485APOS 1 d270139d485apos.htm 485APOS 485APOS
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As filed with the Securities and Exchange Commission on December 16, 2011

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. 50    x

and/or

REGISTRATION STATEMENT

UNDER

  THE INVESTMENT COMPANY ACT OF 1940    x
  Amendment No. 58    x

 

 

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

Prudential Tower

800 Boylston Street

Boston, MA 02199-3600

 

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 (date) pursuant to paragraph (a)(1)
  x 75 days after filing pursuant to paragraph (a)(2)
  ¨ on (date) pursuant to paragraph (a)(2) of rule 485.

If appropriate, check the following:

 

  ¨ This post-effective amendment designates a new effective date for a previously filed post-effective amendment.

 

 

 


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EXPLANATORY NOTE

This post-effective amendment relates to the following funds: ProShares NASDAQ-100 – 15% Volatility Target, ProShares Dow 30 – 15% Volatility Target, ProShares Russell 2000 – 15% Volatility Target, Russell 1000 – 15% Volatility Target, ProShares MSCI EAFE – 15% Volatility Target, ProShares MSCI Emerging Markets – 15% Volatility Target and ProShares S&P MidCap400 – 15% Volatility Target, each a series of ProShares Trust. No information relating to any other series or class of series of ProShares Trust is amended or superseded hereby.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

 

  February [    ], 2012

 

[Category Name]

 

 

[      ] ProShares NASDAQ-100 – 15% Volatility Target

 

[      ] ProShares Dow 30 – 15% Volatility Target

 

[      ] ProShares Russell 2000 – 15% Volatility Target

 

[      ] ProShares Russell 1000 – 15% Volatility Target

 

[      ] ProShares MSCI EAFE – 15% Volatility Target

 

[      ] ProShares MSCI Emerging Markets – 15% Volatility Target

 

[      ] ProShares S&P MidCap400 – 15% Volatility Target

 

   

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

 

3 Summary Section
   [Category Name]
4    ProShares NASDAQ-100 – 15% Volatility Target
10    ProShares Dow 30 – 15% Volatility Target
15    ProShares Russell 2000 – 15% Volatility Target
21    ProShares Russell 1000 – 15% Volatility Target
26    ProShares MSCI EAFE – 15% Volatility Target
32    ProShares MSCI Emerging Markets – 15% Volatility Target
38    ProShares S&P MidCap400 – 15% Volatility Target
44    Investment Objectives, Principal Investment Strategies and Related Risks
56    Management of ProShares Trust
57    Determination of NAV
58    Distributions
58    Dividend Reinvestment Services
58    Taxes

 

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Summary Section

 

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Investment Objective

ProShares NASDAQ 100 – 15% Volatility Target (the “Fund”) seeks investment results, before fees and expenses, that correspond to the performance of the NASDAQ 100 – 15% Volatility Index (the “Index,” Bloomberg ticker: [        ]).

The Index seeks to provide dynamic exposure to the stocks of the NASDAQ-100 Index® (the “NASDAQ 100”), which is a modified market capitalization-weighted index that includes 100 of the largest non-financial domestic and international issues listed on The NASDAQ Stock Market. The dynamic exposure is designed to target an overall volatility for the Index of 15%. The Index seeks to achieve this target volatility through leveraged exposure (i.e., 101—200%) to the NASDAQ 100 during periods when the realized volatility of the NASDAQ 100 is less than 15% and de-leveraged exposure (i.e., 0—99%) to the NASDAQ 100 during periods when the realized volatility of the NASDAQ 100 is greater than 15%. The Index adjusts exposure between the NASDAQ 100 and three-month U.S. Treasury Bills (the “T-Bill Component”) based upon realized historical volatility of the NASDAQ 100. As the historical realized volatility of the NASDAQ 100 increases relative to the target of 15%, exposure to the NASDAQ 100 will decrease and exposure to the T-Bill Component will increase. As the historical realized volatility of the NASDAQ 100 decreases relative to the target of 15%, exposure to the NASDAQ 100 will increase and exposure to the T-Bill Component will decrease. The Index will generally be rebalanced daily. The Fund’s returns will differ from the returns of the NASDAQ 100.

As of December 31, 2011, the NASDAQ 100 included companies with capitalizations between $[        ] and $[        ]. The average capitalization of the companies comprising the NASDAQ 100 was approximately $[        ]. The NASDAQ 100 is published under the Bloomberg ticker symbol “NDX.” The NASDAQ 100 has a historical annualized volatility rate for the five year period ended December 31, 2011 of [        ]%.

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.

Annual Fund Operating Expenses

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

Investment Advisory Fees

     [         ]% 

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

     [         ]% 
  

 

 

 

 

* 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 [        ]% through [        ], 2013. 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 the Fund 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 remain the same, except that the fee waiver/expense reimbursement is assumed only to pertain to the first year. Although your actual cost may be higher or lower, based on these assumptions your approximate costs would be:

 

1 Year

   3 Years  

$            

   $                

The Fund pays transaction and financing costs associated with transacting in securities and derivatives. In addition, investors may pay brokerage commissions on their purchases and sales of the Fund’s shares. These costs 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 transactions. If such instruments were included, the Fund’s portfolio turnover rate would be significantly higher.

Principal Investment Strategies

The Fund seeks investment results, before fees and expenses, that correspond to the performance of the Index. Under normal circumstances, the Fund will invest at least 80% of its total assets in the equity and/or fixed income securities that comprise the Index at any given point in time. At times, the Fund will have leveraged exposure to the equity securities in the Index in a similar proportion as the Index.

The Fund invests in securities and derivatives that ProShare Advisors believes, in combination, should have similar return characteristics as the return of the Index. Cash balances arising from the use of 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 derivatives, which are 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 stocks in order to gain exposure to the Index. These derivatives principally include:

 

   

Swap Agreements — Contracts entered into primarily with major global financial institutions for a specified period ranging from a day to more than one year. In a standard “swap” transaction, two parties agree to exchange the return (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross return to be exchanged or “swapped” between the parties is calculated with respect to a “notional amount,” e.g., the return on or change in value of a particular dollar amount invested in a “basket” of securities representing a particular index.

 

   

Futures Contracts – Standardized contracts traded on, or subject to the rules of, an exchange that call for the future delivery of a specified quantity and type of a particular asset at a specified time and place or, alternatively, may call for cash settlement.

 

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Money Market Instruments — The Fund invests in short-term cash instruments that have a remaining maturity of 397 days or less and exhibit high quality credit profiles, including:

 

   

U.S. Treasury Bills — U.S. government securities that have initial maturities of one year or less, and are supported by the full faith and credit of the United States.

 

   

Repurchase Agreements — 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.

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 the Index. The Fund may gain exposure to only a representative sample of the securities in the Index, which are intended to have aggregate characteristics similar to those of the Index, and may invest in securities not contained in the 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, other than for cash management purposes, nor does it conduct conventional research or analysis (other than in determining counterparty creditworthiness), or forecast 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, in combination, provide exposure to the Index without regard to market conditions, trends or direction.

Please see “Investment Objectives, Principal Investment Strategies, and Related Risks” in the Fund’s full prospectus for additional details.

[As of the close of business on December 31, 2011, the NASDAQ 100 was concentrated in the technology and communications industry groups, which comprised approximately [        ]% and [        ]%, respectively, of the market capitalization of the NASDAQ 100.]

The Fund will not directly short the securities of issuers contained in the NASDAQ 100.

Principal Risks

You could lose money by investing in the Fund.

 

 

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, that the Fund will retain any appreciation in value over extended periods of time, or that the Fund’s returns will maintain, for any period of time, a 15% volatility or be less volatile than the returns of the NASDAQ 100. The Index may underperform more traditional indices, including the NASDAQ 100. In turn, the Fund could lose value while other indices or measures of market performance increase in value. The Index was formed in [2011]. Accordingly, the Index has limited historical performance.

In addition, the Index uses the 30 and 60 day historical volatility data of the NASDAQ 100 to determine realized volatility, which in turn is compared to the target volatility of 15% to determine the allocations to the NASDAQ 100 and the T-Bill Component. As such, a significant near-term change in the realized volatility of the NASDAQ 100 may not result in a commensurate repositioning of the Fund. As a result, the Fund may be more or less exposed to equity securities than short-term volatility might suggest, and this may result in losses.

 

 

Leveraged Exposure Risk — The Index may at times represent leveraged (i.e. greater than 100%) exposure to the NASDAQ 100, the Fund may at such times be subject to greater risk of loss than an unleveraged investment in the NASDAQ 100.

 

 

Risks Associated with the Use of Derivatives — The Fund uses investment techniques and derivatives that may be considered aggressive. Because the Fund’s investments 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. There may be imperfect correlation between the value of

 

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the instruments and the Index, which may prevent the Fund from achieving its investment objective. Additionally, with respect to the use of swap agreements, if the Index has a dramatic intraday move that causes a material decline in the Fund’s net asset value (“NAV”), the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the transaction with the Fund. In that event, the Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve the desired exposure consistent with the Fund’s objective. This, in turn, may prevent the Fund from achieving its investment objective, even if the Index reverses all or a portion of its intraday move by the end of the day. The cost to use derivatives generally 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 the Index, 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. The factors that may adversely affect the Fund’s correlation with the Index include fees, expenses, transaction costs, financing costs associated with the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets for the securities or financial instruments in which the Fund invests. 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. In addition, the Fund may invest in securities or financial instruments not included in 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 and other index rebalancing or reconstitution events may hinder the Fund’s ability to meet its investment objective. Additionally, if the asset underlying a swap agreement has a dramatic intraday move, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the transaction with the Fund. This, in turn, may prevent the Fund from achieving its investment objective, even if the securities or assets underlying the swap agreement reverse all or a portion of their intraday move by the end of the day.

 

 

Counterparty Risk — The Fund will be subject to credit risk (i.e., the risk that a counterparty is unwilling or unable to make timely payments to meet its contractual obligations) with respect to the amount it expects to receive from counterparties to derivatives or repurchase agreements entered into by the Fund. If a counterparty becomes bankrupt or fails to perform its obligations, 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, may be unable to meet its investment objective 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.

The Index may not rebalance frequently enough to account for short-term volatility in the markets, as described further under “Index Performance Risk” below. Adverse market developments may cause the value of an investment in the Fund to decrease.

 

 

Debt Instrument Risk — The Fund may invest in, or seek exposure to, debt instruments. Debt instruments may have varying levels of sensitivity to changes in interest rates, credit risk and other factors. Many types of debt instruments are subject to call risk, which is the risk that the issuer of the security will call or repay principal prior to the maturity date. Callable debt instruments may offer less potential for gains during a period of declining interest rates, as the Fund may be required to reinvest the proceeds received at lower interest rates. In addition, changes in the credit quality of the issuer of a debt instrument can also affect the price of a debt instrument, as can an issuer’s default on its payment obligations. Such factors may cause the value of an investment in the Fund to change. Also, the securities of certain U.S. government

 

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agencies, authorities or instrumentalities are neither issued by nor guaranteed as to principal and interest by the U.S. government, and may be exposed to more credit risk than securities issued by and guaranteed as to principal and interest by the U.S. government.

 

 

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 obtaining exposure to or achieving a high correlation with the Index.

 

 

Market Price Variance Risk — The Fund’s shares will be listed for trading on The NASDAQ Stock Market 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 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, as amended, and has the ability to invest a relatively high percentage of its investments in the securities of a small number of issuers susceptible to a single economic, political or regulatory event, or in derivative instruments with a single counterparty 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 adverse impact from credit risk relating to that counterparty than a diversified fund might be.

 

 

Portfolio Turnover Risk — Daily rebalancing of Fund holdings will cause a higher level of portfolio transactions than compared to most funds. Additionally, active market trading of the Fund’s shares may cause more frequent creation or redemption activities that could, in certain circumstances, increase the number of portfolio transactions. High levels of transactions increase brokerage costs and may result in increased taxable capital gains.

 

 

Technology Industry Risk — The Fund may be subject to risks faced by companies in the technology industry. Securities of technology companies may be subject to greater volatility than stocks of companies in other market sectors. Technology companies may be affected by intense competition, obsolescence of existing technology, general economic conditions and government regulation and may have limited product lines, markets, financial resources or personnel. Technology companies may experience dramatic and often unpredictable changes in growth rates and competition for qualified personnel. These companies also are heavily dependent on patent and intellectual property rights, the loss or impairment of which may adversely affect profitability. A small number of companies represent a large portion of the technology industries as a whole. Further, such stocks in the Index may underperform fixed-income investments and stock market indexes that track other markets, segments and sectors.

 

 

Telecommunications Industry Risk — The Fund may be subject to risks faced by companies in the telecommunications economic sector, including: a telecommunications market characterized by increasing competition and regulation by the Federal Communications Commission and various state regulatory authorities; the need to commit substantial capital to meet increasing competition, particularly in formulating new products and services using new technology; and technological innovations that may make various products and services obsolete. Further, such stocks in the Index may underperform fixed-income investments and stock market indexes that track other markets, segments and sectors.

Investment Results

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

 

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Management

The Fund is advised by ProShare Advisors. Hratch Najarian, Senior Portfolio Manager, has managed the Fund since 2012.

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 comprises 50,000 shares. Retail investors may only purchase and sell shares on a national securities exchange through a broker-dealer. Because the Fund’s shares trade at market prices rather than NAV, shares may trade at a price greater than NAV (premium) or less than NAV (discount).

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

ProShares Dow 30 – 15% Volatility Target (the “Fund”) seeks investment results, before fees and expenses, that correspond to the performance of the Dow 30 – 15% Volatility Index (the “Index,” Bloomberg ticker: [        ]).

The Index seeks to provide dynamic exposure to the stocks of the Dow Jones Industrial AverageSM Index (the “Dow Jones Industrial Average”), which is a price-weighted index maintained by editors of The Wall Street Journal. The dynamic exposure is designed to target an overall volatility for the Index of 15%. The Index seeks to achieve this target volatility through leveraged exposure (i.e., 101—200%) to the Dow Jones Industrial Average during periods when the realized volatility of the Dow Jones Industrial Average is less than 15% and de-leveraged exposure (i.e., 0—99%) during periods when the realized volatility of the Dow Jones Industrial Average is greater than 15%. The Index adjusts exposure between the Dow Jones Industrial Average and three-month U.S. Treasury Bills (the “T-Bill Component”) based upon realized historical volatility of the Dow Jones Industrial Average. As the historical realized volatility of the Dow Jones Industrial Average increases relative to the target of 15%, exposure to the Dow Jones Industrial Average will decrease and exposure to the T-Bill Component will increase. As the historical realized volatility of the Dow Jones Industrial Average decreases relative to the target of 15%, exposure to the Dow Jones Industrial Average will increase and exposure to the T-Bill Component will decrease. The Index will generally be rebalanced daily. The Fund’s returns will differ from the returns of the Dow Jones Industrial Average.

The Dow Jones Industrial Average includes 30 large-cap, “blue-chip” U.S. stocks, excluding utility and transportation companies. Components are selected through a discretionary process with no predetermined criteria except that components should be established U.S. companies that are leaders in their industries, have an excellent reputation, demonstrate sustained growth, are of interest to a large number of investors and accurately represent the sectors covered by the average. The Dow Jones Industrial Average is not limited to traditionally defined industrial stocks, instead, the Dow Jones Industrial Average serves as a measure of the entire U.S. market, covering such diverse industries as financial services, technology, retail, entertainment and consumer goods. Composition changes are rare, and generally occur only after corporate acquisitions or other dramatic shifts in a component’s core business. When such an event necessitates that one component be replaced, the entire Dow Jones Industrial Average is reviewed. As of December 31, 2011, the Dow Jones Industrial Average included companies with capitalizations between $[        ] and $[        ]. The average capitalization of the companies comprising the Dow Jones Industrial Average was approximately $[        ]. The Dow Jones Industrial Average is published under the Bloomberg ticker symbol “INDU.” The Dow Jones Industrial Average has a historical annualized volatility rate for the five year period ended December 31, 2011 of [        ]%.

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.

Annual Fund Operating Expenses

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

 

Investment Advisory Fees

     [         ]% 

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

     [         ]% 
  

 

 

 

 

* 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 [        ]% through [        ], 2013. 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.

 

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

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 remain the same, except that the fee waiver/expense reimbursement is assumed only to pertain to the first year. Although your actual cost may be higher or lower, based on these assumptions your approximate costs would be:

 

1 Year

   3 Years  

$            

   $                

The Fund pays transaction and financing costs associated with transacting in securities and derivatives. In addition, investors may pay brokerage commissions on their purchases and sales of the Fund’s shares. These costs 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 transactions. If such instruments were included, the Fund’s portfolio turnover rate would be significantly higher.

Principal Investment Strategies

The Fund seeks investment results, before fees and expenses, that correspond to the performance of the Index. Under normal circumstances, the Fund will invest at least 80% of its total assets in the equity and/or fixed income securities that comprise the Index at any given point in time. At times, the Fund will have leveraged exposure to the equity securities in the Index in a similar proportion as the Index.

The Fund invests in securities and derivatives that ProShare Advisors believes, in combination, should have similar return characteristics as the return of the Index. Cash balances arising from the use of 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 derivatives, which are 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 stocks in order to gain exposure to the Index. These derivatives principally include:

 

   

Swap Agreements — Contracts entered into primarily with major global financial institutions for a specified period ranging from a day to more than one year. In a standard “swap” transaction, two parties agree to exchange the return (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross return to be exchanged or “swapped” between the parties is calculated with respect to a “notional amount,” e.g., the return on or change in value of a particular dollar amount invested in a “basket” of securities representing a particular index.

 

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Futures Contracts – Standardized contracts traded on, or subject to the rules of, an exchange that call for the future delivery of a specified quantity and type of a particular asset at a specified time and place or, alternatively, may call for cash settlement.

 

 

Money Market Instruments — The Fund invests in short-term cash instruments that have a remaining maturity of 397 days or less and exhibit high quality credit profiles, including:

 

   

U.S. Treasury Bills — U.S. government securities that have initial maturities of one year or less, and are supported by the full faith and credit of the United States.

 

   

Repurchase Agreements — 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.

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 the Index. The Fund may gain exposure to only a representative sample of the securities in the Index, which are intended to have aggregate characteristics similar to those of the Index, and may invest in securities not contained in the 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, other than for cash management purposes, nor does it conduct conventional research or analysis (other than in determining counterparty creditworthiness), or forecast 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, in combination, provide exposure to the Index without regard to market conditions, trends or direction. Please see “Investment Objectives, Principal Investment Strategies, and Related Risks” in the Fund’s full prospectus for additional details.

Principal Risks

You could lose money by investing in the Fund.

 

 

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, that the Fund will retain any appreciation in value over extended periods of time, or that the Fund’s returns will maintain, for any period of time, a 15% volatility or be less volatile than the returns of the Dow Jones Industrial Average. The Index may underperform more traditional indices, including the Dow Jones Industrial Average. In turn, the Fund could lose value while other indices or measures of market performance increase in value. The Index was formed in [2011]. Accordingly, the Index has limited historical performance.

In addition, the Index uses the 30 and 60 day historical volatility data of the Dow Jones Industrial Average to determine realized volatility, which in turn is compared to the target volatility of 15% to determine the allocations to the Dow Jones Industrial Average and the T-Bill Component. As such, a significant near-term change in the realized volatility of the Dow Jones Industrial Average may not result in a commensurate repositioning of the Fund. As a result, the Fund may be more or less exposed to equity securities than short-term volatility might suggest, and this may result in losses.

 

 

Leveraged Exposure Risk — The Index may at times represent leveraged (i.e. greater than 100%) exposure to the Dow Jones Industrial Average, the Fund may at such times be subject to greater risk of loss than an unleveraged investment in the Dow Jones Industrial Average.

 

 

Risks Associated with the Use of Derivatives — The Fund uses investment techniques and derivatives that may be considered aggressive. Because the Fund’s investments 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. There may be imperfect correlation between the value of

 

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the instruments and the Index, which may prevent the Fund from achieving its investment objective. Additionally, with respect to the use of swap agreements, if the Index has a dramatic intraday move that causes a material decline in the Fund’s net asset value (“NAV”), the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the transaction with the Fund. In that event, the Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve the desired exposure consistent with the Fund’s objective. This, in turn, may prevent the Fund from achieving its investment objective, even if the Index reverses all or a portion of its intraday move by the end of the day. The cost to use derivatives generally 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 the Index, 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. The factors that may adversely affect the Fund’s correlation with the Index include fees, expenses, transaction costs, financing costs associated with the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets for the securities or financial instruments in which the Fund invests. 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. In addition, the Fund may invest in securities or financial instruments not included in 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 and other index rebalancing or reconstitution events may hinder the Fund’s ability to meet its investment objective. Additionally, if the asset underlying a swap agreement has a dramatic intraday move, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the transaction with the Fund. This, in turn, may prevent the Fund from achieving its investment objective, even if the securities or assets underlying the swap agreement reverse all or a portion of their intraday move by the end of the day.

 

 

Counterparty Risk — The Fund will be subject to credit risk (i.e., the risk that a counterparty is unwilling or unable to make timely payments to meet its contractual obligations) with respect to the amount it expects to receive from counterparties to derivatives or repurchase agreements entered into by the Fund. If a counterparty becomes bankrupt or fails to perform its obligations, 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, may be unable to meet its investment objective 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.

The Index may not rebalance frequently enough to account for short-term volatility in the markets, as described further under “Index Performance Risk” below. Adverse market developments may cause the value of an investment in the Fund to decrease.

 

 

Debt Instrument Risk — The Fund may invest in, or seek exposure to, debt instruments. Debt instruments may have varying levels of sensitivity to changes in interest rates, credit risk and other factors. Many types of debt instruments are subject to call risk, which is the risk that the issuer of the security will call or repay principal prior to the maturity date. Callable debt instruments may offer less potential for gains during a period of declining interest rates, as the Fund may be required to reinvest the proceeds received at lower interest rates. In addition, changes in the credit quality of the issuer of a debt instrument can also affect the price of a debt instrument, as can an issuer’s default on its payment obligations. Such factors may cause the value of an investment in the Fund to change. Also, the securities of certain U.S. government

 

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agencies, authorities or instrumentalities are neither issued by nor guaranteed as to principal and interest by the U.S. government, and may be exposed to more credit risk than securities issued by and guaranteed as to principal and interest by the U.S. government.

 

 

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 obtaining exposure to or achieving a high correlation with the Index.

 

 

Market Price Variance Risk — The Fund’s shares will be listed for trading on the NYSE Arca 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 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, as amended, and has the ability to invest a relatively high percentage of its investments in the securities of a small number of issuers susceptible to a single economic, political or regulatory event, or in derivative instruments with a single counterparty 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 adverse impact from credit risk relating to that counterparty than a diversified fund might be.

 

 

Portfolio Turnover Risk — Daily rebalancing of Fund holdings will cause a higher level of portfolio transactions than compared to most funds. Additionally, active market trading of the Fund’s shares may cause more frequent creation or redemption activities that could, in certain circumstances, increase the number of portfolio transactions. High levels of transactions increase brokerage costs and may result in increased taxable capital gains.

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. Hratch Najarian, Senior Portfolio Manager, has managed the Fund since 2012.

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 comprises 50,000 shares. Retail investors may only purchase and sell shares on a national securities exchange through a broker-dealer. Because the Fund’s shares trade at market prices rather than NAV, shares may trade at a price greater than NAV (premium) or less than NAV (discount).

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

ProShares Russell 2000 – 15% Volatility Target (the “Fund”) seeks investment results, before fees and expenses, that correspond to the performance of the Russell 2000 – 15% Volatility Index (the “Index,” Bloomberg ticker: [        ]).

The Index seeks to provide dynamic exposure to the stocks of the Russell 2000® Index (the “Russell 2000”), which is a measure of small-cap U.S. stock market performance. The Russell 2000 is a float-adjusted, market capitalization-weighted index containing approximately 2000 of the smallest companies in the Russell 3000® Index or approximately 8% of the total market capitalization of the Russell 3000® Index, which in turn represents approximately 98% of the investable U.S. equity market. The dynamic exposure is designed to target an overall volatility for the Index of 15%. The Index seeks to achieve this target volatility through leveraged exposure (i.e., 101—200%) to the Russell 2000 during periods when the realized volatility of the Russell 2000 is less than 15% and de-leveraged exposure (i.e., 0—99%) to the Russell 2000 during periods when the realized volatility of the Russell 2000 is greater than 15%. The Index adjusts exposure between the Russell 2000 and three-month U.S. Treasury Bills (the “T-Bill Component”) based upon realized historical volatility of the Russell 2000. As the historical realized volatility of the Russell 2000 increases relative to the target of 15%, exposure to the Russell 2000 will decrease and exposure to the T-Bill Component will increase. As the historical realized volatility of the Russell 2000 decreases relative to the target of 15%, exposure to the Russell 2000 will increase and exposure to the T-Bill Component will decrease. The Index will generally be rebalanced daily. The Fund’s returns will differ from the returns of the Russell 2000.

As of December 31, 2011, the Russell 2000 included companies with capitalizations between $[        ] and $[        ]. The average capitalization of the companies comprising the Russell 2000 was approximately $[        ]. The Russell 2000 is published under the Bloomberg ticker symbol “RTY.” The Russell 2000 has a historical annualized volatility rate for the five year period ended December 31, 2011 of [        ]%.

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.

Annual Fund Operating Expenses

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

 

Investment Advisory Fees

     [         ]% 

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

     [         ]% 
  

 

 

 

 

* 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 [        ]% through [        ], 2013. 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 the Fund 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 remain the same, except that the fee waiver/expense reimbursement is assumed only to pertain to the first year. Although your actual cost may be higher or lower, based on these assumptions your approximate costs would be:

 

1 Year

   3 Years  

$            

   $                

The Fund pays transaction and financing costs associated with transacting in securities and derivatives. In addition, investors may pay brokerage commissions on their purchases and sales of the Fund’s shares. These costs 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 transactions. If such instruments were included, the Fund’s portfolio turnover rate would be significantly higher.

Principal Investment Strategies

The Fund seeks investment results, before fees and expenses, that correspond to the performance of the Index. Under normal circumstances, the Fund will invest at least 80% of its total assets in the equity and/or fixed income securities that comprise the Index at any given point in time. At times, the Fund will have leveraged exposure to the equity securities in the Index in a similar proportion as the Index.

The Fund invests in securities and derivatives that ProShare Advisors believes, in combination, should have similar return characteristics as the return of the Index. Cash balances arising from the use of 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 derivatives, which are 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 stocks in order to gain exposure to the Index. These derivatives principally include:

 

   

Swap Agreements — Contracts entered into primarily with major global financial institutions for a specified period ranging from a day to more than one year. In a standard “swap” transaction, two parties agree to exchange the return (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross return to be exchanged or “swapped” between the parties is calculated with respect to a “notional amount,” e.g., the return on or change in value of a particular dollar amount invested in a “basket” of securities representing a particular index.

 

   

Futures Contracts – Standardized contracts traded on, or subject to the rules of, an exchange that call for the future delivery of a specified quantity and type of a particular asset at a specified time and place or, alternatively, may call for cash settlement.

 

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Money Market Instruments — The Fund invests in short-term cash instruments that have a remaining maturity of 397 days or less and exhibit high quality credit profiles, including:

 

   

U.S. Treasury Bills — U.S. government securities that have initial maturities of one year or less, and are supported by the full faith and credit of the United States.

 

   

Repurchase Agreements — 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.

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 the Index. The Fund may gain exposure to only a representative sample of the securities in the Index, which are intended to have aggregate characteristics similar to those of the Index, and may invest in securities not contained in the 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, other than for cash management purposes, nor does it conduct conventional research or analysis (other than in determining counterparty creditworthiness), or forecast 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, in combination, provide exposure to the Index without regard to market conditions, trends or direction. Please see “Investment Objectives, Principal Investment Strategies, and Related Risks” in the Fund’s full prospectus for additional details.

Principal Risks

You could lose money by investing in the Fund.

 

 

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, that the Fund will retain any appreciation in value over extended periods of time, or that the Fund’s returns will maintain, for any period of time, a 15% volatility or be less volatile than the returns of the Russell 2000. The Index may underperform more traditional indices, including the Russell 2000. In turn, the Fund could lose value while other indices or measures of market performance increase in value. The Index was formed in [2011]. Accordingly, the Index has limited historical performance.

In addition, the Index uses the 30 and 60 day historical volatility data of the Russell 2000 to determine realized volatility, which in turn is compared to the target volatility of 15% to determine the allocations to the Russell 2000 and the T-Bill Component. As such, a significant near-term change in the realized volatility of the Russell 2000 may not result in a commensurate repositioning of the Fund. As a result, the Fund may be more or less exposed to equity securities than short-term volatility might suggest, and this may result in losses.

 

 

Leveraged Exposure Risk — The Index may at times represent leveraged (i.e. greater than 100%) exposure to the Russell 2000, the Fund may at such times be subject to greater risk of loss than an unleveraged investment in the Russell 2000.

 

 

Risks Associated with the Use of Derivatives — The Fund uses investment techniques and derivatives that may be considered aggressive. Because the Fund’s investments 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. There may be imperfect correlation between the value of the instruments and the Index, which may prevent the Fund from achieving its investment objective. Additionally, with respect to the use of swap agreements, if the Index has a dramatic intraday move that causes a material decline in the Fund’s net asset value (“NAV”), the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the transaction with the Fund. In that event, the Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve the desired exposure consistent with the Fund’s objective. This, in turn, may prevent the Fund from achieving its investment objective, even if the Index reverses all or a portion of its intraday move by the end of the day. The cost to use derivatives generally increases as interest rates increase, which will lower the Fund’s return.

 

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Correlation Risk — A number of factors may affect the Fund’s ability to achieve a high degree of correlation with the Index, 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. The factors that may adversely affect the Fund’s correlation with the Index include fees, expenses, transaction costs, financing costs associated with the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets for the securities or financial instruments in which the Fund invests. 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. In addition, the Fund may invest in securities or financial instruments not included in 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 and other index rebalancing or reconstitution events may hinder the Fund’s ability to meet its investment objective. Additionally, if the asset underlying a swap agreement has a dramatic intraday move, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the transaction with the Fund. This, in turn, may prevent the Fund from achieving its investment objective, even if the securities or assets underlying the swap agreement reverse all or a portion of their intraday move by the end of the day.

 

 

Counterparty Risk — The Fund will be subject to credit risk (i.e., the risk that a counterparty is unwilling or unable to make timely payments to meet its contractual obligations) with respect to the amount it expects to receive from counterparties to derivatives or repurchase agreements entered into by the Fund. If a counterparty becomes bankrupt or fails to perform its obligations, 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, may be unable to meet its investment objective 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.

The Index may not rebalance frequently enough to account for short-term volatility in the markets, as described further under “Index Performance Risk” below. Adverse market developments may cause the value of an investment in the Fund to decrease.

 

 

Debt Instrument Risk — The Fund may invest in, or seek exposure to, debt instruments. Debt instruments may have varying levels of sensitivity to changes in interest rates, credit risk and other factors. Many types of debt instruments are subject to call risk, which is the risk that the issuer of the security will call or repay principal prior to the maturity date. Callable debt instruments may offer less potential for gains during a period of declining interest rates, as the Fund may be required to reinvest the proceeds received at lower interest rates. In addition, changes in the credit quality of the issuer of a debt instrument can also affect the price of a debt instrument, as can an issuer’s default on its payment obligations. Such factors may cause the value of an investment in the Fund to change. Also, the securities of certain U.S. government agencies, authorities or instrumentalities are neither issued by nor guaranteed as to principal and interest by the U.S. government, and may be exposed to more credit risk than securities issued by and guaranteed as to principal and interest by the U.S. government.

 

 

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 obtaining exposure to or achieving a high correlation with the Index.

 

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Market Price Variance Risk — The Fund’s shares will be listed for trading on the NYSE Arca 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 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, as amended, and has the ability to invest a relatively high percentage of its investments in the securities of a small number of issuers susceptible to a single economic, political or regulatory event, or in derivative instruments with a single counterparty 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 adverse impact from credit risk relating to that counterparty than a diversified fund might be.

 

 

Portfolio Turnover Risk — Daily rebalancing of Fund holdings will cause a higher level of portfolio transactions than compared to most funds. Additionally, active market trading of the Fund’s shares may cause more frequent creation or redemption activities that could, in certain circumstances, increase the number of portfolio transactions. High levels of transactions increase brokerage costs and may result in increased taxable capital gains.

 

 

Small- and Mid-Cap Company Investment Risk — The Index, and by extension, the Fund is exposed to stocks of small- and mid-cap companies. The risk of equity investing may be particularly acute for securities of issuers with smaller market capitalizations. Small- and mid-cap company stocks may trade at greater spreads or lower trading volumes, and may be less liquid than the stocks of larger companies. Small- and mid-cap companies may have limited product lines or resources, may be dependent upon a particular market niche and may have greater fluctuations in price than the stocks of larger companies. Further, stocks of small- and mid-sized companies could be more difficult to liquidate during market downturns compared to larger, more widely traded companies. In addition, small-and mid-cap companies may lack the financial and personnel resources to handle economic or industry-wide setbacks and, as a result, such setbacks could have a greater effect on small- and mid-cap security prices.

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. Hratch Najarian, Senior Portfolio Manager, has managed the Fund since 2012.

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 comprises 50,000 shares. Retail investors may only purchase and sell shares on a national securities exchange through a broker-dealer. Because the Fund’s shares trade at market prices rather than NAV, shares may trade at a price greater than NAV (premium) or less than NAV (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

ProShares Russell 1000 – 15% Volatility Target (the “Fund”) seeks investment results, before fees and expenses, that correspond to the performance of the Russell 1000 – 15% Volatility Index (the “Index,” Bloomberg ticker: [        ]).

The Index seeks to provide dynamic exposure to the stocks of the Russell 1000® Index (the “Russell 1000”), which is designed to provide a comprehensive measure of large-cap U.S. equity performance. The dynamic exposure is designed to target an overall volatility for the Index of 15%. The Index seeks to achieve this target volatility through leveraged exposure (i.e., 101—200%) to the Russell 1000 during periods when the realized volatility of the Russell 1000 is less than 15% and de-leveraged exposure (i.e., 0—99%) to the Russell 1000 during periods when the realized volatility of the Russell 1000 is greater than 15%. The Index adjusts exposure between the Russell 1000 and three-month U.S. Treasury Bills (the “T-Bill Component”) based upon realized historical volatility of the Russell 1000. As the historical realized volatility of the Russell 1000 increases relative to the target of 15%, exposure to the Russell 1000 will decrease and exposure to the T-Bill Component will increase. As the historical realized volatility of the Russell 1000 decreases relative to the target of 15%, exposure to the Russell 1000 will increase and exposure to the T-Bill Component will decrease. The Index will generally be rebalanced daily. The Fund’s returns will differ from the returns of the Russell 1000.

As of December 31, 2011, the Russell 1000 included companies with capitalizations between $[        ] and $[        ]. The average capitalization of the companies comprising the Index was approximately $[        ]. The Index is published under the Bloomberg ticker symbol “RIY.” The Russell 1000 has a historical annualized volatility rate for the five year period ended December 31, 2011 of [        ]%.

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.

Annual Fund Operating Expenses

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

 

Investment Advisory Fees

     [         ]% 

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

     [         ]% 
  

 

 

 

 

* 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 [        ]% through [        ], 2013. 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 the Fund 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 remain the same, except that the fee waiver/expense reimbursement is assumed only to pertain to the first year. Although your actual cost may be higher or lower, based on these assumptions your approximate costs would be:

 

1 Year

   3 Years  

$            

   $                

The Fund pays transaction and financing costs associated with transacting in securities and derivatives. In addition, investors may pay brokerage commissions on their purchases and sales of the Fund’s shares. These costs 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 transactions. If such instruments were included, the Fund’s portfolio turnover rate would be significantly higher.

Principal Investment Strategies

The Fund seeks investment results, before fees and expenses, that correspond to the performance of the Index. Under normal circumstances, the Fund will invest at least 80% of its total assets in the equity and/or fixed income securities that comprise the Index at any given point in time. At times, the Fund will have leveraged exposure to the equity securities in the Index in a similar proportion as the Index.

The Fund invests in securities and derivatives that ProShare Advisors believes, in combination, should have return characteristics as the return of the Index. Cash balances arising from the use of 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 derivatives, which are 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 stocks in order to gain exposure to the Index. These derivatives principally include:

 

   

Swap Agreements — Contracts entered into primarily with major global financial institutions for a specified period ranging from a day to more than one year. In a standard “swap” transaction, two parties agree to exchange the return (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross return to be exchanged or “swapped” between the parties is calculated with respect to a “notional amount,” e.g., the return on or change in value of a particular dollar amount invested in a “basket” of securities representing a particular index.

 

   

Futures Contracts – Standardized contracts traded on, or subject to the rules of, an exchange that call for the future delivery of a specified quantity and type of a particular asset at a specified time and place or, alternatively, may call for cash settlement.

 

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Money Market Instruments — The Fund invests in short-term cash instruments that have a remaining maturity of 397 days or less and exhibit high quality credit profiles, including:

 

   

U.S. Treasury Bills — U.S. government securities that have initial maturities of one year or less, and are supported by the full faith and credit of the United States.

 

   

Repurchase Agreements — 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.

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 the Index. The Fund may gain exposure to only a representative sample of the securities in the Index, which are intended to have aggregate characteristics similar to those of the Index, and may invest in securities not contained in the 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, other than for cash management purposes, nor does it conduct conventional research or analysis (other than in determining counterparty creditworthiness), or forecast 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, in combination, provide exposure to the Index without regard to market conditions, trends or direction. Please see “Investment Objectives, Principal Investment Strategies, and Related Risks” in the Fund’s full prospectus for additional details.

Principal Risks

You could lose money by investing in the Fund.

 

 

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, that the Fund will retain any appreciation in value over extended periods of time, or that the Fund’s returns will maintain, for any period of time, a 15% volatility or be less volatile than the returns of the Russell 1000. The Index may underperform more traditional indices, including the Russell 1000. In turn, the Fund could lose value while other indices or measures of market performance increase in value. The Index was formed in [2011]. Accordingly, the Index has limited historical performance.

In addition, the Index uses the 30 and 60 day historical volatility data of the Russell 1000 to determine realized volatility, which in turn is compared to the target volatility of 15% to determine the allocations to the Russell 1000 and the T-Bill Component. As such, a significant near-term change in the realized volatility of the Russell 1000 may not result in a commensurate repositioning of the Fund. As a result, the Fund may be more or less exposed to equity securities than short-term volatility might suggest, and this may result in losses.

 

 

Leveraged Exposure Risk — The Index may at times represent leveraged (i.e. greater than 100%) exposure to the Russell 1000, the Fund may at such times be subject to greater risk of loss than an unleveraged investment in the Russell 1000.

 

 

Risks Associated with the Use of Derivatives — The Fund uses investment techniques and derivatives that may be considered aggressive. Because the Fund’s investments 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. There may be imperfect correlation between the value of the instruments and the Index, which may prevent the Fund from achieving its investment objective. Additionally, with respect to the use of swap agreements, if the Index has a dramatic intraday move that causes a material decline in the Fund’s net asset value (“NAV”), the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out

 

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the transaction with the Fund. In that event, the Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve the desired exposure consistent with the Fund’s objective. This, in turn, may prevent the Fund from achieving its investment objective, even if the Index reverses all or a portion of its intraday move by the end of the day. The cost to use derivatives generally 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 the Index, 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. The factors that may adversely affect the Fund’s correlation with the Index include fees, expenses, transaction costs, financing costs associated with the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets for the securities or financial instruments in which the Fund invests. 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. In addition, the Fund may invest in securities or financial instruments not included in 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 and other index rebalancing or reconstitution events may hinder the Fund’s ability to meet its investment objective. Additionally, if the asset underlying a swap agreement has a dramatic intraday move, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the transaction with the Fund. This, in turn, may prevent the Fund from achieving its investment objective, even if the securities or assets underlying the swap agreement reverse all or a portion of their intraday move by the end of the day.

 

 

Counterparty Risk — The Fund will be subject to credit risk (i.e., the risk that a counterparty is unwilling or unable to make timely payments to meet its contractual obligations) with respect to the amount it expects to receive from counterparties to derivatives or repurchase agreements entered into by the Fund. If a counterparty becomes bankrupt or fails to perform its obligations, 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, may be unable to meet its investment objective 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.

The Index may not rebalance frequently enough to account for short-term volatility in the markets, as described further under “Index Performance Risk” below. Adverse market developments may cause the value of an investment in the Fund to decrease.

 

 

Debt Instrument Risk — The Fund may invest in, or seek exposure to, debt instruments. Debt instruments may have varying levels of sensitivity to changes in interest rates, credit risk and other factors. Many types of debt instruments are subject to call risk, which is the risk that the issuer of the security will call or repay principal prior to the maturity date. Callable debt instruments may offer less potential for gains during a period of declining interest rates, as the Fund may be required to reinvest the proceeds received at lower interest rates. In addition, changes in the credit quality of the issuer of a debt instrument can also affect the price of a debt instrument, as can an issuer’s default on its payment obligations. Such factors may cause the value of an investment in the Fund to change. Also, the securities of certain U.S. government agencies, authorities or instrumentalities are neither issued by nor guaranteed as to principal and interest by the U.S. government, and may be exposed to more credit risk than securities issued by and guaranteed as to principal and interest by the U.S. government.

 

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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 obtaining exposure to or achieving a high correlation with the Index.

 

 

Market Price Variance Risk — The Fund’s shares will be listed for trading on the NYSE Arca 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 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, as amended, and has the ability to invest a relatively high percentage of its investments in the securities of a small number of issuers susceptible to a single economic, political or regulatory event, or in derivative instruments with a single counterparty 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 adverse impact from credit risk relating to that counterparty than a diversified fund might be.

 

 

Portfolio Turnover Risk — Daily rebalancing of Fund holdings will cause a higher level of portfolio transactions than compared to most funds. Additionally, active market trading of the Fund’s shares may cause more frequent creation or redemption activities that could, in certain circumstances, increase the number of portfolio transactions. High levels of transactions increase brokerage costs and may result in increased taxable capital gains.

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. Hratch Najarian, Senior Portfolio Manager, has managed the Fund since 2012.

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 comprises 50,000 shares. Retail investors may only purchase and sell shares on a national securities exchange through a broker-dealer. Because the Fund’s shares trade at market prices rather than NAV, shares may trade at a price greater than NAV (premium) or less than NAV (discount).

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

ProShares MSCI EAFE – 15% Volatility Target (the “Fund”) seeks investment results, before fees and expenses, that correspond to the performance of the MSCI EAFE – 15% Volatility Index (the “Index,” Bloomberg ticker: [        ]).

The Index seeks to provide dynamic exposure to the stocks of the MSCI EAFE Index (the “MSCI EAFE”), which includes 85% of free float-adjusted, market capitalization in each industry group in developed market countries, excluding the U.S. and Canada. The dynamic exposure is designed to target an overall volatility for the Index of 15%. The Index seeks to achieve this target volatility through leveraged exposure (i.e., 101—200%) to the MSCI EAFE during periods when the realized volatility of the MSCI EAFE is less than 15% and de-leveraged exposure (i.e., 0—99%) to the MSCI EAFE during periods when the realized volatility of the MSCI EAFE is greater than 15%. The Index adjusts exposure between the MSCI EAFE and three-month U.S. Treasury Bills (the “T-Bill Component”) based upon realized historical volatility of the MSCI EAFE. As the historical realized volatility of the MSCI EAFE increases relative to the target of 15%, exposure to the MSCI EAFE will decrease and exposure to the T-Bill Component will increase. As the historical realized volatility of the MSCI EAFE decreases relative to the target of 15%, exposure to the MSCI EAFE will increase and exposure to the T-Bill Component will decrease. The Index will generally be rebalanced daily. The Fund’s returns will differ from the returns of the MSCI EAFE.

[As of December 31, 2011, the MSCI EAFE consisted of the following 22 developed market country indexes: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.] As of December 31, 2011, the MSCI EAFE included companies with capitalizations between $[        ] and $[        ]. The average capitalization of the companies comprising the MSCI EAFE was approximately $[        ]. The MSCI EAFE is published under the Bloomberg ticker symbol “MXEA.” The MSCI EAFE has a historical annualized volatility rate for the five year period ended December 31, 2011 of [        ]%.

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.

Annual Fund Operating Expenses

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

 

Investment Advisory Fees

     [         ]% 

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

     [         ]% 
  

 

 

 

 

* 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 [        ]% through [        ], 2013. 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 the Fund 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 remain the same, except that the fee waiver/expense reimbursement is assumed only to pertain to the first year. Although your actual cost may be higher or lower, based on these assumptions your approximate costs would be:

 

1 Year

   3 Years  

$            

   $                

The Fund pays transaction and financing costs associated with transacting in securities and derivatives. In addition, investors may pay brokerage commissions on their purchases and sales of the Fund’s shares. These costs 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 transactions. If such instruments were included, the Fund’s portfolio turnover rate would be significantly higher.

Principal Investment Strategies

The Fund seeks investment results, before fees and expenses, that correspond to the performance of the Index. Under normal circumstances, the Fund will invest at least 80% of its total assets in the equity and/or fixed income securities that comprise the Index at any given point in time. At times, the Fund will have leveraged exposure to the equity securities in the Index in a similar proportion as the Index.

The Fund invests in securities and derivatives that ProShare Advisors believes, in combination, should have similar return characteristics as the return of the Index. Cash balances arising from the use of 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 derivatives, which are 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 stocks in order to gain exposure to the Index. These derivatives principally include:

 

   

Swap Agreements — Contracts entered into primarily with major global financial institutions for a specified period ranging from a day to more than one year. In a standard “swap” transaction, two parties agree to exchange the return (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross return to be exchanged or “swapped” between the parties is calculated with respect to a “notional amount,” e.g., the return on or change in value of a particular dollar amount invested in a “basket” of securities representing a particular index.

 

   

Futures Contracts – Standardized contracts traded on, or subject to the rules of, an exchange that call for the future delivery of a specified quantity and type of a particular asset at a specified time and place or, alternatively, may call for cash settlement.

 

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Money Market Instruments — The Fund invests in short-term cash instruments that have a remaining maturity of 397 days or less and exhibit high quality credit profiles, including:

 

   

U.S. Treasury Bills — U.S. government securities that have initial maturities of one year or less, and are supported by the full faith and credit of the United States.

 

   

Repurchase Agreements — 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.

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 the Index. The Fund may gain exposure to only a representative sample of the securities in the Index, which are intended to have aggregate characteristics similar to those of the Index, and may invest in securities not contained in the 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, other than for cash management purposes, nor does it conduct conventional research or analysis (other than in determining counterparty creditworthiness), or forecast 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, in combination, provide exposure to the Index without regard to market conditions, trends or direction. Please see “Investment Objectives, Principal Investment Strategies, and Related Risks” in the Fund’s full prospectus for additional details.

Principal Risks

You could lose money by investing in the Fund.

 

 

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, that the Fund will retain any appreciation in value over extended periods of time, or that the Fund’s returns will maintain, for any period of time, a 15% volatility or be less volatile than the returns of the MSCI EAFE. The Index may underperform more traditional indices, including the MSCI EAFE. In turn, the Fund could lose value while other indices or measures of market performance increase in value. The Index was formed in [2011]. Accordingly, the Index has limited historical performance.

In addition, the Index uses the 30 and 60 day historical volatility data of the MSCI EAFE to determine realized volatility, which in turn is compared to the target volatility of 15% to determine the allocations to the MSCI EAFE and the T-Bill Component. As such, a significant near-term change in the realized volatility of the MSCI EAFE may not result in a commensurate repositioning of the Fund. As a result, the Fund may be more or less exposed to equity securities than short-term volatility might suggest, and this may result in losses.

 

 

Leveraged Exposure Risk — The Index may at times represent leveraged (i.e. greater than 100%) exposure to the MSCI EAFE, the Fund may at such times be subject to greater risk of loss than an unleveraged investment in the MSCI EAFE.

 

 

Risks Associated with the Use of Derivatives — The Fund uses investment techniques and derivatives that may be considered aggressive. Because the Fund’s investments 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. There may be imperfect correlation between the value of the instruments and the Index, which may prevent the Fund from achieving its investment objective. Additionally, with respect to the use of swap agreements, if the Index has a dramatic intraday move that causes a material decline in the Fund’s net asset value (“NAV”), the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the transaction with the Fund. In that event, the Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve the desired exposure consistent with the Fund’s objective. This, in turn, may prevent the Fund from achieving its investment objective, even if the Index reverses all or a portion of its intraday move by the end of the day. The cost to use derivatives generally increases as interest rates increase, which will lower the Fund’s return.

 

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Correlation Risk — A number of factors may affect the Fund’s ability to achieve a high degree of correlation with the Index, 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. The factors that may adversely affect the Fund’s correlation with the Index include fees, expenses, transaction costs, financing costs associated with the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets for the securities or financial instruments in which the Fund invests. 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. In addition, the Fund may invest in securities or financial instruments not included in 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 and other index rebalancing or reconstitution events may hinder the Fund’s ability to meet its investment objective. Additionally, if the asset underlying a swap agreement has a dramatic intraday move, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the transaction with the Fund. This, in turn, may prevent the Fund from achieving its investment objective, even if the securities or assets underlying the swap agreement reverse all or a portion of their intraday move by the end of the day.

 

 

Counterparty Risk — The Fund will be subject to credit risk (i.e., the risk that a counterparty is unwilling or unable to make timely payments to meet its contractual obligations) with respect to the amount it expects to receive from counterparties to derivatives or repurchase agreements entered into by the Fund. If a counterparty becomes bankrupt or fails to perform its obligations, 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, may be unable to meet its investment objective 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.

The Index may not rebalance frequently enough to account for short-term volatility in the markets, as described further under “Index Performance Risk” below. Adverse market developments may cause the value of an investment in the Fund to decrease.

 

 

Debt Instrument Risk — The Fund may invest in, or seek exposure to, debt instruments. Debt instruments may have varying levels of sensitivity to changes in interest rates, credit risk and other factors. Many types of debt instruments are subject to call risk, which is the risk that the issuer of the security will call or repay principal prior to the maturity date. Callable debt instruments may offer less potential for gains during a period of declining interest rates, as the Fund may be required to reinvest the proceeds received at lower interest rates. In addition, changes in the credit quality of the issuer of a debt instrument can also affect the price of a debt instrument, as can an issuer’s default on its payment obligations. Such factors may cause the value of an investment in the Fund to change. Also, the securities of certain U.S. government agencies, authorities or instrumentalities are neither issued by nor guaranteed as to principal and interest by the U.S. government, and may be exposed to more credit risk than securities issued by and guaranteed as to principal and interest by the U.S. government.

 

 

Exposure to Foreign Currency Risk — Investments linked to or denominated in foreign currencies are exposed to risk factors in addition to investments denominated in U.S. dollars. The value of an investment linked to or denominated in a foreign currency could change significantly as foreign currencies strengthen

 

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or weaken relative to the U.S. dollar. Risks related to foreign currencies also include those related to economic or political developments, market inefficiencies or a higher risk that essential investment information may be incomplete, unavailable, or inaccurate. A U.S. dollar investment in Depositary Receipts or ordinary shares of foreign issuers traded on U.S. exchanges or an investment in an instrument linked to a foreign currency are subject to foreign currency risk.

 

 

Exposure to Foreign Investments Risk — Exposure to securities of foreign issuers provides the Fund with increased risk. Various factors related to foreign investments may negatively impact the Index’s performance, such as: i) fluctuations in the value of the local foreign currency; ii) differences in securities settlement practices; iii) uncertainty associated with evidence of ownership of investments in countries that lack centralized custodial services; iv) possible regulation of, or other limitations on, investments by U.S. investors in foreign investments; v) potentially higher brokerage commissions; vi) the possibility that a foreign government may withhold portions of interest and dividends at the source; vii) taxation of income earned in foreign countries or other foreign taxes imposed; viii) foreign exchange controls, which may include suspension of the ability to transfer currency from a foreign country; ix) less publicly available information about foreign issuers; x) changes in the denomination currency of a foreign investment; and xi) less certain legal systems in which the Fund might encounter difficulties or be unable to pursue legal remedies. Foreign investments also may be more susceptible to political, social, economic and regional factors than might be the case with U.S. securities.

Because the Fund’s foreign investments will be in developing or “emerging market” countries, all the aforementioned factors are heightened and foreign investments risk is higher.

 

 

Geographic Concentration Risk — Because the Fund will typically focus its investments in particular foreign countries or geographic regions, it may be more volatile than a more geographically diversified fund. The performance of the Fund will be affected by the political, social and economic conditions in those foreign countries and geographic regions and subject to the related risks.

 

 

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 obtaining exposure to or achieving a high correlation with the Index.

 

 

Market Price Variance Risk — The Fund’s shares will be listed for trading on the NYSE Arca 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 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, as amended, and has the ability to invest a relatively high percentage of its investments in the securities of a small number of issuers susceptible to a single economic, political or regulatory event, or in derivative instruments with a single counterparty 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 adverse impact from credit risk relating to that counterparty than a diversified fund might be.

 

 

Portfolio Turnover Risk — Daily rebalancing of Fund holdings will cause a higher level of portfolio transactions than compared to most funds. Additionally, active market trading of the Fund’s shares may cause more frequent creation or redemption activities that could, in certain circumstances, increase the number of portfolio transactions. High levels of transactions increase brokerage costs and may result in increased taxable capital gains.

 

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Valuation Time Risk — The Fund typically values its portfolio at 4:00 p.m. (Eastern time). In certain cases, foreign securities markets close before such time or may not be open for business on the same calendar days as the Fund. As a result, the daily performance of the Fund may vary, perhaps significantly, from the daily performance of the Index.

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. Alexander Ilyasov, Portfolio Manager, has managed the Fund since 2012.

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 comprises 50,000 shares. Retail investors may only purchase and sell shares on a national securities exchange through a broker-dealer. Because the Fund’s shares trade at market prices rather than NAV, shares may trade at a price greater than NAV (premium) or less than NAV (discount).

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

ProShares MSCI Emerging Markets – 15% Volatility Target (the “Fund”) seeks investment results, before fees and expenses, that correspond to the performance of the MSCI Emerging Markets – 15% Volatility Index (the “Index,” Bloomberg ticker: [    ]).

The Index seeks to provide dynamic exposure to the stocks of the MSCI Emerging Markets Index (the “MSCI EM”), which is a free float-adjusted market capitalization index designed to measure equity market performance in the global emerging markets. The dynamic exposure is designed to target an overall volatility for the Index of 15%. The Index seeks to achieve this target volatility through leveraged exposure (i.e., 101—200%) to the MSCI EM during periods when the realized volatility of the MSCI EM is less than 15% and de-leveraged exposure (i.e., 0—99%) to the MSCI EM during periods when the realized volatility of the MSCI EM is greater than 15%. The Index adjusts exposure between the MSCI EM and three-month U.S. Treasury Bills (the “T-Bill Component”) based upon realized historical volatility of the MSCI EM. As the historical realized volatility of the MSCI EM increases relative to the target of 15%, exposure to the MSCI EM will decrease and exposure to the T-Bill Component will increase. As the historical realized volatility of the MSCI EM decreases relative to the target of 15%, exposure to the MSCI EM will increase and exposure to the T-Bill Component will decrease. The Index will generally be rebalanced daily. The Fund’s returns will differ from the returns of the MSCI EM.

[As of December 31, 2011, the MSCI EM consisted of the following 21 emerging market country indexes: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand and Turkey.] As of December 31, 2011, the MSCI EM included companies with capitalizations between $[        ] and $[        ]. The average capitalization of the companies comprising the MSCI EM was approximately $[        ]. The MSCI EM is published under the Bloomberg ticker symbol “MXEF.” The MSCI EM has a historical annualized volatility rate for the five year period ended December 31, 2011 of [        ]%.

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.

Annual Fund Operating Expenses

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

 

Investment Advisory Fees

     [         ]% 

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

     [         ]% 
  

 

 

 

 

* 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 [        ]% through [        ], 2013. 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 the Fund 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 remain the same, except that the fee waiver/expense reimbursement is assumed only to pertain to the first year. Although your actual cost may be higher or lower, based on these assumptions your approximate costs would be:

 

1 Year

   3 Years  

$            

   $                

The Fund pays transaction and financing costs associated with transacting in securities and derivatives. In addition, investors may pay brokerage commissions on their purchases and sales of the Fund’s shares. These costs 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 transactions. If such instruments were included, the Fund’s portfolio turnover rate would be significantly higher.

Principal Investment Strategies

The Fund seeks investment results, before fees and expenses, that correspond to the performance of the Index. Under normal circumstances, the Fund will invest at least 80% of its total assets in the equity and/or fixed income securities that comprise the Index at any given point in time. At times, the Fund will have leveraged exposure to the equity securities in the Index in a similar proportion as the Index.

The Fund invests in securities, derivatives and depositary receipts that ProShare Advisors believes, in combination, should have return characteristics as the return of the Index. Cash balances arising from the use of 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 derivatives, which are 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 stocks in order to gain exposure to the Index. These derivatives principally include:

 

   

Swap Agreements — Contracts entered into primarily with major global financial institutions for a specified period ranging from a day to more than one year. In a standard “swap” transaction, two parties agree to exchange the return (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross return to be exchanged or “swapped” between the parties is calculated with respect to a “notional amount,” e.g., the return on or change in value of a particular dollar amount invested in a “basket” of securities representing a particular index.

 

   

Futures Contracts – Standardized contracts traded on, or subject to the rules of, an exchange that call for the future delivery of a specified quantity and type of a particular asset at a specified time and place or, alternatively, may call for cash settlement.

 

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Depositary Receipts — The Fund may invest in depositary receipts, which principally include:

 

   

American Depositary Receipts (ADRs), which represent the right to receive securities of foreign issuers deposited in a bank or trust company and are an alternative to purchasing the underlying securities in their national markets and currencies.

 

   

Global Depositary Receipts (GDRs), which are receipts for shares in a foreign-based corporation traded in capital markets around the word.

 

 

Money Market Instruments — The Fund invests in short-term cash instruments that have a remaining maturity of 397 days or less and exhibit high quality credit profiles, including:

 

   

U.S. Treasury Bills — U.S. government securities that have initial maturities of one year or less, and are supported by the full faith and credit of the United States.

 

   

Repurchase Agreements — 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.

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 the Index. The Fund may gain exposure to only a representative sample of the securities in the Index, which are intended to have aggregate characteristics similar to those of the Index, and may invest in securities not contained in the 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, other than for cash management purposes, nor does it conduct conventional research or analysis (other than in determining counterparty creditworthiness), or forecast 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, in combination, provide exposure to the Index without regard to market conditions, trends or direction.

Please see “Investment Objectives, Principal Investment Strategies, and Related Risks” in the Fund’s full prospectus for additional details.

Principal Risks

You could lose money by investing in the Fund.

 

 

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, that the Fund will retain any appreciation in value over extended periods of time, or that the Fund’s returns will maintain, for any period of time, a 15% volatility or be less volatile than the returns of the MSCI EM. The Index may underperform more traditional indices, including the MSCI EM. In turn, the Fund could lose value while other indices or measures of market performance increase in value. The Index was formed in [2011]. Accordingly, the Index has limited historical performance.

In addition, the Index uses the 30 and 60 day historical volatility data of the MSCI EM to determine realized volatility, which in turn is compared to the target volatility of 15% to determine the allocations to the MSCI EM and the T-Bill Component. As such, a significant near-term change in the realized volatility of the MSCI EM may not result in a commensurate repositioning of the Fund. As a result, the Fund may be more or less exposed to equity securities than short-term volatility might suggest, and this may result in losses.

 

 

Leveraged Exposure Risk — The Index may at times represent leveraged (i.e. greater than 100%) exposure to the MSCI EM, the Fund may at such times be subject to greater risk of loss than an unleveraged investment in the MSCI EM.

 

 

Risks Associated with the Use of Derivatives — The Fund uses investment techniques and derivatives that may be considered aggressive. Because the Fund’s investments in derivatives may involve a small investment relative to the amount of investment exposure assumed, losses may exceed the amounts

 

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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. There may be imperfect correlation between the value of the instruments and the Index, which may prevent the Fund from achieving its investment objective. Additionally, with respect to the use of swap agreements, if the Index has a dramatic intraday move that causes a material decline in the Fund’s net asset value (“NAV”), the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the transaction with the Fund. In that event, the Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve the desired exposure consistent with the Fund’s objective. This, in turn, may prevent the Fund from achieving its investment objective, even if the Index reverses all or a portion of its intraday move by the end of the day. The cost to use derivatives generally 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 the Index, 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. The factors that may adversely affect the Fund’s correlation with the Index include fees, expenses, transaction costs, financing costs associated with the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets for the securities or financial instruments in which the Fund invests. 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. In addition, the Fund may invest in securities or financial instruments not included in 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 and other index rebalancing or reconstitution events may hinder the Fund’s ability to meet its investment objective. Additionally, if the asset underlying a swap agreement has a dramatic intraday move, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the transaction with the Fund. This, in turn, may prevent the Fund from achieving its investment objective, even if the securities or assets underlying the swap agreement reverse all or a portion of their intraday move by the end of the day.

 

 

Counterparty Risk — The Fund will be subject to credit risk (i.e., the risk that a counterparty is unwilling or unable to make timely payments to meet its contractual obligations) with respect to the amount it expects to receive from counterparties to derivatives or repurchase agreements entered into by the Fund. If a counterparty becomes bankrupt or fails to perform its obligations, 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, may be unable to meet its investment objective 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.

The Index may not rebalance frequently enough to account for short-term volatility in the markets, as described further under “Index Performance Risk” below. Adverse market developments may cause the value of an investment in the Fund to decrease.

 

 

Debt Instrument Risk — The Fund may invest in, or seek exposure to, debt instruments. Debt instruments may have varying levels of sensitivity to changes in interest rates, credit risk and other factors. Many types of debt instruments are subject to call risk, which is the risk that the issuer of the security will call or repay principal prior to the maturity date. Callable debt instruments may offer less potential for gains during a period of declining interest rates, as the Fund may be required to reinvest the proceeds received at lower interest rates. In addition, changes in the credit quality of the issuer of a debt instrument can also affect

 

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the price of a debt instrument, as can an issuer’s default on its payment obligations. Such factors may cause the value of an investment in the Fund to change. Also, the securities of certain U.S. government agencies, authorities or instrumentalities are neither issued by nor guaranteed as to principal and interest by the U.S. government, and may be exposed to more credit risk than securities issued by and guaranteed as to principal and interest by the U.S. government.

 

 

Exposure to Foreign Currency Risk — Investments linked to or denominated in foreign currencies are exposed to risk factors in addition to investments denominated in U.S. dollars. The value of an investment linked to or denominated in a foreign currency could change significantly as foreign currencies strengthen or weaken relative to the U.S. dollar. Risks related to foreign currencies also include those related to economic or political developments, market inefficiencies or a higher risk that essential investment information may be incomplete, unavailable, or inaccurate. A U.S. dollar investment in Depositary Receipts or ordinary shares of foreign issuers traded on U.S. exchanges or an investment in an instrument linked to a foreign currency are subject to foreign currency risk.

 

 

Exposure to Foreign Investments Risk — Exposure to securities of foreign issuers provides the Fund with increased risk. Various factors related to foreign investments may negatively impact the Index’s performance, such as: i) fluctuations in the value of the local foreign currency; ii) differences in securities settlement practices; iii) uncertainty associated with evidence of ownership of investments in countries that lack centralized custodial services; iv) possible regulation of, or other limitations on, investments by U.S. investors in foreign investments; v) potentially higher brokerage commissions; vi) the possibility that a foreign government may withhold portions of interest and dividends at the source; vii) taxation of income earned in foreign countries or other foreign taxes imposed; viii) foreign exchange controls, which may include suspension of the ability to transfer currency from a foreign country; ix) less publicly available information about foreign issuers; x) changes in the denomination currency of a foreign investment; and xi) less certain legal systems in which the Fund might encounter difficulties or be unable to pursue legal remedies. Foreign investments also may be more susceptible to political, social, economic and regional factors than might be the case with U.S. securities.

Because the Fund’s foreign investments will be in developing or “emerging market” countries, all the aforementioned factors are heightened and foreign investments risk is higher.

 

 

Financial Services Industry Risk — The Fund may be subject to risks faced by companies in the financial services economic sector, including: extensive governmental regulation and/or nationalization that affects the scope of their activities, the prices they can charge and the amount of capital they must maintain; adverse effects from increases in interest rates; effects on profitability by loan losses, which usually increase in economic downturns; the severe competition to which banks, insurance, and financial services companies may be subject; and increased inter-industry consolidation and competition in the financial sector. Further, such stocks in the Index may underperform fixed-income investments and stock market indexes that track other markets, segments and sectors.

 

 

Geographic Concentration Risk — Because the Fund will typically focus its investments in particular foreign countries or geographic regions, it may be more volatile than a more geographically diversified fund. The performance of the Fund will be affected by the political, social and economic conditions in those foreign countries and geographic regions and subject to the related risks.

 

 

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 obtaining exposure to or achieving a high correlation with the Index.

 

 

Market Price Variance Risk — The Fund’s shares will be listed for trading on the NYSE Arca 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 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.

 

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Non-Diversification Risk — The Fund is classified as “non-diversified” under the Investment Company Act of 1940, as amended, and has the ability to invest a relatively high percentage of its investments in the securities of a small number of issuers susceptible to a single economic, political or regulatory event, or in derivative instruments with a single counterparty 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 adverse impact from credit risk relating to that counterparty than a diversified fund might be.

 

 

Portfolio Turnover Risk — Daily rebalancing of Fund holdings will cause a higher level of portfolio transactions than compared to most funds. Additionally, active market trading of the Fund’s shares may cause more frequent creation or redemption activities that could, in certain circumstances, increase the number of portfolio transactions. High levels of transactions increase brokerage costs and may result in increased taxable capital gains.

 

 

Valuation Time Risk — The Fund typically values its portfolio at 4:00 p.m. (Eastern time). In certain cases, foreign securities markets close before such time or may not be open for business on the same calendar days as the Fund. As a result, the daily performance of the Fund may vary, perhaps significantly, from the daily performance of the Index.

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. Alexander Ilyasov, Portfolio Manager, has managed the Fund since 2012.

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 comprises 50,000 shares. Retail investors may only purchase and sell shares on a national securities exchange through a broker-dealer. Because the Fund’s shares trade at market prices rather than NAV, shares may trade at a price greater than NAV (premium) or less than NAV (discount).

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

ProShares S&P MidCap400 – 15% Volatility Target (the “Fund”) seeks investment results, before fees and expenses, that correspond to the performance of the S&P MidCap400 – 15% Volatility Index (the “Index,” Bloomberg ticker: [        ]).

The Index seeks to provide dynamic exposure to the stocks of the S&P MidCap400® Index (the “S&P MidCap400”), which is a float-adjusted, market capitalization-weighted index of 400 U.S. operating companies and real estate investment trusts selected through a process that factors criteria such as liquidity, price, market capitalization and financial viability. The dynamic exposure is designed to target an overall volatility for the Index of 15%. The Index seeks to achieve this target volatility through leveraged exposure (i.e., 101—200%) to the S&P MidCap400 during periods when the realized volatility of the S&P MidCap400 is less than 15% and de-leveraged exposure (i.e., 0—99%) to the S&P MidCap400 during periods when the realized volatility of the S&P MidCap400 is greater than 15%. The Index adjusts exposure between the S&P MidCap400 and three-month U.S. Treasury Bills (the “T-Bill Component”) based upon realized historical volatility of the S&P MidCap400. As the historical realized volatility of the S&P MidCap400 increases relative to the target of 15%, exposure to the S&P MidCap400 will decrease and exposure to the T-Bill Component will increase. As the historical realized volatility of the S&P MidCap400 decreases relative to the target of 15%, exposure to the S&P MidCap400 will increase and exposure to the T-Bill Component will decrease. The Index will generally be rebalanced daily. The Fund’s returns will differ from the returns of the S&P MidCap400.

As of December 31, 2011, the S&P MidCap400 included companies with capitalizations between $[        ] and $[        ]. The average capitalization of the companies comprising the S&P MidCap400 was approximately $[        ]. The S&P MidCap400 is published under the Bloomberg ticker symbol “MID.” The S&P MidCap400 has a historical annualized volatility rate for the five year period ended December 31, 2011 of [        ]%.

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.

Annual Fund Operating Expenses

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

 

Investment Advisory Fees

     [         ]% 

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

     [         ]% 
  

 

 

 

 

* 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 [        ]% through [        ], 2013. 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 the Fund 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 remain the same, except that the fee waiver/expense reimbursement is assumed only to pertain to the first year. Although your actual cost may be higher or lower, based on these assumptions your approximate costs would be:

 

1 Year

   3 Years  

$            

   $                

The Fund pays transaction and financing costs associated with transacting in securities and derivatives. In addition, investors may pay brokerage commissions on their purchases and sales of the Fund’s shares. These costs 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 transactions. If such instruments were included, the Fund’s portfolio turnover rate would be significantly higher.

Principal Investment Strategies

The Fund seeks investment results, before fees and expenses, that correspond to the performance of the Index. Under normal circumstances, the Fund will invest at least 80% of its total assets in the equity and/or fixed income securities that comprise the Index at any given point in time. At times, the Fund will have leveraged exposure to the equity securities in the Index in a similar proportion as the Index.

The Fund invests in securities and derivatives that ProShare Advisors believes, in combination, should have similar return characteristics as the return of the Index. Cash balances arising from the use of 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 derivatives, which are 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 stocks in order to gain exposure to the Index. These derivatives principally include:

 

   

Swap Agreements — Contracts entered into primarily with major global financial institutions for a specified period ranging from a day to more than one year. In a standard “swap” transaction, two parties agree to exchange the return (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross return to be exchanged or “swapped” between the parties is calculated with respect to a “notional amount,” e.g., the return on or change in value of a particular dollar amount invested in a “basket” of securities representing a particular index.

 

   

Futures Contracts — Standardized contracts traded on, or subject to the rules of, an exchange that call for the future delivery of a specified quantity and type of a particular asset at a specified time and place or, alternatively, may call for cash settlement.

 

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Money Market Instruments — The Fund invests in short-term cash instruments that have a remaining maturity of 397 days or less and exhibit high quality credit profiles, including:

 

   

U.S. Treasury Bills — U.S. government securities that have initial maturities of one year or less, and are supported by the full faith and credit of the United States.

 

   

Repurchase Agreements — 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.

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 the Index. The Fund may gain exposure to only a representative sample of the securities in the Index, which are intended to have aggregate characteristics similar to those of the Index, and may invest in securities not contained in the 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, other than for cash management purposes, nor does it conduct conventional research or analysis (other than in determining counterparty creditworthiness), or forecast 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, in combination, provide exposure to the Index without regard to market conditions, trends or direction. Please see “Investment Objectives, Principal Investment Strategies, and Related Risks” in the Fund’s full prospectus for additional details.

Principal Risks

You could lose money by investing in the Fund.

 

 

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, that the Fund will retain any appreciation in value over extended periods of time, or that the Fund’s returns will maintain, for any period of time, a 15% volatility or be less volatile than the returns of the S&P MidCap400. The Index may underperform more traditional indices, including the S&P MidCap400. In turn, the Fund could lose value while other indices or measures of market performance increase in value. The Index was formed in [2011]. Accordingly, the Index has limited historical performance.

In addition, the Index uses the 30 and 60 day historical volatility data of the S&P MidCap400 to determine realized volatility, which in turn is compared to the target volatility of 15% to determine the allocations to the S&P MidCap400 and the T-Bill Component. As such, a significant near-term change in the realized volatility of the S&P MidCap400 may not result in a commensurate repositioning of the Fund. As a result, the Fund may be more or less exposed to equity securities than short-term volatility might suggest, and this may result in losses.

 

 

Leveraged Exposure Risk — The Index may at times represent leveraged (i.e. greater than 100%) exposure to the S&P MidCap400, the Fund may at such times be subject to greater risk of loss than an unleveraged investment in the S&P MidCap400.

 

 

Risks Associated with the Use of Derivatives — The Fund uses investment techniques and derivatives that may be considered aggressive. Because the Fund’s investments 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. There may be imperfect correlation between the value of the instruments and the Index, which may prevent the Fund from achieving its investment objective. Additionally, with respect to the use of swap agreements, if the Index has a dramatic intraday move that causes a material decline in the Fund’s net asset value (“NAV”), the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the transaction with the Fund. In that event, the Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve the desired exposure consistent with the Fund’s objective. This, in turn, may prevent the Fund from achieving its investment objective, even if the Index reverses all or a portion of its intraday move by the end of the day. The cost to use derivatives generally increases as interest rates increase, which will lower the Fund’s return.

 

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Correlation Risk — A number of factors may affect the Fund’s ability to achieve a high degree of correlation with the Index, 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. The factors that may adversely affect the Fund’s correlation with the Index include fees, expenses, transaction costs, financing costs associated with the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets for the securities or financial instruments in which the Fund invests. 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. In addition, the Fund may invest in securities or financial instruments not included in 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 and other index rebalancing or reconstitution events may hinder the Fund’s ability to meet its investment objective. Additionally, if the asset underlying a swap agreement has a dramatic intraday move, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the transaction with the Fund. This, in turn, may prevent the Fund from achieving its investment objective, even if the securities or assets underlying the swap agreement reverse all or a portion of their intraday move by the end of the day.

 

 

Counterparty Risk — The Fund will be subject to credit risk (i.e., the risk that a counterparty is unwilling or unable to make timely payments to meet its contractual obligations) with respect to the amount it expects to receive from counterparties to derivatives or repurchase agreements entered into by the Fund. If a counterparty becomes bankrupt or fails to perform its obligations, 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, may be unable to meet its investment objective 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.

The Index may not rebalance frequently enough to account for short-term volatility in the markets, as described further under “Index Performance Risk” below. Adverse market developments may cause the value of an investment in the Fund to decrease.

 

 

Debt Instrument Risk — The Fund may invest in, or seek exposure to, debt instruments. Debt instruments may have varying levels of sensitivity to changes in interest rates, credit risk and other factors. Many types of debt instruments are subject to call risk, which is the risk that the issuer of the security will call or repay principal prior to the maturity date. Callable debt instruments may offer less potential for gains during a period of declining interest rates, as the Fund may be required to reinvest the proceeds received at lower interest rates. In addition, changes in the credit quality of the issuer of a debt instrument can also affect the price of a debt instrument, as can an issuer’s default on its payment obligations. Such factors may cause the value of an investment in the Fund to change. Also, the securities of certain U.S. government agencies, authorities or instrumentalities are neither issued by nor guaranteed as to principal and interest by the U.S. government, and may be exposed to more credit risk than securities issued by and guaranteed as to principal and interest by the U.S. government.

 

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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 obtaining exposure to or achieving a high correlation with the Index.

 

 

Market Price Variance Risk — The Fund’s shares will be listed for trading on The NASDAQ Stock Market 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 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, as amended, and has the ability to invest a relatively high percentage of its investments in the securities of a small number of issuers susceptible to a single economic, political or regulatory event, or in derivative instruments with a single counterparty 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 adverse impact from credit risk relating to that counterparty than a diversified fund might be.

 

 

Portfolio Turnover Risk — Daily rebalancing of Fund holdings will cause a higher level of portfolio transactions than compared to most funds. Additionally, active market trading of the Fund’s shares may cause more frequent creation or redemption activities that could, in certain circumstances, increase the number of portfolio transactions. High levels of transactions increase brokerage costs and may result in increased taxable capital gains.

 

 

Small- and Mid-Cap Company Investment Risk — The Index, and by extension, the Fund is exposed to stocks of small- and mid-cap companies. The risk of equity investing may be particularly acute for securities of issuers with smaller market capitalizations. Small- and mid-cap company stocks may trade at greater spreads or lower trading volumes, and may be less liquid than the stocks of larger companies. Small- and mid-cap companies may have limited product lines or resources, may be dependent upon a particular market niche and may have greater fluctuations in price than the stocks of larger companies. Further, stocks of small- and mid-sized companies could be more difficult to liquidate during market downturns compared to larger, more widely traded companies. In addition, small-and mid-cap companies may lack the financial and personnel resources to handle economic or industry-wide setbacks and, as a result, such setbacks could have a greater effect on small- and mid-cap security prices.

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. Hratch Najarian, Senior Portfolio Manager, has managed the Fund since 2012.

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 comprises 50,000 shares. Retail investors may only purchase and sell shares on a national securities exchange through a broker-dealer. Because the Fund’s shares trade at market prices rather than NAV, shares may trade at a price greater than NAV (premium) or less than NAV (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 Objectives, Principal Investment Strategies and Related Risks

 

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Investment Objectives, Principal Investment Strategies and Related Risks

This section contains additional detail about the principal investment strategies and the related risks you would face as a shareholder of ProShares NASDAQ-100 – 15% Volatility Target, ProShares Dow 30 – 15% Volatility Target, ProShares Russell 2000 – 15% Volatility Target, ProShares Russell 1000 – 15% Volatility Target, ProShares MSCI EAFE – 15% Volatility Target, ProShares MSCI Emerging Markets – 15% Volatility Target or ProShares S&P MidCap400 – 15% Volatility Target (each, a “Fund,” and collectively, the “Funds” or the “Volatility Target ProShares”) as well as information about how to find out more about the Funds’ portfolio holdings disclosure policy.

Investment Objectives

Each Fund is designed to seek investment results that, before fees and expenses, correspond to the performance of each Fund’s Index. Under normal circumstances, each Fund will invest at least 80% of its total assets in equity and/or fixed income securities that comprise the Fund’s Index. At times, a Fund will have leveraged exposure to the equity securities in the Fund’s Index in a similar proportion as the Index. Each 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. Each Fund reserves the right to substitute a different index or security for the index.

Principal Investment Strategies

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

The investment techniques utilized to simulate the movement of each applicable Index are intended to enhance liquidity, maintain a tax-efficient portfolio and reduce transactions costs, while, at the same time, seeking to maintain high correlation with, and similar aggregate characteristics (for example, with respect to equity funds, market capitalization and industry weightings) to, such Index. For example, a Fund may gain exposure directly or indirectly to only a representative sample of the securities in the Index, which are intended to have aggregate characteristics similar to the Index. Similarly, a Fund may overweight or underweight certain components contained in its Index, invest in securities and/or financial instruments that are not included in the Index, or invest in investments not included in the Index but that are designed to provide the requisite exposure to the Index. ProShare Advisors does not invest the assets of a Fund in securities or financial instruments based on ProShare Advisors’ view of the investment merit of a particular security, instrument, or company, other than for cash management purposes, not does it conduct conventional research or analysis, or forecast market movement or trends, in managing the assets of the Fund. Each Fund generally seeks to remain fully invested at all times in securities, money market instruments and other securities and/or financial instruments that, in combination, provide exposure to its Index without regard to market conditions, trends or direction. The Funds do not take temporary defensive positions.

Strategies Specific to the Volatility Target ProShares

As described in its Summary Prospectus, each Volatility Target ProShares Fund invests in, as a principal investment strategy, equity securities, fixed income securities and/or derivatives that ProShare Advisors believes, in combination, should have similar return characteristics as the return of its Index. Cash balances arising from the use of derivatives will typically be held in money market instruments.

 

 

Equity Securities— Each Volatility Target ProShares Fund will generally invest in common stock issued by public companies.

 

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Derivatives — Each Volatility Target ProShares Fund invests in derivatives, which are financial instruments whose value is derived from the value of an underlying asset, interest rate or index. A Volatility Target ProShares Fund invests in derivatives as a substitute for investing directly in stocks or debt. These derivatives principally include:

 

   

Swap Agreements — Contracts entered into primarily with major global financial institutions for a specified period ranging from a day to more than one year. In a standard “swap” transaction, two parties agree to exchange the return (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross return to be exchanged or “swapped” between the parties is calculated with respect to a “notional amount,” e.g., the return on or change in value of a particular dollar amount invested in a “basket” of securities representing a particular index.

 

   

Futures Contracts— A standardized contract traded on, or subject to the rules of, an exchange that calls for the future delivery of a specified quantity and type of commodity at a specified time and place or, alternatively, may call for a cash settlement.

 

 

Depositary Receipts (“DRs”) — ProShares Emerging Markets – 15% Volatility Target may, as a principal investment strategy, invest in depository receipts, which include:

 

   

American Depositary Receipts (ADRs), which represent the right to receive securities of foreign issuers deposited in a bank or trust company.

 

   

Global Depositary Receipts (GDRs), which are receipts for shares in a foreign-based corporation traded in capital markets around the world.

 

 

Money Market Instruments —Each Volatility Target ProShares Fund invests in short-term cash instruments that have a remaining maturity of 397 days or less and exhibit high quality credit profiles.

 

   

U.S. Treasury Bills — Each Volatility Target ProShares Fund may invest in U.S. government securities that have initial maturities of one year or less, and are supported by the full faith and credit of the United States.

 

   

Repurchase Agreements — 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 a Fund as a short-term investment vehicle for cash positions.

Each Volatility Target ProShares Fund subject to the SEC “names rule” (Rule 35d-1 under the 1940 Act) commits to invest at least 80% of its assets (i.e., net assets plus borrowings for investment purposes), under normal circumstances, in investments that, in combination, have economic characteristics similar to securities contained in its index and/or financial instruments with similar economic characteristics.

Principal Risks

Like all investments, investing in the Funds entail risks. The factors most likely to have a significant impact on each Fund’s portfolio are called “principal risks.” The principal risks for each Fund are noted in the summary section and additional information regarding certain of these risks, as well as information related to other potential risks to which the Funds may be subject, is provided below. The SAI contains additional information about the Funds, their investment strategies and related risks. The Funds may be subject to other risks in addition to those identified as principal risks.

 

   

Index Performance Risk — (All Funds) There is no guarantee or assurance that the methodology used to create each Index will result in a Fund achieving high, or even positive, returns, that a Fund will retain any appreciation in value over extended periods of time, or that a Fund’s returns will maintain, for any period of time, a 15% volatility or be less volatile than the returns of a Fund’s underlying index. Each Index may underperform more traditional indices, including a Fund’s underlying index. In turn, each Fund could lose value while other indices or measures of market performance increase in value. Each Fund’s Index was formed in [2011]. Accordingly, each Index has limited historical performance.

 

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In addition, each Fund’s Index uses the 30 and 60 day historical volatility data of the Fund’s underlying index to determine realized volatility, which in turn is compared to the target volatility of 15% to determine the allocations to the underlying index and the T-Bill Component. As such, a significant near-term change in the realized volatility of the underlying index may not result in a commensurate repositioning of a Fund. As a result, a Fund may be more or less exposed to equity securities than short-term volatility might suggest, and this may result in losses.

 

 

Leveraged Exposure Risk —(All Funds) Each Index may at times represent leveraged (i.e. greater than 100%) exposure to the Fund’s underlying index, a Fund may at such times be subject to greater risk of loss than an unleveraged investment in the Fund’s underlying index.

 

 

Risk Associated with the Use of Derivatives — (All Funds) The Funds use 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 Funds to risks different from, or possibly greater than, the risks associated with investing directly in securities contained in the Index, 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 a Fund expects to receive from a counterparty; 4) the risk that securities prices, interest rates and currency markets will move adversely and a 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 a Fund’s position in a particular financial instrument when desired.

 

 

Correlation Risk — (All Funds) A number of factors may affect a Fund’s ability to achieve a high degree of correlation with its Index, and there can be no guarantee that a Fund will achieve a high degree of correlation. Failure to achieve a high degree of correlation may prevent a Fund from achieving its investment objective. A number of factors may adversely affect a Fund’s correlation with its benchmark, including fees, expenses, transaction costs, costs and risks associated with the use of derivatives and income items, accounting standards and disruptions or illiquidity in the markets for the securities or financial instruments in which a Fund invests. A Fund may not have investment exposure to all securities in its underlying index, may have exposure to securities not included in the Index, or its weighting of investment exposure to such securities or industries may be different from that of the Index. In addition, a Fund may invest in securities or financial instruments not included in its Index. A Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to its Index. Activities surrounding periodic index reconstitutions and other index rebalancing or reconstitution events may hinder a Fund’s ability to meet its investment objective. Additionally, if the asset underlying a swap agreement has a dramatic intraday move, the terms of a swap agreement between a Fund and its counterparty may permit the counterparty to immediately close out the transaction with the Fund. This, in turn, may prevent a Fund from achieving its investment objective, even if the securities or assets underlying the swap agreement reverse all or a portion of their intraday move by the end of the day.

 

 

Counterparty Risk — (All Funds) Each 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 a Fund or held by special purpose or structured vehicles. If a counterparty becomes bankrupt or otherwise fails to perform its obligations due to financial difficulties, the value of your investment in a Fund may decline. A Fund may experience significant delays in obtaining any recovery in a bankruptcy or other reorganization proceeding and the Fund may obtain only limited recovery or may obtain no recovery in such circumstances. A Fund typically enters into transactions with counterparties, typically major global financial institutions, 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.

 

 

Debt Instrument Risk — (All Funds) Each Fund may invest in, or seek exposure to, debt instruments. Debt instruments may have varying levels of sensitivity to changes in interest rates, credit risk and other factors. Many types of debt instruments are subject to prepayment risk, which is the risk that the issuer of the security will repay principal prior to the maturity date. Debt instruments allowing prepayment may offer less

 

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potential for gains during a period of declining interest rates. In addition, changes in the credit quality of the issuer of a debt instrument can also affect the price of a debt instrument, as can an issuer’s default on its payment obligations. Such factors may cause the value of an investment in a Fund to decrease. Also, the securities of certain U.S. government agencies, authorities or instrumentalities are neither issued by nor guaranteed as to principal and interest by the U.S. government, and may be exposed to more credit risk than securities issued by and guaranteed as to principal and interest by the U.S. government.

 

 

Equity and Market Risk — (All Funds) 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.

Each Fund’s Index may not rebalance frequently enough to account for short-term volatility in the markets, as described further under “Index Performance Risk” below. Adverse market developments may cause the value of an investment in a Fund to decrease.

 

 

Market Price Variance Risk — (All Funds) Individual shares of each Fund will be listed for trading on the NYSE Arca or the NASDAQ 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 your 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 any Fund at a particular time. Given the fact that the shares can be created and redeemed in Creation Units, ProShare Advisors believes that large discounts or premiums to the NAV of shares should not be sustained. There may, however, be times when the market price and the NAV vary significantly and you may pay more than NAV when buying shares on the secondary market, and you may receive less than NAV when you sell those shares. The market price of shares, like the price of any exchange-traded security, includes a “bid-ask spread” charged by the exchange specialist, market makers or other participants that trade the particular security. In times of severe market disruption, the bid-ask spread often increases significantly. This means that shares may trade at a discount to NAV, and the discount is likely to be greatest when the price of shares is falling fastest, which may be the time that you most want to sell your shares. A Fund’s investment results are measured based upon the daily NAV of the Fund. Investors purchasing and selling shares in the secondary market may not experience investment results consistent with those experienced by those creating and redeeming directly with the Funds.

 

 

Trading Risks — (All Funds) Although shares of each Fund are listed for trading on an Exchange and may be listed or traded on U.S. and non-U.S. stock exchanges other than an Exchange, there can be no assurance that an active trading market for such shares will develop or be maintained. Trading in shares on an Exchange may be halted due to market conditions or for reasons that, in the view of an Exchange, make trading in shares inadvisable. In addition, trading in shares on an Exchange is subject to trading halts caused by extraordinary market volatility pursuant to Exchange “circuit breaker” rules. There can be no assurance that the requirements of the Exchange necessary to maintain the listing of a Fund will continue to be met or will remain unchanged or that the shares will trade with any volume, or at all, on any stock exchange.

 

 

Early Close/Late Close/Trading Halt Risk — (All Funds) 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 a Fund being unable to buy or sell certain securities or derivatives. In such circumstances, a Fund may be unable to rebalance its portfolio, may be unable to accurately price its investments, may be unable to meet its investment objective, and/or may incur substantial trading losses.

 

 

Liquidity Risk —(All Funds) In certain circumstances, such as the disruption of the orderly markets for the securities or derivatives in which a Funds invests, a Fund might not be able to dispose of certain holdings quickly or at prices that represent true market value in the judgment of ProShare Advisors. Such a situation may prevent a Fund from obtaining exposure to or achieving a high correlation with its Index.

 

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Non-Diversification Risk — (All Funds) Each Fund is classified as “non-diversified” under the Investment Company Act of 1940, as amended, and has the ability to invest a relatively high percentage of its investments in the securities of a small number of issuers susceptible to a single economic, political or regulatory event, or in derivative instruments with a single counterparty or if ProShare Advisors determines that doing so is the most efficient means of meeting that Fund’s investment objective. This makes the performance of a Fund more susceptible to adverse impact from credit risk relating to that counterparty than a diversified fund might be.

 

 

Portfolio Turnover Risk — (All Funds) Daily rebalancing of a Fund’s holdings will cause a higher level of portfolio transactions than compared to most funds. Additionally, active market trading of a Fund’s shares may cause more frequent creation or redemption activities that could, in certain circumstances, increase the number of portfolio transactions. High levels of transactions increase brokerage costs and may result in increased taxable capital gains.

 

 

Geographic Concentration Risk — (ProShares MSCI Emerging Markets – 15% Volatility Target and ProShares MSCI EAFE – 15% Volatility Target) Certain Funds that focus their investments in companies economically tied to a particular foreign countries or geographical regions may be particularly susceptible to economic, political or regulatory events affecting those countries or regions. In addition, currency devaluations could occur in countries that have not yet experienced currency devaluation to date, or could continue to occur in foreign countries that have already experienced such devaluations. As a result, Funds that focus their investments in companies economically tied to a particular foreign geographic region or country may be more volatile than a more geographically diversified fund.

 

 

Exposure to Foreign Investments Risk — (ProShares MSCI Emerging Markets – 15% Volatility Target and ProShares MSCI EAFE – 15% Volatility Target) Certain Funds may invest in securities of foreign issuers or other investments that provide those Funds with exposure to foreign issuers (collectively, “foreign investments”). Certain factors related to foreign investments may prevent a Fund from achieving its goals. These factors include the effect of (i) fluctuations in the value of the local currency versus the U.S. dollar and the uncertainty associated with the cost of converting between various currencies, particularly when currency hedging techniques are unavailable; (ii) differences in settlement practices, as compared to U.S. investments, or delayed settlements in some foreign markets; (iii) the uncertainty associated with evidence of ownership of investments in many foreign countries, which may lack the centralized custodial services and rigorous proofs of ownership required by many U.S. investments; (iv) possible regulation of, or other limitations on, investments by U.S. investors in foreign investments; (v) brokerage commissions and fees and other investment related costs that may be higher than those applicable to U.S. investments; (vi) the possibility that a foreign government may withhold portions of interest and dividends at the source; (vii) taxation of income earned in foreign nations or other taxes imposed with respect to investments in foreign nations; (viii) foreign exchange controls, which may include suspension of the ability to transfer currency from a given country; and (ix) changes in the denomination of currency of a foreign investment. In addition, markets for foreign investments are usually less liquid, more volatile and significantly smaller than markets for U.S. securities, which may affect, among other things, a Fund’s ability to purchase or sell foreign investments at appropriate times.

A Fund’s ability to achieve its investment objectives also may be affected by factors related to its ability to obtain information about foreign investments. In many foreign countries, there is less publicly available information about issuers than is available in reports about U.S. issuers. Markets for foreign investments are usually not subject to the degree of government supervision and regulation that exists for U.S. investments. Foreign issuers are not generally subject to uniform accounting, auditing and financial reporting standards, and auditing practices and requirements may not be comparable to those applicable to U.S. issuers. Furthermore, the issuers of foreign investments may be closely controlled by a small number of families, institutional investors or foreign governments whose investment decisions might be difficult to predict. To the extent a Fund’s assets are exposed to contractual and other legal obligations in a foreign country, e.g., swap agreements with foreign counterparties, these factors may affect the Funds’ ability to achieve their investment objectives. A Fund may encounter difficulties or be unable to pursue legal remedies and obtain judgments in foreign courts. In some countries, information about decisions of the judiciary, other government branches, regulatory agencies and tax authorities may be less transparent than decisions by comparable institutions in the U.S., particularly in countries that are politically dominated by a single party or individual. Moreover, enforcement of such decisions may be inconsistent or uncertain.

 

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Foreign investments also may be more susceptible to political, social, economic and regional factors than might be the case for U.S. securities. These factors include the effect of (i) expropriation, nationalization or confiscatory taxation of foreign investments; (ii) changes in credit conditions related to foreign counterparties, including foreign governments and foreign financial institutions; (iii) trade barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures; and (iv) increased correlation between the value of foreign investments and changes in the commodities markets. To the extent a Fund focuses its investments on a particular country or region, the Fund’s ability to meet its investment objectives may be especially subject to factors and developments related to such country or region.

Because ProShares MSCI Emerging Markets – 15% Volatility Target’s foreign investments will be in developing or “emerging market” countries, all the aforementioned factors are heightened and foreign investments risk is higher.

 

 

Exposure to Foreign Currency Risk — (ProShares MSCI Emerging Markets – 15% Volatility Target and ProShares MSCI EAFE – 15% Volatility Target) Investments denominated in foreign currencies are exposed to risk factors in addition to investments denominated in U.S. dollars. The value of an investment denominated in a foreign currency could change significantly as foreign currencies strengthen or weaken relative to the U.S. dollar. Risks related to foreign currencies also include those related to economic or political developments, market inefficiencies or a higher risk that essential investment information may be incomplete, unavailable, or inaccurate.

 

 

Financial Services Industry Risk — (ProShares MSCI Emerging Markets – 15% Volatility Target) The Fund may be subject to risks faced by companies in the financial services economic sector, including: extensive governmental regulation and/or nationalization that affects the scope of their activities, the prices they can charge and the amount of capital they must maintain; adverse effects from increases in interest rates; effects on profitability by loan losses, which usually increase in economic downturns; the severe competition to which banks, insurance, and financial services companies may be subject; and increased inter-industry consolidation and competition in the financial sector. Further, such stocks in the Index may underperform fixed-income investments and stock market indexes that track other markets, segments and sectors.

 

 

Small- and Mid-Cap Company Investment Risk — (ProShares Russell 2000 – 15% Volatility Target and S&P MidCap400 – 15% Volatility Target) An Index, and by extension, a Fund is exposed to stocks of small- and mid-cap companies. The risk of equity investing may be particularly acute for securities of issuers with smaller market capitalizations. Small- and mid-cap company stocks may trade at greater spreads or lower trading volumes, and may be less liquid than the stocks of larger companies. Small- and mid-cap companies may have limited product lines or resources, may be dependent upon a particular market niche and may have greater fluctuations in price than the stocks of larger companies. Further, stocks of small- and mid-sized companies could be more difficult to liquidate during market downturns compared to larger, more widely traded companies. In addition, small- and mid-cap companies may lack the financial and personnel resources to handle economic or industry-wide setbacks and, as a result, such setbacks could have a greater effect on small- and mid-cap security prices.

 

 

Technology Industry Risk — (ProShares NASDAQ-100 – 15% Volatility Target) The Fund is subject to risks faced by companies in the technology industry to the same extent as the Index is so concentrated. Securities of technology companies may be subject to greater volatility than stocks of companies in other market sectors. Technology companies may be affected by intense competition, obsolescence of existing technology, general economic conditions and government regulation and may have limited product lines, markets, financial resources or personnel. Technology companies may experience dramatic and often unpredictable changes in growth rates and competition for qualified personnel. These companies also are heavily dependent on patent and intellectual property rights, the loss or impairment of which may adversely affect profitability. A small number of companies represent a large portion of the technology industries as a whole. Further, such stocks in the Index may underperform fixed-income investments and stock market indexes that track other markets, segments and sectors.

 

 

Telecommunications Industry Risk — (ProShares NASDAQ-100 – 15% Volatility Target) The Fund is subject to risks faced by companies in the telecommunications economic sector to the same extent as the Index is

 

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so concentrated, including: a telecommunications market characterized by increasing competition and regulation by the Federal Communications Commission and various state regulatory authorities; the need to commit substantial capital to meet increasing competition, particularly in formulating new products and services using new technology; and technological innovations that may make various products and services obsolete. Further, such stocks in the Index may underperform fixed-income investments and stock market indexes that track other markets, segments and sectors.

 

 

Valuation Time Risk — (ProShares MSCI Emerging Markets – 15% Volatility Target and ProShares MSCI EAFE – 15% Volatility Target) The Funds typically value their portfolios at 4:00 p.m. (Eastern time). In certain cases, foreign securities markets close before such time or may not be open for business on the same calendar days as the Fund. As a result, the daily performance of a Fund may vary, perhaps significantly, from the daily performance of the Index.

Additional Securities, Instruments and Strategies

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

 

 

Depositary Receipts include ADRs and GDRs.

 

   

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.

 

 

Leveraged Investment Techniques include investing in swap agreements, reverse repurchase agreements, futures contracts and options on securities indexes and forward contracts and engaging in borrowing, which may be used to create leverage. Use of leveraged investment techniques may involve additional costs and risks to a Fund.

 

   

Futures Contracts — A standardized contract traded on, or subject to the rules of, an exchange that calls for the future delivery of a specified quantity and type of asset at a specified time and place or, alternatively, may call for a cash settlement.

 

 

Money Market Instruments are short-term debt instruments that have a remaining maturity of 397 days or less and exhibit high quality credit profiles. Money market instruments may include U.S. Treasury Bills, U.S. government securities, securities issued by governments of other developed countries and repurchase agreements.

 

   

U.S. Treasury Bills — U.S. government securities that have initial maturities of one year or less, and are supported by the full faith and credit of the United States.

 

   

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 Funds as short-term investments for cash positions.

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.

 

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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 a Fund. Your ownership of shares will be shown on the records of DTC and the DTC Participant broker through whom you hold the shares. PROSHARES TRUST WILL NOT HAVE ANY RECORD OF YOUR OWNERSHIP. Your account information will be maintained by your broker, who will provide you with account statements, confirmations of your purchases and sales of shares, and tax information. Your broker also will be responsible for furnishing certain cost basis information and ensuring that you receive shareholder reports and other communications from a Fund. Typically, you will receive other services 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 Funds are registered investment companies, and the acquisition of shares by other investment companies is subject to the restrictions of Section 12(d)(1) thereof.

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

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 Funds or the ability of the Funds 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 Funds is impossible to predict, but could be substantial and adverse.

 

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In particular, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act’) was signed into law 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 Funds 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. Although the original one-year period prescribed for rulemaking and regulations has been extended by both the SEC and CFTC, it is not possible at this time to gauge the exact nature and scope of the impact of the Dodd-Frank Act on the Funds. However, it is expected that swap dealers, major market participants and swap counterparties, including the Funds, 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 Funds’ ability to meet their investment objective either through limits or requirements imposed on it or upon its counterparties. In particular, new position limits imposed on the Funds or their counterparties may impact the Funds’ 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 Funds’ investments and cost of doing business, which could adversely affect investors.

Description of the Index

The Funds will enter into a licensing agreement for the use of the Indexes.

[To be provided.]

Information About the Index Licensors

Dow Jones

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

DowJones does not:

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

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

 

 

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

 

 

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

 

 

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

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

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

MSCI

ProShares MSCI EAFE – 15% Volatility Target and ProShares MSCI Emerging Markets – 15% Volatility Target (the “MSCI Funds”) are not sponsored, endorsed, sold or promoted by Morgan Stanley Capital International Inc. (“MSCI”), any of its affiliates, any of its information providers or any other third party involved in, or related to, compiling, computing or creating any MSCI index (collectively, the “MSCI Parties”). The MSCI indexes are the exclusive property of MSCI. MSCI and the MSCI index names are service marks of MSCI or its affiliates and have been licensed for use for certain purposes by the Trust. None of the MSCI Parties makes any representation or warranty, express or implied, to the issuer or shareholders of the MSCI Funds or any other person or entity regarding the advisability of investing in the MSCI Funds generally or in the MSCI Funds particularly or the ability of any MSCI index to track corresponding stock market performance.

MSCI or its affiliates are the licensors of certain trademarks, service marks and trade names and of the MSCI indexes which are determined, composed and calculated by MSCI without regard to the MSCI Funds or the issuer or shareholders of the MSCI Funds or any other person or entity into consideration in determining, composing or calculating the MSCI indexes. None of the MSCI Parties is responsible for or has participated in the determination of the timing of, prices at, or quantities of the MSCI Funds to be issued or in the determination or calculation of the equation by or the consideration into which the MSCI Funds are redeemable. Further, none of the MSCI Parties has any obligation or liability to the issuer or owners of the MSCI Funds or any other person or entity in connection with the administration, marketing or offering of the MSCI Funds.

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

NASDAQ

ProShares NASDAQ-100 – 15% Volatility Target (the “Nasdaq Fund”) is not sponsored, endorsed, sold or promoted by The NASDAQ OMX Group, Inc. or its affiliates or subsidiaries. (The NASDAQ OMX Group, Inc., collectively with its affiliates and subsidiaries, are referred to as “NASDAQ OMX”). NASDAQ OMX has not passed on the legality or suitability of, or the accuracy or adequacy of descriptions and disclosures relating to, the Nasdaq Fund. NASDAQ OMX makes no representation or warranty, express or implied, to the owners of the Nasdaq Fund or any member of the public regarding the advisability of investing in securities generally or in the Nasdaq Fund particularly. NASDAQ OMX has no liability in connection with the administration, marketing or trading of the Nasdaq Fund.

 

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NASDAQ OMX does not guarantee the accuracy or completeness of the date on which the intra-day portfolio value (the “IPV”) calculations are based or the actual computation of the value of the IPV, nor shall NASDAQ OMX be responsible for any delays in the computation or dissemination of the IPV values. NASDAQ OMX makes no warranty, express or implied, as to results to be obtained by the Nasdaq Fund, or any other person or entity from the use of the IPVs or any data included therein. NASDAQ OMX makes no express or implied warranties, and expressly disclaims all warranties of merchantability or fitness for a particular purpose or use with respect to the IPVs or any data included therein. Without limiting any of the foregoing, in no event shall NASDAQ OMX have any liability for any lost profits or special, incidental, punitive, indirect, or consequential damages, even if notified of the possibility of such damages.

Russell

ProShares Russell 1000 – 15% Volatility Target and ProShares Russell 2000 – 15% Volatility Target (the “Russell Funds”) are not sponsored, endorsed, sold or promoted by Russell Investments (“Russell”) or Nomura Securities Co., Ltd. (“NSC”). Neither Russell nor NSC makes any representation or warranty, express or implied, to the owners of the Russell Funds or any member of the public regarding the advisability of investing in securities generally or in the Russell Funds particularly or the ability of the Russell indexes to track general stock market performance or a segment of the same. Russell’s publication of the Russell indexes in no way suggests or implies an opinion by Russell or NSC as to the advisability of investment in any or all of the securities upon which the Russell indexes are based. Russell’s only relationship to ProShares Trust is the licensing of certain trademarks and trade names of Russell and NSC, and Russell and NCS are not responsible for and have not reviewed the Russell Funds nor any associated literature or publications and Russell and NSC make no representation or warranty express or implied as to their accuracy or completeness, or otherwise. Russell and NSC reserve the right, at any time and without notice, to alter, amend, terminate or in any way change the Russell indexes.

Russell and NSC have no obligation or liability in connection with the administration, marketing or trading of the Russell Funds.

RUSSELL AND NSC DO NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE RUSSELL INDEXES OR ANY DATA INCLUDED THEREIN AND RUSSELL AND NSC SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. RUSSELL AND NSC MAKE NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY PROSHARES TRUST, INVESTORS, OWNERS OF THE RUSSELL FUNDS OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE RUSSELL INDEXES OR ANY DATA INCLUDED THEREIN. RUSSELL AND NSC MAKE NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIM ALL WARRANTIES OR MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE RUSSELL INDEXES OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL RUSSELL OR NSC HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.

STANDARD & POOR’S® “S&P®” “STANDARD & POOR’S®,” “S&P®,” “S&P MIDCAP400,” “STANDARD & POOR’S MIDCAP400,” ARE TRADEMARKS OF THE MCGRAW-HILL COMPANIES, INC. AND HAVE BEEN LICENSED FOR USE BY PROSHARES FUNDS. PROSHARES FUNDS ARE NOT SPONSORED, ENDORSED, SOLD OR PROMOTED BY STANDARD & POOR’S AND STANDARD & POOR’S DOES NOT MAKE ANY REPRESENTATION REGARDING THE ADVISABILITY OF INVESTING IN THE FUNDS.

Portfolio Holdings Information

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

 

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Management of ProShares Trust

 

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Board of Trustees and Officers

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

Investment Adviser

ProShare Advisors, located at 7501 Wisconsin Avenue, Suite 1000, Bethesda, Maryland 20814, serves as the investment adviser to the Funds and provides investment advice and management services to the Funds. ProShare Advisors oversees the investment and reinvestment of the assets in the Funds. For its investment advisory services, [each Fund pays ProShare Advisors a fee at an annualized rate based on its average daily net assets, as follows: 0.75% of the first $6.0 billion of average daily net assets of the Fund; 0.70% of the next $4.0 billion of average daily net assets of the Fund, and 0.65% of average daily net assets of the Fund in excess of $10.0 billion]. A discussion regarding the basis for the Board approving the investment advisory agreement for the Funds will be included in the Trust’s semi-annual or annual report to shareholders that covers the period during which the approval occurred. To the extent the Funds invest in exchange-traded funds (ETFs) sponsored by ProShare Advisors and /or common units of beneficial interest of one or more separate series of a trust sponsored by an affiliate of ProShare Advisors, ProShare Advisors has agreed to waive its investment advisory fees in an amount equal to the investment advisory fees and management services fees applicable to Fund assets invested in such ETFs and/or trust securities.

Portfolio Management

The following individuals have responsibility for the day-to-day management of the Funds, as set forth in the summary section.

Hratch Najarian, ProShare Advisors—Senior Portfolio Manager since December 2009. ProFund Advisors—Senior Portfolio Manager since December 2009; Portfolio Manager from May 2007 through November 2009 and Associate Portfolio Manager from November 2004 through April 2007.

Alexander Ilyasov, ProShare Advisors—Portfolio Manager since November 2009. ProFund Advisors—Portfolio Manager since November 2009. World Asset Management—Portfolio Manager from January 2006 through November 2009; Portfolio Analyst from July 2005 through January 2006.

Determination of NAV

The NAV per Share of each Fund is computed by dividing the value of the net assets of such Fund (i.e., the value of its total assets less total liabilities) by its total number of shares outstanding. Expenses and fees are accrued daily and taken into account for purposes of determining NAV. The NAV of each Fund 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 Funds sold them. See the SAI for more details.

The NYSE is open every week, Monday through Friday, except when the following holidays are celebrated: New Year’s Day, Martin Luther King, Jr. Day (the third Monday in January), Presidents’ Day (the third Monday in February), Good Friday, Memorial Day (the last Monday in May), July 4th, Labor Day (the first Monday in September), Thanksgiving Day (the fourth Thursday in November) and Christmas Day. The NYSE may close

 

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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 Funds’ 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 will earn a share of the investment income and net realized capital gains derived from a Fund’s direct security holdings and derivative instruments. You will receive such earnings as either an income dividend or a capital gains distribution. Each Fund intends to declare and distribute to its shareholders at least annually virtually all of its net income, as well as net realized capital gains, unless they elect to receive cash. Subject to Board approval, some or all of any net capital gains distribution may be declared payable in either additional shares of a Fund or in cash. If such a distribution is declared payable in that fashion, holders of shares will receive additional shares of such Fund unless they elect to receive cash. Dividends may be declared and paid more frequently to comply with the distribution requirements of the Internal Revenue Code or for other reasons.

Dividend Reinvestment Services

As noted above under “Distributions”, a Fund may declare a net capital gain distribution to be payable in additional shares or cash. Even if a 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 a Fund’s portfolio securities after the close of the primary markets for a 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 Funds, 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 each Fund issues and redeems Creation Units at NAV plus applicable transaction fees, and a Fund’s shares may be purchased and sold on the NYSE Arca or the NASDAQ at prevailing market prices, the risks of frequent trading are limited.

Taxes

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

 

 

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

 

 

Investments by a Fund in options, futures, forward contracts, swaps and other derivative financial instruments are subject to numerous special and complex tax rules. These rules could affect the amount, timing or character of the income distributed to shareholders by a Fund. In addition, because the application of these rules may be uncertain under current law, an adverse determination or future Internal Revenue Service guidance with respect to these rules may affect whether a Fund has made sufficient distributions, and otherwise satisfied the relevant requirements, to maintain its qualification as a regulated investment company and avoid a Fund-level tax.

 

 

Investments by a Fund in debt obligations issued or purchased at a discount and certain derivative investments could cause the Fund to recognize taxable income in excess of the cash generated by such investments, potentially requiring the Fund to dispose of investments (including when otherwise disadvantageous to do so) in order to meet its distribution requirements, and could affect the amount, timing or character of the income distributed to shareholders by the Fund.

 

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

 

 

Distributions are taxable to you for federal income tax purposes whether you receive them in cash or reinvest them in additional shares.

 

 

Distributions declared in October, November or December of one year—if paid to you by the end of January of the following year—are taxable for federal income tax purposes as if received in the calendar year in which the distributions were declared.

 

 

Any distributions from income or short-term capital gains that you receive generally are taxable to you as ordinary dividends for federal income tax purposes. Currently, ordinary dividends you receive that are reported as “qualified dividend income” may be taxed at the same rates as long -term capital gains. However, income received in the form of ordinary dividends will not be considered long-term capital gains for other-federal income tax purposes, including the calculation of net capital losses. The special tax treatment of qualified dividend income will apply only to taxable years beginning before January 1, 2013, unless Congress enacts tax legislation providing otherwise.

 

 

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 gain distributions may vary considerably from year to year as a result of a 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 gain 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 or a statutory exemption applies.

 

 

Dividends and interest received by a Fund from sources outside the U.S. may be subject to withholding and other taxes imposed by foreign countries, which would reduce returns from an investment in such Fund. Tax conventions between certain countries and the United States may reduce or eliminate such taxes. If more than 50% of the value of a Fund’s total assets at the close of a taxable year consists of securities of foreign corporations, the Fund will be eligible to elect to “pass through” to you foreign income taxes that it pays. If this election is made, you will be required to include your share of those taxes in gross income as a distribution from that Fund and you generally will be allowed to claim a credit (or a deduction, if you itemize deductions) for such amounts on your federal U.S. income tax return, subject to certain limitations.

 

 

By law, a Fund must generally withhold a percentage of your distributions and proceeds if you have not provided a taxpayer identification number or social security number, have under-reported dividend or interest income or have failed to certify to the Fund that you are not subject to such withholding. The backup withholding rate is currently 28% for amounts paid through December 31, 2012. Under current law, the backup withholding rate will increase to 31% for amounts paid after December 31, 2012.

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 of the exchange and the exchanger’s aggregate basis in the securities surrendered and any cash amount paid.

 

 

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

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

 

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Premium/Discount Information

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

Distribution (12b-1) Plan

Under a Rule 12b-1 Distribution Plan (the “Plan”) adopted by the Board, the Funds may pay the Funds’ 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 Funds as reimbursement or compensation for distribution related activities with respect to the Funds. Because these fees are paid out of the Funds’ 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 Funds in the current Statement of Additional Information (“SAI”), dated [    ], 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.


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STATEMENT OF ADDITIONAL INFORMATION

February [    ], 2012

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 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 Dow30 SM    SDS    UltraShort S&P500®      FXP    UltraShort FTSE 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®      SJB    Short High Yield
              IGS    Short Investment Grade Corporate
UVU    Ultra Russell MidCap Value    SMDD    UltraPro Short MidCap400      TBX    Short 7-10 Year Treasury
UKW    Ultra Russell MidCap Growth    SRTY    UltraPro Short Russell2000      TBZ    UltraShort 3-7 Year Treasury
UVT    Ultra Russell2000 Value            PST    UltraShort 7-10 Year Treasury
UKK    Ultra Russell2000 Growth    Short Style      TBT    UltraShort 20+ Year Treasury
      SJF    UltraShort Russell1000 Value      TPS    UltraShort TIPS
Ultra Sector    SFK    UltraShort Russell1000 Growth        
UYM    Ultra Basic Materials    SJL    UltraShort Russell MidCap Value      Alpha ProShares
BIB    Ultra Nasdaq Biotechnology    SDK    UltraShort Russell MidCap Growth      CSM    Credit Suisse 130/30
UGE    Ultra Consumer Goods    SJH    UltraShort Russell2000 Value      RALS    RAFI® Long/Short
UCC    Ultra Consumer Services    SKK    UltraShort Russell2000 Growth      HDG    Hedge Replication ETF
UYG    Ultra Financials            [        ]    Sovereign Fiscal Strength ETF
RXL    Ultra Health Care    Short Sector      [Volatility Target ProShares]
UXI    Ultra Industrials    SBM    Short Basic Materials      [        ]    MSCI Emerging Markets – 15% Volatility Target
DIG    Ultra Oil & Gas    SEF    Short Financials      [        ]    Russell 1000 – 15% Volatility Target
URE    Ultra Real Estate    DDG    Short Oil & Gas      [        ]    Russell 2000 – 15% Volatility Target
KRU    Ultra KBW Regional Banking    REK    Short Real Estate      [        ]    Dow 30 – 15% Volatility Target
USD    Ultra Semiconductors    KRS    Short KBW Regional Banking      [        ]    MSCI EAFE – 15% Volatility Target
ROM    Ultra Technology    SMN    UltraShort Basic Materials      [        ]    NASDAQ-100 – 15% Volatility Target
LTL    Ultra Telecommunications    BIS    UltraShort Nasdaq Biotechnology      [        ]    S&P MidCap400 – 15% Volatility Target
UPW    Ultra Utilities    SZK    UltraShort Consumer Goods      [Category Name: ]   
      SCC    UltraShort Consumer Services      [         ]    USD Covered Bond
Ultra International    SKF    UltraShort Financials      [        ]    German Sovereign / Sub-Sovereign ETF
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 China 25    REW    UltraShort Technology        
EZJ    Ultra MSCI Japan    TLL    UltraShort Telecommunications        
UMX    Ultra MSCI Mexico Investable    SDP    UltraShort Utilities        
   Market              
Ultra Fixed-Income              
UJB    Ultra High Yield              
IGU    Ultra Investment Grade Corporate              
TPU    Ultra TIPS              
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, 2011 (the “Prospectus”), as supplemented on October 7th, 2011, October 25, 2011, and [    ] 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 above, by telephone at the number, 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, 2011 are incorporated by reference into and are deemed part of this SAI. The principal U.S. national stock exchange on which all Funds (except those noted below) identified in this SAI are listed is NYSE Arca. Ultra Nasdaq Biotechnology, UltraShort Nasdaq Biotechnology, UltraProQQQ, UltraPro Short QQQ and NASDAQ-100 – 15% Volatility Target are listed on The NASDAQ Stock Market.


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TABLE OF CONTENTS

 

     Page  

PROSHARES TRUST

     1   

INVESTMENT POLICIES, TECHNIQUES AND RELATED RISKS

     2   

SPECIAL CONSIDERATIONS

     14   

INVESTMENT RESTRICTIONS

     21   

PORTFOLIO TRANSACTIONS AND BROKERAGE

     22   

MANAGEMENT OF PROSHARES TRUST

     28   

INVESTMENT ADVISOR

     32   

DISCLOSURE OF PORTFOLIO HOLDINGS POLICY

     41   

OTHER SERVICE PROVIDERS

     42   

COSTS AND EXPENSES

     54   

ADDITIONAL INFORMATION CONCERNING SHARES

     54   

PROXY VOTING POLICY AND PROCEDURES

     56   

PURCHASE AND REDEMPTION OF SHARES

     57   

TAXATION

     64   

OTHER INFORMATION

     77   

FINANCIAL STATEMENTS

     86   

APPENDIX A

     A-1   


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GLOSSARY OF TERMS

For ease of use, certain terms or names that are used in this SAI have been shortened or abbreviated. A list of 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    U.S. Commodity Futures Trading Commission
Code or Internal Revenue Code    Internal Revenue Code of 1986, as amended
Distributor or SEI    SEI Investments Distribution Co.
Exchange Fund(s)   

NYSE Arca or The NASDAQ Stock Market

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” of the Advisor or Trust as defined under Section 2(a)(19) of the 1940 Act
New Funds    MSCI Emerging Markets – 15% Volatility Target, Russell 1000 – 15% Volatility Target, Russell 2000 – 15% Volatility Target, MSCI EAFE – 15% Volatility Target, NASDAQ-100 – 15% Volatility Target, Dow 30 – 15% Volatility Target, and S&P MidCap400 – 15% Volatility Target (each of the foregoing, a “Volatility Target ProShares,” and collectively, the “Volatility Target ProShares”) and the USD Covered Bond, Sovereign Fiscal Strength ETF and German Sovereign / Sub-Sovereign ETF.
SAI    The Trust’s Statement of Additional Information dated [October 1, 2011 (as supplemented October 25, 2011 and [    ] )]
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 119 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 Funds, Alpha ProShares Funds and the New Funds are issued and redeemed in-kind for securities included in the relevant index (for purposes of this SAI, the term “index” includes the Merrill Lynch Factor Model – Exchange Series benchmark) and an amount of cash or entirely in cash, in each case at the discretion of the Advisor. Creation Units of the Short ProShares Funds 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.


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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 index 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.

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 index 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 index. If believed appropriate, a Fund may specify an 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 index. 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 index. See “Special Considerations” below for additional details.

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 Ultra ProShares Funds, the Alpha ProShares Funds and the New Funds subject to the SEC “names rule” (Rule 35d-1 under the 1940 Act), 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 securities contained in its index and/or financial instruments with similar economic characteristics. The Short ProShares Funds subject to the SEC “names rule” (Rule 35d-1 under the 1940 Act) 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 that correlate to the inverse of its index. 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

 

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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 foreign issuers, securities traded principally in securities markets outside the United States, U.S.-traded securities of foreign issuers and/or securities denominated in foreign currencies (together “foreign securities”). Also, each Fund may seek exposure to foreign securities by investing in Depositary Receipts (discussed below). 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 government securities, companies and markets. 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 foreign 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 foreign 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 futures contracts and options thereon as a substitute for a comparable market position in the underlying securities or to satisfy regulatory requirements. Cash-settled futures contracts obligate the seller to deliver (and the purchaser to accept) 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 futures contract and the price at which the agreement is made. No physical delivery of the underlying asset is made. A physical-settlement futures contract generally obligates the seller to deliver (and the purchaser to take delivery of) the specified asset on the expiration date of the contract.

 

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

Whether a Fund realizes a gain or loss from futures activities depends generally upon movements in the underlying 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 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, as amended (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. The foregoing is as of the date of this SAI, and may change in the future.

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 10% 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.

When a Fund purchases or sells a 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. For example, 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 also “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. Obligations under futures contracts so covered will not be considered senior securities for purposes of a Fund’s investment restriction concerning senior securities.

 

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

Forward Contracts

The Funds may enter into forward contracts for purposes of attempting to gain exposure to an index or asset without actually purchasing such asset, 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 an underlying asset or the cash value of the underlying asset 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. Forward contracts with terms greater than seven days may be considered to be illiquid for purposes of the Fund’s illiquid investment limitations. A Fund will not enter into a forward contract unless the Advisor believes that the other party to the transaction is creditworthy. A Fund bears the risk of loss of the amount expected to be received under a forward contract in the event of the default or bankruptcy of a counterparty. If such a default occurs, a Fund will have contractual remedies pursuant to the forward contract, but such remedies may be subject to bankruptcy and insolvency laws, which could affect the Fund’s rights as a creditor.

Options

The Funds may buy and write (sell) options 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 asset underlying the option at the exercise price. By writing a call option a Fund becomes obligated during the term of the option to sell the asset underlying the option at the exercise price if the option is exercised. 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 asset 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 asset 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 asset 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 asset and having the same exercise price and expiration date as the one previously sold. Once an option has been exercised, the writer may not execute a closing purchase transaction. To secure the obligation to deliver the underlying asset in the case of a call option, the writer of a call option is required to deposit in escrow the underlying 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 an asset, a Fund may cover its position by owning the underlying asset on which the option is written. Alternatively, the Fund may cover its position by owning a call option on the underlying asset, 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 assets held by the Fund is to attempt to realize, through the receipt of premiums, a greater return than would be realized on the underlying assets alone.

If 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

 

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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.

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. 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” below. 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 options. Obligations under options so covered will not be considered senior securities for purposes of a Fund’s investment restriction concerning senior securities.

 

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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.

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 swap agreements for purposes of attempting to gain exposure to an underlying asset without actually purchasing such asset or to hedge a position. Swap agreements are two-party contracts entered into primarily by institutional investors for periods ranging from a day to more than one year. In a standard “swap” transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross returns to be exchanged or “swapped” between the parties are calculated with respect to a “notional amount,” e.g., the return on or increase in value of a particular dollar amount invested in a “basket” of securities or an ETF 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. Swap agreements with terms greater than seven days may be considered to be illiquid for purposes of the Fund’s illiquid investment limitations. A Fund will not enter into any swap agreement unless the Advisor believes that the other party to the transaction is creditworthy. A Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty. If such a default occurs, a Fund will have contractual remedies pursuant to the swap agreements, but such remedies may be subject to bankruptcy and insolvency laws which could affect the Fund’s right as a creditor.

Each Fund may enter into swap agreements to invest in a market without owning or taking physical custody of securities in circumstances in which direct investment is restricted for legal reasons or is otherwise impracticable. The counterparty to any swap agreement will typically be a major global financial institution. 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 underlying assets (e.g., securities comprising the relevant index), plus the dividends or interest that would have been received on those assets. 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 assets. Therefore, the return to the Fund on any swap agreement should be the gain or loss on the notional amount plus dividends or interest on the assets less the interest paid by the Fund on the notional amount. 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

 

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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 Funds seek to mitigate risks by generally requiring that the counterparties for each Fund agree to post collateral for the benefit of the Fund, marked to market daily, in an amount approximately equal to what the counterparty owes the Fund, although the Funds may not always be successful. To the extent any such collateral is insufficient or there are delays in accessing the collateral, the Funds will be exposed to the risks described above, including possible delays in recovering amounts as a result of bankruptcy proceedings.

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. The foregoing is as of the date of this SAI, and may change in the future.

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.

Short QQQ, UltraShort QQQ, UltraPro Short QQQ, Ultra QQQ and UltraPro QQQ will not sell short the equity securities of issuers contained in the Nasdaq-100 Index. Ultra and UltraShort Nasdaq Biotechnology will not sell short the securities of issues contained in the Nasdaq Biotechnology Index.

Depositary Receipts

The Funds may invest in depository receipts, including American Depositary Receipts (“ADRs”). ADRs represent the right to receive securities of foreign issuers deposited in a domestic bank or a correspondent bank. 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 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 outside the U.S., the Funds can avoid certain risks related to investing in foreign securities on non-U.S. markets.

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

 

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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.

The Funds 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 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. In addition, U.S. government securities include Treasury Inflation-Protected Securities (“TIPS”). TIPS are inflation-protected public obligations of the U.S. Treasury. These securities are designed to provide inflation protection to investors. TIPS are income-generating instruments whose interest and principal payments are adjusted for inflation – a sustained increase in prices that erodes the purchasing power of money. The inflation adjustment, which is typically applied monthly to the principal of the bond, follows a designated inflation index such as the Consumer Price Index (“CPI”). A fixed-coupon rate is applied to the inflation-adjusted principal so that as inflation rises, both the principal value and the interest payments increase. This can provide investors with a hedge against inflation, as it helps preserve the purchasing power of an investment. Because of the inflation adjustment feature, inflation-protected bonds typically have lower yields than conventional fixed-rate bonds. In addition, TIPS decline in value when real interest rates rise. However, in certain interest rate environments, such as when real interest rates are rising faster than nominal interest rates, TIPS may experience greater losses than other fixed income securities with similar duration.

Certain U.S. government securities are issued or guaranteed by agencies or instrumentalities of the U.S. government including, but not limited to, obligations of U.S. government agencies or instrumentalities, such as the Federal National Mortgage Association, the Government National Mortgage Association, the Small Business Administration, the Federal Farm Credit Administration, the Federal Home Loan Banks, Banks for Cooperatives (including the Central Bank for Cooperatives), the Federal Land Banks, the Federal Intermediate Credit Banks, the Tennessee Valley Authority, the Export-Import Bank of the United States, the Commodity Credit Corporation, the Federal Financing Bank, the Student Loan Marketing Association, and the National Credit Union Administration. Some obligations issued or guaranteed by U.S. government agencies and instrumentalities, including, for example, Government National Mortgage Association pass-through certificates, are supported by the full faith and credit of the U.S. Treasury. 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. All U.S. government securities are subject to credit risk.

Yields on U.S. government securities are dependent on a variety of factors, including the general conditions of the money and bond markets, the size of a particular offering, and the maturity of the obligation. Debt securities with longer maturities tend to produce higher yields and are generally subject to potentially greater capital appreciation and depreciation than obligations with shorter maturities and lower yields. The market value of U.S. government securities generally varies inversely with changes in market interest rates. An increase in interest rates, therefore, would generally reduce the market value of a Fund’s portfolio investments in U.S. government securities, while a decline in interest rates would generally increase the market value of a Fund’s portfolio investments in these securities.

 

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Repurchase Agreements

Each of the Funds may enter into repurchase agreements with financial institutions in pursuit of 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.

Other Fixed Income Securities

Each Fund may invest in a wide range of fixed-income securities, which may include foreign sovereign, sub-sovereign and supranational bonds, as well as any other obligations of any rating or maturity such as foreign and domestic investment grade corporate debt securities and lower-rated corporate debt securities (commonly known as “junk bonds”). Lower-rated or high yield debt securities include corporate high yield debt securities, zero-coupon securities, payment-in-kind securities, and STRIPS. Investment grade corporate bonds are those rated BBB or better by S&P or Baa or better by Moody’s. Securities rated BBB by S&P are considered investment grade, but Moody’s considers securities rated Baa to have speculative characteristics. The Funds may also invest in unrated securities.

FOREIGN SOVEREIGN, SUB-SOVEREIGN AND SUPRANATIONAL SECURITIES. The Funds may invest in fixed-rate debt securities issued by non-U.S. governments (foreign sovereign bonds), local governments, entities or agencies of non-U.S. country (foreign sub-sovereign bonds) as well as by two or more central governments or institutions (supranational bonds). These types of debt securities are typically general obligations of the issuer and are typically guaranteed by such issuer. Despite this guarantee, such debt securities are subject to default, restructuring or changes to the terms of the debt to the detriment of security holders. Such an event impacting a security held by a Fund would likely have an adverse impact on the Fund’s returns. Also, due to demand from other investors, certain types of these debt securities may be less accessible to the capital markets and may be difficult for a Fund to source. This may cause a Fund, at times, to pay a premium to obtain such securities for its own portfolio. For more information related to foreign sovereign, sub-sovereign and supranational securities, see “Foreign Securities” and “Exposure to Securities or Issuers in Specific Foreign Countries or Regions” above.

CORPORATE DEBT SECURITIES. Corporate debt securities are fixed-income securities issued by businesses to finance their operations, although corporate debt instruments may also include bank loans to companies. Notes, bonds, debentures and commercial paper are the most common types of corporate debt securities, with the primary difference being their maturities and secured or unsecured status. Commercial paper has the shortest term and is usually unsecured. The broad category of corporate debt securities includes debt issued by domestic or foreign companies of all kinds, including those with small-, mid- and large-capitalizations. Corporate debt may be rated investment-grade or below investment-grade and may carry variable or floating rates of interest.

 

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Because of the wide range of types and maturities of corporate debt securities, as well as the range of creditworthiness of its issuers, corporate debt securities have widely varying potentials for return and risk profiles. For example, commercial paper issued by a large established domestic corporation that is rated investment-grade may have a modest return on principal, but carries relatively limited risk. On the other hand, a long-term corporate note issued by a small foreign corporation from an emerging market country that has not been rated may have the potential for relatively large returns on principal, but carries a relatively high degree of risk.

Corporate debt securities carry both credit risk and interest rate risk. Credit risk is the risk that a Fund could lose money if the issuer of a corporate debt security is unable to pay interest or repay principal when it is due. Some corporate debt securities that are rated below investment-grade are generally considered speculative because they present a greater risk of loss, including default, than higher quality debt securities. The credit risk of a particular issuer’s debt security may vary based on its priority for repayment. For example, higher ranking (senior) debt securities have a higher priority than lower ranking (subordinated) securities. This means that the issuer might not make payments on subordinated securities while continuing to make payments on senior securities. In addition, in the event of bankruptcy, holders of higher-ranking senior securities may receive amounts otherwise payable to the holders of more junior securities. Interest rate risk is the risk that the value of certain corporate debt securities will tend to fall when interest rates rise. In general, corporate debt securities with longer terms tend to fall more in value when interest rates rise than corporate debt securities with shorter terms.

JUNK BONDS. “Junk Bonds” generally offer a higher current yield than that available for higher-grade issues. However, lower-rated securities involve higher risks, in that they are especially subject to adverse changes in general economic conditions and in the industries in which the issuers are engaged, to changes in the financial condition of the issuers and to price fluctuations in response to changes in interest rates. During periods of economic downturn or rising interest rates, highly leveraged issuers may experience financial stress that could adversely affect their ability to make payments of interest and principal and increase the possibility of default. In addition, the market for lower-rated debt securities has expanded rapidly in recent years, and its growth paralleled a long economic expansion. At times in recent years, the prices of many lower-rated debt securities declined substantially, reflecting an expectation that many issuers of such securities might experience financial difficulties. As a result, the yields on lower-rated debt securities rose dramatically, but such higher yields did not reflect the value of the income stream that holders of such securities expected, but rather, the risk that holders of such securities could lose a substantial portion of their value as a result of the issuers’ financial restructuring or default. There can be no assurance that such declines will not recur. The market for lower-rated debt issues generally is thinner and less active than that for higher quality securities, which may limit each Fund’s ability to sell such securities at fair value in response to changes in the economy or financial markets. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, may also decrease the values and liquidity of lower-rated securities, especially in a thinly traded market. Changes by recognized rating services in their rating of a fixed-income security may affect the value of these investments. Each Fund will not necessarily dispose of a security when its rating is reduced below its rating at the time of purchase. However, the Advisor will monitor the investment to determine whether continued investment in the security will assist in meeting each Fund’s investment objective.

UNRATED DEBT SECURITIES. The Funds may also invest in unrated debt securities. Unrated debt, while not necessarily lower in quality than rated securities, may not have as broad a market. Because of the size and perceived demand for the issue, among other factors, certain issuers may decide not to pay the cost of getting a rating for their bonds. The creditworthiness of the issuer, as well as any financial institution or other party responsible for payments on the security, will be analyzed to determine whether to purchase unrated bonds.

COVERED BONDS. The Funds may invest in covered bonds, which are debt securities issued by banks or other credit institutions that are backed by both the issuing institution and underlying pool of assets that compose the bond (a “cover pool”). The cover pool for a covered bond is typically composed of residential or commercial mortgage loans or loans to public sector institutions. A covered bond may lose value if the credit rating of the issuing bank or credit institution is downgraded or the quality of the assets in the cover pool deteriorates.

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, including ETFs, 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.

Because most ETFs are investment companies, absent exemptive relief, investments in such funds generally would be limited under applicable federal statutory provisions. Those provisions restrict a 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. A Fund may invest in certain ETFs in excess of the statutory limit in reliance on an exemptive order issued by the SEC to those entities and pursuant to procedures approved by the Board provided that the Fund complies with the conditions of the exemptive relief, as they may be amended from time to time, and any other applicable investment limitations.

Real Estate Investment Trusts

Each Fund may invest in real estate investment trusts (“REITs”). Equity REITs invest primarily in real property while mortgage REITs invest in construction, development and long-term mortgage loans. Their value may be affected by changes in the value of the underlying property of the REIT, the creditworthiness of the issuer, property taxes, interest rates, and tax and regulatory requirements, such as those relating to the environment. REITs are dependent upon management skill, are not diversified and are subject to heavy cash flow dependency, default by borrowers, self-liquidation and the possibility of failing to qualify for tax-free pass-through of income under the Code and failing to maintain exempt status under the 1940 Act.

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

 

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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 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 nature of the Funds may cause the Funds to experience substantial differences in brokerage commissions from year to year. High portfolio turnover and correspondingly greater brokerage commissions, to a great extent, depend on the purchase, redemption, and exchange activity of a Fund’s investors, as well as each Fund’s investment objective and strategies. 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, 2011, each such Fund’s turnover rate for the period from that Fund’s commencement of operations to May 31, 2011 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

Several factors may affect a Fund’s ability to achieve a high degree of correlation within its Index. Among these factors are: (1) a Fund’s fees and 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 index being held by a Fund and securities not included in the 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

 

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market that has become illiquid or disrupted; (6) a Fund’s Share prices being rounded to the nearest cent; (7) changes to the 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; (9) actual purchases and sales of the shares of a Fund may differ from estimated transactions reported prior to the time share prices are calculated; (10) limit up or limit down trading halts on options or futures contracts which may prevent a Fund from purchasing or selling options or futures contracts; (11) 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; and (12) fluctuations in currency exchange rates. Each Fund, except the Alpha ProShares Funds or the New Funds, has a single day investment objective to match a multiple (2x or 3x), the inverse (-1x) or a multiple of the inverse (-2x or -3x) of the performance of an index on a single day. A “single day” is measured from the time the Fund calculates its NAV to the time of the Fund’s next NAV calculation. These Funds are subject to the correlation risks described above. In addition, while a close correlation of any Fund to its index may be achieved on any single trading day for certain Funds, over time, the cumulative percentage increase or decrease in the NAV of the Shares may diverge, in some cases significantly, from the cumulative percentage decrease or increase in the index due to a compounding effect as further described in the Prospectus. Under normal circumstances, each Volatility Target ProShares and the USD Covered Bond will invest at least 80% of its total assets in the component securities of its Index. At times this means that each Volatility Target ProShares will have leveraged exposure to the equity securities in its Index in the same proportions at the Index.

Leverage

Each Fund, except the inverse (-1x) Funds, the RAFI Long/Short and the Hedge Replication ETF, the USD Covered Bond, the German Sovereign / Sub-Sovereign ETF and the Sovereign Fiscal Strength ETF, intends to use, on a regular basis, leverage in pursuing its investment objectives. Leverage exists when a Fund achieves the right to a return on a capital base that exceeds the amount the Fund has invested. Utilization of leverage involves special risks and should be considered to be speculative. Specifically, leverage creates the potential for greater gains to Fund shareholders during favorable market conditions (i.e., rising markets for the Ultra ProShares Funds and the Credit Suisse 130/30, and falling markets for the Short ProShares Funds), and the risk of magnified losses during adverse market conditions (i.e., falling markets for UltraProShares Funds and the Credit Suisse 130/30, and rising markets for the Short and ProShares Funds). Leverage is likely to cause higher volatility of the NAVs of these Funds’ Shares. Leverage may also 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. Each Volatility Target ProShares will have leveraged exposure through the use of derivatives because its Index may include greater than 100% exposure to the component securities; therefore, these Funds may be subject to additional risks, including derivatives risk. If these Funds achieve their investment objectives, during adverse market conditions, shareholders should experience a loss greater than they would have incurred had these Funds not been leveraged.

•Special Note Regarding the Correlation Risks of Leveraged, Inverse or Inverse Leveraged Funds (all Funds except Alpha ProShares, Volatility Target ProShares, the USD Covered Bond, the German Sovereign / Sub-Sovereign ETF, and the Sovereign Fiscal Strength ETF). As a result of compounding, for periods greater than one day, the use of leverage tends to cause the performance of a Fund to vary from its index’s performance times the stated multiple in the Fund’s investment objective. Compounding affects all investments, but has a more significant impact on leveraged, inverse and inverse leveraged funds. Four factors significantly affect how close daily compounded returns are to longer-term index returns times the fund’s multiple: the length of the holding period, index volatility, whether the multiple is positive or inverse, and its leverage level. Longer holding periods, higher index volatility, inverse multiples and greater leverage each can lead to returns farther from the multiple times the index return. As the tables below show, particularly during periods of higher index volatility, compounding will cause longer term results to vary from the index performance times the stated multiple in the Fund’s investment objective. This effect becomes more pronounced as volatility increases.

A leveraged, inverse, and inverse 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 or inverse exposure;

 

  e) other Fund expenses; and

 

  f) dividends or interest paid with respect to securities included in the index.

The performance for a leveraged, inverse or inverse 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

 

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index performance, on a leveraged, inverse or inverse 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 with respect to equity securities included in the index; (b) no Fund expenses; and (c) borrowing/lending rates (to obtain leverage or inverse exposure) of zero percent. If Fund expenses and/or actual borrowing lending rates were reflected, the Fund’s performance would be lower than shown.

 

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The first table below shows a performance example of an Ultra ProShares Fund (which has an investment objective to correspond to twice (2x) the daily performance of an index). The Ultra ProShares Fund could be expected to achieve a 20% return on a yearly basis if the index performance was 10%, absent any costs, 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 lighter 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 darker 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 (2x) 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 Fund (which has an investment objective to correspond to the inverse (-1x) of the daily performance of an index). In the chart below, areas shaded lighter represent those scenarios where a Short ProShares Fund will return the same or outperform (i.e., return more than) the index performance; conversely areas shaded darker represent those scenarios where a Short ProShares Fund 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 (-1x) 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%   

 

18


Table of Contents

The table below shows a performance example of an UltraShort ProShares Fund (which has an investment objective to correspond to twice the inverse (-2x) of the daily performance of an index). In the chart below, areas shaded lighter represent those scenarios where an UltraShort ProShares Fund will return the same or outperform (i.e., return more than) the index performance; conversely areas shaded darker represent those scenarios where an UltraShort ProShares Fund 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 the Inverse (-2x) 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%     </