485APOS 1 d485apos.htm 485APOS 485APOS
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As filed with the Securities and Exchange Commission on September 24, 2010

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. 25

and/or

REGISTRATION STATEMENT

  UNDER

THE INVESTMENT COMPANY ACT OF 1940

  x  

Amendment No. 32

 

 

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, CEO

ProShare Advisors LLC

7501 Wisconsin Avenue, Suite 1000

Bethesda, MD 20814

(Name and Address of Agent for Service)

 

 

with copies to:

 

John Loder, Esq.

c/o Ropes & Gray LLP

One International Place

Boston, MA 02110

 

Amy R. Doberman

ProShare Advisors LLC

7501 Wisconsin Avenue, Suite 1000

Bethesda, MD 20814

Approximate date of Proposed Public Offering:

 

 

It is proposed that this filing will become effective:

 

  ¨ immediately upon filing pursuant to paragraph (b)

 

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

 

  ¨ on        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: ProShares RAFI US Equity Long/Short. No information relating to any other series or class of series of ProShares Trust is amended or superseded hereby.


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LOGO    Prospectus

 

December    , 2010

 

Alpha ProShares

 

[            ]    ProShares RAFI® US Equity Long/Short

 

 

ProShares Trust   Distributor: SEI Investments Distribution Co.

 

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.


Table of Contents

Table of Contents

 

Summary Section

  3

Investment Objective, Principal Investment Strategies, Related Risks and Disclosure of Portfolio Holdings

  9

Management of ProShares Trust

  16

Determination of NAV

  17

Distributions

  18

Dividend Reinvestment Services

  18

Taxes

  18

 

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Summary Section

 

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Investment Objective

ProShares RAFI US Equity Long/Short (the “Fund”) seeks investment results, before fees and expenses, that track the performance of the RAFI US Equity Long/Short Index (the “Index”).

The Index seeks to utilize a Research Affiliates Fundamental Index® (RAFI) weighting methodology to identify opportunities which are implemented through long and short positions in certain stocks of U.S. domiciled publicly-traded companies listed on major exchanges (the “Eligible Companies”). Research Affiliates, the sponsor of the Index, assigns each Eligible Company a market capitalization weight and a RAFI weight. The RAFI weight is based on the size of a company’s sales, cash flow, dividends and book value. Companies are included in the Index based on a comparison of each company’s RAFI weight to that company’s market capitalization weight. The Index establishes long positions in those companies with the largest RAFI weights relative to their capitalization weights, and short positions in those with the smallest RAFI weights relative to their capitalization weights. The Index seeks to maintain sector neutrality by selecting companies from 10 industry sectors, allocating the same dollar value to both the long and short positions in each sector. The Index is rebalanced monthly such that it has equal overall dollar exposure in both long and short positions and is reconstituted annually, at which time new long and short positions are selected and weighted. The Index may at any time have significant positive or negative correlations with long-only market capitalization weighted indexes. The Index is published under the Bloomberg ticker symbol “RAFILS.”

Fees and Expenses of the Fund

The table below describes the fees and expenses that you may pay if you buy or hold shares of the Fund (“Shares”).

Annual Fund Operating Expenses

(expenses that you pay each year as a percentage of the value of your investment)

 

Investment Advisory Fees

   0.75

Other Expenses*

   [     ]% 
      

Total Annual Operating Expenses Before Fee Waivers and Expense Reimbursements

   [     ]% 

Fee Waiver/Reimbursement**

   [     ]% 
      

Total Annual Operating Expenses After Fee Waivers and Expense Reimbursements

   0.95 % 
      

 

* “Acquired Fund Fees and Expenses” are expected to be less than 0.01% and are included in “Other Expenses”.
** ProShare Advisors LLC (“ProShare Advisors”) has contractually agreed to waive Investment Advisory and Management Services Fees and to reimburse Other Expenses to the extent Total Annual Operating Expenses Before Fee Waivers and Expense Reimbursements, as a percentage of average daily net assets, [exceed 0.95% through December     , 2011]. After such date, the expense limitation may be terminated or revised. Amounts waived or reimbursed in a particular contractual period may be recouped by ProShare Advisors within five years of the end of that contractual period to the extent that recoupment will not cause the Fund’s expenses to exceed any expense limitation in place at that time. A waiver or reimbursement lowers the expense ratio and increases overall returns to investors.

Example: This example is intended to help you compare the cost of investing in Shares with the cost of investing in other mutual funds.

 

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The example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your Shares at the end of each period. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses, which exclude brokerage commissions, remain the same. Although your actual cost may be higher or lower, based on these assumptions your approximate costs would be:

 

1 Year

  3 Years
[$97]   [$441]

Investors may pay brokerage commissions on their purchases and sales of Shares, which are not reflected in the example or the table above.

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover may indicate higher transaction costs and may result in higher taxes when Shares are held in a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance. The Fund’s portfolio turnover rate is calculated without regard to cash instruments or derivatives. If such instruments were included, the Fund’s portfolio turnover rate would be significantly higher.

Principal Investment Strategies

The Fund invests in a combination of equity securities and derivatives that ProShare Advisors believes should track the performance of the Index. Assets of the Fund not invested in equity securities or derivatives will typically be held in money market instruments.

 

   

Equity Securities — The Fund invests in common stock issued by public companies.

 

   

Derivatives — The Fund invests in financial instruments whose value is derived from the value of an underlying asset, interest rate or index. The Fund invests in derivatives as a substitute for investing directly in or making short sales of the equity securities comprising the Index. Derivatives principally include:

 

   

Swap Agreements — Contracts entered into primarily with 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 change in value of a particular dollar amount invested in a “basket” of securities representing a particular index.

 

   

Money Market Instruments — The Fund invests in short-term cash instruments that have terms to maturity of less than 397 days and exhibit high quality credit profiles.

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 may gain exposure to only a representative sample of the securities in the underlying Index, which is intended to have aggregate characteristics similar to those of the underlying Index. ProShare Advisors does not invest the assets of the Fund in securities or derivatives 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 (other than in determining counterparty creditworthiness), 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 derivatives that provide exposure to its underlying Index without regard to market conditions, trends or direction.

Please see Investment Objectives, Principal Investment Strategies, Related Risks and Disclosure of Portfolio Holdings in the Fund’s full prospectus for additional details.

 

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Principal Risks

You could lose money by investing in the Fund.

 

   

Risk Associated with the Use of Derivatives — The Fund uses investment techniques and derivatives that may be considered aggressive. Because the Fund’s investment in derivatives may involve a small investment relative to the amount of investment exposure assumed, losses may exceed the amounts invested in those instruments. The use of derivatives may expose the Fund to potentially dramatic changes (losses or gains) in the value of the instruments. Using derivatives also may result in imperfect correlation between the value of the instruments and the referenced index, which may prevent the Fund from achieving its investment objective. The cost to use derivatives increases as interest rates increase, which will lower the Fund’s return.

 

   

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. 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 the Index, including fees, expenses, transaction costs, costs associated with the use of derivatives, income items and accounting standards. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. 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 the Index. Activities surrounding Index reconstitutions may hinder the Fund’s ability to meet its investment objective on that day.

 

   

Counterparty Risk — The Fund will be subject to credit risk (that is, where changes in an issuer’s financial strength or the credit rating of a financial instrument it issues may affect an instrument’s value) with respect to the amount it expects to receive from counterparties to derivatives and repurchase agreements 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.

 

   

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

 

   

Equity and Market Risk — The equity markets are volatile, and the value of securities, swaps, futures, options contracts and other instruments correlated with the equity markets may fluctuate dramatically from day-to-day. Equity markets are subject to political, regulatory, market and economic developments, as well as developments that impact specific economic sectors, industries or segments of the market. Volatility in the markets and/or adverse market developments may cause the value of an investment in the Fund to decrease.

 

   

Index Performance Risk —There is no guarantee or assurance that the methodology used to create the Index will result in the Fund achieving high, or even positive, returns. The Index may underperform more traditional indices. In turn, the Fund could lose value while other indices or measures of market performance increase in value. In addition, the Index was formed in November 2010. Accordingly, the Index has limited historical performance.

 

   

Liquidity Risk — In certain circumstances, such as the disruption of the orderly markets for the securities or derivatives 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. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with its underlying index.

 

   

Market Price Variance Risk — Fund Shares will be listed for trading on the NYSE Arca (“Exchange”) and can be bought and sold in the secondary market at market prices. The market prices of Shares will fluctuate in response to

 

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changes in net asset value (“NAV”) and supply and demand for Shares. ProShare Advisors cannot predict whether Shares will trade above, below or at their NAV. 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. 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.

 

   

Non-Diversification Risk — The Fund is classified as “non-diversified” under the Investment Company Act of 1940 (“1940 Act”), and 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 the Fund’s objective. This makes the performance of the Fund more susceptible to a single economic, political or regulatory event than a diversified fund might be. This risk may be particularly acute when the Fund’s underlying Index comprises a small number of stocks or other securities.

 

   

Portfolio Turnover Risk — Active market trading of Shares may cause more frequent creation or redemption activities that could, in certain circumstances, increase the number of portfolio transactions. High levels of transactions increase brokerage costs and may result in increased taxable capital gains.

 

   

Short Sale Exposure Risk — The Fund may seek short exposure through financial instruments such as swap agreements consistent with its investment objective, which may cause the Fund to be exposed to certain risks associated with selling securities short. These risks include, under certain market conditions, an increase in the volatility and decrease in the liquidity of securities underlying the short position, which may lower the Fund’s return or result in a loss. Selling securities short may be considered an aggressive investment technique.

Investment Results

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

Management

The Fund is advised by ProShare Advisors and is managed by the following individuals.

 

Portfolio Manager

  

Service to the Fund

  

Title with ProShare Advisors

Todd Johnson

   Since [December 2010]    Chief Investment Officer

Howard S. Rubin, CFA

   Since [December 2010]    Director of Portfolio Management

Ryan Dofflemeyer

   Since [December 2010]    Portfolio Manager

Purchase and Sale of Fund Shares

The Fund will issue and redeem Shares only to Authorized Participants (typically broker-dealers) in exchange for the deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as Creation Units, each of which is comprised of [50,000] Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).

 

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Tax Information

Income and capital gain distributions you receive from the Fund are subject to federal income taxes and may also be subject to state and local taxes. Distributions for this Fund may be significantly higher than those of most exchange-traded funds.

 

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Investment Objective, Principal Investment Strategies, Related Risks and Disclosure of Portfolio Holdings

 

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Investment Objective, Principal Investment Strategies, Related Risks and Disclosure of Portfolio Holdings

This section contains greater detail on the Fund’s principal investment strategies and the related risks you would face as a shareholder of the Fund as well as information about how to find out more about the Fund’s portfolio holdings disclosure policy.

Investment Objective

The Fund seeks investment results, before fees and expenses, that track the performance of the RAFI US Equity Long/Short Index (the “Index”).

The Fund’s investment objective is non-fundamental, meaning it may be changed by the Board of Trustees (the “Board”) of ProShares Trust (the “Trust”), without the approval of Fund shareholders. The Fund reserves the right to substitute a different index or security for the Index underlying its benchmark.

Principal Investment Strategies

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 their respective benchmarks.

The Fund may gain exposure to only a representative sample of the securities in the underlying Index, which is intended to have 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 overweight or underweight certain components contained in the underlying Index.

ProShare Advisors does not invest the assets of the Fund in securities or financial instruments based on ProShare Advisors’ view of the investment merit of a particular security, 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.

Strategies Specific to the Fund

The Fund invests in equity securities and/or derivatives that ProShare Advisors believes, in combination, should have similar return characteristics as the return of the underlying Index.

 

   

Equity Securities — The Fund invests in common stock issued by public companies.

 

   

Derivatives — The Fund invests in financial instruments whose value is derived from the value of an underlying asset, interest rate or index. The Fund invests in derivatives as a substitute for investing directly in, or making short sales of, stocks. Derivatives include:

 

   

Swap Agreements — Contracts entered into primarily with 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 change in value of a particular dollar amount invested in a “basket” of securities representing a particular index.

 

   

Futures Contracts — Contracts that pay a fixed price for an agreed-upon amount of securities on an agreed-upon date.

 

   

Short Sales — In seeking to achieve its investment objective and as part of their principal investment strategies, the Fund also may engage in short sale transactions (or enter into derivative transactions such as swap agreements which create exposure similar to a short sale transaction) with respect to equity securities (including shares of exchange-traded funds) to the extent permitted by the 1940 Act. A short sale is a transaction in which the Fund sells a security it does not own in anticipation that the market price of that security will decline. To complete such a transaction, the Fund must borrow the security to make delivery to the buyer. The Fund is then obligated to replace the security borrowed by borrowing the same security from another lender, purchasing it at the market price at the time of replacement or paying the lender an amount equal to the cost of purchasing the security. The price at such time may be more or less than the price at which the security was sold by the Fund. Until the security is replaced, the Fund is required to repay the lender any dividends it receives or interest which accrues on the security 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

 

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the short sale will be retained by the broker, to the extent necessary to meet the margin requirements, until the short position is closed out. The Fund also will incur costs in making short sales or entering into derivative transactions which provide short sale exposure for the Fund. The Fund also may make short sales “against the box,” i.e., when a security identical to or convertible or exchangeable into one owned by the Fund is borrowed and sold short.

The Fund is subject to the SEC “names rule” (Rule 35d-1 under the Investment Company Act of 1940, as amended (the “1940 Act”)), and as such commits to invest at least 80% of its assets (i.e., net assets plus borrowings for investment purposes), under normal circumstances, in equity securities contained in the underlying Index and/or financial instruments that, in combination, should have similar economic characteristics.

Other Principal Risks

In addition to the risks noted in the summary section, many other factors may also affect the value of an investment in the Fund. The Fund’s NAV will change daily based on the performance of the benchmark index, which in turn is affected by variations in market conditions, interest rates and other economic, political or financial developments. The impact of these developments on the Fund will depend upon the types of 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 summary section and described below. The 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.

 

   

Risk Associated with the Use of Derivatives — The Fund uses investment techniques that may be considered aggressive, including the use of swap agreements, futures contracts, options on futures contracts, securities and indexes, forward contracts, and similar instruments. 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 there may be imperfect correlation between the price of financial instruments and movements in the prices of the underlying securities; 2) the risk that an instrument is mispriced; 3) credit or counterparty risk on the amount the Fund expects to receive from a counterparty; 4) the risk that securities prices, interest rates and currency markets will move adversely and the Fund will incur significant losses; 5) the risk that the cost of holding a financial instrument might exceed its total return; and 6) the possible absence of a liquid secondary market for 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.

 

   

Counterparty Risk — The Fund will be subject to credit risk with respect to the amount it expects to receive from counterparties to financial instruments and repurchase agreements 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 enter into transactions with counterparties whose credit rating, at the time of the transaction, is investment grade, as determined by a nationally recognized statistical rating organization, or, if unrated, judged by ProShare Advisors to be of comparable quality.

 

   

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 may not be the same forces 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.

 

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Short Sale Risk — Selling short is a technique that may be employed by the Fund to achieve investment exposure consistent with its investment objective. Short selling involves borrowing a security and then selling it. If the Fund buys back the security at a price lower than the price at which it sold the security plus accrued interest, the Fund will earn a positive return (profit) on the difference. If the current market price is greater when the time comes to buy back the security plus accrued interest, the Fund will incur a negative return (loss) on the transaction. The use of short sales may involve additional transaction costs and other expenses. As a result, the cost of maintaining a short position may exceed the return on the position, which may cause the Fund to lose money. Under certain market conditions, short sales can increase the volatility and decrease the liquidity of certain securities or positions and may lower the Fund’s return or result in a loss. Entering into short positions through financial instruments such as futures, options and swap agreements may also cause the Fund to be exposed to short sale risk. Selling short may be considered an aggressive investment technique.

Additional Securities, Instruments and Strategies

This section describes additional securities, instruments and strategies that may be utilized by the Fund which are not principal investment strategies of the Fund unless otherwise noted in the Fund’s description of principal strategies.

 

   

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 NYS is always equal to one ordinary share. NYS programs are typically managed by the same banks that manage ADRs, as the mechanics of the instrument are very similar. NYSs 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, securities issued by governments of other developed countries and repurchase agreements.

 

   

Repurchase Agreements are contracts in which a 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.

 

   

Structured Notes are debt obligations that may include components such as swaps, forwards, options, caps or floors, which change their return patterns. Structured notes may be used to alter the risks to a portfolio, or alternatively may be used to indirectly expose a portfolio to asset classes or markets in which one does not desire to invest directly.

 

   

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.

 

   

Forward Contracts — Forward contracts are two-party contracts entered into with dealers or financial institutions where the purchase or sale of a specific quantity of a commodity, security, foreign currency or other financial instrument is agreed upon 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.

 

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Options on Securities and Stock Indices 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. A call option gives one the right to buy a security or futures contract at an agreed-upon price on or before a certain date. A put option gives one the right to sell a security or futures contract at an agreed-upon price on or before a certain date.

 

   

Investments in Other Investment Companies — The Fund may invest in the securities of other investment companies, including exchange-traded funds, to the extent that such an investment would be consistent with the requirements of the 1940 Act or any exemptive order issued by the U.S. Securities and Exchange Commission (the “SEC”). If the Fund invests in, and thus is a shareholder of, another investment company, the Fund’s shareholders will indirectly bear the Fund’s proportionate share of the fees and expenses paid by such other investment company, including advisory fees, in addition to both the management fees payable directly by the Fund to the Fund’s own investment adviser and the other expenses that the Fund bears directly in connection with the Fund’s own operations.

Because most exchange traded funds are investment companies, absent exemptive relief, investment in such funds generally would be limited under applicable federal statutory provisions. Those provisions restrict the Fund’s investment in the shares of another investment company to up to 5% of its assets (which may represent no more than 3% of the securities of such other investment company) and limit aggregate investments in all investment companies to 10% of assets. The Fund may invest in certain exchange traded funds in excess of the statutory limit in reliance on an exemptive order issued to those entities and pursuant to procedures approved by the Board provided that it complies with the conditions of the exemptive relief, as they may be amended from time to time, and any other applicable investment limitations.

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 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 (the “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 1940 Act, 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 of 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”) or The NASDAQ Stock Market is closed other than customary weekend and holiday closings, (2) trading on the NYSE or The NASDAQ Stock Market is restricted, (3) any emergency circumstances exist, as determined by the SEC, and (4) the SEC by order permits for the protection of shareholders of the Fund and (5) for up to 14 calendar days for any of the Ultra International and Short International ProShares during a period of an international local holiday, as further described in the SAI.

 

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A Precautionary Note Regarding Regulatory Initiatives — There is a possibility of future regulatory changes altering, perhaps to a material extent, the nature of an investment in the Fund or the ability of the Fund to continue to implement their investment strategies.

The futures markets are subject to comprehensive statutes, regulations, and margin requirements. In addition, the SEC, CFTC and the exchanges are authorized to take extraordinary actions in the event of a market emergency, including, for example, the retroactive implementation of speculative position limits or higher margin requirements, the establishment of daily price limits and the suspension of trading. The regulation of swaps and futures transactions in the United States is a rapidly changing area of law and is subject to modification by government and judicial action. The effect of any future regulatory change on the Fund is impossible to predict, but could be substantial and adverse.

In particular, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law by President Obama on July 21, 2010. The Dodd-Frank Act will change the way in which the U.S. financial system is supervised and regulated. Title VII of the Dodd-Frank Act sets forth a new legislative framework for OTC derivatives, including Financial Instruments, such as swaps, in which the Fund may invest. Title VII of the Dodd-Frank Act makes broad changes to the OTC derivatives market, grants significant new authority to the SEC and the CFTC to regulate OTC derivatives and market participants, and will require clearing and exchange trading of many OTC derivatives transactions.

Provisions in the Dodd-Frank Act include new registration, recordkeeping, capital and margin requirements for “swap dealers” and “major swap participants” as determined by the Dodd-Frank Act and applicable regulations; and the forced use of clearinghouse mechanisms for many OTC derivative transactions. The CFTC, SEC and other federal regulators have been tasked with developing the rules and regulations enacting the provisions of the Dodd-Frank Act. Because there is a one-year period prescribed in which most of the mandated rulemaking and regulations will be implemented, it is not possible at this time to gauge the exact nature and scope of the impact of the Dodd-Frank Act on any of the Fund, but it is expected that swap dealers, major market participants and swap counterparties, including the Fund, will experience new and/or additional regulations, requirements, compliance burdens and associated costs. The new law and the rules to be promulgated may negatively impact the Fund’s ability to meet its investment objective either through limits or requirements imposed on it or upon its counterparties. In particular, new position limits imposed on the Fund or its counterparties may impact that Fund’s ability to invest in a manner that efficiently meets its investment objective, and new requirements, including capital and mandatory clearing, may increase the cost of the Fund’s investments and cost of doing business, which could adversely affect investors.

Description of the Underlying Index

The Fund has entered into a licensing agreement for the use of the RAFI US Equity Long Short Index that is currently underlying its benchmark.

Index Description — The RAFI US Equity Long Short Index (Index) seeks to utilize the Research Affiliates Fundamental Index (RAFI) weighting methodology to identify opportunities which are implemented through both long and short securities positions. The Index compares RAFI® constituent weightings to market capitalization (CAP) weights for a selection of U.S. domiciled publicly traded companies listed on major exchanges (the “Eligible Companies”). The Index takes long positions in securities with larger RAFI weights relative to their CAP weights. Short positions are taken in securities with smaller RAFI weights relative to their CAP weights. The Index is rebalanced monthly such that it has equal dollar investments in both long and short positions and is reconstituted annually at which time new long and short positions are selected and weighted. Sector neutrality is also achieved during the annual reconstitution. The Index at any time may have significant positive or negative correlations with long-only market capitalization weighted indexes.

Index Construction Summary — The securities in the Index are selected as of each annual reconstitution from a universe consisting of the 1000 largest Eligible Companies by market capitalization and the 1000 highest weighted Eligible Companies by RAFI weight (see RAFI methodology below). The companies included in the Index are then selected for each of 10 industry sectors – 20% of the securities with the largest RAFI weights relative to their CAP weights in each sector are selected to comprise the long portfolio. The 20% of securities within each sector with the smallest RAFI weights relative to their CAP weights are selected to comprise the short portfolio.

 

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Weights are assigned to individual constituents in relation to both the absolute and proportional difference between their RAFI and CAP weights. Weights are then normalized within each sector so that the resulting sector weights in both the long and short portfolios match the model sector weights of a hypothetical RAFI weighted US 1000 long only Index.

RAFI Methodology — The Index is based on the RAFI methodology for selecting and weighting securities based on measures of company size including sales, cash flow, dividends and book value.

The starting universe consists of a Research Affiliates universe of publically traded US companies listed on major US stock exchanges (RA Universe). For each company within this RA Universe, an aggregation of historical accounting data (consisting of sales, cash flow and dividends) and current book value is selected. Five-year averages are then calculated for each company for sales, cash flow and dividends, while current book value acts as a fourth variable. Each of the four measures is equal weighted.

From this data, a composite RAFI weight is calculated for each company. Composite fundamental weights are comprised of individual RAFI weights calculated for each company for each individual accounting variable. Each corporation thereby receives a composite RAFI weight equal to the ratio of its sales (or cash flow, dividends, book value) to the aggregate sales (or cash flow, dividends, book value) across all companies in the sample. If a company does not pay any dividends, the composite calculation does not give it a zero weight on that metric but computes its weight as an equally weighted average of the remaining three metrics. Companies that receive a negative composite weight are removed.

Information About the Index Licensor

The RAFI US Equity Long Short Index was developed by Research Affiliates, LLC. Research Affiliates has developed and may continue to develop proprietary securities indexes created and weighted based on the patented and patent-pending proprietary intellectual property of Research Affiliates, LLC, the Fundamental Index® methodology, a non-capitalization method for creating and weighting of an index of securities, (US Patent Nos. 7,620,577; 7,747,502; 7,778,905; 7,792,719; Patent Pending Publ. Nos. US-2006-0149645-A1, US-2007-0055598-A1, US-2008-0288416-A1, US-2010-0063942-A1, WO 2005/076812, WO 2007/078399 A2, WO 2008/118372, EPN 1733352, and HK1099110). “Fundamental Index®” and/or “Research Affiliates Fundamental Index®” and/or “RAFI” and/or all other RA trademarks, trade names, patented and patent-pending concepts are the exclusive property of Research Affiliates, LLC.

The licensing agreement between the Trust and Research Affiliates is solely for their benefit and not for the benefit of the Fund’s shareholders or any other third parties.

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 are posted on a daily basis to the Trust’s website at proshares.com.

 

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Management of ProShares Trust

 

16


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Board of Trustees and Officers

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

Investment Adviser

ProShare Advisors, located at 7501 Wisconsin Avenue, Suite 1000, Bethesda, Maryland 20814, serves as the investment adviser to the Fund and provides investment advice and management services to the Fund. ProShare Advisors oversees the investment and reinvestment of the assets in the Fund. For its investment advisory 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 approving the investment advisory agreement for the Fund, if available, is in the Trust’s most recent semi-annual report to shareholders dated November 30, 2009, or in the Trust’s most recent annual report to shareholders dated May 31, 2010.]

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 since inception and ProFund Advisors LLC (“ProFund Advisors”) since April 1997. Mr. Sapir formerly 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 since inception and ProFund Advisors 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 The 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-June 2008 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 individual overseen by Todd Johnson and Howard S. Rubin.

Todd Johnson, ProShare Advisors — Chief Investment Officer since December 2008. ProFund Advisors — Chief Investment Officer since December 2008. World Asset Management — Managing Director and Chief Investment Officer from 1994 through November 2008.

Howard S. Rubin, CFA, ProShare Advisors — Director of Portfolio Management since December 2009 and Senior Portfolio Manager from December 2007 through November 2009. ProFund Advisors — Director of Portfolio Management December 2009 and Senior Portfolio Manager from November 2004 through November 2009. Mr. Rubin earned a B.S. in Economics from the Wharton School, University of Pennsylvania and an M.S. in Finance from The George Washington University. Mr. Rubin holds the Chartered Financial Analyst (“CFA”) designation.

The following individual has responsibility for the day-to-day management of the Fund, as set forth in the summary section.

Ryan Dofflemeyer, ProShare Advisors — Portfolio Manager since December 2009 and Associate Portfolio Manager from May 2008 through November 2009. ProFund Advisors — Associate Portfolio Manager from May 2005 through April  2008.

Determination of NAV

The NAV per Share of the Fund is computed by dividing the value of the net assets of such Fund (i.e., the value of its total assets less total liabilities) by 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 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. New York 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 Board. 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.

 

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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.

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 respective Fund or in cash. If such a distribution 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”, 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 in Shares, brokers may make available to their customers who own Shares the DTC book-entry dividend reinvestment service. If this service is available and used, dividend distributions 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.

Frequent Purchases and Redemption of Shares

The Trust’s Board of Trustees has not adopted a policy of monitoring for frequent purchases and redemptions of Shares (“frequent trading”) that appear to attempt to take advantage of potential arbitrage opportunities presented by a lag between a change in the value of the Fund’s portfolio securities after the close of the primary markets for the Fund’s portfolio securities and the reflection of that change in the Fund’s NAV (“market timing”). The Trust believes this is appropriate because an ETF, such as the Fund, is intended to be attractive to arbitrageurs, as trading activity is critical to ensuring that the market price of Shares remains at or close to NAV. Since the Fund issues and redeems Creation Units at NAV plus applicable transaction fees, and the Fund’s shares may be purchased and sold on either NYSE Arca or the NASDAQ Stock Market at prevailing market prices, the risks of frequent trading are limited.

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.

 

   

If the Fund qualifies for treatment as a regulated investment company, it 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

 

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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 the 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 December — if paid to you by the end of 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. Currently, ordinary income dividends you receive that are designated as “qualified dividend income” may be taxed at the same rates as long term capital gains. However, income received in the form of ordinary income dividends will not be considered long-term capital gains for other Federal income tax purposes, including the calculation of net capital losses. It is currently unclear whether the special tax treatment of qualified dividend income will be extended to taxable years beginning on or after January 1, 2011. Short-term capital gain distributions will continue to be taxed at ordinary income rates.

 

   

Any distributions of net long-term capital gains 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 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 from sources outside the U.S. may give rise to withholding and other taxes imposed by foreign countries, which would reduce returns from an investment in Shares. 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 taxpayer identification number or social security number. The backup withholding rate is currently 28% for amounts paid through December 31, 2010. Under current law, the backup withholding rate will increase to 31% for amounts paid after December 31, 2010.

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

 

   

A person who exchanges securities for Creation Units generally will recognize a gain or loss equal to the difference between the market value of the Creation Units at the time and the exchanger’s aggregate basis in the securities surrendered and any cash amount paid.

 

   

A person who exchanges Creation Units for securities generally will recognize a gain or loss equal to the difference between the exchanger’s basis in the Creation Units and the aggregate market value of the securities received and any cash received. However, all or a portion of any loss a person realizes upon an exchange of Creation Units for securities will be disallowed by the Internal Revenue Service if such person purchases other substantially identical Shares of the Fund within 30 days before or after the exchange. In such case, the basis of the newly purchased Shares will be adjusted to reflect the disallowed loss.

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

Premium/Discount Information

The Trust’s website has information about the premiums and discounts for each of the Fund. Premiums or discounts are the differences between the NAV and market price of the Fund on a given day, generally at the time NAV is calculated. A premium is the amount that the Fund is trading above the NAV. A discount is the amount that the Fund is trading below the NAV.

 

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Distribution (12b-1) Plan

Under a Rule 12b-1 Distribution Plan (the “Plan”) adopted by the Board, the Fund may pay the Fund’s distributor and financial intermediaries, such as broker-dealers and investment advisors, up to 0.25% on an annualized basis of the average daily net assets of the Fund as reimbursement or compensation for distribution related activities with respect to the Fund. Because these fees are paid out of the Fund’s assets on an on-going basis, over time these fees will increase the cost of your investment and may cost you more than paying other types of sales charges. For the prior fiscal year, no payments were made by any Fund under the Plan.

 

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LOGO    Investment Company Act file number 811-21114

ProShares®

ProShares Trust

7501 Wisconsin Avenue, Suite 1000 Bethesda, MD 20814

866.PRO.5125      866.776.5125

proshares.com

You can find additional information about the Fund in its current Statement of Additional Information (“SAI”), dated [December x, 2010], which has been filed electronically with the Securities and Exchange Commission (“SEC”) and is incorporated by reference into, and is legally a part of, this Prospectus. A copy of the Statement of Additional Information is available, free of charge, online at proshares.com. You may also receive a free copy of the SAI or make inquiries to ProShares by writing us at the address set forth above or calling us toll-free at the telephone number set forth above.

You can find other information about ProShares on the SEC’s website (www.sec.gov) or you can get copies of this information after payment of a duplicating fee by electronic request at publicinfo@sec.gov or by writing to the Public Reference Section of the SEC, Washington, D.C. 20549-0102. Information about ProShares, including their SAI, can be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. For information on the Public Reference Room, call the SEC at (202) 551-8090.

 

© 2010 ProShare Advisors LLC. All rights reserved.    [    ]-DEC 10


Table of Contents

STATEMENT OF ADDITIONAL INFORMATION

December [    ], 2010

ProShares Trust

7501 WISCONSIN AVENUE, SUITE 1000 — EAST TOWER

BETHESDA, MD 20814

866.PRO.5125     866.776.5125

 

Ultra ProShares    Short ProShares      
Ultra MarketCap    Short MarketCap    Short International

QLD

   Ultra QQQ®    PSQ    Short QQQ®    EFZ    Short MSCI EAFE

DDM

   Ultra Dow30SM    DOG    Short Dow30SM    EUM    Short MSCI Emerging Markets

SSO

   Ultra S&P500®    SH    Short S&P500®    YXI    Short FTSE/Xinhua China 25

UWC

   Ultra Russell3000    MYY    Short MidCap400    EFU    UltraShort MSCI EAFE

MVV

   Ultra MidCap400    SBB    Short SmallCap600    EEV    UltraShort MSCI Emerging Markets

SAA

   Ultra SmallCap600    RWM    Short Russell2000    EPV    UltraShort MSCI Europe

UWM

   Ultra Russell2000    QID    UltraShort QQQ®    JPX    UltraShort MSCI Pacific ex-Japan

TQQQ

   UltraPro QQQ®    DXD    UltraShort Dow30SM    BZQ    UltraShort MSCI Brazil

UDOW

   UltraPro Dow30SM    SDS    UltraShort S&P500®    FXP    UltraShort FTSE/Xinhua China 25

UPRO

   UltraPro S&P500®    TWQ    UltraShort Russell3000    EWV    UltraShort MSCI Japan

UMDD

   UltraPro MidCap400    MZZ    UltraShort MidCap400    SMK    UltraShort MSCI Mexico

URTY

   UltraPro Russell2000    SDD    UltraShort SmallCap600       Investable Market
      TWM    UltraShort Russell2000      
Ultra Style    SQQQ    UltraPro Short QQQ®    Short Fixed-Income

UVG

   Ultra Russell1000 Value    SDOW    UltraPro Short Dow30SM    TBF    Short 20+ Year Treasury

UKF

   Ultra Russell1000 Growth    SPXU    UltraPro Short S&P500®    PST    UltraShort 7-10 Year Treasury

UVU

   Ultra Russell MidCap Value    SMDD    UltraPro Short MidCap400    TBT    UltraShort 20+ Year Treasury

UKW

   Ultra Russell MidCap Growth    SRTY    UltraPro Short Russell2000      

UVT

   Ultra Russell2000 Value          Alpha ProShares

UKK

   Ultra Russell2000 Growth    Short Style    CSM    Credit Suisse 130/30
      SJF    UltraShort Russell1000 Value    [     ]    RAFI® US Equity Long/Short
Ultra Sector    SFK    UltraShort Russell1000 Growth      

UYM

   Ultra Basic Materials    SJL    UltraShort Russell MidCap Value      

BIB

   Ultra Nasdaq Biotechnology    SDK    UltraShort Russell MidCap Growth      

UGE

   Ultra Consumer Goods    SJH    UltraShort Russell2000 Value      

UCC

   Ultra Consumer Services    SKK    UltraShort Russell2000 Growth      

UYG

   Ultra Financials            

RXL

   Ultra Health Care    Short Sector      

UXI

   Ultra Industrials    SBM    Short Basic Materials      

DIG

   Ultra Oil & Gas    SEF    Short Financials      

URE

   Ultra Real Estate    DDG    Short Oil & Gas      

KRU

   Ultra KBW Regional Banking    REK    Short Real Estate      

USD

   Ultra Semiconductors    KRS    Short KBW Regional Banking      

ROM

   Ultra Technology    SMN    UltraShort Basic Materials      

LTL

   Ultra Telecommunications    BIS    UltraShort Nasdaq Biotechnology      

UPW

   Ultra Utilities    SZK    UltraShort Consumer Goods      
      SCC    UltraShort Consumer Services      
Ultra International    SKF    UltraShort Financials      

EFO

   Ultra MSCI EAFE    RXD    UltraShort Health Care      

EET

   Ultra MSCI Emerging Markets    SIJ    UltraShort Industrials      

UPV

   Ultra MSCI Europe    DUG    UltraShort Oil & Gas      

UXJ

   Ultra MSCI Pacific ex-Japan    SRS    UltraShort Real Estate      

UBR

   Ultra MSCI Brazil    SSG    UltraShort Semiconductors      

XPP

   Ultra FTSE/Xinhua China 25    REW    UltraShort Technology      

EZJ

   Ultra MSCI Japan    TLL    UltraShort Telecommunications      

UMX

   Ultra MSCI Mexico Investable Market    SDP    UltraShort Utilities      
Ultra Fixed-Income   

UST

   Ultra 7-10 Year Treasury            

UBT

   Ultra 20+ Year Treasury            

This Statement of Additional Information (“SAI”) is not a prospectus. It should be read in conjunction with the Prospectus of ProShares Trust dated October 1, 2010 (the “Prospectus”), which incorporates this SAI by reference. A copy of the Prospectus and a copy of the Annual Report to shareholders for the Funds that have completed a fiscal year are available, without charge, upon request to the address on the previous page, by telephone at the number on the previous page, or on the Trust’s website at www.proshares.com. The Financial Statements and Notes contained in the Annual Report to Shareholders for the fiscal year ended May 31, 2010 are incorporated by reference into and are deemed part of this SAI. The principal U.S. national stock exchange on which all Funds (except ProShares UltraPro QQQ and ProShares UltraPro Short QQQ) identified in this SAI are listed is NYSE Arca. ProShares Ultra Nasdaq Biotechnology, ProShares UltraShort Nasdaq Biotechnology, ProShares UltraProQQQ and

ProShares UltraPro Short QQQ are listed on The NASDAQ Stock Market.


Table of Contents

TABLE OF CONTENTS

 

     [Page]

PROSHARES TRUST

  

INVESTMENT POLICIES, TECHNIQUES AND RELATED RISKS

   2

SPECIAL CONSIDERATIONS

   11

INVESTMENT RESTRICTIONS

   18

PORTFOLIO TRANSACTIONS AND BROKERAGE

   18

MANAGEMENT OF PROSHARES TRUST

   23

INVESTMENT ADVISOR

   27

DISCLOSURE OF PORTFOLIO HOLDINGS POLICY

   34

OTHER SERVICE PROVIDERS

   35

COSTS AND EXPENSES

   48

ADDITIONAL INFORMATION CONCERNING SHARES

   48

PROXY VOTING POLICY AND PROCEDURES

   50

PURCHASE AND REDEMPTION OF SHARES

   51

TAXATION

   56

OTHER INFORMATION

   65

FINANCIAL STATEMENTS

   71

APPENDIX A

   A-1


Table of Contents

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

Board of Trustees or Board

   Board of Trustees of ProShares Trust

CFTC

   Commodity Futures Trading Commission

Code or Internal Revenue Code

   Internal Revenue Code of 1986, as amended

Distributor or SEI

   SEI Investments Distribution Co.

Exchange

   NYSE Arca or The NASDAQ Stock Market

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 October 1, 2010

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

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, including the ninety-nine 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 management investment company.

The Funds are exchange-traded funds (“ETFs”) and the Shares are listed on an Exchange. The Shares trade on the relevant Exchange at market prices that may differ to some degree from the Shares’ net asset values (“NAV”). 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 in-kind for securities included in the relevant underlying index and an amount of cash or entirely in 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 the Shares directly. Rather, most retail investors will purchase Shares in the secondary market with the assistance of a broker.

Reference is made to the Prospectus for a discussion of the investment objectives and policies of each of the Funds. The discussion below supplements, and should be read in conjunction with, the 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, Maryland 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 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.


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

Exchange Listing and Trading

There can be no assurance that the requirements of the Exchange necessary to maintain the listing of Shares of any Fund will continue to be met. The Exchange may remove a Fund from listing under certain circumstances.

As in the case of all equities traded on the Exchange, 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 Exchange disseminates an updated Indicative Optimized Portfolio Value (“IOPV”) for each Fund. The Trust is not involved in or responsible for any aspect of the calculation or dissemination of the IOPVs and makes no warranty as to the accuracy of the IOPVs. IOPVs are expected to be disseminated on a per Fund basis every 15 seconds during regular trading hours of the Exchange.

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 SAI, the word “invest” refers to a Fund directly and indirectly investing in securities or other instruments. Similarly, when used in this SAI, the word “investment” refers to a Fund’s direct 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 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 their assets to investments that, in combination, have economic characteristics similar to equity securities contained in the underlying index (for Ultra ProShares and Alpha ProShares) and/or financial instruments with similar economic characteristics. For purposes of each such investment policy, “assets” includes a Fund’s net assets, as well as amounts borrowed for investment purposes, if any. In addition, for purposes of such an investment policy, “assets” includes not only the amount of 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 segregated on the Fund’s books and records, as required by applicable regulatory guidance, or otherwise used to cover such investment exposure. The Board has adopted a policy to provide investors with at least 60 days’ notice prior to changes in a Fund’s name policy.

 

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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, and the Funds are particularly sensitive to these market risks.

Foreign Securities

Certain of 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, 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 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.

A Fund’s foreign investments that are related to developing (or “emerging market”) countries may be particularly volatile due to the aforementioned factors.

A Fund may value its financial instruments based upon foreign securities by using market prices of domestically-traded financial instruments with comparable foreign securities market exposure.

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, the investments of such Funds may be exposed to special risks that are specific to the country or region in which the investments are focused. 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.

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

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

 

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Whether a Fund realizes a gain or loss from futures activities depends generally upon movements in the underlying security. 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 buys 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 advisor 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 trading adviser under the Commodity Exchange Act (the “CEA”). The Trust has claimed an exclusion from registration as a commodity pool operator under the CEA. Therefore, neither the Trust nor the Advisor is 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 this 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 inversely 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 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 long or short positions in futures by earmarking or segregating with its custodian bank or on the books and records of the Funds (and mark-to-market on a daily basis) cash or liquid instruments that, when added to any amounts deposited with a futures commission merchant as margin, are equal to the market value of the futures contract or otherwise “cover” its position.

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

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

 

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Forward Contracts

A principal investment strategy of the Funds is to invest in financial instruments whose value is derived from the value of an underlying asset, interest rate or index, 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. 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 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®, the New York Stock Exchange, Inc. (“NYSE”) Composite 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”) and other exchanges (“Options 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 Options 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 Options 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 advisor are combined for purposes of these limits. Pursuant to these limitations, an Options 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. The Advisor intends to comply with all limitations.

 

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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 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 effected. 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) and those options would cease to exist, although outstanding options on that exchange that had been issued by the OCC as a result of trades on that exchange would continue to be exercisable in accordance with their terms.

Swap Agreements

A principal investment strategy of the Funds is to invest in financial instruments whose value is derived from the value of an underlying asset, interest rate or index, which may include swap agreements, and, for the Short ProShares, which 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”

 

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between the parties are calculated with respect to a “notional amount,” i.e., the return on or increase in value of a particular dollar amount invested in a “basket” of securities representing a particular index or group of securities. Forms of swap agreements include interest rate caps, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates exceed a specified rate, or “cap”; interest rate floors, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates fall below a specified level, or “floor”; and interest rate collars, under which a party sells a cap and purchases a floor or vice versa in an attempt to protect itself against interest rate movements exceeding given minimum or maximum levels.

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

A Fund’s current obligations under a swap agreement will be accrued daily (offset against any amounts owed 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. 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 these 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 OTC 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 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. A short sale is a transaction in which a Fund sells a security it does not own in anticipation that the market price of that security will decline. 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 it receives, or interest which accrues, during the period of the loan. To borrow the security, the Fund also may be required to pay a premium, which would increase the cost of the security sold. The net proceeds of the short sale will be retained by the broker, to the extent necessary to meet the margin requirements, until the short position is closed out. A Fund also will incur transaction costs in effecting short sales.

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 or cash 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.

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

Depositary 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 OTC, 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 ADR programs are organized independently and without the cooperation of the issuer of the underlying securities. As a 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 Depositary Receipts (“GDRs”). GDRs are receipts for shares in a foreign-based corporation traded in capital markets around the world. While ADRs permit foreign corporations to offer shares to American citizens, GDRs allow companies in Europe, Asia, the United States and Latin American to offer shares in many markets around the world.

U.S. Government Securities

The Funds 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

 

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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. On September 7, 2008, FNMA and the Federal Home Loan Mortgage Corporation (“Freddie Mac” or “FHLMC”), a similar U.S. government instrumentality, were placed into conservatorship by their new regulator, the Federal Housing Finance Agency. Simultaneously, the U.S. Treasury made a commitment of indefinite duration to maintain the positive net worth of both entities. No assurance can be given that the initiatives discussed above with respect to the debt and mortgage-backed securities issued by FNMA and FHLMC will be successful. 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 its investment objectives, as “cover” for the investment techniques it employs, or for liquidity purposes. Under a repurchase agreement, a Fund purchases a debt security and simultaneously agrees to sell the security back to the seller at a mutually agreed-upon future price and date, normally one day or a few days later. The resale price is greater than the purchase price, reflecting an agreed-upon market interest rate during the purchaser’s holding period. While the maturities of the underlying securities in repurchase transactions may be more than one year, the term of each repurchase agreement will always be less than one year. The Funds follow certain procedures designed to minimize the risks inherent in such agreements. These procedures include effecting repurchase transactions only with large, well-capitalized and well-established financial institutions whose condition will be continually monitored by ProShare Advisors. In addition, the value of the collateral underlying the repurchase agreement will always be at least equal to the repurchase price, including any accrued interest earned on the repurchase agreement. In the event of a default or bankruptcy by a selling financial institution, a Fund will seek to liquidate such collateral which could involve certain costs or delays and, to the extent that proceeds from any sale upon a default of the obligation to repurchase were less than the repurchase price, the Fund could suffer a loss. A Fund also may experience difficulties and incur certain costs in exercising its rights to the collateral and may lose the interest the Fund expected to receive under the repurchase agreement. Repurchase agreements usually are for short periods, such as one week or less, but may be longer. It is the current policy of the Funds not to invest in repurchase agreements that do not mature within seven days if any such investment, together with any other illiquid assets held by the Fund, amounts to more than 15% of the Fund’s total net assets. The investments of each of the Funds in repurchase agreements at times may be substantial when, in the view of ProShare Advisors, liquidity, investment, regulatory, or other considerations so warrant.

Money Market Instruments

To seek its investment objective, as a cash reserve, for liquidity purposes, or as “cover” for positions it has taken, 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.

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 NAV per Share of the Fund will fluctuate more when the Fund is leveraging its investments than would otherwise be the case. Moreover, interest costs on borrowings may fluctuate with changing market rates of interest and may partially offset or exceed the returns on the borrowed funds. Under adverse market conditions, a Fund might have to sell portfolio securities to meet interest or principal payments at a time when investment considerations would not favor such sales.

 

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As required by the 1940 Act, a Fund must maintain continuous asset coverage (total assets, including assets acquired with borrowed funds, less liabilities exclusive of borrowings) of 300% of all amounts borrowed. If at any time the value of a Fund’s assets should fail to meet this 300% coverage test, the Fund, within three days (not including weekends and holidays), will reduce the amount of the Fund’s borrowings to the extent necessary to meet this 300% coverage 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: 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.

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 NAV. 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.

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 or any exemptive order issued by the SEC. 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 advisor and the other expenses that the Fund bears directly in connection with the Fund’s own operations. See “Investments in Other Investment Companies” in the Prospectus for more information.

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 OTC options, certain cover for OTC options, repurchase agreements with maturities in excess of seven days, and certain securities whose disposition is restricted under the federal securities laws. The Fund may not be able to sell illiquid securities when ProShare Advisors considers it desirable to do so or may have to sell such securities at a price that is lower than the price that could be obtained if the securities were more liquid. In addition, the sale of illiquid securities also may require more time and may result in higher dealer discounts and other selling expenses than 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 NAV.

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

 

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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 advisor. The Board of Trustees 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 lesser of 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 the Portfolio Turnover Rate. Instruments excluded from the calculation of portfolio turnover generally would include future contracts, swap agreements and option contracts in which the Funds invest since such contracts generally have a remaining maturity of less than one year. ETFs, 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. However, a low or zero Portfolio Turnover Rate should not be assumed to be indicative of the amount of gains that a Fund may or may not distribute to shareholders, as the instruments excluded from the calculation described above may have generated taxable gains upon their sale or maturity. For those Funds that commenced operations prior to May 31, 2010, each such Fund’s turnover rate for the fiscal year ended May 31, 2010 is set forth in the Annual Report to shareholders. Annual Portfolio turnover rates are also shown in each Fund’s summary prospectus.

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 significantly from their respective daily investment objectives, several factors may affect their ability to achieve this correlation. Among these factors are: (1) a Fund’s expenses, including brokerage (which may be increased by high portfolio turnover) and the cost of the investment techniques employed by that Fund; (2) less than all of the securities in the benchmark index being held by a Fund and securities not included in the benchmark index being held by a Fund; (3) an imperfect correlation between the performance of instruments held by a Fund, such as futures contracts, and the performance of the underlying securities in the cash market; (4) bid-ask spreads (the effect of which may be increased by portfolio turnover); (5) holding instruments traded in a market that has become illiquid or disrupted; (6) a Fund’s Share prices being rounded to the nearest cent; (7) changes to the benchmark index that are not disseminated in advance; (8) the need to conform a Fund’s portfolio holdings to comply with investment restrictions or policies or regulatory or tax law requirements; and (9) early and unanticipated closings of the markets on which the holdings of a Fund trade, resulting in the inability of the Fund to execute intended portfolio transactions. While close tracking of any Fund to its benchmark may be achieved on any single trading day, over time the cumulative percentage increase or decrease in the NAV 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, except Alpha ProShares, 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 NAVs 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.

 

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• 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 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 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) period of time.

 

  d) financing rates associated with leverage;

 

  e) other Fund expenses;

 

  f) dividends paid by companies in the index; and

The fund performance for a leveraged Fund can be estimated given any set of assumptions for the factors described above. The tables on the next five pages 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, or, with respect to Ultra Fixed Income ProShares and Short Fixed Income ProShares, no interest paid on securities 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.

 

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The first table below shows a performance example of an Ultra Fund (which has an investment objective to correspond to twice (200%) the daily performance of the S&P500. The Ultra 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” and “Compounding 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” and “Compounding Risk.” In the charts below, areas shaded green represent those scenarios where a leveraged Fund with the investment objective described will return the same as or outperform (i.e., return more than) the index performance times the stated multiple in the Fund’s investment objective; conversely, areas shaded red represent those scenarios where the Fund will underperform (i.e., return less than) the index performance times the stated multiple in the Fund’s investment objective.

Estimated Fund Return Over One Year When the Fund Objective is to Seek Daily Investment Results, Before Fund Fees and Expenses and Leverage Costs, that Correspond to Twice (200%) the Daily Performance of an Index.

 

One Year
Index Performance

  200% One  Year
Index
Performance
  Index Volatility
    0%   5%   10%   15%   20%   25%   30%   35%   40%   45%   50%   55%   60%
-60%   -120%   -84.0%   -84.0%   -84.2%   -84.4%   -84.6%   -85.0%   -85.4%   -85.8%   -86.4%   -86.9%   -87.5%   -88.2%   -88.8%
-55%   -110%   -79.8%   -79.8%   -80.0%   -80.2%   -80.5%   -81.0%   -81.5%   -82.1%   -82.7%   -83.5%   -84.2%   -85.0%   -85.9%
-50%   -100%   -75.0%   -75.1%   -75.2%   -75.6%   -76.0%   -76.5%   -77.2%   -77.9%   -78.7%   -79.6%   -80.5%   -81.5%   -82.6%
-45%   -90%   -69.8%   -69.8%   -70.1%   -70.4%   -70.9%   -71.6%   -72.4%   -73.2%   -74.2%   -75.3%   -76.4%   -77.6%   -78.9%
-40%   -80%   -64.0%   -64.1%   -64.4%   -64.8%   -65.4%   -66.2%   -67.1%   -68.2%   -69.3%   -70.6%   -72.0%   -73.4%   -74.9%
-35%   -70%   -57.8%   -57.9%   -58.2%   -58.7%   -59.4%   -60.3%   -61.4%   -62.6%   -64.0%   -65.5%   -67.1%   -68.8%   -70.5%
-30%   -60%   -51.0%   -51.1%   -51.5%   -52.1%   -52.9%   -54.0%   -55.2%   -56.6%   -58.2%   -60.0%   -61.8%   -63.8%   -65.8%
-25%   -50%   -43.8%   -43.9%   -44.3%   -45.0%   -46.0%   -47.2%   -48.6%   -50.2%   -52.1%   -54.1%   -56.2%   -58.4%   -60.8%
-20%   -40%   -36.0%   -36.2%   -36.6%   -37.4%   -38.5%   -39.9%   -41.5%   -43.4%   -45.5%   -47.7%   -50.2%   -52.7%   -55.3%
-15%   -30%   -27.8%   -27.9%   -28.5%   -29.4%   -30.6%   -32.1%   -34.0%   -36.1%   -38.4%   -41.0%   -43.7%   -46.6%   -49.6%
-10%   -20%   -19.0%   -19.2%   -19.8%   -20.8%   -22.2%   -23.9%   -26.0%   -28.3%   -31.0%   -33.8%   -36.9%   -40.1%   -43.5%
-5%   -10%   -9.8%   -10.0%   -10.6%   -11.8%   -13.3%   -15.2%   -17.5%   -20.2%   -23.1%   -26.3%   -29.7%   -33.3%   -37.0%
0%   0%   0.0%   -0.2%   -1.0%   -2.2%   -3.9%   -6.1%   -8.6%   -11.5%   -14.8%   -18.3%   -22.1%   -26.1%   -30.2%
5%   10%   10.3%   10.0%   9.2%   7.8%   5.9%   3.6%   0.8%   -2.5%   -6.1%   -10.0%   -14.1%   -18.5%   -23.1%
10%   20%   21.0%   20.7%   19.8%   18.3%   16.3%   13.7%   10.6%   7.0%   3.1%   -1.2%   -5.8%   -10.6%   -15.6%
15%   30%   32.3%   31.9%   30.9%   29.3%   27.1%   24.2%   20.9%   17.0%   12.7%   8.0%   3.0%   -2.3%   -7.7%
20%   40%   44.0%   43.6%   42.6%   40.8%   38.4%   35.3%   31.6%   27.4%   22.7%   17.6%   12.1%   6.4%   0.5%
25%   50%   56.3%   55.9%   54.7%   52.8%   50.1%   46.8%   42.8%   38.2%   33.1%   27.6%   21.7%   15.5%   9.0%
30%   60%   69.0%   68.6%   67.3%   65.2%   62.4%   58.8%   54.5%   49.5%   44.0%   38.0%   31.6%   24.9%   17.9%
35%   70%   82.3%   81.8%   80.4%   78.2%   75.1%   71.2%   66.6%   61.2%   55.3%   48.8%   41.9%   34.7%   27.2%
40%   80%   96.0%   95.5%   94.0%   91.6%   88.3%   84.1%   79.1%   73.4%   67.0%   60.1%   52.6%   44.8%   36.7%
45%   90%   110.3%   109.7%   108.2%   105.6%   102.0%   97.5%   92.2%   86.0%   79.2%   71.7%   63.7%   55.4%   46.7%
50%   100%   125.0%   124.4%   122.8%   120.0%   116.2%   111.4%   105.6%   99.1%   91.7%   83.8%   75.2%   66.3%   57.0%
55%   110%   140.3%   139.7%   137.9%   134.9%   130.8%   125.7%   119.6%   112.6%   104.7%   96.2%   87.1%   77.5%   67.6%
60%   120%   156.0%   155.4%   153.5%   150.3%   146.0%   140.5%   134.0%   126.5%   118.1%   109.1%   99.4%   89.2%   78.6%

 

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The table below shows a performance example of a Short ProShares (which has an investment objective to correspond to the inverse (opposite) of the daily performance of the S&P 500). In the chart below, areas shaded green represent those scenarios where a Short ProShares will outperform (i.e., return more than) the index performance; conversely areas shaded red represent those scenarios where a Short ProShares will underperform (i.e., return less than) the index performance.

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%   45%   50%   55%   60%
-60%   60%   150.0%   149.4%   147.5%   144.4%   140.2%   134.9%   128.5%   121.2%   113.0%   104.2%   94.7%   84.7%   74.4%
-55%   55%   122.2%   121.7%   120.0%   117.3%   113.5%   108.8%   103.1%   96.6%   89.4%   81.5%   73.1%   64.2%   55.0%
-50%   50%   100.0%   99.5%   98.0%   95.6%   92.2%   87.9%   82.8%   76.9%   70.4%   63.3%   55.8%   47.8%   39.5%
-45%   45%   81.8%   81.4%   80.0%   77.8%   74.7%   70.8%   66.2%   60.9%   54.9%   48.5%   41.6%   34.4%   26.9%
-40%   40%   66.7%   66.3%   65.0%   63.0%   60.1%   56.6%   52.3%   47.5%   42.0%   36.1%   29.8%   23.2%   16.3%
-35%   35%   53.8%   53.5%   52.3%   50.4%   47.8%   44.5%   40.6%   36.1%   31.1%   25.6%   19.8%   13.7%   7.3%
-30%   30%   42.9%   42.5%   41.4%   39.7%   37.3%   34.2%   30.6%   26.4%   21.7%   16.7%   11.3%   5.6%   -0.3%
-25%   25%   33.3%   33.0%   32.0%   30.4%   28.1%   25.3%   21.9%   18.0%   13.6%   8.9%   3.8%   -1.5%   -7.0%
-20%   20%   25.0%   24.7%   23.8%   22.2%   20.1%   17.4%   14.2%   10.6%   6.5%   2.1%   -2.6%   -7.6%   -12.8%
-15%   15%   17.6%   17.4%   16.5%   15.0%   13.0%   10.5%   7.5%   4.1%   0.3%   -3.9%   -8.4%   -13.1%   -17.9%
-10%   10%   11.1%   10.8%   10.0%   8.6%   6.8%   4.4%   1.5%   -1.7%   -5.3%   -9.3%   -13.5%   -17.9%   -22.5%
-5%   5%   5.3%   5.0%   4.2%   2.9%   1.1%   -1.1%   -3.8%   -6.9%   -10.3%   -14.0%   -18.0%   -22.2%   -26.6%
0%   0%   0.0%   -0.2%   -1.0%   -2.2%   -3.9%   -6.1%   -8.6%   -11.5%   -14.8%   -18.3%   -22.1%   -26.1%   -30.2%
5%   -5%   -4.8%   -5.0%   -5.7%   -6.9%   -8.5%   -10.5%   -13.0%   -15.7%   -18.8%   -22.2%   -25.8%   -29.6%   -33.6%
10%   -10%   -9.1%   -9.3%   -10.0%   -11.1%   -12.7%   -14.6%   -16.9%   -19.6%   -22.5%   -25.8%   -29.2%   -32.8%   -36.6%
15%   -15%   -13.0%   -13.3%   -13.9%   -15.0%   -16.5%   -18.3%   -20.5%   -23.1%   -25.9%   -29.0%   -32.3%   -35.7%   -39.3%
20%   -20%   -16.7%   -16.9%   -17.5%   -18.5%   -19.9%   -21.7%   -23.8%   -26.3%   -29.0%   -31.9%   -35.1%   -38.4%   -41.9%
25%   -25%   -20.0%   -20.2%   -20.8%   -21.8%   -23.1%   -24.8%   -26.9%   -29.2%   -31.8%   -34.7%   -37.7%   -40.9%   -44.2%
30%   -30%   -23.1%   -23.3%   -23.8%   -24.8%   -26.1%   -27.7%   -29.7%   -31.9%   -34.5%   -37.2%   -40.1%   -43.2%   -46.3%
35%   -35%   -25.9%   -26.1%   -26.7%   -27.6%   -28.8%   -30.4%   -32.3%   -34.5%   -36.9%   -39.5%   -42.3%   -45.3%   -48.3%
40%   -40%   -28.6%   -28.7%   -29.3%   -30.2%   -31.4%   -32.9%   -34.7%   -36.8%   -39.1%   -41.7%   -44.4%   -47.2%   -50.2%
45%   -45%   -31.0%   -31.2%   -31.7%   -32.6%   -33.7%   -35.2%   -37.0%   -39.0%   -41.2%   -43.7%   -46.3%   -49.0%   -51.9%
50%   -50%   -33.3%   -33.5%   -34.0%   -34.8%   -35.9%   -37.4%   -39.1%   -41.0%   -43.2%   -45.6%   -48.1%   -50.7%   -53.5%
55%   -55%   -35.5%   -35.6%   -36.1%   -36.9%   -38.0%   -39.4%   -41.0%   -42.9%   -45.0%   -47.3%   -49.8%   -52.3%   -55.0%
60%   -60%   -37.5%   -37.7%   -38.1%   -38.9%   -40.0%   -41.3%   -42.9%   -44.7%   -46.7%   -49.0%   -51.3%   -53.8%   -56.4%

 

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The table below shows a performance example of an UltraShort ProShares (which has an investment objective to correspond to twice (200%) the inverse (opposite) of the daily performance of the S&P 500). In the chart below, areas shaded green represent those scenarios where an UltraShort ProShares will outperform (i.e., return more than) the index performance; conversely areas shaded red represent those scenarios where an UltraShort ProShares will underperform (i.e., return less than) the index performance.

Estimated Fund Return Over One Year When the Fund Objective is to Seek Daily Investment Results, Before Fees and Expenses, that Correspond to Twice (200%) the Inverse of the Daily Performance of an Index.

 

One Year Index
Performance

  200% Inverse of
One  Year

Index
Performance
  Index Volatility
    0%   5%   10%   15%   20%   25%   30%   35%   40%   45%   50%   55%   60%
-60%   120%   525.0%   520.3%   506.5%   484.2%   454.3%   418.1%   377.1%   332.8%   286.7%   240.4%   195.2%   152.2%   112.2%
-55%   110%   393.8%   390.1%   379.2%   361.6%   338.0%   309.4%   277.0%   242.0%   205.6%   169.0%   133.3%   99.3%   67.7%
-50%   100%   300.0%   297.0%   288.2%   273.9%   254.8%   231.6%   205.4%   177.0%   147.5%   117.9%   88.9%   61.4%   35.8%
-45%   90%   230.6%   228.1%   220.8%   209.0%   193.2%   174.1%   152.4%   128.9%   104.6%   80.1%   56.2%   33.4%   12.3%
-40%   80%   177.8%   175.7%   169.6%   159.6%   146.4%   130.3%   112.0%   92.4%   71.9%   51.3%   31.2%   12.1%   -5.7%
-35%   70%   136.7%   134.9%   129.7%   121.2%   109.9%   96.2%   80.7%   63.9%   46.5%   28.9%   11.8%   -4.5%   -19.6%
-30%   60%   104.1%   102.6%   98.1%   90.8%   81.0%   69.2%   55.8%   41.3%   26.3%   11.2%   -3.6%   -17.6%   -30.7%
-25%   50%   77.8%   76.4%   72.5%   66.2%   57.7%   47.4%   35.7%   23.1%   10.0%   -3.2%   -16.0%   -28.3%   -39.6%
-20%   40%   56.3%   55.1%   51.6%   46.1%   38.6%   29.5%   19.3%   8.2%   -3.3%   -14.9%   -26.2%   -36.9%   -46.9%
-15%   30%   38.4%   37.4%   34.3%   29.4%   22.8%   14.7%   5.7%   -4.2%   -14.4%   -24.6%   -34.6%   -44.1%   -53.0%
-10%   20%   23.5%   22.5%   19.8%   15.4%   9.5%   2.3%   -5.8%   -14.5%   -23.6%   -32.8%   -41.7%   -50.2%   -58.1%
-5%   10%   10.8%   10.0%   7.5%   3.6%   -1.7%   -8.1%   -15.4%   -23.3%   -31.4%   -39.6%   -47.7%   -55.3%   -62.4%
0%   0%   0.0%   -0.7%   -3.0%   -6.5%   -11.3%   -17.1%   -23.7%   -30.8%   -38.1%   -45.5%   -52.8%   -59.6%   -66.0%
5%   -10%   -9.3%   -10.0%   -12.0%   -15.2%   -19.6%   -24.8%   -30.8%   -37.2%   -43.9%   -50.6%   -57.2%   -63.4%   -69.2%
10%   -20%   -17.4%   -18.0%   -19.8%   -22.7%   -26.7%   -31.5%   -36.9%   -42.8%   -48.9%   -55.0%   -61.0%   -66.7%   -71.9%
15%   -30%   -24.4%   -25.0%   -26.6%   -29.3%   -32.9%   -37.3%   -42.3%   -47.6%   -53.2%   -58.8%   -64.3%   -69.5%   -74.3%
20%   -40%   -30.6%   -31.1%   -32.6%   -35.1%   -38.4%   -42.4%   -47.0%   -51.9%   -57.0%   -62.2%   -67.2%   -72.0%   -76.4%
25%   -50%   -36.0%   -36.5%   -37.9%   -40.2%   -43.2%   -46.9%   -51.1%   -55.7%   -60.4%   -65.1%   -69.8%   -74.2%   -78.3%
30%   -60%   -40.8%   -41.3%   -42.6%   -44.7%   -47.5%   -50.9%   -54.8%   -59.0%   -63.4%   -67.8%   -72.0%   -76.1%   -79.9%
35%   -70%   -45.1%   -45.5%   -46.8%   -48.7%   -51.3%   -54.5%   -58.1%   -62.0%   -66.0%   -70.1%   -74.1%   -77.9%   -81.4%
40%   -80%   -49.0%   -49.4%   -50.5%   -52.3%   -54.7%   -57.7%   -61.1%   -64.7%   -68.4%   -72.2%   -75.9%   -79.4%   -82.7%
45%   -90%   -52.4%   -52.8%   -53.8%   -55.5%   -57.8%   -60.6%   -63.7%   -67.1%   -70.6%   -74.1%   -77.5%   -80.8%   -83.8%
50%   -100%   -55.6%   -55.9%   -56.9%   -58.5%   -60.6%   -63.2%   -66.1%   -69.2%   -72.5%   -75.8%   -79.0%   -82.1%   -84.9%
55%   -110%   -58.4%   -58.7%   -59.6%   -61.1%   -63.1%   -65.5%   -68.2%   -71.2%   -74.2%   -77.3%   -80.3%   -83.2%   -85.9%
60%   -120%   -60.9%   -61.2%   -62.1%   -63.5%   -65.4%   -67.6%   -70.2%   -73.0%   -75.8%   -78.7%   -81.5%   -84.2%   -86.7%

 

15


Table of Contents

The tables below show performance examples of an UltraPro and UltraPro Short Fund (which have investment objectives to correspond to three times (300%) and three times the inverse of (-300%), respectively, the daily performance of the S&P 500 Index. In the charts below, areas shaded green represent those scenarios where a Fund will return the same as or outperform (i.e., return more than) the index performance times the stated multiple in the Fund’s investment objective; conversely, areas shaded red represent those scenarios where the Fund will underperform (i.e., return less than) the index performance times the stated multiple in the Fund’s investment objective.

Estimated Fund Return Over One Year When the Fund Objective is to Seek Daily Investment Results, Before Fund Fees and Expenses and Leverage Costs, that Correspond to Three Times (300%) the Daily Performance of an Index.

 

One Year Index
Performance

  300%
One Year Index
Performance
  Index Volatility
    0%   5%   10%   15%   20%   25%   30%   35%   40%   45%   50%   55%   60%
-60%   -180%   -93.6%   -93.6%   -93.8%   -94.0%   -94.3%   -94.7%   -95.1%   -95.6%   -96.0%   -96.5%   -97.0%   -97.4%   -97.8%
-55%   -165%   -90.9%   -91.0%   -91.2%   -91.5%   -91.9%   -92.4%   -93.0%   -93.7%   -94.4%   -95.0%   -95.7%   -96.3%   -96.9%
-50%   -150%   -87.5%   -87.6%   -87.9%   -88.3%   -88.9%   -89.6%   -90.5%   -91.3%   -92.3%   -93.2%   -94.1%   -95.0%   -95.8%
-45%   -135%   -83.4%   -83.5%   -83.9%   -84.4%   -85.2%   -86.2%   -87.3%   -88.5%   -89.7%   -90.9%   -92.1%   -93.3%   -94.3%
-40%   -120%   -78.4%   -78.6%   -79.0%   -79.8%   -80.8%   -82.1%   -83.5%   -85.0%   -86.6%   -88.2%   -89.8%   -91.3%   -92.7%
-35%   -105%   -72.5%   -72.7%   -73.3%   -74.3%   -75.6%   -77.2%   -79.0%   -81.0%   -83.0%   -85.0%   -87.0%   -88.9%   -90.7%
-30%   -90%   -65.7%   -66.0%   -66.7%   -67.9%   -69.6%   -71.6%   -73.8%   -76.2%   -78.8%   -81.3%   -83.8%   -86.2%   -88.4%
-25%   -75%   -57.8%   -58.1%   -59.1%   -60.6%   -62.6%   -65.0%   -67.8%   -70.8%   -73.9%   -77.0%   -80.1%   -83.0%   -85.7%
-20%   -60%   -48.8%   -49.2%   -50.3%   -52.1%   -54.6%   -57.6%   -60.9%   -64.5%   -68.3%   -72.1%   -75.8%   -79.3%   -82.6%
-15%   -45%   -38.6%   -39.0%   -40.4%   -42.6%   -45.5%   -49.1%   -53.1%   -57.5%   -62.0%   -66.5%   -71.0%   -75.2%   -79.1%
-10%   -30%   -27.1%   -27.6%   -29.3%   -31.9%   -35.3%   -39.6%   -44.3%   -49.5%   -54.9%   -60.3%   -65.6%   -70.6%   -75.2%
-5%   -15%   -14.3%   -14.9%   -16.8%   -19.9%   -24.0%   -28.9%   -34.5%   -40.6%   -46.9%   -53.3%   -59.5%   -65.4%   -70.9%
0%   0%   0.0%   -0.7%   -3.0%   -6.5%   -11.3%   -17.1%   -23.7%   -30.8%   -38.1%   -45.5%   -52.8%   -59.6%   -66.0%
5%   15%   15.8%   14.9%   12.3%   8.2%   2.7%   -4.0%   -11.6%   -19.8%   -28.4%   -36.9%   -45.3%   -53.3%   -60.7%
10%   30%   33.1%   32.1%   29.2%   24.4%   18.0%   10.3%   1.6%   -7.8%   -17.6%   -27.5%   -37.1%   -46.3%   -54.8%
15%   45%   52.1%   51.0%   47.6%   42.2%   34.9%   26.1%   16.1%   5.3%   -5.9%   -17.2%   -28.2%   -38.6%   -48.4%
20%   60%   72.8%   71.5%   67.7%   61.5%   53.3%   43.3%   31.9%   19.7%   6.9%   -5.9%   -18.4%   -30.3%   -41.3%
25%   75%   95.3%   93.9%   89.5%   82.6%   73.2%   61.9%   49.1%   35.2%   20.9%   6.4%   -7.7%   -21.2%   -33.7%
30%   90%   119.7%   118.1%   113.2%   105.4%   94.9%   82.1%   67.7%   52.1%   35.9%   19.7%   3.8%   -11.3%   -25.4%
35%   105%   146.0%   144.2%   138.8%   130.0%   118.2%   104.0%   87.8%   70.4%   52.2%   34.0%   16.2%   -0.7%   -16.4%
40%   120%   174.4%   172.3%   166.3%   156.5%   143.4%   127.5%   109.5%   90.0%   69.8%   49.5%   29.6%   10.7%   -6.8%
45%   135%   204.9%   202.6%   195.9%   185.0%   170.4%   152.7%   132.7%   111.1%   88.6%   66.1%   44.0%   23.0%   3.5%
50%   150%   237.5%   235.0%   227.5%   215.5%   199.3%   179.8%   157.6%   133.7%   108.8%   83.8%   59.4%   36.2%   14.6%
55%   165%   272.4%   269.6%   261.4%   248.1%   230.3%   208.7%   184.3%   157.9%   130.4%   102.8%   75.9%   50.3%   26.5%
60%   180%   309.6%   306.5%   297.5%   282.9%   263.3%   239.6%   212.7%   183.6%   153.5%   123.1%   93.5%   65.3%   39.1%

 

16


Table of Contents

Estimated Fund Return Over One Year When the Fund Objective is to Seek Daily Investment Results, Before Fees and Expenses, that Correspond to Three Times (300%) the Inverse of the Daily Performance of an Index.

 

One Year Index
Performance

  300% Inverse of
One  Year

Index
Performance
  Index Volatility
    0%   5%   10%   15%   20%   25%   30%   35%   40%   45%   50%   55%   60%
-60%   180%   462.5%   439.2%   371.5%   265.2%   129.1%   973.9%   810.5%   649.2%   498.3%   363.6%   248.6%   154.4%   80.2%
-55%   165%   997.4%   981.1%   933.5%   858.8%   763.2%   654.2%   539.5%   426.2%   320.2%   225.6%   144.9%   78.7%   26.6%
-50%   150%   700.0%   688.1%   653.4%   599.0%   529.3%   449.8%   366.2%   283.6%   206.3%   137.4%   78.5%   30.3%   -7.7%
-45%   135%   501.1%   492.1%   466.0%   425.1%   372.8%   313.1%   250.3%   188.2%   130.1%   78.3%   34.1%   -2.1%   -30.7%
-40%   120%   363.0%   356.1%   336.0%   304.5%   264.2%   218.2%   169.8%   122.0%   77.3%   37.4%   3.3%   -24.6%   -46.6%
-35%   105%   264.1%   258.7%   242.9%   218.1%   186.4%   150.3%   112.2%   74.6%   39.4%   8.0%   -18.8%   -40.7%   -58.0%
-30%   90%   191.5%   187.2%   174.6%   154.7%   129.3%   100.4%   69.9%   39.8%   11.6%   -13.5%   -34.9%   -52.5%   -66.4%
-25%   75%   137.0%   133.5%   123.2%   107.1%   86.5%   62.9%   38.1%   13.7%   -9.2%   -29.7%   -47.1%   -61.4%   -72.7%
-20%   60%   95.3%   92.4%   83.9%   70.6%   53.6%   34.2%   13.8%   -6.3%   -25.2%   -42.0%   -56.4%   -68.2%   -77.5%
-15%   45%   62.8%   60.4%   53.4%   42.3%   28.1%   11.9%   -5.1%   -21.9%   -37.7%   -51.7%   -63.7%   -73.5%   -81.2%
-10%   30%   37.2%   35.1%   29.2%   19.9%   7.9%   -5.7%   -20.1%   -34.2%   -47.5%   -59.3%   -69.4%   -77.7%   -84.2%
-5%   15%   16.6%   14.9%   9.8%   1.9%   -8.3%   -19.8%   -32.0%   -44.1%   -55.3%   -65.4%   -74.0%   -81.0%   -86.5%
0%   0%   0.0%   -1.5%   -5.8%   -12.6%   -21.3%   -31.3%   -41.7%   -52.0%   -61.7%   -70.3%   -77.7%   -83.7%   -88.5%
5%   -15%   -13.6%   -14.9%   -18.6%   -24.5%   -32.0%   -40.6%   -49.7%   -58.6%   -66.9%   -74.4%   -80.7%   -85.9%   -90.0%
10%   -30%   -24.9%   -26.0%   -29.2%   -34.4%   -40.9%   -48.4%   -56.2%   -64.0%   -71.2%   -77.7%   -83.2%   -87.8%   -91.3%
15%   -45%   -34.2%   -35.2%   -38.1%   -42.6%   -48.3%   -54.8%   -61.7%   -68.5%   -74.8%   -80.5%   -85.3%   -89.3%   -92.4%
20%   -60%   -42.1%   -43.0%   -45.5%   -49.4%   -54.5%   -60.2%   -66.3%   -72.3%   -77.8%   -82.8%   -87.1%   -90.6%   -93.3%
25%   -75%   -48.8%   -49.6%   -51.8%   -55.3%   -59.7%   -64.8%   -70.2%   -75.4%   -80.4%   -84.8%   -88.6%   -91.7%   -94.1%
30%   -90%   -54.5%   -55.2%   -57.1%   -60.2%   -64.2%   -68.7%   -73.5%   -78.2%   -82.6%   -86.5%   -89.8%   -92.6%   -94.8%
35%   -105%   -59.4%   -60.0%   -61.7%   -64.5%   -68.0%   -72.1%   -76.3%   -80.5%   -84.4%   -87.9%   -90.9%   -93.4%   -95.3%
40%   -120%   -63.6%   -64.1%   -65.7%   -68.2%   -71.3%   -75.0%   -78.8%   -82.5%   -86.0%   -89.2%   -91.9%   -94.1%   -95.8%
45%   -135%   -67.2%   -67.7%   -69.1%   -71.3%   -74.2%   -77.5%   -80.9%   -84.3%   -87.4%   -90.3%   -92.7%   -94.7%   -96.2%
50%   -150%   -70.4%   -70.8%   -72.1%   -74.1%   -76.7%   -79.6%   -82.7%   -85.8%   -88.7%   -91.2%   -93.4%   -95.2%   -96.6%
55%   -165%   -73.1%   -73.5%   -74.7%   -76.5%   -78.9%   -81.5%   -84.4%   -87.1%   -89.7%   -92.0%   -94.0%   -95.6%   -96.9%
60%   -180%   -75.6%   -75.9%   -77.0%   -78.7%   -80.8%   -83.2%   -85.8%   -88.3%   -90.7%   -92.8%   -94.6%   -96.0%   -97.2%

The foregoing tables are intended to isolate the effect of index volatility and index performance on the return of a leveraged Fund. The Fund’s actual returns may be significantly greater or less than the returns shown above as a result of any of factors discussed above or under “Correlation Risk” and “Compounding Risk” in the Prospectus.

Non-Diversified Status

Each Fund is a “non-diversified” series of the Trust. A Fund’s classification as a “non-diversified” investment company means that the proportion of the Fund’s assets that may be invested in the securities of a single issuer is not limited by the 1940 Act. Each Fund, however, intends to seek to qualify as a “regulated investment company” (“RIC”) for purposes of the Code, which imposes diversification requirements on these Funds that are less restrictive than the requirements applicable to the “diversified” investment companies under the 1940 Act. With respect to a “non-diversified” Fund, a relatively high percentage of such a Fund’s assets may be invested in the securities of a limited number of issuers, primarily within the same economic sector. That Fund’s portfolio securities, therefore, may be more susceptible to any single economic, political, or regulatory occurrence than the portfolio securities of a more diversified investment company.

 

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INVESTMENT RESTRICTIONS

Each Fund has adopted certain investment restrictions as fundamental policies which cannot be changed without the approval of the holders of a majority of the outstanding voting securities of the Fund, as that term is defined in the 1940 Act. As defined in the 1940 Act, the vote of a majority of the outstanding voting securities means the lesser of: (i) 67% or more of the voting securities of the series present at a duly called meeting of shareholders, if the holders of more than 50% of the outstanding voting securities of the Fund are present or represented by proxy; or (ii) more than 50% of the outstanding voting securities of the series. (All policies of a Fund not specifically identified in this SAI or the Prospectus as fundamental may be changed without a vote of the shareholders of the Fund, upon approval of a majority of the Trustees.) For purposes of the following limitations, all percentage limitations apply immediately after a purchase or initial investment.

A Fund may not:

 

  1. Make investments for the purpose of exercising control or management.

 

  2. Purchase or sell real estate, except that, to the extent permitted by applicable law, the Fund may invest in securities directly or indirectly secured by real estate or interests therein or issued by companies that invest in real estate or interests therein.

 

  3. Make loans to other persons, except that the acquisition of bonds, debentures or other corporate debt securities and investment in government obligations, commercial paper, pass-through instruments, certificates of deposit, bankers’ acceptances and repurchase agreements and purchase and sale contracts and any similar instruments shall not be deemed to be the making of a loan, and except, further, that the Fund may lend its portfolio securities, provided that the lending of portfolio securities may be made only in accordance with applicable law and the guidelines set forth in the Prospectus and this SAI, as they may be amended from time to time.

 

  4. Issue senior securities to the extent such issuance would violate applicable law.

 

  5.

Borrow money, except that the Fund (i) may borrow from banks (as defined in the 1940 Act) in amounts up to 33 1/3% of its total assets (including the amount borrowed), (ii) may, to the extent permitted by applicable law, borrow up to an additional 5% of its total assets for temporary purposes, (iii) may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities, (iv) may purchase securities on margin to the extent permitted by applicable law and (v) may enter into reverse repurchase agreements. The Fund may not pledge its assets other than to secure such borrowings or, to the extent permitted by the Fund’s investment policies as set forth in the Prospectus and SAI, as they may be amended from time to time, in connection with hedging transactions, short sales, when-issued and forward commitment transactions and similar investment strategies.

 

  6. Underwrite securities of other issuers, except insofar as the Fund technically may be deemed an underwriter under the 1933 Act, in selling portfolio securities.

 

  7. Purchase or sell commodities or contracts on commodities, except to the extent the Fund may do so in accordance with applicable law and the Fund’s Prospectus and SAI, as they may be amended from time to time.

No Fund will concentrate (i.e., hold more than 25% of its assets in the stocks of a single industry or group of industries) its investments in issuers of one or more particular industries, except that a Fund will concentrate to approximately the same extent that its underlying index concentrates in the stocks of such particular industry or industries. For purposes of this limitation, securities of the U.S. government (including its agencies and instrumentalities) and tax-free securities of state or municipal governments and their political subdivisions (and repurchase agreements collateralized by government securities) are not considered to be issued by members of any industry.

PORTFOLIO TRANSACTIONS AND BROKERAGE

Subject to the general supervision of the Board of Trustees, ProShare Advisors is responsible for decisions to buy and sell securities for each of the Funds, the selection of brokers and dealers to effect the transactions, and the negotiation of brokerage commissions, if any. ProShare Advisors expects that the Funds may execute brokerage or other agency transactions through registered broker-dealers, who receive compensation for their services, in conformity with the 1940 Act, the 1934 Act and the rules and regulations thereunder. Compensation may also be paid in connection with riskless principal transactions (in NASDAQ or OTC securities and securities listed on an exchange) and agency NASDAQ or OTC transactions executed with an electronic communications network or an alternative trading system.

 

18


Table of Contents

ProShare Advisors may serve as an investment manager to and may place portfolio transactions on behalf of a number of clients, including other investment companies. It is the practice of ProShare Advisors to cause purchase and sale transactions to be allocated among the Funds and others whose assets ProShare Advisors manages in such manner as ProShare Advisors deems equitable. The main factors considered by ProShare Advisors in making such allocations among the Funds and other client accounts of ProShare Advisors are the respective investment objectives, the relative size of portfolio holdings of the same or comparable securities, the availability of cash for investment, the size of investment commitments generally held and the opinions of the person(s) responsible, if any, for managing the portfolios of the Funds and the other client accounts.

The policy of each Fund regarding purchases and sales of securities for a Fund’s portfolio is that primary consideration will be given to obtaining the most favorable prices and efficient executions of transactions. Consistent with this policy, when securities transactions are effected on a stock exchange, each Fund’s policy is to pay commissions that are considered fair and reasonable without necessarily determining that the lowest possible commissions are paid in all circumstances. Each Fund believes that a requirement always to seek the lowest possible commission cost could impede effective portfolio management and preclude the Fund and ProShare Advisors from obtaining a high quality of brokerage (and potentially research) services. In seeking to determine the reasonableness of brokerage commissions paid in any transaction, ProShare Advisors relies upon its experience and knowledge regarding commissions generally charged by various brokers and on its judgment in evaluating the brokerage and research services received from the broker effecting the transaction. Such determinations are necessarily subjective and imprecise, as, in most cases, an exact dollar value for those services is not ascertainable.

Purchases and sales of U.S. government securities are normally transacted through issuers, underwriters or major dealers in U.S. government securities acting as principals. Such transactions are made on a net basis and do not involve payment of brokerage commissions. The cost of securities purchased from an underwriter usually includes a commission paid by the issuer to the underwriters; transactions with dealers normally reflect the spread between bid and asked prices.

In seeking to implement a Fund’s policies, ProShare Advisors effects transactions with those brokers and dealers who ProShare Advisors believes provide the most favorable prices and are capable of providing efficient executions. If ProShare Advisors believes such prices and executions are obtainable from more than one broker or dealer, ProShare Advisors may give consideration to placing portfolio transactions with those brokers and dealers who also furnish research and other services to the Fund or ProShare Advisors, consistent with Section 28(e) of the 1934 Act. Such services may include, but are not limited to, any one or more of the following: information as to the availability of securities for purchase or sale; statistical or factual information or opinions pertaining to investment; wire services; and appraisals or evaluations of portfolio securities. If the broker-dealer providing these additional services is acting as a principal for its own account, no commissions would be payable. If the broker-dealer is not a principal, a commission higher than otherwise available may be justified, at the determination of ProShare Advisors, for the additional services.

The information and services received by ProShare Advisors from brokers and dealers may be of benefit to ProShare Advisors in the management of accounts of some of ProShare Advisors’ other clients and may not in all cases benefit a Fund directly. While the receipt of such information and services is useful in varying degrees and would generally reduce the amount of research or services otherwise performed by ProShare Advisors and thereby reduce ProShare Advisors’ expenses, this information and these services are of indeterminable value and the management fee paid to ProShare Advisors is not reduced by any amount that may be attributable to the value of such information and services.

ProShare Advisors does not consider sales of Shares as a factor in the selection of broker-dealers to execute portfolio transactions.

 

19


Table of Contents

The table below sets forth the brokerage commissions paid by each Fund for the period noted for each Fund that was operational during that period:

 

Fund

   Commissions
Paid

During  Fiscal
Year

Ended
May 31, 2008
   Commissions
Paid

During  Fiscal
Year

Ended
May 31, 2009
   Commissions
Paid

During  Fiscal
Year

Ended
May 31, 2010
   Aggregate Total

ProShares Ultra QQQ

   $ 241,495    $ 708,543    $ 249,875    $ 1,199,913

ProShares Ultra Dow30

   $ 57,736    $ 250,438    $ 98,056    $ 406,230

ProShares Ultra S&P500

   $ 123,303    $ 1,080,014    $ 563,636    $ 1,766,953

ProShares Ultra MidCap400

   $ 20,179    $ 57,698    $ 29,258    $ 107,135

ProShares Ultra SmallCap600

   $ 2,309    $ 17,885    $ 8,840    $ 29,034

ProShares Ultra Russell2000

   $ 28,050    $ 188,632    $ 78,741    $ 295,423

ProShares Ultra Russell1000 Value

   $ 892    $ 6,417    $ 2,531    $ 9,840

ProShares Ultra Russell1000 Growth

   $ 4,351    $ 7,923    $ 2,898    $ 15,172

ProShares Ultra Russell MidCap Value

   $ 1,561    $ 3,008    $ 2,202    $ 6,771

ProShares Ultra Russell MidCap Growth

   $ 4,705    $ 4,919    $ 1,988    $ 11,612

ProShares Ultra Russell2000 Value

   $ 1,599    $ 7,849    $ 3,322    $ 12,770

ProShares Ultra Russell2000 Growth

   $ 1,740    $ 7,106    $ 3,475    $ 12,321

ProShares Ultra Basic Materials

   $ 5,021    $ 139,869    $ 76,886    $ 221,776

ProShares Ultra Consumer Goods

   $ 766    $ 3,010    $ 2,385    $ 6,161

ProShares Ultra Consumer Services

   $ 176    $ 1,952    $ 1,384    $ 3,512

ProShares Ultra Financials

   $ 108,268    $ 1,130,262    $ 204,128    $ 1,442,658

ProShares Ultra Health Care

   $ 1,761    $ 8,878    $ 5,462    $ 16,101

ProShares Ultra Industrials

   $ 1,082    $ 5,945    $ 2,849    $ 9,876

ProShares Ultra Oil & Gas

   $ 21,928    $ 315,950    $ 103,965    $ 441,843

ProShares Ultra Real Estate

   $ 5,084    $ 109,480    $ 65,694    $ 180,258

ProShares Ultra Semiconductors

   $ 7,878    $ 31,145    $ 15,090    $ 54,113

ProShares Ultra Technology

   $ 10,797    $ 24,421    $ 16,029    $ 51,247

ProShares Ultra Telecommunications

   $ 1,162    $ 3,925    $ 1,129    $ 6,216

ProShares Ultra Utilities

   $ 1,049    $ 5,997    $ 1,347    $ 8,393

ProShares Short QQQ

   $ 18,720    $ 41,228    $ 46,747    $ 106,695

ProShares Short Dow30

   $ 11,063    $ 40,539    $ 35,128    $ 86,730

ProShares Short S&P 500

   $ 24,686    $ 133,681    $ 192,476    $ 350,843

ProShares Short MidCap400

   $ 5,661    $ 6,273    $ 5,609    $ 17,543

ProShares Short SmallCap600

   $ 0    $ 0    $ 1,370    $ 1,370

ProShares Short Russell2000

   $ 4,576    $ 18,917    $ 23,020    $ 46,513

ProShares UltraShort QQQ

   $ 459,072    $ 799,627    $ 321,595    $ 1,580,294

ProShares UltraShort Dow30

   $ 90,612    $ 246,390    $ 107,639    $ 444,641

ProShares UltraShort S&P 500

   $ 389,920    $ 1,484,554    $ 672,801    $ 2,547,275

ProShares UltraShort MidCap400

   $ 35,225    $ 27,892    $ 11,007    $ 74,124

ProShares UltraShort SmallCap600

   $ 0    $ 0    $ 2,039    $ 2,039

ProShares UltraShort Russell2000

   $ 91,304    $ 232,962    $ 101,717    $ 425,983

ProShares UltraShort Russell1000 Value

   $ 0    $ 0    $ 0    $ 0

ProShares UltraShort Russell1000 Growth

   $ 0    $ 0    $ 0    $ 0

ProShares UltraShort Russell MidCap Value

   $ 0    $ 0    $ 0    $ 0

ProShares UltraShort Russell MidCap Growth

   $ 0    $ 0    $ 0    $ 0

ProShares UltraShort Russell2000 Value

   $ 0    $ 0    $ 0    $ 0

 

20


Table of Contents

Fund

   Commissions
Paid

During  Fiscal
Year

Ended
May 31, 2008
   Commissions
Paid

During  Fiscal
Year

Ended
May 31, 2009
   Commissions
Paid

During  Fiscal
Year

Ended
May 31, 2010
   Aggregate Total

ProShares UltraShort Russell2000 Growth

   $ 0    $ 0    $ 0    $ 0

ProShares UltraShort Basic Materials

   $ 0    $ 0    $ 0    $ 0

ProShares UltraShort Consumer Goods

   $ 0    $ 0    $ 0    $ 0

ProShares UltraShort Consumer Services

   $ 0    $ 0    $ 0    $ 0

ProShares UltraShort Financials

   $ 0    $ 74,976    $ 0    $ 74,976

ProShares UltraShort Health Care

   $ 0    $ 0    $ 0    $ 0

ProShares UltraShort Industrials

   $ 0    $ 0    $ 0    $ 0

ProShares UltraShort Oil & Gas

   $ 0    $ 0    $ 0    $ 0

ProShares UltraShort Real Estate

   $ 0    $ 0    $ 0    $ 0

ProShares UltraShort Semiconductors

   $ 0    $ 0    $ 0    $ 0

ProShares UltraShort Technology

   $ 0    $ 0    $ 0    $ 0

ProShares UltraShort Telecommunications

   $ 0    $ 0    $ 0    $ 0

ProShares UltraShort Utilities

   $ 0    $ 0    $ 0    $ 0

ProShares Short MSCI EAFE

   $ 0    $ 0    $ 0    $ 0

ProShares Short MSCI Emerging Markets

   $ 0    $ 0    $ 0    $ 0

ProShares UltraShort MSCI EAFE

   $ 0    $ 0    $ 0    $ 0

ProShares UltraShort MSCI Emerging Markets

   $ 0    $ 0    $ 0    $ 0

ProShares UltraShort FTSE/Xinhua China 25

   $ 0    $ 0    $ 0    $ 0

ProShares UltraShort MSCI Japan

   $ 0    $ 0    $ 0    $ 0

ProShares UltraShort 7-10 Year Treasury

   $ 162    $ 23,713    $ 16,566    $ 40,441

ProShares UltraShort 20+ Year Treasury

   $ 602    $ 248,544    $ 223,699    $ 472,845

ProShares Short Financials

   $ 0    $ 488    $ 0    $ 488

ProShares Short Oil & Gas

   $ 0    $ 0    $ 0    $ 0

ProShares Ultra MSCI EAFE

   $ 0    $ 0    $ 1,542    $ 1,542

ProShares Ultra MSCI Emerging Markets

   $ 0    $ 0    $ 3,912    $ 3,912

ProShares Ultra FTSE/Xinhua China 25

   $ 0    $ 0    $ 0    $ 0

ProShares Ultra MSCI Japan

   $ 0    $ 0    $ 0    $ 0

ProShares UltraShort MSCI Europe

   $ 0    $ 0    $ 0    $ 0

ProShares UltraShort MSCI Pacific ex-Japan

   $ 0    $ 0    $ 0    $ 0

ProShares UltraShort MSCI Brazil

   $ 0    $ 0    $ 0    $ 0

ProShares UltraShort MSCI Mexico Investable Market

   $ 0    $ 0    $ 0    $ 0

ProShares UltraPro S&P500

   $ 0    $ 0    $ 45,197    $ 45,197

ProShares UltraPro Short S&P500

   $ 0    $ 0    $ 50,926    $ 50,926

ProShares Ultra Russell3000

   $ 0    $ 0    $ 1,530    $ 1,530

ProShares UltraShort Russell3000

   $ 0    $ 0    $ 0    $ 0

ProShares Credit Suisse 130/30

   $ 0    $ 0    $ 13,222    $ 13,222

ProShares Short 20+ Year Treasury

   $ 0    $ 0    $ 5,311    $ 5,311

ProShares Ultra 7-10 Year Treasury

   $ 0    $ 0    $ 193    $ 193

ProShares Ultra 20+ Year Treasury

   $ 0    $ 0    $ 360    $ 360

ProShares UltraPro MidCap400

   $ 0    $ 0    $ 3,316    $ 3,316

ProShares UltraPro Short MidCap400

   $ 0    $ 0    $ 1,212    $ 1,212

ProShares UltraPro QQQ

   $ 0    $ 0    $ 5,175    $ 5,175

ProShares UltraPro Short QQQ

   $ 0    $ 0    $ 1,449    $ 1,449

ProShares UltraPro Dow30

   $ 0    $ 0    $ 1,860    $ 1,860

 

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Table of Contents

Fund

   Commissions
Paid

During  Fiscal
Year

Ended
May 31, 2008
   Commissions
Paid

During  Fiscal
Year

Ended
May 31, 2009
   Commissions
Paid

During  Fiscal
Year

Ended
May 31, 2010
   Aggregate Total

ProShares UltraPro Short Dow30

   $ 0    $ 0    $ 642    $ 642

ProShares UltraPro Russell2000

   $ 0    $ 0    $ 2,639    $ 2,639

ProShares UltraPro Short Russell2000

   $ 0    $ 0    $ 572    $ 572

ProShares UltraShort Nasdaq Biotechnology

   $ 0    $ 0    $ 0    $ 0

ProShares Ultra Nasdaq Biotechnology

   $ 0    $ 0    $ 629    $ 629

ProShares Short Basic Materials

   $ 0    $ 0    $ 0    $ 0

ProShares Short Real Estate

   $ 0    $ 0    $ 0    $ 0

ProShares Short KBW Regional Banking

   $ 0    $ 0    $ 0    $ 0

ProShares Short FTSE/Xinhua China 25

   $ 0    $ 0    $ 0    $ 0

ProShares Ultra MSCI Europe

   $ 0    $ 0    $ 0    $ 0

ProShares Ultra MSCI Pacific ex-Japan

   $ 0    $ 0    $ 0    $ 0

ProShares Ultra MSCI Brazil

   $ 0    $ 0    $ 0    $ 0

ProShares Ultra MSCI Mexico Investable Market

   $ 0    $ 0    $ 0    $ 0

ProShares Ultra KBW Regional Banking

   $ 0    $ 0    $ 885    $ 885

 

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Table of Contents

Securities of “Regular Broker-Dealer.” The Funds are required to identify any securities of its “regular brokers and dealers” (as such term is defined in the 1940 Act) which they may hold at the close of their most recent fiscal year. “Regular brokers or dealers” of the Trust are the ten brokers or dealers that, during the most recent fiscal year: (i) received the greatest dollar amounts of brokerage commissions from the Trust’s portfolio transactions; (ii) engaged as principal in the largest dollar amounts of portfolio transactions of the Trust; or (iii) sold the largest dollar amounts of the Trust’s Shares.

Holdings in Shares of Regular Broker-Dealers as of May 31, 2010:

 

Fund

  

Broker Dealer

   Dollar Amount of Holdings
ProShares Ultra Dow30    J.P. Morgan Securities, Inc.    $ 6,564,000
ProShares Ultra S&P500    J.P. Morgan Securities, Inc.    $ 25,053,000
   Prudential Securities, Inc.    $ 4,275,000
ProShares Ultra Russell3000    J.P. Morgan Securities, Inc.    $ 65,000
   Prudential Securities, Inc.    $ 11,000
   Thomas Weisel Partners, LLC    $ 0
ProShares Ultra Russell2000    Thomas Weisel Partners, LLC    $ 31,000
ProShares UltraPro Dow30    J.P. Morgan Securities, Inc.    $ 187,000
ProShares UltraPro S&P500    J.P. Morgan Securities, Inc.    $ 1,766,000
   Prudential Securities, Inc.    $ 301,000
ProShares UltraPro Russell2000    Thomas Weisel Partners, LLC    $ 2,000
ProShares Ultra Russell1000 Value    J.P. Morgan Securities, Inc.    $ 263,000
   Prudential Securities, Inc.    $ 21,000
ProShares Ultra Russell1000 Growth    Prudential Securities, Inc.    $ 20,000
ProShares Ultra Russell2000 Value    Thomas Weisel Partners, LLC    $ 4,000
ProShares Ultra Russell2000 Growth    Thomas Weisel Partners, LLC    $ 0
ProShares Ultra Financials    J.P. Morgan Securities, Inc.    $ 84,599,000
   Prudential Securities, Inc.    $ 14,314,000
ProShares Credit Suisse 130/30    J.P. Morgan Securities, Inc.    $ 844,000
   Prudential Securities, Inc.    $ 268,000

MANAGEMENT OF PROSHARES TRUST

Trustees and Officers

The Board has general oversight responsibility with respect to the operation of the Trust and the Funds. The Board has engaged the Advisor to manage the Funds and is responsible for overseeing the Advisor and other service providers to the Trust and the Funds in accordance with the provisions of the federal securities laws.

The Board is currently composed of three Trustees, including two Independent Trustees. In addition to four regularly scheduled meetings per year, the Board holds executive sessions (with and without employees of the Advisor), special meetings, and/or informal conference calls to discuss specific matters that may require action prior to its next regular meeting. The Independent Trustees have retained “independent legal counsel” as defined in the 1940 Act.

 

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Table of Contents

The Board has appointed Michael L. Sapir to serve as Chairman of the Board. Mr. Sapir is also the Chief Executive Officer of the Advisor and, as such, is not an Independent Trustee. The Chairman’s primary role is to participate in the preparation of the agenda for Board meetings, determine which matters need to be acted upon by the Board, and to ensure that the Board obtains all the information necessary to perform its functions and take action. The Chairman also presides at all meetings of the Board and acts, with the assistance of staff, as a liaison with service providers, officers, attorneys and the Independent Trustees between meetings. The Chairman may perform such other functions as may be requested by the Board from time to time. The Board does not have a lead Independent Trustee.

Characteristics of the Trust include, among others, that (1) all the Funds are series of the same trust; (2) all the Funds are exchange-traded funds; (3) all the Funds have common service providers; and (4) all the Funds (except one) pursue investment strategies involving leverage or inverse leverage. In light of these characteristics, the Board has determined that a three-member Board, including two Independent Trustees, is of an adequate size to oversee the operations of the Trust, and that, in light of the small size of the Board, a complex Board leadership structure is not necessary or desirable. The relatively small size of the Board facilitates ready communication among the Board members, and between the Board and management, both at Board meetings and between meetings. In view of the small size of the Board, the Board has concluded that designating one of the two Independent Trustees as the “lead Independent Trustee” would not be likely to meaningfully enhance the effectiveness of the Board.

The Board oversight of the Trust and the Funds extends to the Trust’s risk management processes. The Board and its Audit Committee consider risk management issues as part of their responsibilities throughout the year at regular and special meetings. The Advisor and other service providers prepare regular reports for Board and Audit Committee meetings that address a variety of risk — related matters, and the Board as a whole or the Audit Committee may also receive special written reports or presentations on a variety of risk issues at the request of the Board or the Audit Committee. For example, the portfolio managers of the Funds meet regularly with the Board to discuss portfolio performance, including investment risk, counterparty risk and the impact on the Funds of investments in particular securities or instruments, such as derivatives. The Advisor also prepares reports for the Board regarding various issues, including valuation and liquidity. As noted above, given the relatively small size of the Board, the Board has not regarded it as necessary to adopt a complex leadership structure in order for the Board to effectively exercise its risk oversight function.

The Board has appointed a chief compliance officer (“CCO”) for the Trust (who is also the Chief Compliance Officer for the Advisor). The CCO reports directly to the Board and participates in the Board’s meetings. The Independent Trustees meet at least annually in executive session with the CCO, and the Funds’ CCO prepares and presents an annual written compliance report to the Board. In addition, the CCO presents an annual report to the Board in accordance with the Trust’s compliance policies and procedures. The CCO also provides updates to the Board on the operation of the Trust’s compliance policies and procedures and on how these procedures are designed to mitigate risk. Finally, the CCO and/or other Officers report to the Board in the event any material risk issues arise. The CCO also oversees the Advisor’s Risk Management Committee, which meets periodically to assess and address areas of risk within the organization.

In addition, the Audit Committee of the Board meets regularly with the Trust’s independent public accounting firm to review reports on, among other things, the Funds’ controls over financial reporting.

The Trustees, their age, term of office and length of time served, principal business occupations during the past five years and the number of portfolios in the Fund Complex overseen and other directorships, if any, held by each Trustee, are shown below. Unless noted otherwise, the addresses of each Trustee is: c/o ProShares Trust, 7501 Wisconsin Avenue, Suite 1000, Bethesda, MD 20814.

 

24


Table of Contents

Name, and Age

  

Term of Office

and Length of

Time Served

  

Principal Occupation(s) During

Past 5 Years

  

Number of

Operational

Portfolios in

Fund Complex*

Overseen by
Trustee

  

Other Directorships

Held by Trustee

Independent Trustees            

Russell S. Reynolds, III

Birth Date: 7/57

   Indefinite; October 1997 to present    RSR Partners (Executive Recruitment): Managing Director (May 2007 to present); Directorship Search Group, Inc. (Executive Recruitment): President (May 2004 to May 2007)    ProShares (100) ProFunds (112) Access One Trust (3)    RSR Partners, Inc.

Michael C. Wachs

Birth Date: 10/61

   Indefinite; October 1997 to present    Spring Mill Capital Management, LLC (Commercial Real Estate Investment): Principal (July 2009 to present); AMC Delancey Group, Inc. (Real Estate Development): President (January 2001 to May 2009)    ProShares (100) ProFunds (112) Access One Trust (3)    AMC Delancey Group, Inc.
Interested Trustee            

Michael L. Sapir**

Birth Date: 5/58

   Indefinite; April 1997 to present    Chairman and Chief Executive Officer of the Advisor (November 2005 to present); and of ProFund Advisors LLC (April 1997 to present); ProShare Capital Management LLC; Managing Partner (June 2008 to present).    ProShares (100) ProFunds (112) Access One Trust (3)    None

 

* The “Fund Complex” consists of all funds registered under the 1940 Act and are advised by ProFund Advisors LLC and ProShare Advisors LLC.
** Mr. Sapir is an “interested person,” as defined by the 1940 Act, because of his ownership interest in the Advisor.

 

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Table of Contents

Executive Officers

 

Name and Age

  

Position(s) Held

with Trust

  

Term of Office and

Length of Time Served

  

Principal Occupation(s)

During Past 5 Years

Louis M. Mayberg

Birth Date: 8/62

   President    Indefinite; November 2005 to present    President of the Advisor (November 2005 to present); ProFund Advisors (April 1997 to present); and ProShare Capital Management LLC (June 2008 to present).

Charles S. Todd

Three Canal Plaza, Suite 100

Portland, ME 04101

Birth Date: 9/71

   Treasurer    Indefinite; December 2008 to present    Director, Foreside Management Services, LLC (December 2008 to present); Vice President/Assistant Vice President within the Fund Administration Department of J.P. Morgan Investor Services Co. (June 2000 to December 2008).

Victor M. Frye, Esq.

Birth Date: 10/58

   Chief Compliance Officer and AML Officer    Indefinite; November 2005 to present    Counsel and Chief Compliance Officer of the Advisor (November 2005 to present) and ProFund Advisors (October 2002 to present).

Amy R. Doberman

Birth Date: 3/62

   Chief Legal Officer and Secretary    Indefinite; June 2009 to present    General Counsel of the Advisor, ProFund Advisors LLC and ProShare Capital Management LLC (April 2009 to present); Managing Director, Morgan Stanley Investment Management (July 2004 to April 2009).

Listed below for each Trustee is a dollar range of securities beneficially owned in the Trust, together with the aggregate dollar range of equity securities in all registered investment companies overseen by each Trustee that are in the same family of investment companies as the Trust, as of December 31, 2009.

 

Name of Trustee

   Dollar Range of Equity Securities in
the Trust
   Aggregate Dollar Range of Equity
Securities in All Registered  Investment
Companies Overseen by Trustee in
Family of Investment Companies

Independent Trustees

     

Russell S. Reynolds, III, Trustee

   None    $10,001 – $50,000

Michael C. Wachs, Trustee

   None    $10,001 – $50,000

Interested Trustee

     

Michael L. Sapir, Trustee and Chairman

   None    $10,001 – $50,000

Committees

The Board of Trustees has an Audit Committee. The Audit Committee is composed entirely of Independent Trustees. Currently, the Audit Committee is composed of Messrs. Wachs and Reynolds. The Audit Committee makes recommendations to the full Board of Trustees with respect to the engagement of an independent registered public accounting firm and reviews with the independent registered public accounting firm the plan and results of the internal controls, audit engagement and matters having a material effect on the Trust’s financial operations. During the past fiscal year, the Audit Committee has met twice and the Board of Trustees has met five times.

Compensation of Trustees and Officers

Each Independent Trustee is paid a $133,500 annual retainer for service as Trustee on the Board of Trustees and for service as Trustee for other funds in the Fund Complex, $6,375 for attendance at each quarterly in-person meeting of the Board of Trustees, $3,000 for attendance at each special meeting of the Board of Trustees, and $3,000 for attendance at telephonic meetings. Trustees who are also Officers or affiliated persons receive no remuneration from the Trust for their services as Trustees. The Officers, other than the CCO, receive no compensation directly from the Trust for performing the duties of their offices.

 

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Table of Contents

The Trust does not accrue pension or retirement benefits as part of each Fund’s expenses, and Trustees are not entitled to benefits upon retirement from the Board of Trustees.

The following table shows aggregate compensation paid to the Trustees for the fiscal year ended May 31, 2010.

 

Name

   Aggregate
Compensation
From Funds
   Pension or
Retirement
Benefits
Accrued

as Part of
Trust
Expenses
   Estimated
Annual
Benefits
Upon
Retirement
   Total
Compensation
From Trust
and

Fund
Complex

Paid to
Trustees

Independent Trustees

           

Russell S. Reynolds, III, Trustee

   $ 174,395.59    $ 0    $ 0    $ 174,395.59

Michael C. Wachs, Trustee

   $ 174,238.41    $ 0    $ 0    $ 174,238.41

Interested Trustee

           

Michael L. Sapir, Trustee and Chairman

   $ 0    $ 0    $ 0    $ 0

Control Persons and Principal Holders of Securities

As of September 1, 2010, the Trustees and Officers of the Trust owned in the aggregate less than 1% of the shares of the Funds of the Trust (all series taken together).

See Appendix A to this SAI for a list of the Principal Holders of each Fund.

INVESTMENT ADVISOR

Portfolio Management

Listed below for each portfolio manager is a dollar range of securities beneficially owned in the Funds managed by the portfolio manager, together with the aggregate dollar range of equity securities in all registered investment companies in the Fund Complex as of May 31, 2010.

 

Name of Portfolio Manager

   Dollar Range of
Funds Currently
Owned

Todd Johnson

   None

Howard S. Rubin

   None

Ryan Dofflemeyer

   None

Alexander Ilyasov

   $1-$10,000

Michelle Liu

   None

Michael Neches

   $1-$10,000

Hratch Najarian

   None

Robert Parker

   $10,001-$50,000

Portfolio Managers’ Compensation

ProShare Advisors believes that its compensation program is competitively positioned to attract and retain high-caliber investment professionals. The compensation package for portfolio managers consists of a fixed base salary, an annual incentive bonus opportunity and a competitive benefits package. A portfolio manager’s salary compensation is designed to be competitive with the marketplace and reflect a portfolio manager’s relative experience and contribution to the firm. Fixed base salary compensation is reviewed and adjusted annually to reflect increases in the cost of living and market rates.

The annual incentive bonus opportunity provides cash bonuses based upon the overall firm’s performance and individual contributions. Principal consideration is given to appropriate risk management, teamwork and investment support activities in determining the annual bonus amount.

Portfolio managers are eligible to participate in the firm’s standard employee benefits programs, which include a competitive 401(k) retirement savings program with employer match, life insurance coverage, and health and welfare programs.

 

27


Table of Contents

Other Accounts Managed by Portfolio Managers

Portfolio managers are generally responsible for multiple investment company accounts. Listed below for each portfolio manager are the number and type of accounts managed or overseen by such portfolio manager as of May 31, 2010.

 

Name of Portfolio Manager

   Number of All Registered
Investment Companies
Managed/Total Assets
   Number of All Other Pooled
Investment Vehicles
Managed/Total Assets
   Number of All Other
Accounts Managed/
Total Assets
Todd Johnson    212/$27.3 billion    14/$1.8 billion    45/$2.3 billion
Howard S. Rubin    212/$27.3 billion    14/$1.8 billion    45/$2.3 billion
Ryan Dofflemeyer    1/$54.8 million    0/$0    0/$0
Alexander Ilyasov    37/$l.9 billion    0/$0    0/$0
Michelle Liu    10/$6.5 billion    0/$0    0/$0
Michael Neches    71/$5.4 billion    0/$0    0/$0
Hratch Najarian    49/$4.8 billion`    0/$0    0/$0
Robert Parker    38/$8.4 billion    0/$0    1/$37.4 million

In the course of providing advisory services, the Advisor may simultaneously recommend the sale of a particular security for one account while recommending the purchase of the same security for another account if such recommendations are consistent with each client’s investment strategies. The Advisor also may recommend the purchase or sale of securities that may also be recommended by ProFund Advisors LLC, an affiliate of the Advisor.

The Advisor, its principals, officers and employees (and members of their families) and affiliates may participate directly or indirectly as investors in the Advisor’s clients, such as the Funds. Thus the Advisor may recommend to clients the purchase or sale of securities in which it, or its officers, employees or related persons have a financial interest. The Advisor may give advice and take actions in the performance of its duties to its clients that differ from the advice given or the timing and nature of actions taken, with respect to other clients’ accounts and/or employees’ accounts that may invest in some of the same securities recommended to clients. In addition, the Advisor, its affiliates and principals may trade for their own accounts. Consequently, non-customer and proprietary trades may be executed and cleared through any prime broker or other broker utilized by clients. It is possible that officers or employees of the Advisor may buy or sell securities or other instruments that the Advisor has recommended to, or purchased for, its clients and may engage in transactions for their own accounts in a manner that is inconsistent with the Advisor’s recommendations to a client. Personal securities transactions by employees may raise potential conflicts of interest when such persons trade in a security that is owned by, or considered for purchase or sale for, a client. The Advisor has adopted policies and procedures designed to detect and prevent such conflicts of interest and, when they do arise, to ensure that it effects transactions for clients in a manner that is consistent with its fiduciary duty to its clients and in accordance with applicable law.

Any Access Person, as such term is defined under the 1940 Act or the Investment Advisers Act of 1940, as amended, of the Advisor may make security purchases subject to the terms of the ProShare Advisors Code of Ethics, which is consistent with the requirements of Rule 17j-1 under the 1940 Act.

The Advisor and its affiliated persons may come into possession from time to time of material nonpublic and other confidential information about companies which, if disclosed, might affect an investor’s decision to buy, sell, or hold a security. Under applicable law, the Advisor and its affiliated persons would be prohibited from improperly disclosing or using this information for their personal benefit or for the benefit of any person, regardless of whether the person is a client of the Advisor. Accordingly, should the Advisor or any affiliated person come into possession of material nonpublic or other confidential information with respect to any company, the Advisor and its affiliated persons will have no responsibility or liability for failing to disclose the information to clients as a result of following its policies and procedures designed to comply with applicable law.

Investment Advisory Agreement

Under an investment advisory agreement between ProShare Advisors and the Trust, on behalf of each Fund (the “Agreement” or “Advisory Agreement”), each Fund pays ProShare Advisors a fee at an annualized rate, based on its average daily net assets, of 0.75%. ProShare Advisors manages the investment and the reinvestment of the assets of each of the Funds, in accordance with the investment objectives, policies, and limitations of the Fund, subject to the general supervision and control of the Trustees and the Officers of the Funds. The address of ProShare Advisors is 7501 Wisconsin Avenue, Suite 1000 – East Tower, Bethesda, Maryland 20814. ProShare Advisors bears all costs associated with providing these advisory services. ProShare Advisors has contractually agreed to waive investment advisory and management services fees and to reimburse other expenses to the extent total annual Fund operating expenses, as a percentage of average daily net assets, exceed [0.95% through September 30, 2011]. After such date, the expense limitation may be terminated or revised. Amounts waived or reimbursed in a particular contractual period may be recouped by ProShare Advisors within five years of the end of that contractual period to the extent that recoupment will not cause a Fund’s expenses to exceed any expense limitation in place at that time. ProShare Advisors, from its own resources, including profits from advisory fees received from the Funds, also may make payments to broker-dealers and other financial institutions for their expenses in

 

28


Table of Contents

connection with the distribution of the Funds’ Shares. A discussion regarding the basis for the Board of Trustees approving the Advisory Agreement of the Trust will be (or is) available in the Trust’s Annual and/or Semi-Annual Report to shareholders. The Investment Advisory fees paid, as well as any amounts reimbursed pursuant to the Expense Limitation Agreement, for the fiscal years ended May 31, 2008, May 31, 2009 and May 31, 2010 for each Fund that was operational as of each date are set forth below.

 

Fund

   Investment Advisory Fees Paid
during the Year  Ended

May 31, 2010
   Reimbursements and Waivers by the
Advisor during the  Fiscal Year Ended
May 31, 2010

ProShares Ultra QQQ®

   $ 6,866,006    $ 743,592

ProShares Ultra Dow30SM

   $ 3,327,459    $ 178,395

ProShares Ultra S&P500®

   $ 13,434,380    $ —  

ProShares Ultra Russell3000

   $ 44,881    $ 192,880

ProShares Ultra MidCap400

   $ 1,013,272    $ 145,319

ProShares Ultra SmallCap600

   $ 435,248    $ 165,631

ProShares Ultra Russell2000

   $ 1,741,745    $ 593,799

ProShares UltraPro QQQ®

   $ 70,918    $ 65,492

ProShares UltraPro Dow30SM

   $ 31,337    $ 37,666

ProShares UltraPro S&P500®

   $ 615,080    $ 258,676

ProShares UltraPro MidCap400

   $ 48,941    $ 80,364

ProShares UltraPro Russell2000

   $ 39,154    $ 108,982

ProShares Ultra Russell1000 Value

   $ 150,823    $ 184,717

ProShares Ultra Russell1000 Growth

   $ 213,973    $ 160,026

ProShares Ultra Russell MidCap Value

   $ 149,301    $ 164,048

ProShares Ultra Russell MidCap Growth

   $ 142,443    $ 152,367

ProShares Ultra Russell2000 Value

   $ 164,780    $ 256,653

ProShares Ultra Russell2000 Growth

   $ 205,056    $ 232,486

ProShares Ultra Basic Materials

   $ 3,128,213    $ 187,851

ProShares Ultra Nasdaq Biotechnology

   $ 5,976    $ 27,324

ProShares Ultra Consumer Goods

   $ 211,619    $ 136,987

ProShares Ultra Consumer Services

   $ 118,498    $ 140,353

ProShares Ultra Financials

   $ 15,265,950    $ 92,453

ProShares Ultra Health Care

   $ 324,378    $ 129,466

ProShares Ultra Industrials

   $ 304,341    $ 149,310

ProShares Ultra Oil & Gas

   $ 3,697,305    $ 195,389

ProShares Ultra Real Estate

   $ 4,422,639    $ 208,611

ProShares Ultra KBW Regional Banking

   $ 5,201    $ 27,385

ProShares Ultra Semiconductors

   $ 683,037    $ 148,952

ProShares Ultra Technology

   $ 1,111,251    $ 168,085

ProShares Ultra Telecommunications

   $ 95,517    $ 131,102

ProShares Ultra Utilities

   $ 199,366    $ 132,043

ProShares Ultra MSCI EAFE

   $ 71,970    $ 100,129

ProShares Ultra MSCI Emerging Markets

   $ 166,890    $ 134,420

ProShares Ultra MSCI Europe

   $ 1,873    $ 26,332

ProShares Ultra MSCI Pacific ex-Japan

   $ 1,752    $ 26,289

ProShares Ultra MSCI Brazil

   $ 1,928    $ 26,340

ProShares Ultra FTSE/Xinhua China 25

   $ 233,497    $ 112,699

ProShares Ultra MSCI Japan

   $ 70,557    $ 102,252

ProShares Ultra Mexico Investable Market

   $ 1,895    $ 26,308

ProShares Ultra 7-10 Year Treasury

   $ 33,911    $ 59,593

ProShares Ultra 20+ Year Treasury

   $ 36,996    $ 59,551

ProShares Short QQQ®

   $ 1,401,686    $ 235,706

ProShares Short Dow30SM

   $ 1,956,180    $ 127,797

ProShares Short S&P500®

   $ 11,621,461    $ —  

ProShares Short MidCap400

   $ 301,533    $ 94,165

 

29


Table of Contents

Fund

   Investment Advisory Fees Paid
during the Year  Ended

May 31, 2010
   Reimbursements and Waivers by the
Advisor during the  Fiscal Year Ended
May 31, 2010

ProShares Short SmallCap600

   $ 272,555    $ 92,571

ProShares Short Russell2000

   $ 1,266,465    $ 209,335

ProShares UltraShort QQQ®

   $ 7,277,365    $ 701,390

ProShares UltraShort Dow30SM

   $ 4,381,624    $ 133,594

ProShares UltraShort S&P500®

   $ 25,901,387    $ —  

ProShares UltraShort Russell3000

   $ 24,317    $ 39,561

ProShares UltraShort MidCap400

   $ 371,792    $ 93,592

ProShares UltraShort SmallCap600

   $ 185,342    $ 101,322

ProShares UltraShort Russell2000

   $ 3,567,071    $ 425,406

ProShares UltraPro Short QQQ®

   $ 30,330    $ 36,700

ProShares UltraPro Short Dow30SM

   $ 20,346    $ 32,482

ProShares UltraPro Short S&P500®

   $ 1,086,216    $ 81,157

ProShares UltraPro Short MidCap400

   $ 12,874    $ 30,556

ProShares UltraPro Short Russell2000

   $ 20,391    $ 31,649

ProShares UltraShort Russell1000 Value

   $ 79,770    $ 107,041

ProShares UltraShort Russell1000 Growth

   $ 85,347    $ 106,588

ProShares UltraShort Russell MidCap Value

   $ 31,753    $ 109,395

ProShares UltraShort Russell MidCap Growth

   $ 53,137    $ 108,411

ProShares UltraShort Russell2000 Value

   $ 88,475    $ 106,062

ProShares UltraShort Russell2000 Growth

   $ 95,379    $ 107,392

ProShares Short Basic Materials

   $ 7,915    $ 27,199

ProShares Short Financials

   $ 862,817    $ 108,467

ProShares Short Oil & Gas

   $ 95,302    $ 109,400

ProShares Short Real Estate

   $ 7,526    $ 27,355

ProShares Short KBW Regional Banking

   $ 8,122    $ 26,502

ProShares UltraShort Basic Materials

   $ 942,049    $ 120,147

ProShares UltraShort Nasdaq Biotechnology

   $ 7,349    $ 25,558

ProShares UltraShort Consumer Goods

   $ 150,971    $ 108,861

ProShares UltraShort Consumer Services

   $ 402,067    $ 104,878

ProShares UltraShort Financials

   $ 6,189,528    $ 116,850

ProShares UltraShort Health Care

   $ 52,811    $ 110,194

ProShares UltraShort Industrials

   $ 175,290    $ 108,857

ProShares UltraShort Oil & Gas

   $ 1,992,759    $ 130,731

ProShares UltraShort Real Estate

   $ 6,192,224    $ 131,851

ProShares UltraShort Semiconductors

   $ 223,535    $ 107,126

ProShares UltraShort Technology

   $ 193,192    $ 109,006

ProShares UltraShort Telecommunications

   $ 13,576    $ 110,202

ProShares UltraShort Utilities

   $ 64,747    $ 110,305

ProShares Short MSCI EAFE

   $ 461,622    $ 125,927

ProShares Short MSCI Emerging Markets

   $ 1,614,339    $ 209,833

ProShares Short FTSE/Xinhua China 25

   $ 8,528    $ 27,924

ProShares UltraShort MSCI EAFE

   $ 270,065    $ 123,457

ProShares UltraShort MSCI Emerging Markets

   $ 1,562,166    $ 211,021

ProShares UltraShort MSCI Europe

   $ 182,654    $ 83,222

ProShares UltraShort MSCI Pacific ex-Japan

   $ 23,719    $ 64,966

ProShares UltraShort MSCI Brazil

   $ 107,132    $ 80,219

ProShares UltraShort FTSE/Xinhua China 25

   $ 2,555,995    $ 282,662

ProShares UltraShort MSCI Japan

   $ 113,528    $ 150,974

ProShares UltraShort MSCI Mexico Investable Market

   $ 51,338    $ 69,872

 

30


Table of Contents

Fund

   Investment Advisory Fees Paid
during the Year  Ended

May 31, 2010
   Reimbursements and Waivers by the
Advisor during the Fiscal  Year Ended
May 31, 2010

ProShares Short 20+ Year Treasury

   $ 1,532,139    $ 164,825

ProShares UltraShort 7-10 Year Treasury

   $ 2,825,276    $ 134,699

ProShares UltraShort 20+ Year Treasury

   $ 33,461,662    $ —  

ProShares Credit Suisse 130/30

   $ 200,642    $ 173,142

 

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Table of Contents

Fund

   Investment Advisory Fees Paid
during the Fiscal Year

Ended May 31, 2009
   Reimbursements and
Waivers by the
Advisor during the
Fiscal Year Ended
May 31, 2009

ProShares Ultra Financials

   $ 14,803,443    $ 660,796

ProShares Ultra Health Care

   $ 309,458    $ 151,296

ProShares Ultra Industrials

   $ 107,305    $ 183,848

ProShares Ultra Oil & Gas

   $ 4,213,221    $ 305,096

ProShares Ultra Real Estate

   $ 1,065,299    $ 220,264

ProShares Ultra Semiconductors

   $ 514,260    $ 153,366

ProShares Ultra Technology

   $ 667,053    $ 206,003

ProShares Ultra Telecommunications

   $ 67,615    $ 64,992

ProShares Ultra Utilities

   $ 174,654    $ 137,432

ProShares Short QQQ®

   $ 692,522    $ 190,047

ProShares Short Dow30SM

   $ 1,548,368    $ 150,771

ProShares Short S&P500®

   $ 4,088,840    $ —  

ProShares Short MidCap400

   $ 269,348    $ 111,213

ProShares Short SmallCap600

   $ 147,461    $ 99,413

ProShares Short Russell2000

   $ 526,689    $ 130,679

ProShares UltraShort QQQ®

   $ 7,966,960    $ 784,846

ProShares UltraShort Dow30SM

   $ 4,199,894    $ 178,268

ProShares UltraShort S&P500®

   $ 20,896,604    $ —  

ProShares UltraShort MidCap400

   $ 859,432    $ 90,076

ProShares UltraShort SmallCap600

   $ 374,625    $ 79,823

ProShares UltraShort Russell2000

   $ 5,559,853    $ 507,230

ProShares UltraShort Russell1000 Value

   $ 155,434    $ 104,226

ProShares UltraShort Russell1000 Growth

   $ 183,945    $ 105,248

ProShares UltraShort Russell MidCap Value

   $ 61,013    $ 127,107

ProShares UltraShort Russell MidCap Growth

   $ 98,207    $ 109,565

ProShares UltraShort Russell2000 Value

   $ 153,626    $ 105,440

ProShares UltraShort Russell2000 Growth

   $ 194,129    $ 170,552

ProShares Short Financials

   $ 379,396    $ 121,021

ProShares Short Oil & Gas

   $ 61,664    $ 62,034

ProShares UltraShort Basic Materials

   $ 1,416,180    $ 109,223

ProShares UltraShort Consumer Goods

   $ 316,620    $ 100,209

ProShares UltraShort Consumer Services

   $ 1,077,757    $ 117,126

ProShares UltraShort Financials

   $ 12,429,007    $ —  

ProShares UltraShort Health Care

   $ 95,887    $ 105,918

ProShares UltraShort Industrials

   $ 570,982    $ 105,915

ProShares UltraShort Oil & Gas

   $ 6,608,975    $ 19,222

ProShares UltraShort Real Estate

   $ 8,613,202    $ 116,505

ProShares UltraShort Semiconductors

   $ 258,032    $ 102,897

ProShares UltraShort Technology

   $ 417,349    $ 101,131

ProShares UltraShort Telecommunications

   $ 48,040    $ 83,098

ProShares UltraShort Utilities

   $ 141,218    $ 237,276

ProShares Short MSCI EAFE

   $ 379,512    $ 99,505

ProShares Short MSCI Emerging Markets

   $ 346,694    $ 112,787

ProShares UltraShort MSCI EAFE

   $ 880,933    $ 186,761

ProShares UltraShort MSCI Emerging Markets

   $ 2,995,638    $ 501,700

ProShares UltraShort FTSE/Xinhua China 25

   $ 2,559,981    $ 225,733

ProShares UltraShort MSCI Japan

   $ 155,635    $ 181,777

ProShares UltraShort 7-10 Year Treasury

   $ 1,505,802    $ 126,711

ProShares UltraShort 20+ Year Treasury

   $ 11,722,122    $ 245,463

 

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Table of Contents

Fund

   Investment Advisory Fees Paid
during the Fiscal Year

Ended May 31, 2008
   Reimbursements and
Waivers by the
Advisor during the
Fiscal Year Ended
May 31, 2008

ProShares Ultra QQQ®

   $ 5,478,722    $ 669,160

ProShares Ultra Dow30SM

   $ 1,843,668    $ 175,665

ProShares Ultra S&P500®

   $ 4,653,000    $ 180,250

ProShares Ultra MidCap400

   $ 689,534    $ 278,398

ProShares Ultra SmallCap600

   $ 96,228    $ 146,746

ProShares Ultra Russell2000

   $ 584,910    $ 421,746

ProShares Ultra Russell1000 Value

   $ 68,007    $ 100,604

ProShares Ultra Russell1000 Growth

   $ 160,386    $ 130,951

ProShares Ultra Russell MidCap Value

   $ 55,360    $ 109,675

ProShares Ultra Russell MidCap Growth

   $ 98,538    $ 131,436

ProShares Ultra Russell2000 Value

   $ 64,923    $ 168,368

ProShares Ultra Russell2000 Growth

   $ 75,298    $ 164,667

ProShares Ultra Basic Materials

   $ 165,463    $ 104,346

ProShares Ultra Consumer Goods

   $ 61,130    $ 87,973

ProShares Ultra Consumer Services

   $ 31,752    $ 88,154

ProShares Ultra Financials

   $ 2,293,196    $ 265,245

ProShares Ultra Health Care

   $ 99,287    $ 105,375

ProShares Ultra Industrials

   $ 69,251    $ 100,248

ProShares Ultra Oil & Gas

   $ 483,734    $ 156,021

ProShares Ultra Real Estate

   $ 196,127    $ 102,827

ProShares Ultra Semiconductors

   $ 270,432    $ 115,778

ProShares Ultra Technology

   $ 417,345    $ 158,319

ProShares Ultra Telecommunications

   $ 15,935    $ 40,177

ProShares Ultra Utilities

   $ 107,270    $ 94,092

ProShares Short QQQ®

   $ 625,697    $ 175,126

ProShares Short Dow30SM

   $ 1,019,676    $ 136,313

ProShares Short S&P500®

   $ 1,927,759    $ 61,354

ProShares Short MidCap400

   $ 467,216    $ 101,610

ProShares Short SmallCap600

   $ 92,018    $ 72,503

ProShares Short Russell2000

&