIDED BY THE SECURITIES AND EXCHANGE COMMISSION (SEC)

You can review and copy information about the Fund (including the SAI) at the SEC’s Public Reference Room in Washington, DC. To find out more about this public service, call the SEC at 1-202-942-8090. Reports and other information about the Fund is also available on the SEC’s website (www.sec.gov), or you can receive copies of this information, for a fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing the Public Reference Section, Securities and Exchange Commission, Washington, DC 20549-0102.

© 2008 ProShare Advisors LLC. All rights reserved.

ProShares Investment Company Act file number: 811-21114

 

 

LOGO

 

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STATEMENT OF ADDITIONAL INFORMATION

PROSHARES TRUST

7501 WISCONSIN AVENUE, SUITE 1000

BETHESDA, MARYLAND 20814

PHONE: (866) PRO-5125

 

Barrons 400 ProShares   Short MarketCap
 

UltraShort DJ Wilshire Total Market ProShares

 

UltraShort Russell3000 ProShares

Ultra MarketCap   Short International

Ultra DJ Wilshire Total Market ProShares

 

UltraShort MSCI Australia ProShares

Ultra Russell3000 ProShares

 

UltraShort MSCI Brazil ProShares

 

UltraShort MSCI BRIC ProShares

Ultra International  

UltraShort MSCI Europe ProShares

Ultra MSCI EAFE ProShares

 

UltraShort MSCI Latin America ProShares

Ultra MSCI Emerging Markets ProShares

 

UltraShort MSCI Mexico ProShares

Ultra MSCI Japan ProShares

 

UltraShort MSCI Pacific ex-Japan ProShares

Ultra FTSE/Xinhua China 25 ProShares

 

UltraShort MSCI South Korea ProShares

 

UltraShort MSCI Taiwan ProShares

 

UltraShort S&P Europe 350® ProShares

This SAI is not a prospectus. It should be read in conjunction with the Funds’ prospectuses (the “Prospectus”), which incorporate this Statement of Additional Information by reference. 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 www.proshares.com.

The date of this SAI is [May     ], 2008.


Table of Contents

TABLE OF CONTENTS

 

PROSHARES TRUST

   4

INVESTMENT POLICIES, TECHNIQUES AND RELATED RISKS

   5

SPECIAL CONSIDERATIONS

   22

INVESTMENT RESTRICTIONS

   25

PORTFOLIO TRANSACTIONS AND BROKERAGE

   26

MANAGEMENT OF PROSHARES TRUST

   27

INVESTMENT ADVISOR

   30

DISCLOSURE OF PORTFOLIO HOLDINGS POLICY

   32

OTHER SERVICE PROVIDERS

   33

COSTS AND EXPENSES

   34

ADDITIONAL INFORMATION CONCERNING SHARES

   34

PROXY VOTING POLICY AND PROCEDURES

   36

PURCHASE AND REDEMPTION OF SHARES

   38

TAXATION

   43

OTHER INFORMATION

   50

 

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GLOSSARY OF TERMS

For ease of use, certain terms or names that are used in this SAI have been shortened or abbreviated. A list of these terms and their corresponding full names or definitions can be found below. An investor may find it helpful to review the terms and names before reading the SAI.

 

Term   Definition
1933 Act   Securities Act of 1933, as amended
1934 Act   Securities Exchange Act of 1934, as amended
1940 Act   Investment Company Act of 1940, as amended
The Advisor or ProShare Advisors   ProShare Advisors LLC
AMEX   American Stock Exchange LLC
CFTC   Commodity Futures Trading Commission
Code or Internal Revenue Code   Internal Revenue Code of 1986
Distributor or SEI   SEI Investments Distribution Co.
Fund(s)   One or more of the series of the Trust identified on the front cover of this SAI
Independent Trustee(s)   Trustees who are not “Interested Persons” as defined under Section 2(a)(19) of the 1940 Act
SAI   The Trust’s Statement of Additional Information dated [May    ], 2008
SEC   U.S. Securities and Exchange Commission
Shares   The shares of the Funds
Trust   ProShares Trust
Trustee(s)   One or more of the trustees of the Trust

 

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PROSHARES TRUST

The Trust is a Delaware statutory trust and is registered with the SEC as an open-end management investment company under the 1940 Act. The Trust was organized on May 29, 2002 and consists of multiple series, or “Funds”, including the 18 Funds listed on the front cover of this SAI. Other Funds may be added in the future. Each of the Funds is registered as a non-diversified managed investment company.

The Funds are exchange-traded funds, the Shares are listed on AMEX. The Shares trade on AMEX at market prices that may differ to some degree from the Shares’ net asset values. Each Fund issues and redeems Shares on a continuous basis at net asset value in large, specified numbers of Shares called “Creation Units.” Creation Units of the Ultra ProShares and Barrons 400 ProShares are issued and redeemed principally in-kind for securities included in the relevant underlying index. Creation Units of the Short ProShares are purchased and redeemed in cash. Except when aggregated in Creation Units, Shares are not redeemable securities of the Funds. Retail investors, therefore, generally will not be able to purchase the Shares directly. Rather, most retail investors will purchase Shares in the secondary market with the assistance of a broker.

Reference is made to the Prospectuses for a discussion of the investment objectives and policies of each of the Funds. The discussion below supplements, and should be read in conjunction with, the applicable Prospectus. Portfolio management is provided to the Funds by ProShare Advisors, a Maryland limited liability company with offices at 7501 Wisconsin Avenue, Suite 1000, Bethesda, MD 20814.

The investment restrictions of the Funds specifically identified as fundamental policies may not be changed without the affirmative vote of at least a majority of the outstanding voting securities of that Fund, as defined in the 1940 Act. The investment objectives and all other investment policies of the Funds not specified as fundamental (including the benchmarks of the Funds) may be changed by the Trustees of the Funds without the approval of shareholders.

The investment techniques and strategies discussed below may be used by a Fund if, in the opinion of the Advisor, the techniques or strategies may be advantageous to the Fund. A Fund is free to 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 a Fund, will result in the achievement of the Fund’s objectives. Also, there can be no assurance that any Fund will grow to, or maintain, an economically viable size, in which case management may determine to liquidate the Fund at a time that may not be opportune for shareholders.

The use of the term “favorable market conditions” throughout this SAI is intended to convey rising markets for the Ultra ProShares and Barrons 400 ProShares and falling markets for the Short ProShares. The use of the term “adverse market conditions” is intended to convey falling markets for the Ultra ProShares and Barrons 400 ProShares and rising markets for the Short ProShares.

AMEX Listing and Trading

The Shares of each Fund are approved for listing and trading on the AMEX. Shares (redeemable only when aggregated in Creation Units) trade on the AMEX at prices that may differ to some degree from their net asset value. There can be no assurance that the requirements of the AMEX necessary to maintain the listing of Shares of any Fund will continue to be met. The AMEX may, but is not required to, remove a Fund from listing if (i) following the initial 12 month period beginning upon the commencement of trading of the Fund, there are fewer than 50 beneficial owners of the Fund for 30 or more consecutive trading days; (ii) the value of the index to which such Fund is based is no longer calculated or available; or (iii) such other event shall occur or condition exists that, in the opinion of the AMEX, makes further dealings on the AMEX inadvisable. In addition, the AMEX may remove the Shares from listing and trading upon termination of the Trust.

As in the case of stocks traded on the AMEX, the brokers’ commission on transactions in the Funds will be based on negotiated commission rates at customary levels for retail customers.

In order to provide current Share pricing information, the AMEX disseminates an updated “Indicative Intra-Day Value” (“IIV”) for each Fund. The Trust is not involved in or responsible for any aspect of the calculation or

 

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dissemination of the IIVs and makes no warranty as to the accuracy of the IIVs. IIVs are expected to be disseminated on a per Fund basis every 15 seconds during regular trading hours of the AMEX.

The AMEX will calculate and disseminate the IIV throughout the trading day for each Ultra ProShares and Barrons 400 ProShares by (i) calculating the current value of all Equity Securities held by a Fund; (ii) calculating the estimated amount of the value of cash and Money Market Instruments held in the Fund’s portfolio (“Estimated Cash”); (iii) calculating the marked-to-market gains or losses from the Fund’s total return swap exposure based on the Underlying Index percentage change, the swap costs determined by the daily imbedded weighted interest rate and the notional value of the swap contracts, if any; (iv) calculating the marked-to-market gains or losses of the futures contracts and other Financial Instruments held by the Fund, if any; (v) adding the current value of Equity Securities, the Estimated Cash, the marked-to-market gains or losses from swaps and the futures contracts and other Financial Instruments, to arrive at a value; and (vi) dividing that value by the total shares outstanding to obtain current IIV.

The AMEX will calculate and disseminate the IIV throughout the trading day for each Short ProShares by (i) calculating the Estimated Cash; (ii) calculating the marked-to-market gains or losses of swaps, futures and other Financial Instruments held by the Fund in a manner described above; (iii) adding the Estimated Cash and the marked-to-market gains or losses of the Financial Instruments to arrive at a value; and (iv) dividing that value by the total shares outstanding to obtain current IIV.

INVESTMENT POLICIES, TECHNIQUES AND RELATED RISKS

General

A Fund may consider changing its benchmark or the index underlying its benchmark at any time, including if, for example, the current index becomes unavailable; the Board of Trustees believes that the current index no longer serves the investment needs of a majority of shareholders or that another index may better serve their needs; or if the financial or economic environment makes it difficult for the Fund’s investment results to correspond sufficiently to its current benchmark or underlying index. If believed appropriate, a Fund may specify a benchmark index for itself that is “leveraged” or proprietary. Of course, there can be no assurance that a Fund will achieve its objective.

Fundamental securities analysis is not used by ProShare Advisors in seeking to correlate a Fund’s investment returns with its benchmark. Rather, ProShare Advisors primarily uses a mathematical approach to determine the investments a Fund makes and techniques it employs. While ProShare Advisors attempts to minimize any “tracking error,” certain factors tend to cause a Fund’s investment results to vary from a perfect correlation to its benchmark. See “Special Considerations.”

For purposes of this Statement of Additional Information, the word “invest” refers both to a Fund’s directly investing, and indirectly investing, in securities or other instruments. Similarly, when used in this Statement of Additional Information, the word “investment” refers both to a Fund’s direct investments and indirect investments in securities and other instruments. For example, the Funds typically invest indirectly in securities or instruments by using financial instruments with economic exposure similar to those underlying securities or instruments.

Additional information concerning the Funds, their investments policies and techniques, and the securities and financial instruments in which they may invest is set forth below.

Name Policies

The Funds have adopted non-fundamental investment policies obligating them to commit, under normal market conditions, at least 80% of assets to investments that, in combination, have economic characteristics similar to equity securities contained in the underlying index and/or financial instruments with similar economic characteristics. For purposes of each such an investment policy, “assets” includes the Funds’ net assets, as well as any amounts borrowed for investment purposes. In addition, for purposes of such an investment policy, “assets” includes not only the amount of a Fund’s net assets attributable to investments directly providing investment exposure to the type of investments suggested by its name (e.g., the value of stocks, or the value of derivative instruments such as futures, options or options on futures), but also the amount of the Fund’s net assets that are

 

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segregated on the Fund’s books and records, as required by applicable regulatory guidance, or otherwise used to cover such investment exposure. The Board of Trustees has adopted a policy to provide investors with at least 60 days’ notice prior to changes in a Fund’s name policy. In addition, pursuant to an exemptive order received from the SEC, certain Funds have committed to invest between 85% and 100% of their assets in the securities comprising their underlying indexes.

Equity Securities

The market price of securities owned by a Fund may go up or down, sometimes rapidly or unpredictably. Securities may decline in value due to factors affecting securities markets generally or particular industries represented in the securities markets. The value of a security may decline due to general market conditions not specifically related to a particular company, such as real or perceived adverse economic conditions, changes in the general outlook for corporate earnings, changes in interest or currency rates, or adverse investor sentiment generally. They may also decline due to factors 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. The Funds are particularly sensitive to these market risks.

Foreign Securities

The Funds may invest in securities principally traded outside of the U.S. or in foreign issuers. Foreign securities may involve special risks due to foreign economic, political, and legal developments, including unfavorable changes in currency exchange rates, exchange control regulation (including currency blockage), expropriation or nationalization of assets, confiscatory taxation, taxation of income earned in foreign nations and withholding of portions of interest and dividends in certain countries, and the possible difficulty of obtaining and enforcing judgments against foreign entities.. Default in foreign government securities, political or social instability or diplomatic developments which could affect investments in securities of issuers in foreign nations. In addition, in many countries there is less publicly available information about issuers than is available in reports about companies in the United States. Foreign companies are not generally subject to uniform accounting, auditing and financial reporting standards, and auditing practices and requirements may differ from those applicable to U.S. companies. The growing interconnectivity of global economies and financial markets has increased the possibilities that conditions in any one country or region could have an adverse impact on issuers of securities in a different country or region.

In addition, the securities of some foreign governments, companies, and securities markets are less liquid, and may be more volatile, than comparable domestic issuers. Some foreign investments may be subject to brokerage commissions and fees that are higher than those applicable to U.S. investments. A Fund also may be affected by different settlement practices or delayed settlements in some foreign markets. Furthermore, some foreign jurisdictions regulate and limit U.S. investments in the securities of certain issuers.

Emerging Market Securities.  The risks described above apply to a heightened degree when a Fund invests in securities of companies in developing countries (“emerging markets”). See the below discussion of considerations regarding investments in Latin American countries, including Brazil and Mexico, as well as China, India, Taiwan and certain European countries, including Russia. Investing in emerging market countries involves risks not typically associated with investing in U.S. securities and subjects a Fund to risks greater than, or in addition to, the risks of investing in foreign, developed countries. These include greater risks of nationalization or expropriation of assets and confiscatory taxation; currency devaluations and other currency exchange rate fluctuations; greater social, economic, and political uncertainty; greater uncertainty in the supervision and regulation of the securities markets and the participants in those markets; controls on foreign investment and limitations on repatriation of invested capital and on a Fund’s ability to exchange local currencies for U.S. dollars; unavailability of currency hedging techniques in certain emerging market countries; a difference in, or lack of, auditing and financial reporting standards, possibly resulting in the unavailability of material information about issuers; risk that it may be more difficult to obtain and/or enforce a judgment in a court outside of the United States; and greater price volatility, substantially less liquidity, and significantly smaller market capitalization of securities markets. In addition, a number of emerging market countries restrict foreign investment in their securities, to varying degrees. High rates of inflation and rapid fluctuations in inflation rates have had, and may continue to have, negative effects on the

 

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economies and securities markets of certain emerging market countries. Any change in the leadership or politics of emerging market countries, or countries that exercise a significant influence over those countries, may halt the expansion of, or reverse the liberalization of, foreign investment policies and could adversely affect existing investment opportunities. The securities markets of emerging market countries generally are smaller, less developed, less liquid, and more volatile than those of developed markets, including the U.S. Likewise, disclosure and regulatory standards tend to be less stringent and those markets tend to be subject to less monitoring and government enforcement of regulations may be arbitrary and difficult to predict.

Many emerging market countries have experienced substantial—in some cases, extremely high—rates of inflation for many years. Rapid fluctuations in such rates may continue to affect adversely those countries’ economies and securities markets. Emerging market economies generally depend on international trade to a significant degree. Accordingly, trade barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures imposed or negotiated with a country’s principal trading partners have had and may continue to have an adverse effect on an emerging market economy. Furthermore, the economies of emerging market countries may be based predominantly on a few industries or may depend significant on the revenue of particular commodities. The governments of many emerging market countries continue to exercise significant control over those their economies and may take actions that affect the ability of creditors to pay debt obligations.

Investment-related costs and custodial services tend to be higher in emerging market countries relative to those of developed countries, which may reduce a Fund’s investment returns. Emerging market countries are subject to risks associated with political uncertainty, instability, risk of war, terrorism, nationalization, limitations on the removal of funds or other assets or diplomatic developments affecting U.S. investments. There is no assurance that such adverse political changes will not cause a Fund to suffer losses of investments in emerging market countries.

Exposure to Securities or Issuers in Specific Foreign Countries or Regions

Some Funds focus their investments in particular geographical regions or countries. In addition to the risks of investing in foreign securities, discussed above, such Funds may be exposed to special risks that are specific to the country or region in which they focus their investments. Furthermore, Funds with such a focus may be subject to additional risks associated with events in nearby countries or regions or those of a country’s principal trading partners. Additionally, some Funds have an investment focus in a country or region that is an emerging market and, therefore, are subject to heightened risks relative to Funds that focus their investments in more developed countries or regions. The discussion below highlights the general risks associated with the specific countries or regions in which some of the Funds invest.

Exposure to European Companies

Funds that invest in European companies may be subject to political, social and economic risks particular to the European markets. The securities markets of many European countries are relatively small, with the majority of the market capitalization and trading volume concentrated in a limited number of companies, representing a small number of industries. Consequently, a Fund exposed to the securities of European companies may experience greater price volatility and significantly lower liquidity than a portfolio invested in securities of U.S. companies. European markets may be subject to greater influence by adverse events generally affecting the market for securities and financial instruments, and by large investors trading significant blocks of securities, than is usual in the U.S. In addition, settlements may in some instances be subject to delays and related administrative uncertainties.

Foreign investment in European countries may be restricted or controlled to varying degrees. Such restrictions or controls at times may limit or preclude investment in specific securities and increase the cost and expenses of an investment. For example, certain countries require governmental approval prior to investments by foreign persons, limit the amount of investment by foreign persons in a particular company or limit the investment by foreign persons to only a specific class of securities of a company, which may have less advantageous terms than a class of securities available for purchase by nationals. In addition, the repatriation of investment income and capital from some European countries is regulated, in some cases, requiring advance governmental notification or approval. Investments in securities of these countries could be adversely affected by delays in, or a government’s refusal to grant, any required approval for repatriation.

 

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Some European issuers are not subject to the same degree of regulation as are U.S. issuers with respect to such matters as insider trading rules, restrictions on market manipulation, shareholder proxy requirements, and timely disclosure of information. The reporting, accounting, and auditing standards of European countries differ from U.S. standards in important respects. In general, less information is available to investors in European companies than to investors in U.S. companies.

Most developed countries in Western Europe are members of the European Union and the Economic and Monetary Union of the European Union (the “EMU”). The EMU requires compliance with restrictions on inflation rates, deficits, interest rates, debt levels and fiscal and monetary controls, each of which may significantly affect every country in Europe. The European Union and EMU have reduced or eliminated trade and regulatory barriers among member countries and have generally increased the interconnectedness of the economies of European countries. As a result, a particular European country’s economy may be less insulated from adverse events in the region. Declining rates of imports or exports, changes in governmental regulations on trade, changes in the exchange rate of the euro, and recessions among EU members could therefore have a significant adverse effect on the entire European region as well as on principal trading partners outside Europe.

Investment in emerging market countries within Europe may be subject to special risks due to the inexperience of financial intermediaries, the lack of certain technologies and the lack of a sufficient capital base to expand business operations. Additionally, former Communist regimes of a number of Eastern European countries have expropriated a large amount of property, the claims of which have not been entirely settled. There can be no assurance that an investment in these European countries would not also be expropriated, nationalized, or otherwise confiscated, resulting in a loss of the Fund’s investment in such country.

Exposure to Russian Companies. Investments in securities of Russian companies are subject to special legal, regulatory, monetary and economic risks. Over the past century, Russia has experienced political, social and economic turbulence and endured decades of Communist rule, under which tens of millions of its citizens were collectivized into state agricultural and industrial enterprises. Since the collapse of the Soviet Union, Russia’s government has become more democratic and open, but recent events may be seen as reversing this trend. Economic uncertainty in the face of these political developments remains high. In the current political and social environment, there exists an increased risk that the Russian government could return to a more centrally planned economy, potentially resulting in confiscatory taxation and nationalization or expropriation of assets invested in Russia.

The Russian economy is heavily dependent upon the export of a range of commodities, including most industrial metals, forestry products, oil, and gas. Accordingly, the Russian economy is strongly affected by international commodity prices and is particularly vulnerable to any weakening in the global demand for these products.

Foreign investors face a high degree of currency risk when investing in Russian securities and may not have access to currency hedging instruments. In August 1998, Russia devalued the ruble, defaulted on short-term domestic bonds, and imposed a moratorium on the repayment of its international debt and the restructuring of repayment terms. These actions have negatively affected the Russian economy. The risk of further devaluations continues. In addition, the Russian government could impose capital controls on foreign portfolio investments in the event of extreme financial or political crisis. Such capital controls would prevent the sale of a portfolio of foreign assets and the repatriation of investment income and capital.

Relative to domestic securities, brokerage commissions and other fees generally are higher for securities traded in Russian markets. There may be less government supervision and regulation of Russian stock exchanges, currency markets, trading systems and brokers. The procedures and rules governing transactions and custody in Russia may involve delays in payment, delivery or recovery of money or investments. In particular, Russia’s system of share registration and custody creates certain risks of investment loss that are not typically associated with investments in other securities markets.

Exposure to Latin American Companies

The economies of Latin American countries are considered emerging market economies. Therefore, the risks of foreign investments in these countries will be magnified, as discussed above. In addition, currency

 

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devaluations in any one Latin American country could affect the entire region. Some Latin American currencies have experienced steady devaluations relative to the U.S. dollar or have had to make major adjustments in their currencies from time to time. In addition, governments of many Latin American countries have exercised and continue to exercise substantial influence over many aspects of the private sector in such countries. Governmental actions in the future could have a significant effect on economic conditions in Latin American countries, which could affect the companies in which a Fund invests, and therefore, the value of Fund shares.

High interest, inflation and unemployment rates are characteristic of Latin American economies. Many countries have experienced substantial, and in some periods extremely high, rates of inflation for many years. For companies that keep accounting records in the local currency, inflation accounting rules require, for both tax and accounting purposes, that certain assets and liabilities be restated on the company’s balance sheet in order to express items in terms of currency of constant purchasing power. Inflation accounting could indirectly generate losses or profits for certain Latin American companies. Inflation and rapid fluctuations in inflation rates could continue to have negative effects on Latin American economies and securities markets. Commodities such as agricultural products, minerals and metals represent a significant percentage of exports for many Latin American countries, and, consequently, the economies of these countries are particularly sensitive to fluctuations in commodity prices.

In some Latin American countries, substantial limitations may affect a foreign investor’s ability to repatriate investment income, capital or the proceeds or sales of securities. A Fund could be adversely affected by such limitations or by a delay in, or refusal to grant, any required governmental approval for repatriation of capital.

Some Latin American countries have entered into regional trade agreements designed to, among other things, reduce barriers among countries, increase competition among companies and reduce government subsidies in certain industries. No assurance can be given that these will be successful in the long term, or that they will result in the economic stability intended. These trade arrangements may not be fully implemented, or may be partially or completely unwound. A significant participant could choose to abandon a trade agreement, which could diminish its credibility and influence. Such occurrences could have adverse effects on the markets of participating and non-participating countries, including the sharp appreciation or depreciation of participants’ national currencies and a significant increase in exchange rate volatility, a resurgence in economic protectionism, an undermining of confidence in the Latin American markets, an undermining of Latin American economic stability, the collapse or slowdown of the drive towards Latin American economic unity or a reversion of the attempts to lower government debt and inflation rates that were introduced in anticipation of such trade agreements. Such developments could have an adverse effect on a Fund’s investments in securities exposed to Latin America generally or in specific countries participating in such trade agreements.

Exposure to Brazilian Companies.  Securities or financial instruments with exposure to Brazil’s financial markets may be subject to political, social and economic risks associated with investment in Brazil. The Brazilian government has exercised, and continues to exercise, substantial influence over many aspects of the private sector by legislation and regulation, including regulation of prices and wages. The government recently began a program of privatization, particularly in the telecommunications and energy sectors. The outcome of regulatory decisions related to industry privatization is unpredictable and such decisions have had, and may in the future have, an adverse effect on the interests of private investors. Continued privatization could adversely affect the Brazilian economy and could result in significant losses for investors in privatized industries.

Brazilian law imposes limitations affecting foreign investors in Brazilian companies. Under current law, a Fund may repatriate income received from dividends and interest earned on, and net realized capital gains from, its investments in Brazilian securities, but in the event that a significant imbalance in Brazil’s balance of payments develops or is foreseen, the National Monetary Council may, for a limited period, impose restrictions on foreign capital remittances abroad. Exchange control regulations, which may restrict repatriation of investment income, capital or the proceeds of securities sales by foreign investors, could limit the Fund’s ability to make sufficient distributions within time periods required to qualify for favorable U.S. tax treatment afforded to regulated investment companies. Further economic reforms or modifications to the existing policies by the Brazilian government could adversely affect the liquidity of the Brazilian stock market in the future.

The Brazilian real has been subject to significant devaluations and is generally more volatile than the U.S. dollar. Such currency volatility could affect a Fund’s returns in the future. The real may also be affected by currency volatility elsewhere in Latin America and the U.S. In addition to currency volatility, the Brazilian

 

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economy has been affected by high levels of government debt, which has been as high as 51% of gross domestic product.

Exposure to Mexican Companies.  Investments in Mexican companies may be subject to additional risks related to the Mexican economy, including risks attributable to political, social, monetary and regulatory uncertainty in the region. High rates of interest, inflation, and unemployment characterize some Central and South American economies. Events, such as currency devaluations, affecting the economies of Central and South America may have significant effects on the Mexican economy.

Exposure to Asian Companies

Investments in Asian issuers may be affected by political, social and economic conditions in Asia. Some Asian economies have experienced over-extension of credit, currency devaluations and restrictions, rising unemployment, high inflation, decreased exports and economic recessions. Economic events in any one Asian country or market could have a significant effect on the entire region, as well as on principal trading partners outside of Asia. For instance, because the economies of Asian countries are related, it is not uncommon for many of the countries to be in recessions at the same time.

Exposure to Chinese Companies.  Investment in companies economically tied to China is subject to legal, regulatory, monetary and economic risks. China is dominated by the one-party rule of the Communist Party and, therefore, investments in China are subject to risks associated with greater control over the economy, political and legal uncertainties, and currency fluctuations. In addition, Chinese investments involve the specific risk that the Chinese government may decide not to continue to support the economic reform programs implemented in 1978 and could possibly return to the completely centrally planned economy that existed prior to 1978. The Chinese government exercises significant control over China’s economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Other risks associated with investments in China are the risk of confiscatory taxation and nationalization or expropriation of assets.

The Chinese securities markets are emerging markets characterized by a relatively small number of equity issues and relatively low trading volume, resulting in substantially less liquidity and greater price volatility. Companies in the Chinese region may not be subject to the same disclosure, accounting, auditing and financial reporting standards and practices as U.S. companies. Thus, there may be less information publicly available about Chinese companies than about most U.S. companies. Compared to the U.S. securities markets, there may be less government supervision and regulation of Chinese stock exchanges, currency markets, trading systems and brokers. Brokerage commissions and other fees generally are higher for securities traded in Chinese markets. The procedures and rules governing transactions and custody in China also may involve delays in payment, delivery or recovery of money or investments.

Exposure to Taiwanese Companies.  Although Taiwan has experienced rapid growth in recent years, it is still considered to be an emerging market country. Taiwan’s financial markets are generally underdeveloped and lack regulatory transparency. Some companies in Taiwan may have less established shareholder governance and disclosure standards than those in the U.S. Many Taiwanese companies are closely controlled by family and institutional investors whose investment decisions might be difficult to predict based on standard U.S.-based equity analysis. Consequently, certain such investments could be vulnerable to unfavorable decisions by management or shareholders.

Taiwan has few natural resources and must export to pay for its imports of basic requirements. The Taiwanese economy is heavily dependent upon commodity prices and international trade, which may make its economy less stable. Taiwan may also suffer from debt burdens and high and volatile inflation rates. Taiwan, like some emerging market countries, may experience currency devaluations and economic recessions, causing a negative effect on its economy and securities market. Taiwan’s government is generally authoritarian and may periodically suppress civil dissent. Disparities of wealth, the pace and success of democratization and capital market development, as well as ethnic, religious and racial disaffection, have led to social unrest, violence and labor unrest as in many emerging market countries. Unanticipated political or social developments in the future could result in sudden and significant changes in the Taiwanese economy. Taiwan has also experienced natural disasters of varying degrees of severity, and the risks of such phenomena and the resulting damage continue to exist.

 

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Taiwan is an island located across the Taiwan Strait from mainland China. The Taiwanese government and the Chinese government dispute each other’s legitimacy. The Chinese government considers Taiwan to be part of greater China and, therefore, a territory that should be under its political control. This dispute and resulting political tension present a significant risk to Taiwan’s economic and political future. Investments with exposure to the Taiwanese economy are subject to additional risk tied to changes in the relationship between China and Taiwan, as well as the geopolitical concerns of countries with interests in the region, such as the U.S. and Russia.

Exposure to Japanese Companies. The performance of Funds investing in companies economically tied to Japan may be affected by political, social and economic conditions in Japan. In addition, the Japanese economy may be affected by Southeast Asian and Chinese consumer demands and the state of the Southeast Asian and Chinese economies.

The Japanese economy and financial markets produced disappointing returns from 1990 to 2003. Over that period, and since then, the Japanese stock market, as measured by the Tokyo Stock Price Index, has been volatile. The Japanese economy faced a number of problems such as non-performing loans, deflation, a large government budget deficit, and low interest rates. A number of high profile bankruptcies occurred in the construction, real-estate and retail sectors. While many structural improvements have been made at the corporate level since 2003, problems persist, most notably, a large government budget deficit.

Japanese institutional investors, such as banks, insurance companies and pension funds, have been large sellers of equities, particularly since 2001. Banks and insurance companies in Japan have been restructuring, and selling shareholdings as part of this process, although this selling has diminished over time. In addition, Japanese pension funds invest in fixed interest investments and tend to sell shares in connection with portfolio rebalancing when the equity market rises. Such selling practices could negatively affect Japanese equity returns.

Furthermore, poor performance of the global economy could negatively affect equity returns in Japan. In particular, in the recent past, Japan’s economy and stock market have had a strong correlation with the U.S. economic cycle and U.S. stock markets and, thus, Japan’s economy could be negatively affected by economic trouble in the U.S. Japan also has a growing economic relationship with China and other Southeast Asia countries, and therefore, Japan’s economy could also be adversely affected by economic trouble in those countries.

Overseas trade is important to Japan’s economy. Japan has few natural resources and must export to pay for its imports of these basic requirements. Japan has also experienced natural disasters of varying degrees of severity, and the risks of such phenomena and the resulting damage continue to exist.

The Japanese Yen has appreciated against the U.S. dollar since 1986. At times, the Japanese Yen has been volatile and such currency volatility could affect returns in the future. The Japanese Yen may also be affected by currency volatility elsewhere in Asia, especially Southeast Asia.

Some companies in Japan may have less established shareholder governance and disclosure standards than those of U.S. companies. Some Japanese companies are controlled by family and institutional investors whose investment decisions may be hard to predict based on standard U.S.-based equity analysis. Consequently, certain Fund investments may be vulnerable to unfavorable decisions by management or shareholders.

Exposure to South Korean Companies. Investments in companies economically tied to South Korea are subject to additional risks particular to the South Korean economy, including risks associated with political, social, monetary and regulatory uncertainty.

South Korea’s financial markets are generally underdeveloped and lack regulatory transparency. Despite dramatic growth in recent years, South Korea retains many characteristics and risks associated with emerging market countries. See “Emerging Market Securities” above. The restructuring of the South Korean economy and the need to create a more liberalized economy with a mechanism for bankrupt firms to exit the market remain important unfinished economic reform tasks. These factors could adversely affect the South Korean economy and cause a diversion of corporate investment to China and other lower wage countries. South Korea’s economic growth potential is susceptible to problems from large scale emigration, rigid labor regulations and ongoing labor relations issues. In addition, some companies in the region may have less established shareholder governance and

 

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disclosure standards than those applicable to U.S. companies The largest South Korean conglomerates, or chaebol, are closely controlled by family and financial institutional investors, whose investment decisions could be hard to predict based on standard U.S.-based equity analysis. Consequently, certain Fund investments may be vulnerable to unfavorable decisions by management or shareholders.

North and South Korea each have substantial military capabilities, and historical tensions between the two present the ongoing risk of war. Any outbreak of hostilities between the two countries could have a severe adverse effect on the South Korean economy and its securities markets.

Exposure to Indian Companies. The value of a Fund’s investments in securities or financial instruments with economic exposure to India may be affected by political and economic developments in India, including social, religious or regional tensions, changes in government regulation and government intervention, high rates of inflation or interest rates and withholding tax affecting India. In addition, unanticipated political or social developments could affect the value of investments exposed to companies in India and the availability of additional investments providing economic exposure to companies located or operating in India. Furthermore, the risk of monsoons and other natural disasters in South Asia also can affect the value of these investments. However, the growing interconnectivity of global economies and financial markets has increased opportunities for Indian companies, particularly in the area of technology and service outsourcing.

Securities of many issuers in the Indian market may be less liquid and more volatile than securities of comparable domestic issuers. India has less developed clearance and settlement procedures, and there have been times when settlements have been unable to keep pace with the volume of securities transactions and have been significantly delayed. The Indian stock exchanges have in the past been subject to repeated closure and there can be no certainty that this will not recur. In addition, significant delays are common in registering transfers of securities, and a Fund may be unable to sell securities until the registration process is completed and may experience delays in receipt of dividends and other entitlements. The risk of loss may also be increased because there may be less information available about Indian issuers because they are not subject to the extensive accounting, auditing and financial reporting standards and practices that are applicable in the U.S. There is also a lower level of regulation and monitoring of the Indian securities market generally as well as of its participants, compared to other more developed markets.

Foreign investment in the securities of issuers in India is usually restricted or controlled to some degree. In India, “Foreign Institutional Investors” (“FIIs”) may predominately invest in exchange-traded securities (and securities to be listed, or those approved on the over-the-counter exchange of India) subject to the conditions specified in the guidelines for Direct Foreign Investment by FIIs in India (the “Guidelines”), published in a Press Note dated September 14, 1992, issued by the Government of India, Ministry of Finance, Investment Division. The Guidelines require FIIs to observe certain investment restrictions, including account ownership ceilings, and only registered FIIs and non-Indian mutual funds that comply with certain statutory conditions may make direct portfolio investments in exchange-traded Indian securities. Income, gains and initial capital with respect to such investments are freely repatriable, subject to payment of applicable Indian taxes. Even though the Fund will not directly purchase Indian equity securities, the availability of financial instruments with exposure to Indian financial markets may be substantially limited by the restrictions on FIIs.

Exposure to Australian Companies

The Australian economy is subject to political, social and economic risks particular to Australia, and the agricultural and mining sectors of Australia’s economy account for the majority of its exports. Therefore, Australia is susceptible to fluctuations in the commodity markets and, in particular, in the price and demand for agricultural products and natural resources. Any negative changes in these sectors could have an adverse impact on the Australian economy.

Futures Contracts and Related Options

The Funds may purchase or sell stock index futures contracts and options thereon as a substitute for a comparable market position in the underlying securities or to satisfy regulatory requirements. A futures contract generally obligates the seller to deliver (and the purchaser to take delivery of) the specified commodity on the

 

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expiration date of the contract. A stock index futures contract obligates the seller to deliver (and the purchaser to take) an amount of cash equal to a specific dollar amount (the contract multiplier) multiplied by the difference between the final settlement price of a specific stock index futures contract and the price at which the agreement is made. No physical delivery of the underlying stocks in the index is made.

The Funds generally choose to engage in closing or offsetting transactions before final settlement wherein a second identical futures contract is sold to offset a long position (or bought to offset a short position). In such cases the obligation is to deliver (or take delivery of) cash equal to a specific dollar amount (the contract multiplier) multiplied by the difference between the price of the offsetting transaction and the price at which the original contract was entered into. If the original position entered into is a long position (futures contract purchased) there will be a gain (loss) if the offsetting sell transaction is done at a higher (lower) price, inclusive of commissions. If the original position entered into is a short position (futures contract sold) there will be a gain (loss) if the offsetting buy transaction is done at a lower (higher) price, inclusive of commissions.

Whether a Fund realizes a gain or loss from futures activities depends generally upon movements in the underlying commodity. The extent of the Fund’s loss from an unhedged short position in futures contracts is potentially unlimited. The Funds may engage in related closing transactions with respect to options on futures contracts. The Funds intend to engage in transactions in futures contracts that are traded on a U.S. exchange or board of trade or that have been approved for sale in the United States by the CFTC.

When a Fund purchases or sells a stock index futures contract, or sells an option thereon, the Fund “covers” its position. To cover its position, a Fund may enter into an offsetting position or segregate with its custodian bank or on the books and records of the Fund (and mark-to-market on a daily basis) cash or liquid instruments that, when added to any amounts deposited with a futures commission merchant as margin, are equal to the market value of the futures contract or otherwise “cover” its position.

The CFTC has eliminated limitations on futures trading by certain regulated entities, including registered investment companies, and consequently registered investment companies may engage in unlimited futures transactions and options thereon provided that the investment adviser to the company claims an exclusion from regulation as a commodity pool operator. In connection with its management of the Trust, the Advisor has claimed such an exclusion from registration as a commodity pool operator under the Commodity Exchange Act (the “CEA”). Therefore, it is not subject to the registration and regulatory requirements of the CEA. There are no limitations on the extent to which each Fund may engage in transactions involving futures and options thereon, except as set forth in the Funds’ Prospectus and SAI.

Upon entering into a futures contract, each Fund will be required to deposit with the broker an amount of cash or cash equivalents in the range of approximately 5% to 7% of the contract amount (this amount is subject to change by the exchange on which the contract is traded). This amount, known as “initial margin,” is in the nature of a performance bond or good faith deposit on the contract and is returned to 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, a 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 Fund may cover its long position in a futures contract by taking a short position in the instruments underlying the futures contract, or by taking positions in instruments the prices of which are expected to move relatively consistently with the futures contract. A Fund may cover its short position in a futures contract by taking a long position in the instruments underlying the futures contract, or by taking positions in instruments, the prices of which are expected to move relatively consistently inversely to the futures contract. A Fund may “cover” its short position in a futures contract by purchasing a call option on the same futures contract with a strike price (i.e., an exercise price) as low or lower than the price of the futures contract, or, if the strike price of the call is greater than the price of the futures contract, the Fund will earmark or segregate cash or liquid instruments equal in value to the difference between the strike price of the call and the price of the future. A Fund may cover its short position in a futures contract by taking a long position in the instruments underlying the futures contract, or by taking positions in instruments, the prices of which are expected to move relatively consistently with a long position in the futures contract. A Fund may cover long or short positions in futures by earmarking or segregating with its custodian bank

 

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or on the books and records of the Funds (and mark-to-market on a daily basis) cash or liquid instruments that, when added to any amounts deposited with a futures commission merchant as margin, are equal to the market value of the futures contract or otherwise “cover” its position.

A Fund may cover its sale of a call option on a futures contract by taking a long position in the underlying futures contract at a price less than or equal to the strike price of the call option, or, if the long position in the underlying futures contract is established at a price greater than the strike price of the written (sold) call, the Fund will earmark or maintain in a segregated account liquid instruments equal in value to the difference between the strike price of the call and the price of the future. A Fund may also cover its sale of a call option by taking positions in instruments, the prices of which are expected to move relatively consistently with the call option. A Fund may cover its sale of a put option on a futures contract by taking a short position in the underlying futures contract at a price greater than or equal to the strike price of the put option, or, if the short position in the underlying futures contract is established at a price less than the strike price of the written put, the Fund will segregate cash or liquid instruments equal in value to the difference between the strike price of the put and the price of the future. A Fund may also cover its sale of a put option by taking positions in instruments the prices of which are expected to move relatively consistently with the put option.

Although the Funds intend to sell futures contracts only if there is an active market for such contracts, no assurance can be given that a liquid market will exist for any particular contract at any particular time. Many futures exchanges and boards of trade limit the amount of fluctuation permitted in futures contract prices during a single trading day. Once the daily limit has been reached in a particular contract, no trades may be made that day at a price beyond that limit or trading may be suspended for specified periods during the day. Futures contract prices could move to the limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of futures positions and potentially subjecting a Fund to substantial losses. If trading is not possible, or if a Fund determines not to close a futures position in anticipation of adverse price movements, the Fund will be required to make daily cash payments of variation margin. The risk that the Fund will be unable to close out a futures position will be minimized by entering into such transactions on a national securities exchange with an active and liquid secondary market.

Forward Contracts

A principal investment strategy of the Funds is to enter into Financial Instruments, which may include forward contracts, and for the Short ProShares, may be the primary or sole investment strategy of the Funds. The Funds may enter into equity, equity index or interest rate forward contracts for purposes of attempting to gain exposure to an index or group of securities without actually purchasing these securities, or to hedge a position. Forward contracts are two-party contracts pursuant to which one party agrees to pay the counterparty a fixed price for an agreed-upon amount of commodities, securities, or the cash value of the commodities, securities or the securities index, at an agreed upon date. When required by law, a Fund will segregate liquid assets in an amount equal to the value of the Fund’s total assets committed to the consummation of such forward contracts. Obligations under forward contracts so covered will not be considered senior securities for purposes of a Fund’s investment restriction concerning senior securities. Because they are two-party contracts and because they may have terms greater than seven days, forward contracts may be considered to be illiquid for purposes of the Fund’s illiquid investment limitations. A Fund will not enter into a forward contract unless the Advisor believes that the other party to the transaction is creditworthy. A Fund bears the risk of loss of the amount expected to be received under a forward contract in the event of the default or bankruptcy of a counterparty. If such a default occurs, a Fund will have contractual remedies pursuant to the forward contract, but such remedies may be subject to bankruptcy and insolvency laws, which could affect the Fund’s rights as a creditor.

Index Options

The Funds may purchase and write options on stock indexes to create investment exposure consistent with their investment objectives, to hedge or limit the exposure of their positions, or to create synthetic money market positions.

A stock index fluctuates with changes in the market values of the stocks included in the index. Options on stock indexes give the holder the right to receive an amount of cash upon exercise of the option. Receipt of this cash amount will depend upon the closing level of the stock index upon which the option is based being greater than (in

 

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the case of a call) or less than (in the case of a put) the exercise price of the option. The amount of cash received, if any, will be the difference between the closing price of the index and the exercise price of the option, multiplied by a specified dollar multiple. The writer (seller) of the option is obligated, in return for the premiums received from the purchaser of the option, to make delivery of this amount to the purchaser. All settlements of index options transactions are in cash.

Index options are subject to substantial risks, including the risk of imperfect correlation between the option price and the value of the underlying securities composing the stock index selected and the risk that there might not be a liquid secondary market for the option. Because the value of an index option depends upon movements in the level of the index rather than the price of a particular stock, whether a Fund will realize a gain or loss from the purchase or writing (sale) of options on an index depends upon movements in the level of stock prices in the stock market generally or, in the case of certain indexes, in an industry or market segment, rather than upon movements in the price of a particular stock. This requires different skills and techniques than are required for predicting changes in the price of individual stocks. A Fund will not enter into an option position that exposes the Fund to an obligation to another party, unless the Fund either (i) owns an offsetting position in securities or other options and/or (ii) earmarks or segregates with the Fund’s custodian bank cash or liquid instruments that, when added to the premiums deposited with respect to the option, are equal to the market value of the underlying stock index not otherwise covered.

The Funds may engage in transactions in stock index options listed on national securities exchanges or traded in the over-the-counter (“OTC”) market as an investment vehicle for the purpose of realizing the Fund’s investment objective. Options on indexes are settled in cash, not by delivery of securities. The exercising holder of an index option receives, instead of a security, cash equal to the difference between the closing price of the securities index and the exercise price of the option.

Some stock index options are based on a broad market index such as the S&P 500 Index, the NYSE Composite Index, or the AMEX Major Market Index, or on a narrower index such as the Philadelphia Stock Exchange Over-the-Counter Index. Options currently are traded on the Chicago Board Options Exchange (the “CBOE”), the AMEX, and other exchanges (“Exchanges”). Purchased OTC options and the cover for written OTC options will be subject to the relevant Fund’s 15% limitation on investment in illiquid securities. See “Illiquid Securities.”

Each of the Exchanges has established limitations governing the maximum number of call or put options on the same index which may be bought or written (sold) by a single investor, whether acting alone or in concert with others (regardless of whether such options are written on the same or different Exchanges or are held or written on one or more accounts or through one or more brokers). Under these limitations, option positions of all investment companies advised by the same investment adviser are combined for purposes of these limits. Pursuant to these limitations, an Exchange may order the liquidation of positions and may impose other sanctions or restrictions. These position limits may restrict the number of listed options which a Fund may buy or sell; however, the Advisor intends to comply with all limitations.

Options on Securities

The Funds may buy and write (sell) options on securities for the purpose of realizing their investment objective. By buying a call option, a Fund has the right, in return for a premium paid during the term of the option, to buy the securities underlying the option at the exercise price. By writing a call option on securities, a Fund becomes obligated during the term of the option to sell the securities underlying the option at the exercise price if the option is exercised. By buying a put option, a Fund has the right, in return for a premium paid during the term of the option, to sell the securities underlying the option at the exercise price. By writing a put option, a Fund becomes obligated during the term of the option to purchase the securities underlying the option at the exercise price if the option is exercised. During the term of the option, the writer may be assigned an exercise notice by the broker-dealer through whom the option was sold. The exercise notice would require the writer to deliver, in the case of a call, or take delivery of, in the case of a put, the underlying security against payment of the exercise price. This obligation terminates upon expiration of the option, or at such earlier time that the writer effects a closing purchase transaction by purchasing an option covering the same underlying security and having the same exercise price and expiration date as the one previously sold. Once an option has been exercised, the writer may not execute a closing purchase transaction. To secure the obligation to deliver the underlying security in the case of a call option, the

 

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writer of a call option is required to deposit in escrow the underlying security or other assets in accordance with the rules of the Options Clearing Corporation (the “OCC”), an institution created to interpose itself between buyers and sellers of options. The OCC assumes the other side of every purchase and sale transaction on an exchange and, by doing so, gives its guarantee to the transaction. When writing call options on securities, a Fund may cover its position by owning the underlying security on which the option is written. Alternatively, the Fund may cover its position by owning a call option on the underlying security, on a share-for-share basis, which is deliverable under the option contract at a price no higher than the exercise price of the call option written by the Fund or, if higher, by owning such call option and depositing and segregating cash or liquid instruments equal in value to the difference between the two exercise prices. In addition, a Fund may cover its position by segregating cash or liquid instruments equal in value to the exercise price of the call option written by the Fund. When a Fund writes a put option, the Fund will segregate with its custodian bank cash or liquid instruments having a value equal to the exercise value of the option. The principal reason for a Fund to write call options on stocks held by the Fund is to attempt to realize, through the receipt of premiums, a greater return than would be realized on the underlying securities alone.

If a Fund that writes an option wishes to terminate the Fund’s obligation, the Fund may effect a “closing purchase transaction.” The Fund accomplishes this by buying an option of the same series as the option previously written by the Fund. The effect of the purchase is that the writer’s position will be canceled by the OCC. However, a writer may not effect a closing purchase transaction after the writer has been notified of the exercise of an option. Likewise, a Fund which is the holder of an option may liquidate its position by effecting a “closing sale transaction.” The Fund accomplishes this by selling an option of the same series as the option previously purchased by the Fund. There is no guarantee that either a closing purchase or a closing sale transaction can be affected. If any call or put option is not exercised or sold, the option will become worthless on its expiration date. A Fund will realize a gain (or a loss) on a closing purchase transaction with respect to a call or a put option previously written by the Fund if the premium, plus commission costs, paid by the Fund to purchase the call or put option to close the transaction is less (or greater) than the premium, less commission costs, received by the Fund on the sale of the call or the put option. The Fund also will realize a gain if a call or put option which the Fund has written lapses unexercised, because the Fund would retain the premium.

Although certain securities exchanges attempt to provide continuously liquid markets in which holders and writers of options can close out their positions at any time prior to the expiration of the option, no assurance can be given that a market will exist at all times for all outstanding options purchased or sold by a Fund. If an options market were to become unavailable, the Fund would be unable to realize its profits or limit its losses until the Fund could exercise options it holds, and the Fund would remain obligated until options it wrote were exercised or expired. Reasons for the absence of liquid secondary market on an exchange include the following: (i) there may be insufficient trading interest in certain options; (ii) restrictions may be imposed by an exchange on opening or closing transactions or both; (iii) trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of options; (iv) unusual or unforeseen circumstances may interrupt normal operations on an exchange; (v) the facilities of an exchange or the OCC may not at all times be adequate to handle current trading volume; or (vi) one or more exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class or series of options) would cease to exist, although outstanding options on that exchange that had been issued by the OCC as a result of trades on that exchange would continue to be exercisable in accordance with their terms.

Swap Agreements

A principal investment strategy of the Funds is to enter into Financial Instruments, which may include swap agreements, and, for the Short ProShares, that may be the primary or sole investment strategy (along with selling securities short). The Funds may enter into equity, equity index or interest rate swap agreements for purposes of attempting to gain exposure to an index or group of securities without actually purchasing those securities, or to hedge a position. Swap agreements are two-party contracts entered into primarily by institutional investors for periods ranging from a day to more than one year. In a standard “swap” transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross returns to be exchanged or “swapped” between the parties are calculated with respect to a “notional amount,” i.e., the return on or increase in value of a particular dollar amount invested in a “basket” of securities representing a particular index or group of securities. Forms of swap agreements include interest rate caps, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest

 

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rates exceed a specified rate, or “cap”; interest rate floors, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates fall below a specified level, or “floor”; and interest rate collars, under which a party sells a cap and purchases a floor or vice versa in an attempt to protect itself against interest rate movements exceeding given minimum or maximum levels.

Most swap agreements entered into by the Funds calculate the obligations of the parties to the agreement on a “net basis.” Consequently, a Fund’s current obligations (or rights) under a swap agreement will generally be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement (the “net amount”).

A Fund’s current obligations under a swap agreement will be accrued daily (offset against any amounts owing to the Fund) and any accrued but unpaid net amounts owed to a swap counterparty will be covered by segregating or earmarking assets determined to be liquid. Obligations under swap agreements so covered will not be construed to be “senior securities” for purposes of a Fund’s investment restriction concerning senior securities. Because they are two-party contracts and because they may have terms of greater than seven days, swap agreements may be considered to be illiquid for purposes of the Funds’ illiquid investment limitations. A Fund will not enter into any swap agreement unless the Advisor believes that the other party to the transaction is creditworthy. A Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty. If such a default occurs, a Fund will have contractual remedies pursuant to the swap agreements, but such remedies may be subject to bankruptcy and insolvency laws which could affect the Fund’s right as a creditor.

Each Fund may enter into swap agreements to invest in a market without owning or taking physical custody of securities in circumstances in which direct investment is restricted for legal reasons or is otherwise impracticable. The counterparty to any swap agreement will typically be a bank, investment banking firm or broker/dealer. On a long swap, the counterparty will generally agree to pay the Fund the amount, if any, by which the notional amount of the swap agreement would have increased in value had it been invested in the particular stocks, plus the dividends that would have been received on those stocks. The Fund will agree to pay to the counterparty a floating rate of interest on the notional amount of the swap agreement plus the amount, if any, by which the notional amount would have decreased in value had it been invested in such stocks. Therefore, the return to the Fund on any swap agreement should be the gain or loss on the notional amount plus dividends on the stocks less the interest paid by the Fund on the notional amount. As a trading technique, the Advisor may substitute physical securities with a swap agreement having risk characteristics substantially similar to the underlying securities.

Swap agreements typically are settled on a net basis, which means that the two payment streams are netted out, with the Fund receiving or paying, as the case may be, only the net amount of the two payments. Payments may be made at the conclusion of a swap agreement or periodically during its term. Swap agreements do not involve the delivery of securities or other underlying assets. Accordingly, the risk of loss with respect to swap agreements is limited to the net amount of payments that a Fund is contractually obligated to make. If the other party to a swap agreement defaults, a Fund’s risk of loss consists of the net amount of payments that such Fund is contractually entitled to receive, if any. The net amount of the excess, if any, of a Fund’s obligations over its entitlements with respect to each equity swap will be accrued on a daily basis and an amount of cash or liquid assets, having an aggregate NAV at least equal to such accrued excess will be earmarked or segregated by a Fund’s custodian. Inasmuch as these transactions are entered into for hedging purposes or are offset by earmarked or segregated cash or liquid assets, as permitted by applicable law, the Funds and their Advisor believe that transactions do not constitute senior securities within the meaning of the 1940 Act, and, accordingly, will not treat them as being subject to a Fund’s borrowing restrictions.

The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. As a result, the swap market has become relatively liquid in comparison with the markets for other similar instruments which are traded in the over-the-counter market. The Advisor, under the supervision of the Board of Trustees, is responsible for determining and monitoring the liquidity of the Funds’ transactions in swap agreements.

The use of equity swaps is a highly specialized activity which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions.

 

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Short Sales

The Funds may engage in short sales transactions. To complete such a transaction, a Fund must borrow the security to make delivery to the buyer. The Fund is then obligated to replace the security borrowed by borrowing the same security from another lender, purchasing it at the market price at the time of replacement or paying the lender an amount equal to the cost of purchasing the security. The price at such time may be more or less than the price at which the security was sold by the Fund. Until the security is replaced, the Fund is required to repay the lender any dividends or interest which accrues during the period of the loan. To borrow the security, the Fund also may be required to pay a premium, which would increase the cost of the security sold. The net proceeds of the short sale will be retained by the broker, to the extent necessary to meet the margin requirements, until the short position is closed out. A Fund also will incur transaction costs in effecting short sales.

A Fund will incur a loss as a result of a short sale if the price of the security increases between the date of the short sale and the date on which the Fund replaces the borrowed security. A Fund will realize a gain if the price of the security declines in price between those dates. The amount of any gain will be decreased, and the amount of any loss increased, by the amount of the premium, dividends or interest a Fund may be required to pay, if any, in connection with a short sale.

The Funds may make short sales “against the box,” i.e., when a security identical to or convertible or exchangeable into one owned by a Fund is borrowed and sold short. Whenever a Fund engages in short sales, it earmarks or segregates liquid securities in an amount that, when combined with the amount of collateral deposited with the broker in connection with the short sale, equals the current market value of the security sold short. The earmarked or segregated assets are marked to market daily.

The Funds will not sell short the equity securities of issuers contained in the NASDAQ-100 Index.

Depository Receipts

Some Funds may invest in American Depositary Receipts (“ADRs”). For many foreign securities, U.S. Dollar denominated ADRs, which are traded in the United States on exchanges or over-the-counter, are issued by domestic banks. ADRs represent the right to receive securities of foreign issuers deposited in a domestic bank or a correspondent bank. ADRs do not eliminate all the risk inherent in investing in the securities of foreign issuers. However, by investing in ADRs rather than directly in foreign issuers’ stock, the Funds can avoid currency risks during the settlement period for either purchase or sales.

In general, there is a large, liquid market in the United States for many ADRs. The information available for ADRs is subject to the accounting, auditing and financial reporting standards of the domestic market or exchange on which they are traded, which standards are more uniform and more exacting than those to which many foreign issuers may be subject. Certain ADRs, typically those denominated as unsponsored, require the holders thereof to bear most of the costs of such facilities, while issuers of sponsored facilities normally pay more of the costs thereof. The depository of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the issuer of the deposited securities or to pass through the voting rights to facility holders with respect to the deposited securities, whereas the depository of a sponsored facility typically distributes shareholder communications and passes through the voting rights.

The Funds may invest in both sponsored and unsponsored ADRs. Unsponsored ADRs programs are organized independently and without the cooperation of the issuer of the underlying securities. As result, available information concerning the issuers may not be as current for sponsored ADRs, and the prices of unsponsored depository receipts may be more volatile than if such instruments were sponsored by the issuer.

A Fund may also invest in Global Depository Receipts (“GDRs”). GDRs are receipts for shares in a foreign-based corporation traded in capital markets around the world. While ADRs permit foreign corporations to offer shares to American citizens, GDRs allow companies in Europe, Asia, the United States and Latin American to offer shares in many markets around the world.

 

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U.S. Government Securities

Each Fund also may invest in U.S. government securities in pursuit of their investment objectives, as “cover” for the investment techniques these Funds employ, or for liquidity purposes.

U.S. government securities include U.S. Treasury securities, which are backed by the full faith and credit of the U.S. Treasury and which differ only in their interest rates, maturities, and times of issuance. U.S. Treasury bills have initial maturities of one year or less; U.S. Treasury notes have initial maturities of one to ten years; and U.S. Treasury bonds generally have initial maturities of greater than ten years. Certain U.S. government securities are issued or guaranteed by agencies or instrumentalities of the U.S. government including, but not limited to, obligations of U.S. government agencies or instrumentalities, such as the Federal National Mortgage Association, the Government National Mortgage Association, the Small Business Administration, the Federal Farm Credit Administration, the Federal Home Loan Banks, Banks for Cooperatives (including the Central Bank for Cooperatives), the Federal Land Banks, the Federal Intermediate Credit Banks, the Tennessee Valley Authority, the Export-Import Bank of the United States, the Commodity Credit Corporation, the Federal Financing Bank, the Student Loan Marketing Association, and the National Credit Union Administration. Some obligations issued or guaranteed by U.S. government agencies and instrumentalities, including, for example, Government National Mortgage Association pass-through certificates, are supported by the full faith and credit of the U.S. Treasury. Other obligations issued by or guaranteed by Federal agencies, such as those securities issued by the Federal National Mortgage Association, are supported by the discretionary authority of the U.S. government to purchase certain obligations of the federal agency 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, no assurance can be given that the U.S. government will always do so, since the U.S. government is not so obligated by law. U.S. Treasury notes and bonds typically pay coupon interest semi-annually and repay the principal at maturity.

Yields on U.S. government securities are dependent on a variety of factors, including the general conditions of the money and bond markets, the size of a particular offering, and the maturity of the obligation. Debt securities with longer maturities tend to produce higher yields and are generally subject to potentially greater capital appreciation and depreciation than obligations with shorter maturities and lower yields. The market value of U.S. government securities generally varies inversely with changes in market interest rates. An increase in interest rates, therefore, would generally reduce the market value of a Fund’s portfolio investments in U.S. government securities, while a decline in interest rates would generally increase the market value of a Fund’s portfolio investments in these securities.

Repurchase Agreements

Each of the Funds may enter into repurchase agreements with financial institutions in pursuit of the Funds’ investment objectives, as “cover” for the investment techniques the Funds employ, or for liquidity purposes. Under a repurchase agreement, a Fund purchases a debt security and simultaneously agrees to sell the security back to the seller at a mutually agreed-upon future price and date, normally one day or a few days later. The resale price is greater than the purchase price, reflecting an agreed-upon market interest rate during the purchaser’s holding period. While the maturities of the underlying securities in repurchase transactions may be more than one year, the term of each repurchase agreement will always be less than one year. The Funds follow certain procedures designed to minimize the risks inherent in such agreements. These procedures include effecting repurchase transactions only with large, well-capitalized and well-established financial institutions whose condition will be continually monitored by ProShare Advisors. In addition, the value of the collateral underlying the repurchase agreement will always be at least equal to the repurchase price, including any accrued interest earned on the repurchase agreement. In the event of a default or bankruptcy by a selling financial institution, a Fund will seek to liquidate such collateral which could involve certain costs or delays and, to the extent that proceeds from any sale upon a default of the obligation to repurchase were less than the repurchase price, the Fund could suffer a loss. A Fund also may experience difficulties and incur certain costs in exercising its rights to the collateral and may lose the interest the Fund expected to receive under the repurchase agreement. Repurchase agreements usually are for short periods, such as one week or less, but may be longer. It is the current policy of the Funds not to invest in repurchase agreements that do not mature within seven days if any such investment, together with any other illiquid assets held by the Fund, amounts to more than 15% of the Fund’s total net assets. The investments of each of the Funds in repurchase

 

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agreements at times may be substantial when, in the view of ProShare Advisors, liquidity, investment, regulatory or other considerations so warrant.

Money Market Instruments

To seek its investment objective, as a cash reserve, for liquidity purposes, or as “cover” for positions it has taken, a 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.

Reverse Repurchase Agreements

Each Fund may use reverse repurchase agreements as part of its investment strategy. Reverse repurchase agreements involve sales by a Fund of portfolio assets concurrently with an agreement by the Fund to repurchase the same assets at a later date at a fixed price. Generally, the effect of such a transaction is that the Fund can recover all or most of the cash invested in the portfolio securities involved during the term of the reverse repurchase agreement, while the Fund will be able to keep the interest income associated with those portfolio securities. Such transactions are advantageous only if the interest cost to the Fund of the reverse repurchase transaction is less than the cost of obtaining the cash otherwise. Opportunities to achieve this advantage may not always be available, and the Fund intends to use the reverse repurchase technique only when the Advisor believes it will be to the Fund’s advantage to do so. The Fund will earmark or segregate cash or liquid instruments equal in value to the Fund’s obligations in respect of reverse repurchase agreements.

Borrowing

The Funds may borrow money for cash management purposes or investment purposes. Borrowing for investment is known as leveraging. Leveraging investments, by purchasing securities with borrowed money, is a speculative technique which increases investment risk, but also increases investment opportunity. Since substantially all of a Fund’s assets will fluctuate in value, whereas the interest obligations on borrowings may be fixed, the net asset value per share of the Fund will fluctuate more when the Fund is leveraging 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, a Fund might have to sell portfolio securities to meet interest or principal payments at a time when investment considerations would not favor such sales.

As required by the 1940 Act, a Fund must maintain continuous asset coverage (total assets, including assets acquired with borrowed funds, less liabilities exclusive of borrowings) of 300% of all amounts borrowed. If at any time the value of a Fund’s assets should fail to meet this 300% coverage test, the Fund, within three days (not including weekends and holidays), will reduce the amount of the Fund’s borrowings to the extent necessary to meet this 300% coverage 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 Funds are authorized to borrow money as a temporary measure for extraordinary or emergency purposes in amounts not in excess of 5% of the value of each Fund’s total assets. This borrowing is not subject to the foregoing 300% asset coverage requirement. The Funds are authorized to pledge portfolio securities as ProShare Advisors deems appropriate in connection with any borrowings.

Each Fund may also enter into reverse repurchase agreements, which may be viewed as a form of borrowing, with financial institutions. However, to the extent a Fund “covers” its repurchase obligations as described above in “Reverse Repurchase Agreements,” such agreement will not be considered to be a “senior security” and, therefore, will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by that Fund.

Lending of Portfolio Securities

Subject to the Funds’ investment restrictions set forth below, a Fund may lend its portfolio securities to brokers, dealers, and financial institutions, provided that cash equal to at least 100% of the market value of the securities loaned is deposited by the borrower with the Fund and is maintained each business day in a segregated

 

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account pursuant to applicable regulations. While such securities are on loan, the borrower will pay the lending Fund any income accruing thereon, and the Fund may invest the cash collateral in portfolio securities, thereby earning additional income. A Fund will not lend more than 33 1/3% of the value of the Fund’s total assets. Loans will be subject to termination by the lending Fund on four business days’ notice, or by the borrower on one day’s notice. Borrowed securities must be returned when the loan is terminated. Any gain or loss in the market price of the borrowed securities which occurs during the term of the loan inures to the lending Fund and that Fund’s shareholders. There may be risks of delay in receiving additional collateral or risks of delay in recovery of the securities or even loss of rights in the securities lent should the borrower of the securities fail financially. A Fund may pay reasonable finders, borrowers, administrative, and custodial fees in connection with a loan.

When-Issued and Delayed-Delivery Securities

Each Fund, from time to time, in the ordinary course of business, may purchase securities on a when-issued or delayed-delivery basis (i.e., delivery and payment can take place between a month and 120 days after the date of the transaction). These securities are subject to market fluctuations and no interest accrues to the purchaser during this period. At the time a Fund makes the commitment to purchase securities on a when-issued or delayed-delivery basis, the Fund will record the transaction and thereafter reflect the value of the securities, each day, in determining the Fund’s net asset value. Each Fund will not purchase securities on a when-issued or delayed-delivery basis if, as a result, more than 15% of the Fund’s net assets would be so invested. At the time of delivery of the securities, the value of the securities may be more or less than the purchase price.

The Trust will earmark or segregate cash or liquid instruments equal to or greater in value than the Fund’s purchase commitments for such when-issued or delayed-delivery securities, or when the Trust does not believe that a Fund’s net asset value or income will be adversely affected by the Fund’s purchase of securities on a when-issued or delayed delivery basis.

Investments in Other Investment Companies

The Funds may invest in the securities of other investment companies to the extent that such an investment would be consistent with the requirements of the 1940 Act. If a Fund invests in, and, thus, is a shareholder of, another investment company, the Fund’s shareholders will indirectly bear the Fund’s proportionate share of the fees and expenses paid by such other investment company, including advisory fees, in addition to both the management fees payable directly by the Fund to the Fund’s own investment adviser and the other expenses that the Fund bears directly in connection with the Fund’s own operations.

Real Estate Investment Trusts

Each Fund may invest in real estate investment trusts (“REITs”). Equity REITs invest primarily in real property while mortgage REITs make construction, development and long term mortgage loans. Their value may be affected by changes in the value of the underlying property of the REIT, the creditworthiness of the issuer, property taxes, interest rates, and tax and regulatory requirements, such as those relating to the environment. REITs are dependent upon management skill, are not diversified and are subject to heavy cash flow dependency, default by borrowers, self liquidation and the possibility of failing to qualify for tax free income status under the Code and failing to maintain exempt status under the 1940 Act.

Illiquid Securities

Each Fund may purchase illiquid securities, including securities that are not readily marketable and securities that are not registered (“restricted securities”) under the 1933 Act, but which can be sold to qualified institutional buyers under Rule 144A under the 1933 Act. A Fund will not invest more than 15% of the Fund’s net assets in illiquid securities. The term “illiquid securities” for this purpose means securities that cannot be disposed of within seven days in the ordinary course of business at approximately the amount at which the Fund has valued the securities. Under the current guidelines of the staff of the SEC, illiquid securities also are considered to include, among other securities, purchased over-the-counter options, certain cover for OTC options, repurchase agreements with maturities in excess of seven days, and certain securities whose disposition is restricted under the Federal securities laws. The Fund may not be able to sell illiquid securities when ProShare Advisors considers it desirable to do so or may have to sell such securities at a price that is lower than the price that could be obtained if the

 

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securities were more liquid. In addition, the sale of illiquid securities also may require more time and may result in higher dealer discounts and other selling expenses than does the sale of securities that are not illiquid. Illiquid securities also may be more difficult to value due to the unavailability of reliable market quotations for such securities, and investments in illiquid securities may have an adverse impact on net asset value.

Institutional markets for restricted securities have developed as a result of the promulgation of Rule 144A under the 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, a Fund may make such investments. Whether or not such securities are illiquid depends on the market that exists for the particular security. The staff of the SEC has taken the position that the liquidity of Rule 144A restricted securities is a question of fact for a board of trustees to determine, such determination to be based on a consideration of the readily-available trading markets and the review of any contractual restrictions. The staff also has acknowledged that, while a board of trustees retains ultimate responsibility, trustees may delegate this function to an investment adviser. The Board of Trustees of the Funds has delegated this responsibility for determining the liquidity of Rule 144A restricted securities which may be invested in by a Fund to ProShare Advisors. It is not possible to predict with assurance exactly how the market for Rule 144A restricted securities or any other security will develop. A security which when purchased enjoyed a fair degree of marketability may subsequently become illiquid and, accordingly, a security which was deemed to be liquid at the time of acquisition may subsequently become illiquid. In such event, appropriate remedies will be considered to minimize the effect on the Fund’s liquidity.

Portfolio Turnover

A Fund’s portfolio turnover may vary from year to year, as well as within a year. The overall reasonableness of brokerage commissions is evaluated by ProShare Advisors based upon its knowledge of available information as to the general level of commissions paid by other institutional investors for comparable services. In addition, a Fund’s portfolio turnover level may adversely affect the ability of the Fund to achieve its investment objective. “Portfolio Turnover Rate” is defined under the rules of the SEC as the value of the securities purchased or securities sold, excluding all securities whose maturities at time of acquisition were one year or less, divided by the average monthly value of such securities owned during the year. Based on this definition, instruments with remaining maturities of less than one year are excluded from the calculation of Portfolio Turnover Rate. Instruments excluded from the calculation of portfolio turnover generally would include the futures contracts and option contracts in which the Funds invest since such contracts generally have a remaining maturity of less than one year. Pursuant to the formula prescribed by the SEC, the Portfolio Turnover Rate for each Fund is calculated without regard to instruments, including options and futures contracts, having a maturity of less than one year. Exchange-traded funds, such as the Funds, may incur very low levels of portfolio turnover (or none at all in accordance with the SEC methodology described above) because of the way in which they operate and the way shares are created in creation units.

SPECIAL CONSIDERATIONS

As discussed above and in the Prospectus, the Funds present certain risks, some of which are further described below.

Tracking and Correlation

While the Funds do not expect that their daily returns will deviate adversely from their respective daily investment objectives, several factors may affect their ability to achieve this correlation. Among these factors are: (1) a Fund’s expenses, including brokerage (which may be increased by high portfolio turnover), and the cost of the investment techniques employed by that Fund; (2) less than all of the securities in the benchmark index being held by a Fund and securities not included in the benchmark index being held by a Fund; (3) an imperfect correlation between the performance of instruments held by a Fund, such as futures contracts, and the performance of the underlying securities in the cash market; (4) bid-ask spreads (the effect of which may be increased by portfolio turnover); (5) holding instruments traded in a market that has become illiquid or disrupted; (6) a Fund’s share prices being rounded to the nearest cent; (7) changes to the benchmark index that are not disseminated in advance; (8) the need to conform a Fund’s portfolio holdings to comply with investment restrictions or policies or regulatory or tax law requirements; and (9) early and unanticipated closings of the markets on which the holdings of a Fund trade,

 

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resulting in the inability of the Fund to execute intended portfolio transactions. While close tracking of any Fund to its benchmark may be achieved on any single trading day, over time, the cumulative percentage increase or decrease in the net asset value of the Shares of a Fund may diverge significantly from the cumulative percentage decrease or increase in the benchmark due to a compounding effect.

Leverage

Each Fund intends to use, on a regular basis, leveraged investment techniques in pursuing its investment objectives. Utilization of leverage involves special risks and should be considered to be speculative. Leverage exists when a Fund achieves the right to a return on a capital base that exceeds the amount the Fund has invested. Leverage creates the potential for greater gains to Fund shareholders during favorable market conditions and the risk of magnified losses during adverse market conditions. Leverage is likely to cause higher volatility of the net asset values of these Funds’ Shares. Leverage may involve the creation of a liability that does not entail any interest costs or the creation of a liability that requires the Fund to pay interest which would decrease the Fund’s total return to shareholders. If these Funds achieve their investment objectives, during adverse market conditions, shareholders should experience a loss greater than they would have incurred had these Funds not been leveraged.

Special Note Regarding the Correlation Risks of Leveraged Funds.  As discussed in the Prospectus, some of the Funds are “leveraged” funds in the sense that they each have an investment objective to match a multiple of the performance of an index on a given day. These Funds are subject to all of the correlation risks described in the Prospectus. In addition, there is a special form of correlation risk that derives from these Funds’ use of leverage, which is that for periods greater than one day, the use of leverage tends to cause the performance of a Fund to be either greater than or less than the index performance times the stated multiple in the Fund’s investment objective.

A leveraged fund’s return for periods longer than one day is primarily a function of the following:

 

a) index performance;

 

b) index volatility;

 

c) financing rates associated with leverage;

 

d) other fund expenses;

 

e) dividends paid by companies in the index; and

 

f) period of time.

The fund performance for a leveraged fund can be estimated given any set of assumptions for the factors described above. The tables below illustrate the impact of two factors, index volatility and index performance, on a leveraged fund. Index volatility is a statistical measure of the magnitude of fluctuations in the returns of an index and is calculated as the standard deviation of the natural logarithms of one plus the index return (calculated daily), multiplied by the square root of the number of trading days per year (assumed to be 252). The tables show estimated fund returns for a number of combinations of index performance and index volatility over a one-year period. Assumptions used in the tables include: (a) no dividends paid by the companies included in the index; (b) no fund expenses; and (c) borrowing/lending rates (to obtain leverage) of zero percent. If fund expenses were included, the fund’s performance would be lower than shown.

The first table below shows an example in which a leveraged fund that has an investment objective to correspond to twice (200% ) the daily performance of an index. The leveraged fund could be expected to achieve a 20% return on a yearly basis if the index performance was 10%, absent any costs or the correlation risk or other factors described above and in the Prospectus under “Correlation Risk.” However, as the table shows, with an index volatility of 20%, such a fund would return 16.3%, again absent any costs or other factors described above and in the Prospectus under “Correlation Risk.” In the charts below, areas shaded green represent those scenarios where a leveraged fund with the investment objective described will outperform (i.e., return more than) the index performance times the stated multiple in the Fund’s investment objective; conversely areas shaded red represent those scenarios where the Fund will underperform (i.e., return less than) the index performance times the stated multiple in the Fund’s investment objective.

 

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Estimated Fund Return Over One Year When the Fund Objective is to Seek Daily Investment Results, Before Fund Fees and Expenses and Leverage Costs, that Correspond to Twice (200%) the Daily Performance of an Index.

 

One Year Index

Performance

  200%
One Year Index

Performance
  Index Volatility  
    0%     5%     10%     15%     20%     25%     30%     35%     40%  
-40%   -80%   -64.0 %   -64.1 %   -64.4 %   -64.8 %   -65.4 %   -66.2 %   -67.1 %   -68.2 %   -69.3 %
-35%   -70%   -57.8 %   -57.9 %   -58.2 %   -58.7 %   -59.4 %   -60.3 %   -61.4 %   -62.6 %   -64.0 %
-30%   -60%   -51.0 %   -51.1 %   -51.5 %   -52.1 %   -52.9 %   -54.0 %   -55.2 %   -56.6 %   -58.2 %
-25%   -50%   -43.8 %   -43.9 %   -44.3 %   -45.0 %   -46.0 %   -47.2 %   -48.6 %   -50.2 %   -52.1 %
-20%   -40%   -36.0 %   -36.2 %   -36.6 %   -37.4 %   -38.5 %   -39.9 %   -41.5 %   -43.4 %   -45.5 %
-15%   -30%   -27.8 %   -27.9 %   -28.5 %   -29.4 %   -30.6 %   -32.1 %   -34.0 %   -36.1 %   -38.4 %
-10%   -20%   -19.0 %   -19.2 %   -19.8 %   -20.8 %   -22.2 %   -23.9 %   -26.0 %   -28.3 %   -31.0 %
-5%   -10%   -9.8 %   -10.0 %   -10.6 %   -11.8 %   -13.3 %   -15.2 %   -17.5 %   -20.2 %   -23.1 %
0%   0%   0.0 %   -0.2 %   -1.0 %   -2.2 %   -3.9 %   -6.1 %   -8.6 %   -11.5 %   -14.8 %
5%   10%   10.3 %   10.0 %   9.2 %   7.8 %   5.9 %   3.6 %   0.8 %   -2.5 %   -6.1 %
10%   20%   21.0 %   20.7 %   19.8 %   18.3 %   16.3 %   13.7 %   10.6 %   7.0 %   3.1 %
15%   30%   32.3 %   31.9 %   30.9 %   29.3 %   27.1 %   24.2 %   20.9 %   17.0 %   12.7 %
20%   40%   44.0 %   43.6 %   42.6 %   40.8 %   38.4 %   35.3 %   31.6 %   27.4 %   22.7 %
25%   50%   56.3 %   55.9 %   54.7 %   52.8 %   50.1 %   46.8 %   42.8 %   38.2 %   33.1 %
30%   60%   69.0 %   68.6 %   67.3 %   65.2 %   62.4 %   58.8 %   54.5 %   49.5 %   44.0 %
35%   70%   82.3 %   81.8 %   80.4 %   78.2 %   75.1 %   71.2 %   66.6 %   61.2 %   55.3 %
40%   80%   96.0 %   95.5 %   94.0 %   91.6 %   88.3 %   84.1 %   79.1 %   73.4 %   67.0 %

Estimated Fund Return Over One Year When the Fund Objective is to Seek Daily Investment Results, Before Fees and Expenses, that Correspond to the Inverse of the Daily Performance of an Index.

 

One Year Index
Performance

  Inverse of
One Year Index
Performance
  Index Volatility  
    0%     5%     10%     15%     20%     25%     30%     35%     40%  
-40%   40%   66.7 %   66.3 %   65.0 %   63.0 %   60.1 %   56.6 %   52.3 %   47.5 %   42.0 %
-35%   35%   53.8 %   53.5 %   52.3 %   50.4 %   47.8 %   44.5 %   40.6 %   36.1 %   31.1 %
-30%   30%   42.9 %   42.5 %   41.4 %   39.7 %   37.3 %   34.2 %   30.6 %   26.4 %   21.7 %
-25%   25%   33.3 %   33.0 %   32.0 %   30.4 %   28.1 %   25.3 %   21.9 %   18.0 %   13.6 %
-20%   20%   25.0 %   24.7 %   23.8 %   22.2 %   20.1 %   17.4 %   14.2 %   10.6 %   6.5 %
-15%   15%   17.6 %   17.4 %   16.5 %   15.0 %   13.0 %   10.5 %   7.5 %   4.1 %   0.3 %
-10%   10%