10-K 1 d92789d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

 

x Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015.

or

 

¨ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from                     to                     .

Commission file number: 001-34200

 

 

PROSHARES TRUST II

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   87-6284802

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

c/o ProShare Capital Management LLC

7501 Wisconsin Avenue, Suite 1000

Bethesda, Maryland 20814

(Address of principal executive offices) (Zip Code)

(240) 497-6400

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

     
Common Units of Beneficial Interest   NYSE Arca, Inc.
(Title of each class)   (Name of exchange on which registered)
                            (Title of class)                           (Name of exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act: None

 

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    x  Yes    ¨  No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     ¨  Yes    x  No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x      Accelerated filer                  ¨
Non-accelerated filer ¨   (Do not check if a smaller reporting company)    Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.).    ¨  Yes    x  No

The aggregate market value of each Fund’s units held by non-affiliates as of June 30, 2015 and the number of outstanding units for each Fund as of February 18, 2016 are included in the table below.

 

 

 


Table of Contents
     Aggregate Market Value of
the Fund’s Units Held by
Non-Affiliates
as of
June 30, 2015
   

 

   Number of Outstanding Units
as of
February 18, 2016
 

ProShares Managed Futures Strategy

   $           9,405,209           350,010   

ProShares VIX Short-Term Futures ETF

     168,418,477           5,099,811   

ProShares VIX Mid-Term Futures ETF

     26,470,911           412,403   

ProShares Short VIX Short-Term Futures ETF

     189,747,162           14,350,000   

ProShares Ultra VIX Short-Term Futures ETF

     426,519,614           7,052,448   

ProShares UltraShort Bloomberg Commodity

     5,337,333           59,995   

ProShares UltraShort Bloomberg Crude Oil

     181,067,201           969,942   

ProShares UltraShort Bloomberg Natural Gas

     13,156,390           74,944   

ProShares UltraShort Gold

     73,816,366           596,977   

ProShares UltraShort Silver

     60,618,396           616,976   

ProShares Short Euro

     19,372,715           400,000   

ProShares UltraShort Australian Dollar

     19,281,775           350,000   

ProShares UltraShort Euro

     629,887,847           17,500,000   

ProShares UltraShort Yen

     405,570,914           2,499,290   

ProShares Ultra Bloomberg Commodity

     2,349,354           199,961   

ProShares Ultra Bloomberg Crude Oil

     988,879,588           103,827,866   

ProShares Ultra Bloomberg Natural Gas

     62,926,084           1,942,169   

ProShares Ultra Gold

     88,896,519           2,250,000   

ProShares Ultra Silver

     287,418,504           7,946,526   

ProShares Ultra Euro

     13,272,232           700,000   

ProShares Ultra Yen

     5,359,606           99,970   

DOCUMENTS INCORPORATED BY REFERENCE:

None.

THE FINANCIAL STATEMENT SCHEDULES CONTAINED IN PART IV OF THIS ANNUAL REPORT ON FORM 10-K CONSTITUTE THE ANNUAL REPORT WITH RESPECT TO THE COMMODITY POOLS FOR PURPOSES OF COMMODITY FUTURES TRADING COMMISSION RULE 4.22(C)


Table of Contents

PROSHARES TRUST II

Table of Contents

 

     Page  

Part I.

  

Item 1. Business.

     1   

Item 1A. Risk Factors.

     28   

Item 1B. Unresolved Staff Comments.

     56   

Item 2. Properties.

     56   

Item 3. Legal Proceedings.

     56   

Item 4. Mine Safety Disclosures.

     56   

Part II.

  

Item  5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

     56   

Item 6. Selected Financial Data.

     66   

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

     73   

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

     108   

Item 8. Financial Statements and Supplementary Data.

     127   

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

     134   

Item 9A. Controls and Procedures.

     134   

Item 9B. Other Information.

     135   

Part III.

  

Item 10. Directors, Executive Officers and Corporate Governance.

     136   

Item 11. Executive Compensation.

     139   

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

     140   

Item 13. Certain Relationships and Related Transactions, and Director Independence.

     140   

Item 14. Principal Accounting Fees and Services.

     140   

Part IV.

  

Item 15. Exhibits and Financial Statement Schedules.

     141   

Exhibit Index

     141   

Signatures

     311   


Table of Contents

Part I

Item 1. Business.

Summary

ProShares Trust II (formerly known as the Commodities and Currencies Trust) (the “Trust”) is a Delaware statutory trust formed on October 9, 2007 and is currently organized into separate series (each, a “Fund” and collectively, the “Funds”). As of December 31, 2015, the following twenty-one series of the Trust have commenced investment operations: (i) ProShares Managed Futures Strategy (the “Managed Futures Fund”); (ii) ProShares VIX Short-Term Futures ETF and ProShares VIX Mid-Term Futures ETF (each, a “Matching VIX Fund” and collectively, the “Matching VIX Funds”); (iii) ProShares Short VIX Short-Term Futures ETF and ProShares Ultra VIX Short-Term Futures ETF (each, a “Geared VIX Fund” and collectively, the “Geared VIX Funds”); and (iv) ProShares UltraShort Bloomberg Commodity, ProShares UltraShort Bloomberg Crude Oil, ProShares UltraShort Bloomberg Natural Gas, ProShares UltraShort Gold, ProShares UltraShort Silver, ProShares UltraShort Australian Dollar, ProShares UltraShort Euro, ProShares UltraShort Yen, ProShares Ultra Bloomberg Commodity, ProShares Ultra Bloomberg Crude Oil, ProShares Ultra Bloomberg Natural Gas, ProShares Ultra Gold, ProShares Ultra Silver, ProShares Ultra Euro and ProShares Ultra Yen (each, a “Leveraged Fund” and collectively, the “Leveraged Funds”); and (v) ProShares Short Euro (the “Short Euro Fund”). Each of the Funds listed above issues common units of beneficial interest (“Shares”), which represent units of fractional undivided beneficial interest in and ownership of only that Fund. The Shares of each Fund are listed on the New York Stock Exchange Archipelago (“NYSE Arca”), as further described below. The Managed Futures Fund and the Matching VIX Funds are collectively referred to as the “Matching Funds” in this Annual Report on Form 10-K. The Geared VIX Funds and the Matching VIX Funds are collectively referred to as the “VIX Funds” in this Annual Report on Form 10-K. The Leveraged Funds, the Short Euro Fund and the Geared VIX Funds, are collectively referred to as the “Geared Funds” in this Annual Report on Form 10-K.

On May 22, 2015, the Trust announced plans to liquidate ProShares Ultra Australian Dollar (ticker symbol: GDAY). ProShares Ultra Australian Dollar was closed to purchases and redemptions as of the close of regular trading on the NYSE Arca on June 18, 2015. Beginning June 19, 2015, no secondary market for ProShares Ultra Australian Dollar’s Shares remained. Proceeds of the liquidation were distributed to shareholders on June 29, 2015. Any shareholders remaining in the fund on June 29, 2015 automatically had their shares redeemed for cash at ProShares Ultra Australian Dollar’s net asset value per Share as of June 19, 2015. On June 30, 2015, the NYSE Arca filed a Form 25 removing the listing of ProShares Ultra Australian Dollar on the NYSE Arca. On July 10, 2015, a Form 15 was filed with the U.S. Securities and Exchange Commission (“SEC”) terminating the registration of ProShares Ultra Australian Dollar.

The Trust had no operations prior to November 24, 2008, other than matters relating to its organization, the registration of each series under the Securities Act of 1933, as amended, and the sale and issuance to ProShare Capital Management LLC (the “Sponsor”) of fourteen Shares at an aggregate purchase price of $350 in each of the following Funds: ProShares UltraShort Bloomberg Commodity, ProShares UltraShort Bloomberg Crude Oil, ProShares UltraShort Gold, ProShares UltraShort Silver, ProShares UltraShort Euro, ProShares UltraShort Yen, ProShares Ultra Bloomberg Commodity, ProShares Ultra Bloomberg Crude Oil, ProShares Ultra Gold, ProShares Ultra Silver, ProShares Ultra Euro and ProShares Ultra Yen.

Groups of Funds are collectively referred to in this Annual Report on Form 10-K in several different ways. References to “Short Funds,” “UltraShort Funds,” or “Ultra Funds” refer to the different Funds based upon their investment objectives, but without distinguishing among the Funds’ benchmarks. References to “Commodity Index Funds,” “Commodity Funds” and “Currency Funds” refer to the different Funds according to their general benchmark categories without distinguishing among the Funds’ investment objectives or Fund-specific benchmarks. References to “VIX Funds” or the “Managed Futures Fund” refer to the different Funds based upon their investment objective and their general benchmark categories.

Each of the Funds generally invests in Financial Instruments (i.e., instruments whose value is derived from the value of an underlying asset, rate or index, including futures contracts, swap agreements, forward contracts and other instruments) as a substitute for investing directly in commodities, currencies, or spot volatility products in order to gain exposure to its applicable commodity futures index, commodity, currency exchange rate or equity volatility index. Financial Instruments also are used to produce economically “inverse,” “inverse leveraged” or “leveraged” investment results for the Geared Funds.

 

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As further described below, each “Short” Fund seeks daily investment results (before fees and expenses) that correspond to the inverse (-1x) of the daily performance of its corresponding benchmark. Each “UltraShort” Fund seeks daily investment results (before fees and expenses) that correspond to two times the inverse (-2x) of the daily performance of its corresponding benchmark. Each “Ultra” Fund seeks daily investment results (before fees and expenses) that correspond to two times (2x) the daily performance of its corresponding benchmark. Each Matching VIX Fund and the Managed Futures Fund seek investment results (before fees and expenses), both over a single day and over time, that match the performance of its corresponding benchmark. Daily performance is measured from the calculation of one net asset value per Share (“NAV”) to the next.

Each Geared Fund seeks investment results for a single day only, not for longer periods. A “single day” is measured from the time a Fund calculates its respective NAV to the time of the Fund’s next NAV calculation. This is different from most exchange-traded funds and means that the return of such Geared Fund for a period longer than a single trading day will be the result of each day’s returns compounded over the period, which will very likely differ from -1x, -2x or 2x of the return of the index to which such Geared Fund is benchmarked for that period. A Geared Fund will lose money if its benchmark’s performance is flat over time, and it is possible for a Geared Fund to lose money over time even if its benchmark’s performance increases (or decreases, in the case of a Short or UltraShort Fund). Longer holding periods, higher benchmark volatility, inverse exposure and greater leverage each affect the impact of compounding on a Geared Fund’s returns. Daily compounding of a Geared Fund’s investment returns can dramatically and adversely affect its longer-term performance during periods of high volatility. Geared Funds are riskier than similarly benchmarked exchange-traded funds that are not geared. Accordingly, these Funds may not be suitable for all investors and should be used only by knowledgeable investors who understand the potential consequences of seeking daily leveraged, inverse or inverse leveraged investment results. Shareholders who invest in the Funds should actively manage and monitor their investments, as frequently as daily.

Each Geared Fund and the Managed Futures Fund continuously offers and redeems its Shares in blocks of 50,000 Shares and each Matching VIX Fund continuously offers and redeems shares in blocks of 25,000 Shares (each such block a “Creation Unit”). Only Authorized Participants may purchase and redeem Shares from a Fund and then only in Creation Units. An Authorized Participant is an entity that has entered into an Authorized Participant Agreement with one or more of the Funds. Shares of the Funds are offered to Authorized Participants in Creation Units at each Fund’s respective NAV. Authorized Participants may then offer to the public, from time to time, Shares from any Creation Unit they create at a per-Share market price that varies depending on, among other factors, the trading price of the Shares of each Fund on the NYSE Arca, the NAV per Share and the supply of and demand for the Shares at the time of the offer. Shares from the same Creation Unit may be offered at different times and may have different offering prices based upon the above factors. Additionally, the price at which an Authorized Participant sells a Share may be higher or lower than the price paid by such Authorized Participant in connection with the creation of such Share in a Creation Unit. The form of Authorized Participant Agreement and related Authorized Participant Handbook set forth the terms and conditions under which an Authorized Participant may purchase or redeem a Creation Unit. Authorized Participants do not receive from any Fund, the Sponsor, or any of their affiliates, any fees or compensation in connection with their sale of Shares to the public. An Authorized Participant may receive commissions or fees from investors who purchase Shares through their commission or fee-based brokerage accounts.

On March 19, 2015, the company that ran the London U.S. dollar gold fixing, ceased calculating the price of gold for the London Bullion Market Association (the “LBMA”). The LBMA selected ICE Benchmark Administration to calculate the price, which was renamed the LBMA Gold Price, and is based on an electronic, physically settled auction-based methodology, beginning on March 20, 2015.

As of December 31, 2015, ProShare Capital Management LLC, a Maryland limited liability company, served as the Trust’s Sponsor (the “Sponsor”) and commodity pool operator. On February 17, 2013, the Sponsor’s commodity trading advisor registration was withdrawn. Wilmington Trust Company serves as the Trustee of the Trust (the “Trustee”). The Funds are commodity pools, as defined in the Commodity Exchange Act (the “CEA”) and the applicable regulations of the Commodity Futures Trading Commission (the “CFTC”) and are operated by the Sponsor, a commodity pool operator registered with the CFTC. The Trust is not an investment company registered under the Investment Company Act of 1940, as amended (the “1940 Act”).

 

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The Sponsor maintains an Internet website at www.ProShares.com, through which monthly account statements and the Trust’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “1934 Act”), can be accessed free of charge, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the U.S. Securities and Exchange Commission (the “SEC”). Additional information regarding the Trust may also be found on the SEC’s EDGAR database at www.sec.gov.

Investment Objectives and Principal Investment Strategies

Investment Objectives

The Matching Funds

Investment Objective of the Managed Futures Fund

The Managed Futures Fund seeks results that, both over a single day and over time, match (before fees and expenses) the performance of its index. If the Managed Futures Fund is successful in meeting its objective, its value (before fees and expenses) should gain approximately as much on a percentage basis as the level of the S&P Strategic Futures Index (the “SFI”) when the index rises. Conversely, its value (before fees and expenses) should lose approximately as much on a percentage basis as the level of the SFI when the index declines. The Managed Futures Fund attempts to profit in both rising and falling markets by obtaining investment exposure to its benchmark through the relevant futures contracts.

Investment Objectives of the “Matching VIX” Funds

Each “Matching VIX” Fund seeks results, both over a single day and over time, that match (before fees and expenses) the performance of the S&P 500 VIX Short-Term Futures Index (the “Short-Term VIX Index”) or the S&P 500 VIX Mid-Term Futures Index (the “Mid-Term VIX Index”) (each a “VIX Futures Index” and together, the “VIX Futures Indexes”). The VIX Futures Indexes seek to offer exposure to forward market equity volatility through publicly traded futures markets. If a Matching VIX Fund is successful in meeting its objective, its value (before fees and expenses) should gain approximately as much on a percentage basis as the level of its corresponding VIX Futures Index when the benchmark rises. Conversely, its value (before fees and expenses) should lose approximately as much on a percentage basis as the level of its benchmark when the benchmark declines. Each Matching VIX Fund acquires exposure through VIX futures contracts, such that each Matching VIX Fund has exposure intended to approximate its applicable VIX Futures Index at the time of its NAV calculation. The VIX Futures Indexes track the performance of VIX futures contracts; they do not track the performance of the Chicago Board Options Exchange (“CBOE”) Volatility Index (the “VIX”), and the Matching VIX Funds should not be expected to match the performance of the VIX.

The Geared Funds

Investment Objectives of the “Short” Funds

Each “Short” Fund seeks daily investment results (before fees and expenses) that correspond to the inverse (-1x) of the daily performance, whether positive or negative, of the corresponding benchmark shown below. Expenses may include, among other things, costs related to the purchase, sale and storage of commodities or currencies and the cost of leverage, all of which may be embedded in Financial Instruments used by that Fund. If a Short Fund is successful in meeting its objective, its value on a given day (before fees and expenses) should gain approximately as much on a percentage basis as its corresponding benchmark when the benchmark declines. Conversely, its value on a given day (before fees and expenses) should lose approximately as much on a percentage basis as the corresponding benchmark when the benchmark rises. Each Short Fund will acquire short exposure through any one of or combinations of Financial Instruments, including Financial Instruments with respect to the applicable Short Fund’s benchmark, such that each Short Fund has exposure intended to approximate the inverse (-1x) of its corresponding benchmark at the time of its NAV calculation.

 

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Investment Objectives of the “UltraShort” Funds

Each “UltraShort” Fund seeks daily investment results (before fees and expenses) that correspond to two times the inverse (-2x) of the daily performance, whether positive or negative, of the corresponding benchmark shown below. Expenses may include, among other things, costs related to the purchase, sale and storage of commodities or currencies and the cost of leverage, all of which may be embedded in Financial Instruments used by that Fund. If an UltraShort Fund is successful in meeting its objective, its value on a given day (before fees and expenses) should gain approximately two times as much on a percentage basis as its corresponding benchmark when the benchmark declines. Conversely, its value on a given day (before fees and expenses) should lose approximately two times as much on a percentage basis as the corresponding benchmark when the benchmark rises. Each UltraShort Fund acquires short exposure through any one of or combinations of Financial Instruments, including Financial Instruments with respect to the applicable UltraShort Fund’s benchmark, such that each UltraShort Fund has exposure intended to approximate two times the inverse (-2x) of its corresponding benchmark at the time of its NAV calculation.

Investment Objectives of the “Ultra” Funds

Each “Ultra” Fund seeks daily investment results (before fees and expenses) that correspond to two times (2x) the daily performance, whether positive or negative, of the corresponding benchmark shown below. Expenses may include, among other things, costs related to the purchase, sale and storage of commodities or currencies and the cost of leverage, all of which may be embedded in Financial Instruments used by that Fund. If an Ultra Fund is successful in meeting its objective, its value on a given day (before fees and expenses) should gain approximately two times as much on a percentage basis as its corresponding benchmark when the benchmark rises. Conversely, its value on a given day (before fees and expenses) should lose approximately two times as much on a percentage basis as the corresponding benchmark when the benchmark declines. Each Ultra Fund acquires long exposure through any one of or combinations of Financial Instruments, including Financial Instruments with respect to the applicable Ultra Fund’s benchmark such that each Ultra Fund has exposure intended to approximate two times (2x) its corresponding benchmark at the time of its NAV calculation.

The corresponding benchmark for each Fund is listed below:

ProShares Managed Futures Strategy: The S&P Strategic Futures Index (the “SFI”). The SFI is a long/short rules-based investable index that seeks to potentially capture the economic benefit derived from both rising and declining trends in futures prices.

ProShares VIX Short-Term Futures ProShares Short VIX Short-Term Futures and ProShares Ultra VIX Short-Term Futures: The S&P 500 VIX Short-Term Futures Index. The S&P 500 VIX Short-Term Futures Index seeks to offer exposure to market volatility through publicly traded futures markets and is designed to measure the return from a rolling long position in the first and second month VIX futures contracts.

ProShares VIX Mid-Term Futures: The S&P 500 VIX Mid-Term Futures Index. The S&P 500 VIX Mid-Term Futures Index seeks to offer exposure to market volatility through publicly traded futures markets and is designed to measure the return from a rolling long position in the fourth, fifth, sixth and seventh month VIX futures contracts.

ProShares UltraShort Bloomberg Commodity and ProShares Ultra Bloomberg Commodity: The Bloomberg Commodity IndexSM. The Bloomberg Commodity Index is designed to track commodity futures prices.

ProShares UltraShort Bloomberg Crude Oil and ProShares Ultra Bloomberg Crude Oil: The Bloomberg WTI Crude Oil SubindexSM. The Bloomberg WTI Crude Oil Subindex is designed to track crude oil futures prices.

ProShares UltraShort Bloomberg Natural Gas and ProShares Ultra Bloomberg Natural Gas: The Bloomberg Natural Gas SubindexSM. The Bloomberg Natural Gas Subindex is designed to track natural gas futures prices traded on the NYMEX.

 

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ProShares UltraShort Gold and ProShares Ultra Gold: The daily performance of gold bullion as measured by the U.S. dollar p.m. LBMA Gold Price.

ProShares UltraShort Silver and ProShares Ultra Silver: The daily performance of silver bullion as measured by the London Silver Price.

ProShares UltraShort Australian Dollar: The 4:00 p.m. (Eastern Time) spot price of the Australian dollar versus the U.S. dollar using Australian dollar/U.S. dollar exchange rate as provided by Bloomberg, expressed in terms of U.S. dollars per unit of foreign currency.

ProShares Short Euro, ProShares UltraShort Euro and ProShares Ultra Euro: The 4:00 p.m. (Eastern Time) spot price of the euro versus the U.S. dollar, using euro/U.S. dollar exchange rate as provided by Bloomberg, expressed in terms of U.S. dollars per unit of foreign currency.

ProShares UltraShort Yen and ProShares Ultra Yen: The 4:00 p.m. (Eastern Time) spot price of the Japanese yen versus the U.S. dollar using the Japanese yen/U.S. dollar exchange rate as provided by Bloomberg, expressed in terms of U.S. dollars per unit of foreign currency.

Principal Investment Strategies

In seeking to achieve each Fund’s investment objective, the Sponsor uses a mathematical approach to investing. Using this approach, the Sponsor determines the type, quantity and mix of investment positions, which the Sponsor believes in combination, should produce daily returns consistent with a Fund’s objective. The Sponsor relies upon a pre-determined model to generate orders that result in repositioning each Fund’s investments in accordance with their respective investment objectives. Each Geared Fund invests principally in any one of or combinations of Financial Instruments, including swap agreements, futures contracts, forward contracts and other instruments with respect to the applicable Fund’s benchmark to the extent determined appropriate by the Sponsor. The types of commodity or currency interests in which each Commodity Fund, Commodity Index Fund or Currency Fund invests may vary daily. The Funds do not currently intend to invest directly in any commodity or currency. Each VIX Fund intends to obtain exposure to the applicable equity market volatility index by primarily investing in VIX futures contracts based on the VIX. Each Fund will also hold cash or cash equivalents such as U.S. Treasury securities or other high credit quality, short-term fixed-income or similar securities (such as shares of money market funds and collateralized repurchase agreements) for direct investment or as collateral for Financial Instruments. Each Fund may invest up to 100% of its assets in any of these types of cash or cash equivalent securities.

The Sponsor does not invest the assets of the Funds based on its view of the investment merit of a particular investment, other than for cash management purposes, nor does it conduct conventional volatility, commodity or currency research or analysis, or forecast market movement or trends, in managing the assets of the Funds. Each Fund seeks to remain fully invested at all times in Financial Instruments and money market instruments that, in combination, provide exposure to its underlying benchmark consistent with its investment objective without regard to market conditions, trends or direction.

Certain of the Funds may obtain exposure through Financial Instruments to a representative sample of the components in its underlying index, which have aggregate characteristics similar to those of the underlying index. This “sampling” process typically involves selecting a representative sample of components in an index principally to enhance liquidity and reduce transaction costs while seeking to maintain high correlation with, and similar aggregate characteristics (e.g., underlying commodities and valuations) to, the underlying index. In addition, the Funds may obtain exposure to components not included in the underlying index, invest in assets that are not included in the underlying index or may overweight or underweight certain components contained in the underlying index. For further discussion of the Financial Instruments, see “Information About Financial Instruments and Commodities Markets” below.

 

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Information About Financial Instruments and Commodities Markets

Swap Agreements

Swap agreements are two-party contracts that have traditionally been entered into primarily by institutional investors in over the counter (“OTC”) markets for a specified period ranging from a day to more than a year. However, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) provides for significant reforms of the OTC derivatives markets, including a requirement to execute certain swap and forward transactions on a CFTC-regulated market and/or to clear such transactions through a CFTC-regulated central clearing organization. In a standard swap transaction, the parties agree to exchange the returns on a particular predetermined investment, instrument or index for a fixed or floating rate of return (the “interest rate leg,” which will also include the cost of borrowing for short swaps) in respect of a predetermined notional amount. The notional amount of the agreement reflects the extent of a Fund’s total investment exposure under the swap agreement. Transaction or commission costs are reflected in the benchmark level at which the transaction is entered into. The gross returns to be exchanged are calculated with respect to the notional amount and the benchmark returns to which the swap is linked. Swaps are usually closed out on a net basis, i.e., the two payment streams are netted out in a cash settlement on the payment date specified in the agreement, with the parties receiving or paying, as the case may be, only the net amount of the two payments. Thus, while the notional amount reflects a Fund’s total investment exposure under the swap agreement (i.e., the entire face amount or principal of a swap agreement), the net amount is a Fund’s current obligations (or rights) under the swap agreement, which is 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 on any given termination date. In a typical swap agreement entered into by an UltraShort Fund or a Short Fund, absent fees, transaction costs and interest, such Fund would be required to make payments to the swap counterparty in the event the benchmark increases and would be entitled to settlement payments in the event the benchmark decreases. In a typical swap agreement entered into by an Ultra Fund, absent fees, transaction costs and interest, the Ultra Fund would be entitled to settlement payments in the event the benchmark increases and would be required to make payments to the swap counterparty in the event the benchmark decreases. In the case of futures contracts-based indexes, such as those used by the VIX Fund, the Managed Futures Fund and the Commodity Index Funds, the reference interest rate is zero, although a financing spread or fee is normally still applied.

Swap agreements involve, to varying degrees, elements of market risk and exposure to loss in excess of the amount which would be reflected on the Statement of Financial Condition. The notional amounts of the agreement reflect the extent of each Ultra Fund’s total investment exposure under the swap agreement. An UltraShort Fund’s or a Short Fund’s exposure is not limited by the notional amount and its exposure is in theory potentially infinite as there is no fixed limit on the increase in any index value. The primary risks associated with the use of swap agreements arise from the inability of counterparties to perform. Each Fund that invests in swaps bears the risk of loss of the net amount, if any, expected to be received under a swap agreement in the event of the default or bankruptcy of a swap counterparty. Each such Fund enters or intends to enter into swap agreements only with major, global financial institutions; however, there are no limitations on the percentage of its assets each Fund may invest in swap agreements with a particular counterparty. Each Fund that invests in swaps may use various techniques to minimize credit risk including early termination or reset and payment, using different counterparties and limiting the net amount due from any individual counterparty.

Each Fund that invests in swaps generally collateralizes the swap agreements with cash and/or certain securities. Collateral posted in connection with uncleared derivative transactions is generally held for the benefit of the counterparty in a segregated tri-party account at the Custodian to protect the counterparty against non-payment by the Fund. The counterparty also may collateralize the uncleared swap agreements with cash and/or certain securities, which collateral is typically held for the benefit of the Fund in a segregated tri-party account at the Custodian. In the event of a default by the counterparty, and the Fund is owed money in the uncleared swap transaction, such Fund will seek withdrawal of this collateral from the segregated account and may incur certain costs exercising its right with respect to the collateral. These Funds remain subject to credit risk with respect to the amount it expects to receive from counterparties.

The Funds have sought to mitigate these risks in connection with the uncleared OTC swaps by generally requiring that the counterparties for each Fund agree to post collateral for the benefit of the Fund, marked to market daily, subject to certain minimum thresholds; however there are no limitations on the percentage of its assets each Fund may invest in swap agreements with a particular counterparty. To the extent any such collateral is insufficient or there are delays in accessing the collateral, the Funds will be exposed to counterparty risk as described above, including possible delays in recovering amounts as a result of bankruptcy proceedings.

 

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The counterparty risk for cleared derivative transactions is generally lower than for uncleared OTC derivatives since generally a clearing organization becomes substituted for each counterparty to a cleared derivative contract and, in effect, guarantees the parties’ performance under the contract as each party to a trade looks only to the clearing house for performance of financial obligations. In addition, cleared derivative transactions benefit from daily marking-to-market and settlement, and segregation and minimum capital requirements applicable to intermediaries.

Forward Contracts

A forward contract is a contractual obligation to purchase or sell a specified quantity of a particular underlying asset at or before a specified date in the future at a specified price and, therefore, is economically similar to a futures contract. Unlike futures contracts, however, forward contracts are typically traded in the OTC markets and are not standardized contracts. Forward contracts for a given commodity or currency are generally available for various amounts and maturities and are subject to individual negotiation between the parties involved. Moreover, there is generally no direct means of offsetting or closing out a forward contract by taking an offsetting position as one would a futures contract on a U.S. exchange. If a trader desires to close out a forward contract position, he generally will establish an opposite position in the contract but will settle and recognize the profit or loss on both positions simultaneously on the delivery date. Thus, unlike in the futures contract market where a trader who has offset positions will recognize profit or loss immediately, in the forward market a trader with a position that has been offset at a profit will generally not receive such profit until the delivery date, and likewise a trader with a position that has been offset at a loss will generally not have to pay money until the delivery date. In recent years, however, the terms of forward contracts have become more standardized, and in some instances such contracts now provide a right of offset or cash settlement as an alternative to making or taking delivery of the underlying commodity or currency. The primary risks associated with the use of forward contracts arise from the inability of the counterparty to perform.

Each Fund that invests in forward contracts generally collateralizes the uncleared forward contracts with cash and/or certain securities. Such collateral is generally held for the benefit of the counterparty in a segregated tri-party account at the Custodian to protect the counterparty against non-payment by the Fund. The counterparty also may collateralize the uncleared forward contracts with cash and/or certain securities, which collateral is typically held for the benefit of the Fund in a segregated tri-party account at the Custodian. In the event of a default by the counterparty, and the Fund is owed money in the uncleared forward transaction, such Fund will seek withdrawal of this collateral from the segregated account and may incur certain costs exercising its right with respect to the collateral. These Funds remain subject to credit risk with respect to the amount it expects to receive from OTC counterparties.

The Funds have sought to mitigate these risks with respect to uncleared OTC forwards by generally requiring that the counterparties for each Fund agree to post collateral for the benefit of the Fund, marked to market daily, subject to certain minimum thresholds; however, there are no limitations on the percentage of its assets each Fund may invest in forward contracts with a particular counterparty. To the extent any such collateral is insufficient or there are delays in accessing the collateral, the Funds will be exposed to counterparty risk as described above, including possible delays in recovering amounts as a result of bankruptcy proceedings.

The forward markets provide what has typically been a highly liquid market for foreign exchange trading, and in certain cases the prices quoted for foreign exchange forward contracts may be more favorable than the prices for foreign exchange futures contracts traded on U.S. exchanges. Forward contracts have traditionally not been cleared or guaranteed by a third party. However, the Dodd-Frank Act provides for significant reforms of OTC derivatives markets. As a result of the Dodd-Frank Act, the CFTC now regulates non-deliverable forwards (including deliverable forwards where the parties do not take delivery). Certain non-deliverable forward contracts, such as non-deliverable foreign exchange forwards, may be subject to regulation as swap agreements, including mandatory clearing. All foreign exchange forwards, including non-deliverable foreign exchange forwards as well as physically settled foreign exchange forwards, are subject to new reporting requirements. Changes in the forward markets may entail increased costs and result in burdensome reporting requirements.

 

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Commercial banks participating in trading OTC foreign exchange forward contracts often do not require margin deposits, but rely upon internal credit limitations and their judgments regarding the creditworthiness of their counterparties. In recent years, however, many OTC market participants in foreign exchange trading have begun to require that their counterparties post margin.

Futures Contracts

A futures contract is 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 cash settlement as is the case with VIX futures contracts. Futures contracts are traded on a wide variety of commodities, including bonds, interest rates, agricultural products, stock indexes, currencies, energy, metals, economic indicators and statistical measures. The notional size and calendar term of futures contracts on a particular commodity are identical and are not subject to any negotiation, other than with respect to price and the number of contracts traded between the buyer and seller. Each Fund generally deposits cash with a Futures Commission Merchant (“FCM”) for its open positions in futures contracts, which may, in turn, transfer such deposits to the clearing house to protect the clearing house against non-payment by the Fund. The clearing house becomes substituted for each counterparty to a futures contract, and, in effect, guarantees performance. In addition, the FCM may require the Funds to deposit collateral in excess of the clearing house’s margin requirements for the FCM’s own protection.

Certain futures contracts, such as VIX futures contracts (including the futures contracts that comprise each of the VIX Futures Indexes), as well as stock index contracts and certain commodity futures contracts, settle in cash, reflecting the difference between the contract purchase/sale price and the contract settlement price. The cash settlement mechanism avoids the potential for either side to have to deliver the underlying asset. For other futures contracts, the contractual obligations of a buyer or seller may generally be satisfied by taking or making physical delivery of the underlying asset or by making an offsetting sale or purchase of an identical futures contract on the same or linked exchange before the designated date of delivery. The difference between the price at which the futures contract is purchased or sold and the price paid for the offsetting sale or purchase, after allowance for brokerage commissions, constitutes the profit or loss to the trader.

Regulations

Derivatives exchanges in the United States are subject to regulation under the CEA, by the CFTC, the governmental agency having responsibility for regulation of derivatives exchanges and trading on those exchanges. Following the adoption of the Dodd-Frank Act, the CFTC also has authority to regulate OTC derivative markets, including certain OTC foreign exchange markets. The CFTC has exclusive authority to designate exchanges for the trading of specific futures contracts and options on futures contracts and to prescribe rules and regulations of the marketing of each. The CFTC also regulates the activities of “commodity pool operators” and the CFTC has adopted regulations with respect to certain of such persons’ activities. Pursuant to its authority, the CFTC requires a commodity pool operator, such as the Sponsor, to keep accurate, current and orderly records with respect to each pool it operates. The CFTC may suspend, modify or terminate the registration of any registrant for failure to comply with CFTC rules or regulations. Suspension, restriction or termination of the Sponsor’s registration as a commodity pool operator would prevent it, until such time (if any) as such registration were to be reinstated, from managing, and might result in the termination of the Funds. If the Sponsor were unable to provide services and/or advice to the Funds, the Funds would be unable to pursue their investment objectives unless and until the Sponsor’s ability to provide services and advice to the Funds was reinstated or a replacement for the Sponsor as commodity pool operator could be found. Such an event could result in termination of the Funds.

The CEA requires all FCMs to meet and maintain specified fitness and financial requirements, segregate customer funds from proprietary funds and account separately for all customers’ funds and positions, and to maintain specified books and records open to inspection by the staff of the CFTC. See “Item 1A. Risk Factors. Risks Related to Regulatory Requirements and Potential Legislative Changes-Failure of the FCMs to segregate assets may increase losses in the Funds” in this Annual Report on Form 10-K.

The CEA also gives the states certain powers to enforce its provisions and the regulations of the CFTC.

Under certain circumstances, the CEA grants shareholders the right to institute a reparations proceeding before the CFTC against the Sponsor (as a registered commodity pool operator), an FCM, as well as those of their respective employees who are required to be registered under the CEA. Shareholders may also be able to maintain a private right of action for certain violations of the CEA.

 

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Pursuant to authority in the CEA, the National Futures Association (the “NFA”) has been formed and registered with the CFTC as a registered futures association. At the present time, the NFA is the only self-regulatory organization for commodities professionals other than exchanges. As such, the NFA promulgates rules governing the conduct of commodity professionals and disciplines those professionals that do not comply with such standards. The CFTC has delegated to the NFA responsibility for the registration of commodity pool operators, FCMs, swap dealers, commodity trading advisors, introducing brokers and their respective associated persons and floor brokers. The Sponsor is a member of the NFA (the Funds themselves are not required to become members of the NFA). As an NFA member, the Sponsor is subject to NFA standards relating to fair trade practices, financial condition, and consumer protection. The CFTC is prohibited by statute from regulating trading on foreign commodity exchanges and markets.

The CEA and CFTC regulations prohibit market abuse and generally require that all futures exchange-based trading be conducted in compliance with rules designed to ensure the integrity of market prices and without any intent to manipulate prices. CFTC regulations and futures exchange rules also impose limits on the size of the positions that a person may hold or control as well as standards for aggregating certain positions. The rules of the CFTC and the futures exchanges also authorize special emergency actions to halt, suspend or limit trading overall or to restrict, halt, suspend or limit the trading of an individual trader or to otherwise impose special reporting or margin requirements. See also “Item 1A. Risk Factors. Regulatory changes or actions, including the implementation of new Legislation, may alter the operations and profitability of the Funds” and “Item 1A. Risk Factors. Regulatory and exchange accountability levels may restrict the creation of Creation Units and the operation of the Trust” in this Annual Report on Form 10-K.

Description of the S&P Strategic Futures Index (“SFI”)

Developed by S&P and launched on August 14, 2014, the SFI is a long/short rules-based investable index that seeks to capture the economic benefit derived from both rising and declining trends in futures prices. The SFI is currently composed of 24 underlying futures contracts (each, a SFI Futures Contract, collectively, the SFI Futures Contracts), representing unleveraged long or short positions in futures contracts in the commodity and financial markets. The SFI includes both commodity futures contracts (the “Commodity Futures Contracts”) as well as currency and U.S. Treasury futures contracts (the “Financial Futures Contracts”) that were deemed to have sufficient liquidity.

The weight assigned to each SFI Futures Contract is determined on a monthly basis, and implemented as of each monthly repositioning. Weights are determined using a proprietary risk-weighting methodology that measures the risk exposure of the SFI Futures Contracts and then weights each SFI Futures Contract so that it contributes the same level of risk to the SFI.

The SFI’s exposure to the SFI Futures Contracts are not long-only, but will be either long or short based on a comparison of the current price input of each SFI Futures Contract with its own seven-month weighted moving average of its price input.

The following chart reflects the December 31, 2015 weight (rounded to the nearest one-hundredth) for each SFI Futures Contract of the SFI. The weights will be determined each month and implemented as of the next monthly rebalancing.

 

SFI

 

SFI Futures Contracts

   Base Weight
(Rounded to
the
Nearest 0.01)
 

Light Crude

     1.23 %

Heating Oil

     1.59 %

RBOB Gas

     1.54 %

Natural Gas

     2.15 %

Copper

     2.75 %

Gold

     3.81 %

Silver

     1.91 %

Lean Hogs

     3.03 %

Live Cattle

     4.61 %

 

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Corn

     2.99 %

Soybeans

     3.27 %

Wheat

     2.72 %

Coffee

     2.20 %

Cocoa

     4.46 %

Sugar

     2.62 %

Cotton

     3.51 %

Australian dollar

     3.77 %

British pound

     5.37 %

Canadian dollar

     5.13 %

Euro

     4.35 %

Japanese yen

     7.37 %

Swiss franc

     3.44 %

U.S. Treasury Notes

     16.23 %

U.S. Treasury Bonds

     9.95 %
  

 

 

 
     100 %

Determining the Long/Short Positioning of each SFI Futures Contract

Each month, S&P will determine whether an SFI Futures Contract should be either a long or short position by comparing the price change of the most recent month (the “First Month Price Change”) of the SFI Futures Contract to the seven-month exponential weighted moving average price change (the “Seven Month Price Change”). Long positions are tracked when an SFI Futures Contract’s First Month Price Change is greater than or equal to the Seven Month Price Change. Short positions are tracked when an SFI Futures Contract’s First Month Price Change is less than the Seven Month Price Change. The First Month Price Change of each SFI Futures Contract is calculated by calculating the percentage difference of each SFI Futures Contract’s price on the last PDD (as defined below) relative to the current PDD.

When calculating the Seven Month Price Change, each month’s price input is represented as the monthly percentage change of an SFI Futures Contract’s price which is calculated in the same manner as the First Month Price Change. Monthly positions are determined on the second to last SFI business day of the month (defined as the position determination date, or “PDD”) when the monthly percentage change of an SFI Future Contract’s price is compared to past monthly price changes, exponentially weighted to give greatest weight to the most recent return and least weight to the return seven months prior. The weighted sum of the percentage changes of all SFI Futures Contract prices equals the daily movement of the SFI. To create an exponential average for comparison, price inputs (percentage change from current and previous PDDs) are weighted per the schedule below. Due to this weighting methodology, current price movements are more important than those of the more distant past.

 

Number of Months

   Weight
(Rounded to the
Nearest 0.01)
 

7

     2.32 %

6

     3.71 %

5

     5.94 %

4

     9.51 %

3

     15.22 %

2

     24.34 %

1

     38.96 %
  

 

 

 

Total

     100 %

Rolling

During this monthly rebalancing, the SFI will also “roll” certain of its positions from the current contract to a contract further from settlement. In order to maintain consistent exposure to the SFI Futures Contracts that compose the SFI, each SFI Futures Contract must be sold prior to its expiration date and replaced by a contract maturing at a specified date in the future. This process is known as “rolling.” SFI Futures Contracts are rolled periodically. The rolls are implemented pursuant to a roll schedule over a five-day period from the first (1st) through the fifth (5th) index business days of the month. An index business day is any day on which the majority of the SFI Futures Contracts are open for official trading and official settlement prices are provided, excluding holidays and weekends.

 

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In order to mitigate the potential negative impact of contango on long commodity positions, certain Commodity Futures Contracts will be rolled according to an “enhanced” rolling methodology. This methodology seeks to modify the normal roll methodology for futures contracts in the energy sector when such long position would be materially and negatively impacted by contango. In addition, the methodology identifies seasonal factors applicable to both the energy and agricultural futures markets and implements a modified roll to mitigate potential costs of such seasonal impacts.

Information about the Index Licensor

The “S&P Strategic Futures” is a product of S&P Dow Jones Indices LLC or its affiliates (“SPDJI”) and has been licensed for use by ProShares. Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”) and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). The trademarks have been licensed to SPDJI and have been sublicensed for use for certain purposes by ProShares. The Managed Futures Fund is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, any of their respective affiliates (collectively, “S&P Dow Jones Indices”). S&P Dow Jones Indices does not make any representation or warranty, express or implied, to the owners of the Managed Futures Fund or any member of the public regarding the advisability of investing in securities generally or in the Managed Futures Fund particularly or the ability of the SFI to track general market performance. S&P Dow Jones Indices’ only relationship to ProShares with respect to the SFI is the licensing of the Index and certain trademarks, service marks and/or trade names of S&P Dow Jones Indices and/or its licensors. The SFI is determined, composed and calculated by S&P Dow Jones Indices without regard to ProShares or the Managed Futures Fund. S&P Dow Jones Indices has no obligation to take the needs of ProShares or the owners of the Managed Futures Fund into consideration in determining, composing or calculating the SFI. S&P Dow Jones Indices is not responsible for and has not participated in the determination of the prices, and amount of the Managed Futures Fund or the timing of the issuance or sale of the Managed Futures Fund or in the determination or calculation of the equation by which the Managed Futures Fund is to be converted into cash, surrendered or redeemed, as the case may be. S&P Dow Jones Indices has no obligation or liability in connection with the administration, marketing or trading of the Managed Futures Fund. There is no assurance that investment products based on the SFI will accurately track index performance or provide positive investment returns. S&P Dow Jones Indices LLC is not an investment advisor. Inclusion of a security within an index is not a recommendation by S&P Dow Jones Indices to buy, sell, or hold such security, nor is it considered to be investment advice.

NEITHER S&P DOW JONES INDICES NOR THIRD PARTY LICENSOR GUARANTEES THE ADEQUACY, ACCURACY, TIMELINESS AND/OR THE COMPLETENESS OF THE SFI OR ANY DATA RELATED THERETO OR ANY COMMUNICATION, INCLUDING BUT NOT LIMITED TO, ORAL OR WRITTEN COMMUNICATION (INCLUDING ELECTRONIC COMMUNICATIONS) WITH RESPECT THERETO. S&P DOW JONES INDICES SHALL NOT BE SUBJECT TO ANY DAMAGES OR LIABILITY FOR ANY ERRORS, OMISSIONS, OR DELAYS THEREIN. S&P DOW JONES INDICES MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES, OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE OR AS TO RESULTS TO BE OBTAINED BY PROSHARES, OWNERS OF THE MANAGED FUTURES FUND, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE SFI OR WITH RESPECT TO ANY DATA RELATED THERETO. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT WHATSOEVER SHALL S&P DOW JONES INDICES BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES INCLUDING BUT NOT LIMITED TO, LOSS OF PROFITS, TRADING LOSSES, LOST TIME OR GOODWILL, EVEN IF THEY HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, WHETHER IN CONTRACT, TORT, STRICT LIABILITY, OR OTHERWISE. THERE ARE NO THIRD PARTY BENEFICIARIES OF ANY AGREEMENTS OR ARRANGEMENTS BETWEEN S&P DOW JONES INDICES AND PROSHARES, OTHER THAN THE LICENSORS OF S&P DOW JONES INDICES.

 

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Description of the Bloomberg Commodity Index SM and its Sub-Indexes

Overview of the Bloomberg Family of Indices

Bloomberg Commodity IndexSM

The Bloomberg Commodity IndexSM (the “Bloomberg Commodity Index”) is designed to be a highly liquid and diversified benchmark for the commodity futures market. It is intended to reflect the overall commodity sector by measuring the performance of commodity futures contracts. The performance of the commodity futures market is often very different than the performance of the physical, or “spot”, commodities market. See “Item 1A. Risk Factors. The Commodity Index Funds are linked to an index comprised of commodity futures contracts, and are not linked to the spot prices of the underlying physical commodities. Commodity futures contracts may perform very differently from the spot price of the underlying physical commodities” in this Annual Report on Form 10-K. Unlike equities, which entitle the holder to a continuing stake in a corporation, commodity futures contracts specify a delivery date for the underlying physical commodity or its cash equivalent. The Bloomberg Commodity Index is a “rolling index,” which means that the Bloomberg Commodity Index does not take actual physical possession of any commodities; rather, it tracks a rolling futures position. An investor with a rolling futures position is able to avoid delivering (or taking delivery of) underlying physical commodities while maintaining exposure to those commodities. The roll for each index component occurs over a period of five Bloomberg Commodity Index business days in certain months according to a pre-determined schedule, generally beginning on the fifth business day of the month and ending on the ninth business day. Each day, approximately 20% of each rolling futures position that is included in the month’s roll is rolled, increasing from 0% to 20%, 40%, 60%, 80% and finally 100%. The Bloomberg Commodity Index is calculated by applying the weighting adjustments at the close of each day, with the adjusted weights used for the next day’s calculation. Not all contracts are rolled every month; generally the futures that underlie the indexes within the Bloomberg Commodity Index family roll approximately every other month. The exact roll methodology differs between certain commodities. The index will reflect the performance of its underlying commodities, including the impact of rolling, without regard to income earned on cash positions. For more information about the risks associated with rolling futures positions, see “Item 1A. Risk Factors. Potential negative impact from rolling futures positions” in this Annual Report on Form 10-K.

The Bloomberg Commodity Index is comprised of five different commodity sectors: energy, livestock, industrial metals, precious metals and agriculture. These five sectors track futures contracts prices of 22 specific commodities: natural gas, WTI crude oil, brent crude, RBOB gasoline, ULS Diesel, live cattle, lean hogs, Chicago wheat, Kansas City wheat, corn, soybeans, soybean oil, soybean meal, aluminum, COMEX copper, zinc, nickel, gold, silver, sugar, cotton and coffee. The Bloomberg Commodity Index is designed to minimize concentration in any one commodity or sector. No single commodity can constitute more than 15% of the Bloomberg Commodity Index and no related group of commodities (e.g., energy, precious metals, livestock or grains) may constitute more than 33% of the index as of the annual reweighting of the components. The Bloomberg Commodity Index family of indices also includes ten subindexes that group commodities based on type, as well as single commodity subindexes representing each of the commodities that are currently tracked by the Bloomberg Commodity Index. As discussed below, ProShares UltraShort Bloomberg Crude Oil and ProShares Ultra Bloomberg Crude Oil are designed to track one of these subindexes, the Bloomberg WTI Crude Oil SubindexSM and ProShares UltraShort Bloomberg Natural Gas and ProShares Ultra Bloomberg Natural Gas are designed to track another one of these sub-indexes, the Bloomberg Natural Gas SubindexSM.

To determine its component weightings, the Bloomberg Commodity Index relies primarily on liquidity data, or the relative amount of trading activity of a particular commodity. Liquidity is an important indicator of the value placed on a commodity by financial and physical market participants. The index also relies to a lesser extent on dollar-adjusted production data. The index thus relies on data that is endogenous to the futures markets (liquidity) and exogenous to the futures markets (production) in determining relative weightings. All data used in both the liquidity and production calculations is averaged over a five-year period.

In consultation with the Bloomberg Commodity Index Advisory Committee, the Bloomberg Commodity Index Supervisory Committee meets annually to determine the composition of the index in accordance with the rules established in the Bloomberg Handbook. The Supervisory Committee consists of employees of Bloomberg. Bloomberg Commodity Index Advisory Committee members are drawn from the academic, financial and legal communities. The Bloomberg Commodity Index is re-weighted and rebalanced each year in January on a price-percentage basis. The annual weightings for the Index are determined each year in June or July by Bloomberg under the supervision of the Bloomberg Commodity Index Oversight Committee, announced after approval by the Committee and implemented the following January.

 

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The Bloomberg Commodity Index is composed of commodities traded on U.S. exchanges, with the exception of aluminum, nickel and zinc, which trade on the London Metal Exchange. Trading hours for the U.S. commodity exchanges are between 8:00 a.m. and 3:00 p.m. (Eastern Time). The Bloomberg Commodity Index contract trades exclusively on the Chicago Board of Trade’s (“CBOT”) electronic trading platform. A daily settlement price for the Bloomberg Commodity Index is published at approximately 5:00 p.m. (Eastern Time).

The Bloomberg Commodity Index is designed to provide:

 

    Weightings that reflect economic significance

 

    Diversification

 

    Annual reweighting and rebalancing

 

    Liquidity

The Bloomberg Commodity Index is a proprietary index that Bloomberg calculates. The methodology for determining the composition and weighting of the Bloomberg Commodity Index and for calculating its level is subject to modification at any time. Bloomberg disseminates the Index level at least every 15 seconds from 8:00 a.m. to 3:00 p.m. (Eastern Time), and publishes a daily Index level at approximately 5:00 p.m. (Eastern Time), each business day.

As of December 31, 2015, the individual commodity weightings for the Bloomberg Commodity Index components were as follows:

 

Commodity    Target Weights (%)  

Gold

     12.68 %

Corn

     7.98 %

Natural Gas

     8.77 %

COMEX Copper

     7.09 %

Aluminum

     4.72 %

WTI Crude Oil

     7.42 %

Soybeans

     5.65 %

Live Cattle

     3.34 %

Sugar

     5.00 %

Brent Crude Oil

     6.28 %

Coffee

     1.95

Chicago Wheat

     3.28 %

Silver

     4.34 %

Zinc

     2.21 %

Soybean Oil

     3.17 %

Nickel

     1.46 %

ULS Diesel

     3.14 %

Soybean Meal

     2.50 %

RBOB Gasoline

     4.23 %

Lean Hogs

     1.78 %

Kansas City Wheat

     1.08 %

Cotton

     1.93

Bloomberg WTI Crude Oil SubindexSM

ProShares UltraShort Bloomberg Crude Oil and ProShares Ultra Bloomberg Crude Oil are designed to correspond (before fees and expenses) to two times the inverse (-2x) or two times (2x), respectively, of the daily performance of the Bloomberg WTI Crude Oil SubindexSM, a sub-index of the Bloomberg Commodity Index. The Bloomberg WTI Crude Oil SubindexSM is intended to reflect the performance of crude oil as measured by the price of futures contracts of West Texas Intermediate sweet, light crude oil traded on the NYMEX, including the impact of rolling, without regard to income earned on cash positions. The performance of the crude oil futures market is normally very different than the performance of the physical crude oil market (e.g., the price of crude oil at port). See “Item 1A. Risk Factors. The Commodity Index Funds are linked to an index comprised of commodity futures contracts, and are not directly linked to the spot prices of the underlying physical commodities. Commodity futures contracts may perform very differently from the spot price of the underlying physical commodities” in this Annual Report on Form 10-K.

 

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The Bloomberg WTI Crude Oil SubindexSM is based on the Crude Oil component of the Bloomberg Commodity Index, which is described above under “Bloomberg Commodity IndexSM,” and tracks what is known as a rolling futures position. The roll occurs over a period of five Bloomberg business days in certain months according to a pre-determined schedule, generally beginning on the fifth business day of the month and ending on the ninth business day. Each day, approximately 20% of each rolling futures position that is included in the month’s roll is rolled, increasing from 0% to 20%, 40%, 60%, 80% and finally 100%. The exact roll methodology differs between certain commodities. The Bloomberg WTI Crude Oil SubindexSM will reflect the performance of its underlying crude oil futures contracts, including the impact of rolling, without regard to income earned on cash positions. For more information about the risks associated with rolling futures positions, see “Item 1A. Risk Factors. Potential negative impact from rolling futures positions” in this Annual Report on Form 10-K.

Bloomberg Natural Gas SubindexSM

ProShares UltraShort Bloomberg Natural Gas and ProShares Ultra Bloomberg Natural Gas are designed to correspond (before fees and expenses) to two times the inverse (-2x) or two times (2x) of the daily performance of the Bloomberg Natural Gas SubindexSM, respectively. The Bloomberg Natural Gas SubindexSM is intended to reflect the performance of a rolling position in natural gas futures contracts traded on the NYMEX without regard to income earned on cash positions. An investment in natural gas futures contracts may often perform very differently than the price of physical natural gas (e.g., the wellhead or end-user price of natural gas). See “Item 1A. Risk Factors. The Commodity Index Funds are linked to an index comprised of commodity futures contracts, and are not linked to the spot prices of the underlying physical commodities. Commodity futures contracts may perform very differently from the spot price of the underlying physical commodities” in this Annual Report on Form 10-K.

The Bloomberg Natural Gas SubindexSM is based on the Natural Gas component of the Bloomberg Commodity Index, which is described above under “Bloomberg Commodity IndexSM,” and tracks what is known as a rolling futures position. The roll occurs over a period of five Bloomberg Commodity Index business days in certain months according to a pre-determined schedule, generally beginning on the fifth business day of the month and ending on the ninth business day. Each day, approximately 20% of each rolling futures position that is included in the month’s roll is rolled, increasing from 0% to 20%, 40%, 60%, 80% and finally 100%. The exact roll methodology differs between certain commodities. The index will reflect the performance of its underlying natural gas contracts, including the impact of rolling, without regard to income earned on cash positions. For more information about the risks associated with rolling futures positions, see “Item 1A. Risk Factors. Potential negative impact from rolling futures positions” in this Annual Report on Form 10-K.

Information About the Index Licensor

“BLOOMBERG®”, “BLOOMBERG WTI CRUDE OIL SUBINDEXSM” and “BLOOMBERG NATURAL GAS SUBINDEXSM” ARE SERVICE MARKS OF BLOOMBERG FINANCE L.P. AND ITS AFFILIATES (COLLECTIVELY, “BLOOMBERG”) AND HAVE BEEN LICENSED FOR USE FOR CERTAIN PURPOSES BY PROSHARES TRUST II (“LICENSEE”).

The Funds are not sponsored, endorsed, sold or promoted by Bloomberg UBS AG, UBS Securities LLC (“UBS Securities”), or any of their subsidiaries or affiliates. None of Bloomberg, UBS AG, UBS Securities, or any of their subsidiaries or affiliates makes any representation or warranty, express or implied, to the owners of or counterparts to the Funds or any member of the public regarding the advisability of investing in securities or commodities generally or in the Funds particularly. The only relationship of Bloomberg, UBS AG, UBS Securities, or any of their subsidiaries or affiliates to the Licensee is the licensing of certain trademarks, trade names and service marks and of the Bloomberg Commodity IndexSM, Bloomberg WTI Crude Oil SubindexSM and Bloomberg Natural Gas SubindexSM, which are determined, composed and calculated by Bloomberg in conjunction with UBS Securities without regard to the Licensee or the Funds. Bloomberg and UBS Securities have no obligation to take the needs of the Licensee or the shareholders of the Funds into consideration in determining, composing or calculating the Bloomberg Commodity IndexSM, the Bloomberg WTI Crude Oil SubindexSM or the Bloomberg Natural Gas SubindexSM. None of Bloomberg, UBS AG, UBS Securities, or any of their respective subsidiaries or affiliates is

 

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responsible for or has participated in the determination of the timing of, prices at, or quantities of the shares of the Funds that have been or are to be issued or in the determination or calculation of the equation by which the Shares of the Funds are converted into cash. None of Bloomberg, UBS AG, UBS Securities or any of their subsidiaries or affiliates shall have any obligation or liability, including, without limitation, to Fund shareholders, in connection with the administration, marketing or trading of the Funds. Notwithstanding any of the foregoing, UBS AG, UBS Securities and their respective subsidiaries and affiliates may independently issue and/or sponsor financial products unrelated to the Shares currently being issued by the Licensee, but which may be similar to and competitive with the Funds. In addition, UBS AG, UBS Securities and their subsidiaries and affiliates actively trade commodities, commodity indexes and commodity futures (including the Bloomberg Commodity IndexSM, Bloomberg WTI Crude Oil SubindexSM and Bloomberg Natural Gas SubindexSM), as well as swaps, options and derivatives which are linked to the performance of such commodities, commodity indexes and commodity futures. It is possible that this trading activity will affect the value of the Bloomberg Commodity IndexSM, the Bloomberg WTI Crude Oil SubindexSM, the Bloomberg Natural Gas SubindexSM and Fund shares.

This Annual Report on Form 10-K relates only to the Funds and does not relate to the exchange-traded physical commodities underlying any of the Bloomberg Commodity IndexSM, the Bloomberg WTI Crude Oil SubindexSM or the Bloomberg Natural Gas SubindexSM components. Purchasers of the Shares should not conclude that the inclusion of a futures contract in the Bloomberg Commodity IndexSM, the Bloomberg WTI Crude Oil SubindexSM or the Bloomberg Natural Gas SubindexSM is any form of investment recommendation of the futures contract or the underlying exchange-traded physical commodity by Bloomberg, UBS AG, UBS Securities or any of their subsidiaries or affiliates. The information in this Annual Report on Form 10-K regarding the components of the Bloomberg Commodity IndexSM, the Bloomberg WTI Crude Oil SubindexSM and the Bloomberg Natural Gas SubindexSM has been derived solely from publicly available documents. None of Bloomberg, UBS AG, UBS Securities or any of their subsidiaries or affiliates has made any due diligence inquiries with respect to the Bloomberg Commodity IndexSM, the Bloomberg WTI Crude Oil SubindexSM or the Bloomberg Natural Gas SubindexSM components in connection with the Funds. None of Bloomberg, UBS AG, UBS Securities or any of their subsidiaries or affiliates makes any representation that these publicly available documents or any other publicly available information regarding the Bloomberg Commodity IndexSM, the Bloomberg WTI Crude Oil SubindexSM or the Bloomberg Natural Gas SubindexSM components, including without limitation a description of factors that affect the prices of such components, are accurate or complete.

NONE OF BLOOMBERG, UBS AG, UBS SECURITIES OR ANY OF THEIR SUBSIDIARIES OR AFFILIATES GUARANTEES THE ACCURACY AND/OR THE COMPLETENESS OF THE BLOOMBERG COMMODITY INDEXSM, THE BLOOMBERG WTI CRUDE OIL SUBINDEXSM OR THE BLOOMBERG NATURAL GAS SUBINDEXSM OR ANY DATA RELATED THERETO AND NONE OF BLOOMBERG, UBS AG, UBS SECURITIES OR ANY OF THEIR SUBSIDIARIES OR AFFILIATES SHALL HAVE ANY LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. NONE OF BLOOMBERG, UBS AG, UBS SECURITIES OR ANY OF THEIR SUBSIDIARIES OR AFFILIATES MAKES ANY WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE LICENSEE, FUND SHAREHOLDERS, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE BLOOMBERG COMMODITY INDEXSM, THE BLOOMBERG WTI CRUDE OIL SUBINDEXSM OR THE BLOOMBERG NATURAL GAS SUBINDEXSM OR ANY DATA RELATED THERETO. NONE OF BLOOMBERG, UBS AG, UBS SECURITIES OR ANY OF THEIR SUBSIDIARIES OR AFFILIATES MAKES ANY EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE BLOOMBERG COMMODITY INDEXSM, THE BLOOMBERG WTI CRUDE OIL SUBINDEXSM, THE BLOOMBERG NATURAL GAS SUBINDEXSM OR ANY DATA RELATED THERETO. WITHOUT LIMITING ANY OF THE FOREGOING, TO THE MAXIMUM EXTENT ALLOWED BY LAW, BLOOMBERG ITS LICENSORS (INCLUDING UBS AG AND UBS SECURITIES) AND THEIR RESPECTIVE EMPLOYEES, CONTRACTORS, AGENTS, SUPPLIERS AND VENDORS SHALL HAVE NO LIABILITY OR RESPONSIBILITY WHATSOEVER FOR ANY INJURY OR DAMAGES WHETHER DIRECT, INDIRECT, CONSEQUENTIAL, INCIDENTAL, PUNITIVE OR OTHERWISE ARISING IN CONNECTION WITH THE PRODUCTS OR THE BLOOMBERG COMMODITY INDEXSM, THE BLOOMBERG NATURAL GAS SUBINDEXSM OR ANY DATA OR VALUES RELATING THERETO WHETHER ARISING FROM THEIR NEGLIGENCE OR OTHERWISE, EVEN IF NOTIFIED OF THE POSSIBILITY THEREOF. THERE ARE NO THIRD PARTY BENEFICIARIES OF ANY AGREEMENTS OR ARRANGEMENTS AMONG BLOOMBERG, UBS SECURITIES AND THE LICENSEE, OTHER THAN UBS AG.

 

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Description of the Commodity Benchmarks

Gold

ProShares UltraShort Gold and ProShares Ultra Gold are designed to correspond (before fees and expenses) to two times the inverse (-2x) or two times (2x), respectively, of the daily performance of gold bullion as measured by the U.S. dollar p.m. LBMA Gold Price. The Funds do not directly or physically hold the underlying gold, but instead, seek exposure to gold through the use of Financial Instruments whose value is based on the underlying price of gold to pursue their investment objective. The benchmark price of gold is the U.S. dollar price of gold bullion as measured by the London afternoon fixing price per troy ounce of unallocated gold bullion for delivery in London through a member of the LBMA authorized to affect such delivery. On March 19, 2015, the company that ran the London U.S. dollar gold fixing, ceased calculating the price of gold for the LBMA. The LBMA selected ICE Benchmark Administration to calculate the price, which was renamed the LBMA Gold Price, and is based on an electronic, physically settled auction-based methodology, beginning on March 20, 2015.

The price of gold is volatile with fluctuations expected to affect the value of the Shares of the Fund. The price movement of gold may be influenced by a variety of factors, including announcements from central banks regarding reserve gold holdings, agreements among central banks, political uncertainties and economic concerns. The gold market is a global marketplace consisting of both OTC transactions and exchange-traded products. The OTC market generally consists of transactions in spot, forwards, options and other derivatives, while exchange-traded transactions consist of futures and options.

The LBMA Gold Price is determined each trading day at 3:00 p.m. London time providing a reference gold price for that day’s trading. Many long-term contracts are priced on the basis of the LBMA Gold Price and market participants will usually refer to the LBMA Gold Price when looking for a basis for valuation.

Silver

ProShares UltraShort Silver and ProShares Ultra Silver are designed to correspond (before fees and expenses) to two times the inverse (-2x) or two times (2x), respectively, of the daily performance of silver bullion as measured by the London Silver Price. The Funds do not directly or physically hold the underlying silver, but instead seek exposure to silver through the use of Financial Instruments whose value is based on the underlying price of silver to pursue their investment objective. The benchmark price of silver is the daily performance silver bullion as measured by the London Silver Price.

The price of silver is volatile with fluctuations expected to affect the value of the Shares of the Fund. The largest industrial users of silver are the photographic, jewelry, and electronic industries and developments in these industries among other factors may influence the price of silver. Like gold, the silver market is a global marketplace consisting of both OTC transactions and exchange-traded products. The OTC market generally consists of transactions in spot, forwards, options and other derivatives, while exchange-traded transactions consist of futures and options.

The London Silver Price is determined each trading day at 12:00 p.m. London time providing a reference silver price for that day’s trading. Many long-term contracts are priced on the basis of the London Silver Price and market participants will usually refer to the London Silver Price when looking for a basis for valuation.

Description of the Currencies Benchmarks

The Currency Funds are designed to correspond (before fees and expenses) to the inverse (-1), two times the inverse (-2x), or two times (2x) of the daily performance of the spot price of the applicable currency versus the U.S. dollar. The spot price of each currency is measured by the 4:00 p.m. (Eastern Time) spot prices as provided by Bloomberg, expressed in terms of U.S. dollars per unit of foreign currency. The Currency Funds do not necessarily directly or physically hold the underlying currency and will instead seek exposure through the use of certain Financial Instruments whose value is based on the price of the underlying currency to pursue its investment objective.

 

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Australian Dollar

ProShares UltraShort Australian Dollar is designed to correspond (before fees and expenses) to two times the inverse (-2x) of the daily performance of the Australian dollar spot price versus the U.S. dollar, respectively. This Fund uses the 4:00 p.m. (Eastern Time) Australian dollar/U.S. dollar exchange rate as provided by Bloomberg, expressed in terms of U.S. dollars per unit of foreign currency, as the basis for the underlying benchmark.

The Australian dollar is the national currency of Australia and the currency of the accounts of the Reserve Bank of Australia, the Australian central bank. The official currency code for the Australian dollar is “AUD.” The Australian dollar is referred to in Australia as “dollar.” As with U.S. currency, 100 Australian cents are equal to one Australian dollar. In Australia, unlike most other countries, cash transactions are rounded to the nearest five cents. The most commonly used symbol used to represent the Australian dollar is “A$.”

In 1913, the Commonwealth Bank of Australia issued the first Australian currency notes. In 1915, the Commonwealth Bank of Australia became the exclusive issuer of currency in Australia. From 1930 through the 1960s, the Australian banking system underwent substantial transformation. In 1960, the Reserve Bank of Australia was established. In 1966, a new decimalized currency was introduced. At various times throughout the 1900s, the value of Australian currency was based on a fixed quantity of gold; at other times, the Australian dollar was pegged to foreign currencies, including the U.S. dollar. Beginning in 1983, the Australian dollar’s value was allowed to float, with the result that its value now depends almost entirely on market forces. The foregoing information is compiled from the Reserve Bank of Australia’s website (www.rba.gov.au).

Euro

ProShares Short Euro, ProShares UltraShort Euro and ProShares Ultra Euro are designed to correspond (before fees and expenses) to the inverse (-1), two times the inverse (-2x), or two times (2x) of the daily performance of the euro spot price versus the U.S. dollar, respectively. These Funds use the 4:00 p.m. (Eastern Time) euro/U.S. dollar exchange rate as provided by Bloomberg, expressed in terms of U.S. dollars per unit of foreign currency, as the basis for the underlying benchmark.

In 1998, the European Central Bank in Frankfurt was organized by Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain in order to establish a common currency-the euro. Unlike the U.S. Federal Reserve System, the Bank of Japan and other comparable central banks, the European Central Bank is a central authority that conducts monetary policy for an economic area consisting of many otherwise largely autonomous states.

At its inception on January 1, 1999, the euro was launched as an electronic currency used by banks, foreign exchange dealers and stock markets. In 2002, the euro became cash currency for approximately 300 million citizens of twelve European countries (the eleven countries mentioned above, in addition to Greece). As of December 31, 2015, 23 countries used the euro, including Andorra, Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Monaco, the Netherlands, Portugal, San Marino, Slovakia, Slovenia, Spain and the Vatican City.

Although the European countries that have adopted the euro are members of the European Union (“EU”), the United Kingdom, Denmark and Sweden are EU members that have not adopted the euro as their national currency.

Japanese Yen

ProShares UltraShort Yen and ProShares Ultra Yen are designed to correspond (before fees and expenses) to two times the inverse (-2x) or two times (2x), respectively, of the daily performance of the Japanese yen spot price versus the U.S. dollar. These Funds use the 4:00 p.m. (Eastern Time) Japanese yen/U.S. dollar exchange rate as provided by Bloomberg, expressed in terms of U.S. dollars per unit of foreign currency, as the basis for the underlying benchmark.

The Japanese yen has been the official currency of Japan since 1871. The Bank of Japan has been operating as the central bank of Japan since 1882.

 

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Description of the VIX Futures Indexes

The VIX Funds seek to offer exposure to forward equity market volatility by obtaining exposure to the VIX Futures Indexes, which are based on publicly traded VIX futures contracts. The VIX Futures Indexes are intended to reflect the returns that are potentially available through an unleveraged investment in the VIX futures contracts comprising each VIX Futures Index. The VIX, which is not the index underlying the VIX Funds, is calculated based on the prices of put and call options on the S&P 500. The VIX Funds can be expected to perform very differently from the VIX.

The Short-Term VIX Index employs rules for selecting VIX futures contracts comprising the Short-Term VIX Index and a formula to calculate a level for that index from the prices of these VIX futures contracts. Specifically, the VIX futures contracts comprising the Short-Term VIX Index represent the prices of two near-term VIX futures contracts, replicating a position that rolls the nearest month VIX futures to the next month VIX futures on a daily basis in equal fractional amounts. This results in a constant weighted average maturity of one-month. The roll period begins on the Tuesday prior to the monthly CBOE VIX futures settlement and runs through the Tuesday prior to the subsequent month’s CBOE VIX futures settlement date.

The Mid-Term VIX Index also employs rules for selecting its VIX futures contracts comprising the Mid-Term VIX Index and a formula to calculate a level for that index from the prices of these VIX futures contracts. Specifically, the VIX futures contracts comprising the Mid-Term VIX Index represent the prices for four contract months of VIX futures contracts, representing a rolling long position in the fourth, fifth, sixth and seventh month VIX futures contracts. The Mid-Term VIX Index rolls continuously throughout each month while maintaining positions in the fifth and sixth month contracts. This results in a constant weighted average maturity of five months.

The level of each VIX Futures Index will be published by Bloomberg L.P. in real time and at the close of trading on each VIX Futures Index business day under the following ticker symbols:

 

Index

  

Bloomberg Ticker Symbol

S&P 500 VIX Short-Term Futures Index    SPVXSPID
S&P 500 VIX Mid-Term Futures Index    SPVXMPID

The performance of the VIX Futures Indexes is influenced by the S&P 500 (and options thereon) and the VIX. A description of VIX futures contracts, the VIX and the S&P 500 follows:

VIX Futures Contracts

Both VIX Futures Indexes are comprised of VIX futures contracts. VIX futures contracts were first launched for trading by the CBOE in 2004. VIX futures contracts have expirations ranging from the front month consecutively out to the tenth month. VIX futures contracts allow investors the ability to invest based on their view of forward implied market volatility. Investors that believe the forward implied market volatility of the S&P 500, as represented by VIX futures contracts, will increase may buy VIX futures contracts. Conversely, investors that believe that the forward implied market volatility of the S&P 500, as represented by VIX futures contracts, will decline may sell VIX futures contracts. VIX futures contracts are reported by Bloomberg under the ticker symbol “VX.”

While the VIX represents a measure of the current expected volatility of the S&P 500 over the next 30 days, the prices of VIX futures contracts are based on the current expectation of what the expected 30-day volatility will be at a particular time in the future (on the expiration date). The VIX and VIX futures contracts generally behave quite differently. To illustrate, on November 30, 2015, the VIX was 16.13 and the price of the December 2015 VIX futures contracts expiring on December 16, 2015 was 16.98. In this example, the price of the VIX represented the 30-day implied, or “spot,” volatility (the volatility expected for the period from November 30, 2015 to December 1, 2015) of the S&P 500 and the February VIX futures contracts represented forward implied volatility (the volatility expected for the period from December 16, 2015 to January 15, 2016 of the S&P 500. The spot/forward relationship between the VIX and VIX futures contracts has two noteworthy consequences: (1) the price of a VIX futures contract can be lower, equal to or higher than the VIX, depending on whether the market expects volatility to be lower, equal to or higher in the 30-day forward period covered by the VIX futures contract than in the 30-day spot period covered by the VIX; and (2) an investor cannot create a position equivalent to one in VIX futures contracts by buying the VIX and holding the position to the futures expiration date while financing the transaction.

 

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The VIX

The VIX Funds are not linked to the VIX and can be expected to perform very differently from the VIX. The VIX is an index designed to measure the implied volatility of the S&P 500 over 30 days in the future, and is calculated based on the prices of certain put and call options on the S&P 500. The VIX is reflective of the premium paid by investors for certain options linked to the level of the S&P 500. During periods of rising investor uncertainty, including periods of market instability, the implied level of volatility of the S&P 500 typically increases and, consequently, the prices of options linked to the S&P 500 typically increase (assuming all other relevant factors remain constant or have negligible changes). This, in turn, causes the level of the VIX to increase. The VIX has historically had a negative correlation to the S&P 500. The VIX was developed by the CBOE and is calculated, maintained and published by the CBOE. The CBOE has no obligation to continue to publish, and may discontinue the publication of, the VIX. The VIX is reported by Bloomberg under the ticker symbol “VIX.”

The calculation of the VIX involves a formula that uses the prices of a weighted series of out-of-the-money put and call options on the level of the S&P 500 (“SPX Options”) with two adjacent expiry terms to derive a constant 30-day forward measure of market volatility. The VIX is calculated independent of any particular option pricing model and in doing so seeks to eliminate any biases which may otherwise be included in using options pricing methodology based on certain assumptions. Although the VIX measures the 30-day forward volatility of the S&P 500 as implied by the SPX Options, 30-day options are only available once a month. To arrive at the VIX level, a broad range of out-of-the-money SPX Options expiring on the two closest nearby months (“near term options” and “next term options,” respectively) are selected in order to bracket a 30-day calendar period. SPX Options having a maturity of less than eight days are excluded at the outset and, when the near term options have eight days or less left to expiration, the VIX rolls to the second and third contract months in order to minimize pricing anomalies that occur close to expiration. The model-free implied volatility using prices of the near term options and next term options are then calculated on a strike price weighted average basis in order to arrive at a single average implied volatility value for each month. The results of each of the two months are then interpolated to arrive at a single value with a constant maturity of 30 days to expiration.

The S&P 500

The S&P 500 is an index that measures large-cap U.S. stock market performance. It is a float-adjusted market capitalization weighted index of 500 U.S. operating companies and real estate investment trusts selected by the S&P U.S. Index Committee through a non-mechanical process that factors in criteria such as liquidity, price, market capitalization and financial viability. Reconstitution occurs both on a quarterly and ongoing basis. As of December 31, 2015, the S&P 500 included companies with capitalizations between $1.8 billion and $586.9 billion. The average capitalization of the companies comprising the Index was approximately $38.9 billion. S&P publishes the S&P 500. The daily calculation of the current value of the S&P 500 is based on the relative value of the aggregate market value of the common stocks of 500 companies as of a particular time compared to the aggregate average initial market value of the common stocks of 500 similar companies at the time of the inception of the S&P 500. The 500 companies are not the 500 largest publicly traded companies and not all 500 companies are listed on the NYSE. S&P chooses companies for inclusion in the S&P 500 with the objective of achieving a distribution by broad industry groupings that approximates the distribution of these groupings in the common stock population of the U.S. equity market. S&P may from time-to-time, in its sole discretion, add companies to, or delete companies from, the S&P 500 to achieve the objectives stated above. Relevant criteria employed by S&P include the viability of the particular company, the extent to which that company represents the industry group to which it is assigned, the extent to which the company’s common stock is widely held and the market value and trading activity of the common stock of that company.

THE VIX FUNDS ARE NOT SPONSORED, ENDORSED, SOLD OR PROMOTED BY S&P AND ITS AFFILIATES OR CBOE. S&P AND CBOE MAKE NO REPRESENTATION, CONDITION OR WARRANTY, EXPRESS OR IMPLIED, TO THE OWNERS OF THE VIX FUNDS OR ANY MEMBER OF THE PUBLIC REGARDING THE ADVISABILITY OF INVESTING IN SECURITIES GENERALLY OR IN THE VIX FUNDS PARTICULARLY OR THE ABILITY OF THE INDEXES TO TRACK MARKET PERFORMANCE AND/OR

 

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OF GROUPS OF ASSETS OR ASSET CLASSES AND/OR TO ACHIEVE ITS STATED OBJECTIVE AND/OR TO FORM THE BASIS OF A SUCCESSFUL INVESTMENT STRATEGY, AS APPLICABLE. S&P’S AND CBOE’S ONLY RELATIONSHIP TO THE TRUST ON BEHALF OF ITS APPLICABLE SERIES AND THE SPONSOR IS THE LICENSING OF CERTAIN TRADEMARKS AND TRADE NAMES AND OF THE VIX FUTURES INDEXES WHICH ARE DETERMINED, COMPOSED AND CALCULATED BY S&P WITHOUT REGARD TO THE TRUST ON BEHALF OF ITS APPLICABLE SERIES AND THE SPONSOR OR THE VIX FUNDS. S&P HAS NO OBLIGATION TO TAKE THE NEEDS OF THE TRUST ON BEHALF OF ITS APPLICABLE SERIES AND THE SPONSOR OR THE OWNERS OF THE VIX FUNDS INTO CONSIDERATION IN DETERMINING, COMPOSING OR CALCULATING THE VIX FUTURES INDEXES. S&P AND CBOE ARE NOT ADVISORS TO THE VIX FUNDS AND ARE NOT RESPONSIBLE FOR AND HAVE NOT PARTICIPATED IN THE DETERMINATION OF THE PRICES AND AMOUNT OF THE VIX FUNDS OR THE TIMING OF THE ISSUANCE OR SALE OF THE VIX FUNDS OR IN THE DETERMINATION OR CALCULATION OF THE EQUATION BY WHICH THE VIX FUND SHARES ARE TO BE CONVERTED INTO CASH. S&P AND CBOE HAVE NO OBLIGATION OR LIABILITY IN CONNECTION WITH THE ADMINISTRATION, MARKETING, OR TRADING OF THE VIX FUNDS.

NEITHER S&P, ITS AFFILIATES NOR THIRD PARTY LICENSORS, INCLUDING CBOE, GUARANTEES THE ACCURACY AND/OR THE COMPLETENESS OF THE VIX FUTURES INDEXES OR ANY DATA INCLUDED THEREIN AND S&P, ITS AFFILIATES AND THEIR THIRD PARTY LICENSORS, INCLUDING CBOE, SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P AND CBOE MAKE NO WARRANTY, CONDITION OR REPRESENTATION, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE TRUST ON BEHALF OF ITS APPLICABLE SERIES AND THE SPONSOR, OWNERS OF THE VIX FUNDS, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE VIX FUTURES INDEXES OR ANY DATA INCLUDED THEREIN. S&P AND CBOE MAKE NO EXPRESS OR IMPLIED WARRANTIES, REPRESENTATIONS OR CONDITIONS, AND EXPRESSLY DISCLAIM ALL WARRANTIES OR CONDITIONS OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE AND ANY OTHER EXPRESS OR IMPLIED WARRANTY OR CONDITION WITH RESPECT TO THE VIX FUTURES INDEXES OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P, ITS AFFILIATES OR THEIR THIRD PARTY LICENSORS, INCLUDING CBOE, HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS) RESULTING FROM THE USE OF THE VIX FUTURES INDEXES OR ANY DATA INCLUDED THEREIN, EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.

Creation and Redemption of Shares

Each Fund creates and redeems Shares from time to time, but only in one or more Creation Units. A Creation Unit is a block of 50,000 Shares of the Managed Futures Fund or a Geared Fund or a block of 25,000 Shares of a Matching VIX Fund. Creation Units may be created or redeemed only by Authorized Participants. Except when aggregated in Creation Units, the Shares are not redeemable securities.

The manner by which Creation Units are purchased and redeemed is dictated by the terms of the Authorized Participant Agreement and Authorized Participant Handbook. By placing a purchase order, an Authorized Participant agrees to deposit cash (unless as provided otherwise in the prospectus) with the Custodian of the Funds.

If permitted by the Sponsor in its sole discretion with respect to a Fund, an Authorized Participant may also agree to enter into or arrange for an exchange of a futures contract for related position (“EFCRP”) or block trade with the relevant Fund whereby the Authorized Participant would also transfer to such Fund a number and type of exchange-traded futures contracts at or near the closing settlement price for such contracts on the purchase order date. Similarly, the Sponsor in its sole discretion may agree with an Authorized Participant to use an EFCRP to affect an order to redeem Creation Units.

An EFCRP is a technique permitted by the rules of the applicable futures exchange that, as utilized by a Fund in the Sponsor’s discretion, would allow such Fund to take a position in a futures contract from an Authorized Participant, or give futures contracts to an Authorized Participant, in the case of a redemption, rather than to enter the futures exchange markets to obtain such a position. An EFCRP by itself will not change either party’s net risk position

 

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materially. Because the futures position that a Fund would otherwise need to take in order to meet its investment objective can be obtained without unnecessarily impacting the financial or futures markets or their pricing, EFCRPs can generally be viewed as transactions beneficial to a Fund. A block trade is a technique that permits certain Funds to obtain a futures position without going through the market auction system and can generally be viewed as a transaction beneficial to the Fund.

Authorized Participants pay a fixed transaction fee of up to $500 in connection with each order to create or redeem a Creation Unit in order to compensate Brown Brothers Harriman & Co. (“BBH&Co.”), as the Administrator, the Custodian and the Transfer Agent of each Fund and its Shares, for services in processing the creation and redemption of Creation Units and to offset the costs of increasing or decreasing derivative positions. Authorized Participants also may pay a variable transaction fee to the Funds of up to 0.10% (and a variable transaction fee to the Matching VIX Funds of 0.05%) of the value of the Creation Unit that is purchased or redeemed unless the transaction fee is waived or otherwise adjusted by the Sponsor. The Sponsor provides such Authorized Participant with prompt notice in advance of any such waiver or adjustment of the transaction fee. Authorized Participants may sell the Shares included in the Creation Units they purchase from the Funds to other investors in the secondary market.

The form of Authorized Participant Agreement and the related Authorized Participant Handbook set forth the procedures for the creation and redemption of Creation Units and for the payment of cash required for such creations and redemptions. The Sponsor may delegate its duties and obligations under the form of Authorized Participant Agreement to SEI Investments Distribution Co. (“SEI”) or BBH&Co., in its capacity as the Administrator, without consent from any shareholder or Authorized Participant. The form of Authorized Participant Agreement and the related procedures attached thereto may be amended by the Sponsor without the consent of any shareholder or Authorized Participant. Authorized Participants who purchase Creation Units from a Fund receive no fees, commissions or other form of compensation or inducement of any kind from either the Sponsor or the Fund, and no such person has any obligation or responsibility to the Sponsor or the Fund to affect any sale or resale of Shares.

Authorized Participants are cautioned that some of their activities may result in their being deemed participants in a distribution in a manner which would render them statutory underwriters and subject them to the prospectus delivery and liability provisions of the Securities Act of 1933, as amended (the “1933 Act”).

Each Authorized Participant must be registered as a broker-dealer under the 1934 Act and regulated by Financial Industry Regulatory Authority (“FINRA”), or exempt from being, or otherwise not required to be, so regulated or registered, and must be qualified to act as a broker or dealer in the states or other jurisdictions where the nature of its business so requires. Certain Authorized Participants may be regulated under federal and state banking laws and regulations. Each Authorized Participant must have its own set of rules and procedures, internal controls and information barriers as it determines is appropriate in light of its own regulatory regime.

Authorized Participants may act for their own accounts or as agents for broker-dealers, custodians and other securities market participants that wish to create or redeem Creation Units.

Persons interested in purchasing Creation Units should contact the Sponsor or the Administrator to obtain the contact information for the Authorized Participants. Shareholders who are not Authorized Participants are only able to redeem their Shares through an Authorized Participant.

Pursuant to the Authorized Participant Agreement, the Sponsor agreed to indemnify the Authorized Participants against certain liabilities, including liabilities under the 1933 Act, and to contribute to the payments the Authorized Participants may be required to make in respect of those liabilities.

The following description of the procedures for the creation and redemption of Creation Units is only a summary and an investor should refer to the relevant provisions of the Amended and Restated Trust Agreement of the Trust, as may be further amended from time to time (the “Trust Agreement”) and the form of Authorized Participant Agreement for more detail. The Trust Agreement and the form of Authorized Participant Agreement are incorporated by reference into this Annual Report on Form 10-K.

 

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Creation Procedures

On any Business Day, an Authorized Participant may place an order with the Distributor to create one or more Creation Units. For purposes of processing both purchase and redemption orders, a “Business Day” for each Fund means any day on which the NAV of such Fund is determined. Purchase orders must be placed by the cut-off time shown below or earlier if the NYSE, a Fund’s primary listing exchange, or other exchange material to the valuation or operation of such Fund (an “Exchange” as defined below) closes before the cut-off time. If a purchase order is received prior to the applicable cut-off time, the day on which SEI receives a valid purchase order is the purchase order date. If the purchase order is received after the applicable cut-off time, the purchase order date will be the next day. Purchase orders are irrevocable. By placing a purchase order, and prior to delivery of such Creation Units, an Authorized Participant’s DTC account will be charged the non-refundable transaction fee due for the purchase order.

Determination of Required Payment

The total payment required to create each Creation Unit is the NAV of 50,000 Shares of the Managed Futures Fund or the applicable Geared Fund or 25,000 Shares of the applicable Matching VIX Fund on the purchase order date plus the applicable transaction fee. For each Fund, Authorized Participants have create/redeem cut-off times prior to the NAV calculation time, which may be different from the close of the U.S. markets, as shown in the table below.

 

Underlying Benchmark

  

Create/Redeem Cutoff

  

NAV Calculation Time

Silver    6:30 a.m. (Eastern Time)    7:00 a.m. (Eastern Time)*
Gold    9:30 a.m. (Eastern Time)    10:00 a.m. (Eastern Time)*
Bloomberg Commodity IndexSM    10:45 a.m. (Eastern Time)    2:30 p.m. (Eastern Time)
S&P Strategic Futures Index    10:45 a.m. (Eastern Time)    3:00 p.m. (Eastern Time)
S&P 500 VIX Short-Term Futures Index    2:00 p.m. (Eastern Time)    4:15 p.m. (Eastern Time)
S&P 500 VIX Mid-Term Futures Index    2:00 p.m. (Eastern Time)    4:15 p.m. (Eastern Time)
Bloomberg WTI Crude Oil SubindexSM    2:00 p.m. (Eastern Time)    2:30 p.m. (Eastern Time)
Bloomberg Natural Gas SubindexSM    2:00 p.m. (Eastern Time)    2:30 p.m. (Eastern Time)
Australian dollar    3:00 p.m. (Eastern Time)    4:00 p.m. (Eastern Time)
Euro    3:00 p.m. (Eastern Time)    4:00 p.m. (Eastern Time)
Yen    3:00 p.m. (Eastern Time)    4:00 p.m. (Eastern Time)

 

* For silver and gold, this time may vary due to differences in when daylight savings time is effective between London and New York. The actual times equate to noon London time for silver and 3:00 p.m. London time for gold.

Delivery of Cash

Cash required for settlement will typically be transferred to the Custodian through: (1) the Continuous Net Settlement (“CNS”) clearing process of the National Securities Clearing Corporation (“NSCC”), as such processes have been enhanced to effect creations and redemptions of Creation Units; or (2) the facilities of DTC on a Delivery Versus Payment (“DVP”) basis, which is the procedure in which the buyer’s payment for securities is due at the time of delivery. Security delivery and payment are simultaneous. If the Custodian does not receive the cash by the market close on the first Business Day following the purchase order date (T+1), such order may be charged interest for delayed settlement or cancelled. The Sponsor reserves the right to extend the deadline for the Custodian to receive the cash required for settlement up to the third Business Day following the purchase order date (T+3). In the event a purchase order is cancelled, the Authorized Participant will be responsible for reimbursing the Fund for all costs associated with cancelling the order including costs for repositioning the portfolio. At its sole discretion, the Sponsor may agree to a delivery date other than T+3. Additional fees may apply for special settlement. The Creation Unit will be delivered to the Authorized Participant upon the Custodian’s receipt of the purchase amount.

Delivery of Exchange of Futures Contract for Related Position (“EFCRP”) Futures Contracts or Block Trades

In the event that the Sponsor shall have determined to permit the Authorized Participant to transfer futures contracts pursuant to an EFCRP or to engage in a block trade purchase of futures contracts from the Authorized Participant with respect to a Fund, as well as to deliver cash, in the creation process, futures contracts required for settlement must be transferred directly to the Fund’s account at its FCM. If the cash is not received by the market close on the third Business Day following the purchase order date (T+3); such order may be charged interest for delayed

 

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settlements or cancelled. In the event a purchase order is cancelled, the Authorized Participant will be responsible for reimbursing a Fund for all costs associated with cancelling the order including costs for repositioning the portfolio. At its sole discretion, the Sponsor may agree to a delivery date other than T+3. The Creation Unit will be delivered to the Authorized Participant upon the Custodian’s receipt of the cash purchase amount and the futures contracts.

Suspension or Rejection of Purchase Orders

In respect of any Fund, the Sponsor may, in its discretion, suspend the right to purchase, or postpone the purchase settlement date, (1) for any period during which any of the NYSE, NYSE Arca, CBOE, CFE, CME (including CBOT and NYMEX) or ICE or other exchange material to the valuation or operation of the Funds (each, an “Exchange”) is closed or when trading is suspended or restricted on such exchanges in any of the underlying commodities; (2) for any period during which an emergency exists as a result of which the fulfillment of a purchase order is not reasonably practicable; or (3) for such other period as the Sponsor determines to be necessary for the protection of the shareholders. The Sponsor will not be liable to any person or in any way for any loss or damages that may result from any such suspension or postponement.

The Sponsor also may reject a purchase order if:

 

    it determines that the purchase order is not in proper form;

 

    the Sponsor believes that the purchase order would have adverse tax consequences to a Fund or its shareholders;

 

    the order would be illegal; or

 

    circumstances outside the control of the Sponsor make it, for all practical purposes, not feasible to process creations of Creation Units.

None of the Sponsor, the Administrator or the Custodian will be liable for the suspension or rejection of any purchase order.

Redemption Procedures

The procedures by which an Authorized Participant can redeem one or more Creation Units mirror the procedures for the creation of Creation Units. On any Business Day, an Authorized Participant may place an order with the Distributor to redeem one or more Creation Units. If a redemption order is received prior to the applicable cut-off time, or earlier if the Exchange, or other exchange material to the valuation or operation of such Fund, closes before the cut-off time, the day on which SEI receives a valid redemption order is the redemption order date. If the redemption order is received after the applicable cut-off time, the redemption order date will be the next day. Redemption orders are irrevocable. The redemption procedures allow Authorized Participants to redeem Creation Units. Individual shareholders may not redeem directly from a Fund.

By placing a redemption order, an Authorized Participant agrees to deliver the Creation Units to be redeemed through DTC’s book-entry system to the applicable Fund not later than noon (Eastern Time), on the first Business Day immediately following the redemption order date (T+1). The Sponsor reserves the right to extend the deadline for the Fund to receive the Creation Units required for settlement up to the third Business Day following the redemption order date (T+3). By placing a redemption order, and prior to receipt of the redemption proceeds, an Authorized Participant must wire to the Custodian the non-refundable transaction fee due for the redemption order or any proceeds due will be reduced by the amount of the fee payable. At its sole discretion, the Sponsor may agree to a delivery date other than T+3. Additional fees may apply for special settlement.

Upon request of an Authorized Participant made at the time of a redemption order, the Sponsor at its sole discretion may determine, in addition to delivering redemption proceeds, to transfer futures contracts to the Authorized Participant pursuant to an EFCRP or to a block trade sale of futures contracts to the Authorized Participant.

 

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Determination of Redemption Proceeds

The redemption proceeds from a Fund consist of the cash redemption amount and, if permitted by the Sponsor in its sole discretion with respect to a Fund, an EFCRP or block trade with the relevant Fund, as described in “Creation and Redemption of Shares” above. The cash redemption amount is equal to the NAV of the number of Creation Unit(s) of such Fund requested in the Authorized Participant’s redemption order as of the time of the calculation of such Fund’s NAV on the redemption order date, less transaction fees and any amounts attributable to any applicable EFCRP or block trade.

Delivery of Redemption Proceeds

The redemption proceeds due from a Fund are delivered to the Authorized Participant at noon (Eastern Time), on the third Business Day immediately following the redemption order date if, by such time on such Business Day immediately following the redemption order date, a Fund’s DTC account has been credited with the Creation Units to be redeemed. The Fund should be credited through: (1) the CNS clearing process of NSCC, as such processes have been enhanced to effect creations and redemptions of Creation Units; or (2) the facilities of DTC on a Delivery Versus Payment basis. If a Fund’s DTC account has not been credited with all of the Creation Units to be redeemed by such time, the redemption distribution is delivered to the extent whole Creation Units are received. Any remainder of the redemption distribution is delivered on the next Business Day to the extent any remaining whole Creation Units are received if: (1) the Sponsor receives the fee applicable to the extension of the redemption distribution date which the Sponsor may, from time to time, determine, and; (2) the remaining Creation Units to be redeemed are credited to the Fund’s DTC account by noon (Eastern Time), on such next Business Day. Any further outstanding amount of the redemption order may be cancelled. The Authorized Participant will be responsible for reimbursing a Fund for all costs associated with cancelling the order including costs for repositioning the portfolio.

The Sponsor is also authorized to deliver the redemption distribution notwithstanding that the Creation Units to be redeemed are not credited to a Fund’s DTC account by noon (Eastern Time), on the third Business Day immediately following the redemption order date if the Authorized Participant has collateralized its obligation to deliver the Creation Units through DTC’s book-entry system on such terms as the Sponsor may determine from time-to-time.

In the event that the Authorized Participant shall have requested, and the Sponsor shall have determined to permit the Authorized Participant to receive futures contracts pursuant to an EFCRP, as well as the cash redemption proceeds, in the redemption process, futures contracts required for settlement shall be transferred directly from the Fund’s account at its FCM to the account of the Authorized Participant at its FCM.

Suspension or Rejection of Redemption Orders

In respect of any Fund, the Sponsor may, in its discretion, suspend the right of redemption, or postpone the redemption settlement date: (1) for any period during which any Exchange, or other exchange material to the valuation or operation of the Fund, is closed or when trading is suspended or restricted on such Exchanges in any of the underlying commodities; (2) for any period during which an emergency exists as a result of which the redemption distribution is not reasonably practicable; or (3) for such other period as the Sponsor determines to be necessary for the protection of the shareholders. The Sponsor will not be liable to any person or in any way for any loss or damages that may result from any such suspension or postponement.

The Sponsor will reject a redemption order if the order is not in proper form as described in the form of Authorized Participant Agreement or if the fulfillment of the order might be unlawful.

Creation and Redemption Transaction Fee

To compensate BBH&Co. for services in processing the creation and redemption of Creation Units and to offset some or all of the transaction costs, an Authorized Participant may be required to pay a fixed transaction fee to BBH&Co. of up to $500 per order to create or redeem Creation Units and may pay a variable transaction fee to a Fund of up to 0.10% (and a variable transaction fee to the Matching VIX Funds of 0.05%) of the value of a Creation Unit. An order may include multiple Creation Units. The transaction fee(s) may be reduced, increased or otherwise changed by the Sponsor at its sole discretion.

 

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Special Settlement

The Sponsor may allow for early settlement of purchase or redemption orders. Such arrangements may result in additional charges to the Authorized Participant.

NAV

The NAV in respect of a Fund means the total assets of the Fund including, but not limited to, all cash and cash equivalents or other debt securities less total liabilities of such Fund, each determined on the basis of generally accepted accounting principles in the United States, consistently applied under the accrual method of accounting. In particular, the NAV includes any unrealized profit or loss on open Financial Instruments, and any other credit or debit accruing to a Fund but unpaid or not received by a Fund. 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 the NAV. Each Fund’s NAV is calculated on each day other than a day when the Exchange is closed for regular trading. The Funds compute their NAVs at the times set forth below, or an earlier time as set forth on www.ProShares.com if necessitated by the Exchange or other exchange material to the valuation or operation of such Fund closing early. Each Fund’s NAV is calculated only once each trading day.

 

Fund

  

NAV Calculation Time

UltraShort Silver, Ultra Silver

   7:00 a.m. (Eastern Time)*

UltraShort Gold, Ultra Gold

   10:00 a.m. (Eastern Time)*

UltraShort Bloomberg Commodity,

  

Ultra Bloomberg Commodity

   2:30 p.m. (Eastern Time)

UltraShort Bloomberg Crude Oil,

  

Ultra Bloomberg Crude Oil

   2:30 p.m. (Eastern Time)

UltraShort Bloomberg Natural Gas,

  

Ultra Bloomberg Natural Gas

   2:30 p.m. (Eastern Time)

Managed Futures Strategy

   3:00 p.m. (Eastern Time)

Short Euro,

  

UltraShort Euro,

  

Ultra Euro

   4:00 p.m. (Eastern Time)

UltraShort Australian Dollar

   4:00 p.m. (Eastern Time)

UltraShort Yen,

  

Ultra Yen

   4:00 p.m. (Eastern Time)

VIX Short-Term Futures ETF,

  

Ultra VIX Short-Term Futures ETF,

  

Short VIX Short-Term Futures ETF

   4:15 p.m. (Eastern Time)

VIX Mid-Term Futures ETF

   4:15 p.m. (Eastern Time)

 

* For silver and gold, this time may vary due to differences in when daylight savings time is effective between London and New York. The actual times equate to noon London time for silver and 3:00 p.m. London time for gold.

In calculating the NAV of a Fund, the settlement value of the Fund’s non-exchange traded Financial Instruments, is determined by applying the then-current disseminated value for the applicable benchmark to the terms of such Fund’s non-exchange traded Financial Instruments. However, in the event that an underlying reference asset is not trading due to the operation of daily limits or otherwise, the Sponsor may, in its sole discretion, choose to fair value the index level in order to value the Fund’s non-exchange traded Financial Instruments for purposes of the NAV calculation. Such fair value prices would generally be determined based on available inputs about the current value of the underlying reference assets and would be based on principles that the Sponsor deems fair and equitable so long as such principles are consistent with normal industry standards.

 

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Futures contracts traded on a U.S. exchange are calculated at their then-current market value, which is based upon the settlement price (for the VIX Funds, the Managed Futures Fund and the Commodity Index Funds) or the last traded price before the NAV time (for the Currency Funds), for that particular futures contract traded on the applicable U.S. exchange on the date with respect to which the NAV is being determined. If a futures contract traded on a U.S. exchange could not be liquidated on such day, due to the operation of daily limits or other rules of the exchange upon which that position is traded or otherwise, the Sponsor may, in its sole discretion, choose to determine a fair value price as the basis for determining the market value of such position for such day. Such fair value prices would generally be determined based on available inputs about the current value of the underlying reference assets and would be based on principles that the Sponsor deems fair and equitable so long as such principles are consistent with normal industry standards.

The Funds may use a variety of money market instruments to invest excess cash. Short-term debt instruments used in this capacity and expected to be held-to-maturity will be priced for NAV purposes at amortized cost.

Indicative Optimized Portfolio Value (“IOPV”)

The IOPV is an indicator of the value of a Fund’s net assets at the time the IOPV is disseminated. The IOPV is calculated and disseminated every 15 seconds throughout the trading day. The IOPV is generally calculated using the prior day’s closing net assets of a Fund as a base and updating throughout the trading day changes in the value of the Financial Instruments held by a Fund. The IOPV should not be viewed as an actual real time update of the NAV because NAV is calculated only once at the end of each trading day. The IOPV also should not be viewed as a precise value of the Shares. The IOPV for Funds based on the Bloomberg WTI Crude Oil SubindexSM and the Bloomberg Natural Gas IndexSM will not update following the determination of the 2:30 p.m. settlement price of the futures contracts underlying those indexes. The IOPVs for Funds based on the Bloomberg Commodity IndexSM will receive progressively more limited updates during a trading day as the settlement price for each individual component is determined, and such IOPVs will not update after all of the underlying components have determined settlement prices.

The NYSE Arca disseminates the IOPV. In addition, the IOPV is published on the NYSE Arca’s website and is available through on-line information services such as Bloomberg and Reuters.

Dissemination of the IOPV provides additional information that is not otherwise available to the public and may be useful to investors and market professionals in connection with the trading of Shares. Investors and market professionals are able throughout the trading day to compare the market price of a Fund and the IOPV. If the market price of Shares diverges significantly from the IOPV, market professionals may have an incentive to execute arbitrage trades. Such arbitrage trades can tighten the tracking between the market price of a Fund and the IOPV and thus can be beneficial to all market participants.

Purchases and Sales in the Secondary Market on the NYSE Arca

The Shares of each Fund are listed on the NYSE Arca. The Shares of each Fund that has commenced investment operations, began trading on the NYSE Arca on the respective dates below under the following symbols:

 

Fund

  

Commencement of Operations

  

Ticker Symbol

ProShares Managed Futures Strategy

   October 1, 2014    FUTS

ProShares VIX Short-Term Futures ETF

   January 3, 2011    VIXY

ProShares VIX Mid-Term Futures ETF

   January 3, 2011    VIXM

ProShares Short VIX Short-Term Futures ETF

   October 3, 2011    SVXY

ProShares Ultra VIX Short-Term Futures ETF

   October 3, 2011    UVXY

ProShares UltraShort Bloomberg Commodity

   November 25, 2008    CMD

ProShares UltraShort Bloomberg Crude Oil

   November 25, 2008    SCO

ProShares UltraShort Bloomberg Natural Gas

   October 4, 2011    KOLD

ProShares UltraShort Gold

   December 3, 2008    GLL

 

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Fund

  

Commencement of Operations

  

Ticker Symbol

ProShares UltraShort Silver

   December 3, 2008    ZSL

ProShares Short Euro

   June 26, 2012    EUFX

ProShares UltraShort Australian Dollar

   July 17, 2012    CROC

ProShares UltraShort Euro

   November 25, 2008    EUO

ProShares UltraShort Yen

   November 25, 2008    YCS

ProShares Ultra Bloomberg Commodity

   November 25, 2008    UCD

ProShares Ultra Bloomberg Crude Oil

   November 25, 2008    UCO

ProShares Ultra Bloomberg Natural Gas

   October 4, 2011    BOIL

ProShares Ultra Gold

   December 3, 2008    UGL

ProShares Ultra Silver

   December 3, 2008    AGQ

ProShares Ultra Euro

   November 25, 2008    ULE

ProShares Ultra Yen

   November 25, 2008    YCL

Secondary market purchases and sales of Shares are subject to ordinary brokerage commissions and charges. The Shares of each Fund trade like any other exchange-listed security.

Fees and Expenses

Offering Expenses

The Trust has paid expenses incurred in connection with organizing the initial offering of each Fund’s Shares, and the Sponsor did not charge its fee in the first year of operations of each Fund in an amount equal to the offering costs. The Sponsor reimbursed each Geared Fund and the Short Euro Fund to the extent that its organizational and offering costs exceeded 0.95% of its average daily NAV for the first year of operations. The Sponsor reimbursed each Matching VIX Fund to the extent that its organizational and offering costs exceeded 0.85% of its average daily NAV for the first year of operations. The Sponsor reimbursed the Managed Futures Fund to the extent that its initial offering costs exceed 0.75% of its average daily net assets for the first year of operations. Normal and expected expenses incurred in connection with the continuous offering of Shares of each Fund are paid by the Sponsor.

Offering expenses mean those expenses incurred in connection with the qualification and registration of the Shares of each Fund and in offering, distributing and processing the Shares of each Fund under applicable federal law, and any other expenses actually incurred and, directly or indirectly, related to the organization of each offering of the Shares of such Fund, including, but not limited to, expenses such as:

 

    initial SEC registration fees and SEC and FINRA filing fees;

 

    costs of preparing, printing (including typesetting), amending, supplementing, mailing and distributing the Trust’s Registration Statements, the exhibits thereto and the related prospectuses;

 

    the costs of qualifying, printing (including typesetting), amending, supplementing and mailing sales materials used in connection with the offering and issuance of the Shares; and

 

    accounting, auditing and legal fees (including disbursements related thereto) incurred in connection therewith.

Management Fee

Each Geared Fund pays the Sponsor a Management Fee, monthly in arrears, in an amount equal to 0.95% per annum of its average daily NAV of such Fund. Each Matching VIX Fund pays the Sponsor a management fee, monthly in arrears, in an amount equal to 0.85% per annum of its average daily NAV. The Managed Futures Fund pays the Sponsor a Management Fee, monthly in arrears, in an amount equal to 0.75% per annum of its average daily NAV. For the first year of the Managed Futures Fund’s operations, the Sponsor will not charge its fee in an amount equal to the offering costs. The Sponsor reimbursed the Managed Futures Fund to the extent that its offering costs exceeded the Management Fee for the first year of operations. No other management fee is paid by the Funds. The Management Fee is paid in consideration of the Sponsor’s trading advisory services and the other services provided to the Funds that the Sponsor pays directly.

 

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Licensing Fee

The Sponsor pays S&P a licensing fee for use of the VIX Futures Indexes as the benchmarks for the VIX Funds and a licensing fee for the S&P Strategic Futures Index as the benchmark for the Managed Futures Fund. The Sponsor pays Bloomberg a licensing fee for the Bloomberg Commodity IndexSM, as well as each subindex that serves as a benchmark for a Commodity Index Fund.

Routine Operational, Administrative and Other Ordinary Expenses

The Sponsor pays all of the routine operational, administrative and other ordinary expenses of each Fund, generally, as determined by the Sponsor, including, but not limited to, fees and expenses of the Administrator, Custodian, Distributor, ProFunds Distributors, Inc., an affiliated broker-dealer of the Sponsor, and Transfer Agent, licensing fees, accounting and audit fees and expenses, tax preparation expenses, legal fees not in excess of $100,000 per annum, ongoing SEC registration fees not exceeding 0.021% per annum of the NAV of a Fund, Financial Industry Regulatory Authority (“FINRA”) filing fees, individual K-1 preparation and mailing fees not exceeding 0.10% per annum of the NAV of a Fund, and report preparation and mailing expenses.

Non-Recurring Fees and Expenses

Each Fund pays all its non-recurring and unusual fees and expenses, if any, as determined by the Sponsor. Non-recurring and unusual fees and expenses are fees and expenses which are unexpected or unusual in nature, such as legal claims and liabilities, litigation costs or indemnification or other material expenses which are not currently anticipated obligations of the Funds. Routine operational, administrative and other ordinary expenses are not deemed extraordinary expenses.

Selling Commission

Retail investors may purchase and sell Shares through traditional brokerage accounts. Investors are expected to be charged a customary commission by their brokers in connection with purchases of Shares that will vary from investor to investor. Investors are encouraged to review the terms of their brokerage accounts for applicable charges. The price at which an Authorized Participant sells a Share may be higher or lower than the price paid by such Authorized Participant in connection with the creation of such Share in a Creation Unit.

Brokerage Commissions and Fees

Each Fund, with the exception of the Matching VIX Funds, pays all of its brokerage commissions, including applicable exchange fees, NFA fees and give-up fees, pit brokerage fees and other transaction related fees and expenses charged in connection with trading activities for each Fund’s investments in CFTC regulated investments. The Sponsor is currently paying brokerage commissions on VIX futures contracts for the Matching VIX Funds in amounts that exceed variable create/redeem fees collected by more than 0.02% of the Matching VIX Fund’s average net assets annually.

Other Transaction Costs

The Funds bear other transaction costs including the effects of trading spreads and financing costs/fees, if any, associated with the use of Financial Instruments, and costs relating to the purchase of U.S. Treasury securities or similar high credit quality short-term fixed-income or similar securities (such as shares of money market funds and collateralized repurchase agreements).

Employees

The Trust has no employees.

Item 1A. Risk Factors.

These risk factors should be read in connection with the other information included in this Annual Report on Form 10-K, including Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Funds’ Financial Statements and the related Notes to the Funds’ Financial Statements. For purposes of this section:

 

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    The term “Managed Futures Fund” refers to ProShares Managed Futures Strategy;

 

    The term “Matching VIX Fund” refers to ProShares VIX Short-Term Futures ETF and ProShares VIX Mid-Term Futures ETF;

 

    The term “Geared VIX Fund” refers to ProShares Ultra VIX Short-Term Futures ETF and ProShares Short VIX Short-Term Futures ETF;

 

    The term “VIX Fund” refers to each Geared VIX Fund and each Matching VIX Fund;

 

    The term “Geared Fund” refers to ProShares UltraShort Bloomberg Commodity, ProShares UltraShort Bloomberg Crude Oil, ProShares UltraShort Bloomberg Natural Gas, ProShares UltraShort Gold, ProShares UltraShort Silver, ProShares Short Euro, ProShares UltraShort Australian Dollar, ProShares UltraShort Euro, ProShares UltraShort Yen, ProShares Ultra Bloomberg Commodity, ProShares Ultra Bloomberg Crude Oil, ProShares Ultra Bloomberg Natural Gas, ProShares Ultra Gold, ProShares Ultra Silver, ProShares Ultra Euro and ProShares Ultra Yen, and each Geared VIX Fund;

 

    The term “Commodity Index Fund” refers to ProShares UltraShort Bloomberg Commodity, ProShares UltraShort Bloomberg Crude Oil, ProShares UltraShort Bloomberg Natural Gas, ProShares Ultra Bloomberg Commodity, ProShares Ultra Bloomberg Crude Oil and ProShares Ultra Bloomberg Natural Gas;

 

    The term “Commodity Fund” refers to ProShares UltraShort Gold, ProShares UltraShort Silver, ProShares Ultra Gold and ProShares Ultra Silver; and

 

    The term “Currency Fund” refers to ProShares Short Euro, ProShares UltraShort Australian Dollar, ProShares UltraShort Euro, ProShares UltraShort Yen, ProShares Ultra Euro and ProShares Ultra Yen.

Risks Specific to the Geared Funds

In addition to the risks described elsewhere in this “Risk Factors” section, the following risks apply to the Geared Funds.

Due to the compounding of daily returns, the Geared Funds’ returns over periods longer than a single day will likely differ in amount and possibly even direction from the Geared Fund multiple times the benchmark return for the period.

Each of the Geared Funds is “geared” in the sense that each has an investment objective to correspond (before fees and expenses) to the inverse (e.g., -1x), an inverse multiple (e.g., -2x), or a multiple (e.g., 2x), of the performance of a benchmark on a given day. Each Geared Fund seeks investment results for a single day only, as measured from its NAV calculation time to its next NAV calculation time, and not for any other period. The return of a Geared Fund for a period longer than a single day is the result of its return for each day compounded over the period and usually will differ from the inverse (-1x), two times the inverse (-2x), or two times (2x) the return of the Geared Fund’s benchmark for the period. A Geared Fund will lose money if its benchmark’s performance is flat over time, and it is possible for a Geared Fund to lose money over time regardless of the performance of an underlying benchmark, as a result of daily rebalancing, the benchmark’s volatility and compounding. Longer holding periods, higher benchmark volatility, inverse exposure and greater leverage each affect the impact of compounding on a Geared Fund’s returns. Daily compounding of a Geared Fund’s investment returns can dramatically and adversely affect its longer-term performance during periods of high volatility. Volatility may be at least as important to a Geared Fund’s return for a period as the return of the Geared Fund’s underlying benchmark.

Each Ultra or UltraShort Fund uses leverage and should produce daily returns that are more volatile than that of its benchmark. For example, the daily return of an Ultra Fund with a 2x multiple should be approximately two times as volatile on a daily basis as the return of a fund with an objective of matching the same benchmark. The daily return of a Short or an UltraShort Fund is designed to return the inverse (-1x) or two times the inverse (-2x) of the return, respectively, that would be expected of a fund with an objective of matching the same benchmark. The Geared Funds are not appropriate for all investors and present different risks than other funds. The Geared Funds that use leverage are riskier than similarly benchmarked exchange-traded funds that do not use leverage. An investor should

 

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only consider an investment in a Geared Fund if he or she understands the consequences of seeking daily leveraged, daily inverse or daily inverse leveraged investment results. Daily objective geared funds, if used properly and in conjunction with the investor’s view on the future direction and volatility of the markets, can be useful tools for investors who want to manage their exposure to various markets and market segments and who are willing to monitor and/or periodically rebalance their portfolios. Shareholders who invest in the Geared Funds should actively manage and monitor their investments, as frequently as daily.

The hypothetical examples below illustrate how daily geared fund returns can behave for periods longer than a single day. Each involves a hypothetical fund XYZ that seeks to double the daily performance of benchmark XYZ. On each day, fund XYZ performs in line with its objective (two times (2x) the benchmark’s daily performance before fees and expenses). Notice that, in the first example (showing an overall benchmark loss for the period), over the entire seven-day period, the fund’s total return is more than two times the loss of the period return of the benchmark. For the seven-day period, benchmark XYZ lost 3.26% while fund XYZ lost 7.01% (versus -6.52% or 2 x -3.26%).

 

     Benchmark XYZ     Fund XYZ  
     Level      Daily
Performance
    Daily
Performance
    Net Asset
Value
 

Start

     100.00           $ 100.00   

Day 1

     97.00         -3.00     -6.00   $ 94.00   

Day 2

     99.91         3.00     6.00   $ 99.64   

Day 3

     96.91         -3.00     -6.00   $ 93.66   

Day 4

     99.82         3.00     6.00   $ 99.28   

Day 5

     96.83         -3.00     -6.00   $ 93.32   

Day 6

     99.73         3.00     6.00   $ 98.92   

Day 7

     96.74         -3.00     -6.00   $ 92.99   
     

 

 

   

 

 

   

Total Return

        -3.26     -7.01  
     

 

 

   

 

 

   

Similarly, in another example (showing an overall benchmark gain for the period), over the entire seven-day period, the fund’s total return is considerably less than double that of the period return of the benchmark. For the seven-day period, benchmark XYZ gained 2.72% while fund XYZ gained 4.86% (versus 5.44% (or 2 x 2.72%)).

 

     Benchmark XYZ     Fund XYZ  
     Level      Daily
Performance
    Daily
Performance
    Net Asset
Value
 

Start

     100.00           $ 100.00   

Day 1

     103.00         3.00     6.00   $ 106.00   

Day 2

     99.91         -3.00     -6.00   $ 99.64   

Day 3

     102.91         3.00     6.00   $ 105.62   

Day 4

     99.82         -3.00     -6.00   $ 99.28   

Day 5

     102.81         3.00     6.00   $ 105.24   

Day 6

     99.73         -3.00     -6.00   $ 98.92   

Day 7

     102.72         3.00     6.00   $ 104.86   
     

 

 

   

 

 

   

Total Return

        2.72     4.86  
     

 

 

   

 

 

   

These effects are caused by compounding, which exists in all investments, but has a more significant impact in geared funds. In general, during periods of higher benchmark volatility, compounding will cause an Ultra Fund’s results for periods longer than a single day to be less than two times (2x) the return of the benchmark (or less than the inverse (-1x) or two times the inverse (-2x) times the return of the benchmark for the Short Funds and UltraShort Funds, respectively). This effect becomes more pronounced as volatility increases. Conversely, in periods of lower benchmark volatility (particularly when combined with higher benchmark returns), an Ultra Fund’s returns over longer periods can be higher than two times (2x) the return of the benchmark. Actual results for a particular period, before fees and expenses, are also dependent on the magnitude of the benchmark return in addition to the benchmark volatility. Similar effects exist for the Short Funds and UltraShort Funds, and the significance of these effects may be even greater with such inverse or inverse leveraged funds.

 

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The graphs that follow illustrate this point. Each of the graphs shows a simulated hypothetical one-year performance of a benchmark compared with the performance of a geared fund that perfectly achieves its geared daily investment objective. The graphs demonstrate that, for periods greater than a single day, a geared fund is likely to underperform or overperform (but not match) the benchmark performance (or the inverse of the benchmark performance) times the multiple stated as the daily fund objective. Investors should understand the consequences of holding daily rebalanced funds for periods longer than a single day and should actively manage and monitor their investments, as frequently as daily. A one-year period is used solely for illustrative purposes. Deviations from the benchmark return (or the inverse of the benchmark return) times the fund multiple can occur over periods as short as two days (each day as measured from NAV to NAV) and may also occur in periods shorter than a single day (when measured intraday as opposed to NAV to NAV). See “Intraday Price Performance Risk” below for additional details. To isolate the impact of daily leveraged, inverse or inverse leveraged exposure, these graphs assume: a) no fund expenses or transaction costs; b) borrowing/lending rates (to obtain required inverse, inverse leveraged or leveraged exposure) and cash reinvestment rates of zero percent; and c) the fund consistently maintaining perfect exposure (-1x, -2x or 2x) as of the fund’s NAV time each day. If these assumptions were different, the fund’s performance would be different than that shown. If fund expenses, transaction costs and financing expenses greater than zero percent were included, the fund’s performance would also be different than that shown. Each of the graphs also assumes a volatility rate of 70%, which is an approximate average of the five-year historical volatility rate of the most volatile benchmark referenced herein (the S&P 500 VIX Short-Term Futures Index). A benchmark’s volatility rate is a statistical measure of the magnitude of fluctuations in its returns.

 

LOGO

The graph above shows a scenario where the benchmark, which exhibits day-to-day volatility, is flat or trendless over the year (i.e., provides a return of 0% over the course of the year), but the Short Fund (-1x) is down.

 

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LOGO

The graph above shows a scenario where the benchmark, which exhibits day-to-day volatility, is up over the year, but the Short Fund (-1x) is down more than the inverse of the benchmark.

 

LOGO

 

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The graph above shows a scenario where the benchmark, which exhibits day-to-day volatility, is down over the year, but the Short Fund (-1x) is up less than the inverse of the benchmark.

 

LOGO

The graph above shows a scenario where the benchmark, which exhibits day-to-day volatility, is flat or trendless over the year (i.e., provides a return of 0% over the course of the year), but the Ultra Fund (2x) and the UltraShort Fund (-2x) are both down.

 

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LOGO

The graph above shows a scenario where the benchmark, which exhibits day-to-day volatility, is up over the year, but the Ultra Fund (2x) is up less than two times the benchmark and the UltraShort Fund (-2x) is down less than two times the inverse of the benchmark.

 

LOGO

 

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The graph above shows a scenario where the benchmark, which exhibits day-to-day volatility, is down over the year, but the Ultra Fund (2x) is down less than two times the benchmark and the UltraShort Fund (-2x) is up less than two times the inverse of the benchmark.

The historical five year average volatility of the benchmarks utilized by the Funds ranges from 4.70% to 70.08%, as set forth in the table below.

 

Index

   Identifier    Historical Five-Year
Average Volatility Rate
As of December 31, 2015

S&P Strategic Futures Index*

   SPSFIT    4.70%

S&P 500 VIX Short-Term Futures Index

   SPVXSPID    70.08%

S&P 500 VIX Mid-Term Futures Index

   SPVXMPID    33.25%

Bloomberg Commodity IndexSM

   BCOM    13.91%

Bloomberg WTI Crude Oil SubindexSM

   BCOMCL    30.84%

Bloomberg Natural Gas SubindexSM

   BCOMNG    44.67%

The daily performance of gold bullion as measured by the U.S. dollar p.m. LBMA Gold Price

   GOLDLNPM    17.80%

The daily performance of silver bullion as measured by the London Silver Price

   SLVRLN    36.26%

The U.S. dollar price of the euro

   USDEUR    9.36%

The U.S. dollar price of the Japanese yen

   USDJPY    8.93%

The U.S. dollar price of the Australian dollar

   USDAUD    10.77%

 

* The S&P Strategic Futures Index launched on August 14, 2014. Accordingly, the Index has not been in existence for five years.

The tables below illustrate the impact of two factors that affect a Geared Fund’s performance, benchmark volatility and benchmark return. Benchmark volatility is a statistical measure of the magnitude of fluctuations in the returns of a benchmark and is calculated as the standard deviation of the natural logarithms of one plus the benchmark 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 benchmark volatility and benchmark return over a one-year period. To isolate the impact of daily leveraged, inverse or inverse leveraged exposure, these graphs assume: a) no fund expenses or transaction costs; b) borrowing/lending rates of zero percent (to obtain required inverse, inverse leveraged or leveraged exposure) and cash reinvestment rates of zero percent; and c) the fund consistently maintaining perfect exposure (-1x, -2x or 2x) as of the fund’s NAV time each day. If these assumptions were different, the fund’s performance would be different than that shown. If fund expenses, transaction costs and financing expenses were included, the fund’s performance would be different than that shown. The tables below show examples in which a Geared Fund has an investment objective to correspond (before fees and expenses) to the inverse (-1), two times the inverse (-2x) or two times (2x) the daily performance of a benchmark. The Geared Fund that has an investment objective to correspond to two times (2x) the daily performance of a benchmark could incorrectly be expected to achieve a 20% return on a yearly basis if the benchmark return was 10%, absent the effects of compounding. However, as the tables below show, with a benchmark volatility of 40%, such a fund would return 3.1%. In the charts below, shaded areas represent those scenarios where a geared fund with the investment objective described will outperform (i.e., return more than) the benchmark performance times the stated multiple in the fund’s investment objective; conversely areas not shaded represent those scenarios where the fund will underperform (i.e., return less than) the benchmark performance times the multiple stated as the daily fund objective.

 

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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 a Benchmark.

 

One Year

Benchmark

Performance

   Inverse
(-1x) of
One  Year
Benchmark
Performance
               Benchmark Volatility  
      0%     5%     10%     15%     20%     25%     30%     35%     40%     45%     50%     55%     60%     65%     70%  

-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 %     63.9 %     53.2 %

-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 %     45.6 %     36.1 %

-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 %     31.1 %     22.5 %

-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 %     19.2 %     11.4 %

-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 %     9.2 %     2.1 %

-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 %     0.8 %     -5.7 %

-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 %     -6.4 %     -12.5 %

-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 %     -12.6 %     -18.3 %

-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 %     -18.1 %     -23.4 %

-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 %     -22.9 %     -27.9 %

-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 %     -27.2 %     -31.9 %

-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 %     -31.0 %     -35.5 %

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 %     -34.5 %     -38.7 %

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 %     -37.6 %     -41.7 %

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 %     -40.4 %     -44.3 %

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 %     -43.0 %     -46.7 %

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 %     -45.4 %     -48.9 %

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 %     -47.6 %     -51.0 %

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 %     -49.6 %     -52.9 %

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 %     -51.5 %     -54.6 %

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 %     -53.2 %     -56.2 %

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 %     -54.8 %     -57.7 %

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 %     -56.3 %     -59.2 %

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 %     -57.7 %     -60.5 %

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 %     -59.0 %     -61.7 %

Estimated Fund Return Over One Year When the Fund Objective is to Seek Daily Investment Results, Before Fees and Expenses, that Correspond to Two Times the Inverse (-2x) of the Daily Performance of a Benchmark.

 

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One Year

Benchmark

Performance

  Two
Times
Inverse
(-2x) of
One  Year
Benchmark
Performance
              Benchmark Volatility  
    0%     5%     10%     15%     20%     25%     30%     35%     40%     45%     50%     55%     60%     65%     70%  

-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%       76.0%       43.7%  

-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%       39.0%       13.5%  

-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%       12.6%       -8.0%  

-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%       -6.9%       -24.0%  

-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%       -21.8%       -36.1%  

-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%       -33.4%       -45.6%  

-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%       -42.5%       -53.1%  

-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%       -49.9%       -59.1%  

-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%       -56.0%       -64.1%  

-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%       -61.0%       -68.2%  

-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%       -65.2%       -71.6%  

-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%       -68.8%       -74.5%  

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%       -71.8%       -77.0%  

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%       -74.5%       -79.1%  

10%

  -20%     -17.4%       -18.0%       -19.8%       -22.7%       -26.7%       -31.5%       -36.9%       -42.8%       -48.9%       -55.0%       -61.0%       -66.7%       -71.9%       -76.7%       -81.0%  

15%

  -30%     -24.4%       -25.0%       -26.6%       -29.3%       -32.9%       -37.3%       -42.3%       -47.6%       -53.2%       -58.8%       -64.3%       -69.5%       -74.3%       -78.7%       -82.6%  

20%

  -40%     -30.6%       -31.1%       -32.6%       -35.1%       -38.4%       -42.4%       -47.0%       -51.9%       -57.0%       -62.2%       -67.2%       -72.0%       -76.4%       -80.4%       -84.0%  

25%

  -50%     -36.0%       -36.5%       -37.9%       -40.2%       -43.2%       -46.9%       -51.1%       -55.7%       -60.4%       -65.1%       -69.8%       -74.2%       -78.3%       -82.0%       -85.3%  

30%

  -60%     -40.8%       -41.3%       -42.6%       -44.7%       -47.5%       -50.9%       -54.8%       -59.0%       -63.4%       -67.8%       -72.0%       -76.1%       -79.9%       -83.3%       -86.4%  

35%

  -70%     -45.1%       -45.5%       -46.8%       -48.7%       -51.3%       -54.5%       -58.1%       -62.0%       -66.0%       -70.1%       -74.1%       -77.9%       -81.4%       -84.6%       -87.4%  

40%

  -80%     -49.0%       -49.4%       -50.5%       -52.3%       -54.7%       -57.7%       -61.1%       -64.7%       -68.4%       -72.2%       -75.9%       -79.4%       -82.7%       -85.6%       -88.3%  

45%

  -90%     -52.4%       -52.8%       -53.8%       -55.5%       -57.8%       -60.6%       -63.7%       -67.1%       -70.6%       -74.1%       -77.5%       -80.8%       -83.8%       -86.6%       -89.1%  

50%

  -100%     -55.6%       -55.9%       -56.9%       -58.5%       -60.6%       -63.2%       -66.1%       -69.2%       -72.5%       -75.8%       -79.0%       -82.1%       -84.9%       -87.5%       -89.8%  

55%

  -110%     -58.4%       -58.7%       -59.6%       -61.1%       -63.1%       -65.5%       -68.2%       -71.2%       -74.2%       -77.3%       -80.3%       -83.2%       -85.9%       -88.3%       -90.4%  

60%

  -120%     -60.9%       -61.2%       -62.1%       -63.5%       -65.4%       -67.6%       -70.2%       -73.0%       -75.8%       -78.7%       -81.5%       -84.2%       -86.7%       -89.0%       -91.0%  

 

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Estimated Fund Return Over One Year When the Fund Objective is to Seek Daily Investment Results, Before Fees and Expenses, that Correspond to Two Times (2x) the Daily Performance of a Benchmark.

 

One Year
Benchmark
Performance

   Two
Times
(2x)
One Year
Benchmark
Performance
               Benchmark Volatility  
      0%     5%     10%     15%     20%     25%     30%     35%     40%     45%     50%     55%     60%     65%     70%  

-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 %     -89.5 %     -90.2 %

-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 %     -86.7 %     -87.6 %

-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 %     -83.6 %     -84.7 %

-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 %     -80.2 %     -81.5 %

-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 %     -76.4 %     -77.9 %

-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 %     -72.3 %     -74.1 %

-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 %     -67.9 %     -70.0 %

-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 %     -63.1 %     -65.5 %

-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 %     -58.1 %     -60.8 %

-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 %     -52.6 %     -55.7 %

-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 %     -46.9 %     -50.4 %

-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 %     -40.8 %     -44.7 %

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 %     -34.5 %     -38.7 %

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 %     -27.7 %     -32.5 %

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 %     -20.7 %     -25.9 %

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 %     -13.3 %     -19.0 %

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 %     -5.6 %     -11.8 %

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 %     2.4 %     -4.3 %

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 %     10.8 %     3.5 %

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 %     19.4 %     11.7 %

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 %     28.5 %     20.1 %

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 %     37.8 %     28.8 %

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 %     47.5 %     37.8 %

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 %     57.5 %     47.2 %

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 %     67.8 %     56.8 %

The foregoing tables are intended to isolate the effect of benchmark volatility and benchmark performance on the return of inverse, inverse leveraged or leveraged funds. The Geared Funds’ actual returns may be significantly greater or less than the returns shown above as a result of any of the factors discussed above or under the below risk factor describing correlation risks.

Correlation Risks Specific to the Geared Funds.

In order to achieve a high degree of correlation with their applicable underlying benchmarks, the Geared Funds seek to rebalance their portfolios daily to keep exposure consistent with their investment objectives. Being materially under- or overexposed to the benchmarks may prevent such Geared Funds from achieving a high degree of correlation with their applicable underlying benchmarks. Market disruptions or closures, large movements of assets into or out of the Geared Funds, regulatory restrictions or extreme market volatility will adversely affect such Geared Funds’ ability to adjust exposure to requisite levels. The target amount of portfolio exposure is impacted dynamically by the benchmarks’ movements during each day. Because of this, it is unlikely that the Geared Funds will be perfectly exposed (i.e., -1x, -2x or 2x, as applicable) at the end of each day, and the likelihood of being materially under- or overexposed is higher on days when the benchmark levels are volatile near the close of the trading day. In addition, unlike other funds that do not rebalance their portfolios as frequently, each Geared Fund may be subject to increased trading costs associated with daily portfolio rebalancing in order to maintain appropriate exposure to the underlying benchmarks. Such costs include commissions paid to the FCMs, and may vary by FCM.

 

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These risks are particularly acute for the Geared VIX Funds due to the high degree of volatility in VIX futures contracts. Investors in the Geared VIX Funds should be aware that these Funds bear a greater risk of not achieving their investment objective on a daily basis, a risk that increases with the level of volatility on a particular day.

For general correlation risks of the Funds, please see “Correlation Risks For All Funds.” below.

Intraday Price Performance Risk.

Each Geared Fund is typically rebalanced at or about the time of its NAV calculation time (which may be other than at the close of the U.S. equity markets). As such, the intraday position of the Geared Fund will generally be different from the Geared Fund’s stated daily investment objective (i.e., -1x, -2x or 2x). When Shares are bought intraday, the performance of a Geared Fund’s Shares until the Fund’s next NAV calculation will generally be greater than or less than the Geared Fund’s stated daily inverse, inverse multiple or multiple.

The use of leveraged, inverse and/or inverse leveraged positions could result in the total loss of an investor’s investment.

Each of the UltraShort and Ultra Funds utilize inverse leveraged or leveraged positions, respectively, in seeking to achieve their respective investment objectives and will lose more money in market environments adverse to their respective daily investment objectives than funds that do not employ leverage. The use of inverse leveraged and/or leveraged positions could result in the total loss of an investor’s investment.

For example, because the UltraShort and Ultra Funds include a two times the inverse (-2x) or two times (2x) multiplier, a single-day movement in the relevant benchmark approaching 50% at any point in the day could result in the total loss or almost total loss of an investor’s investment if that movement is contrary to the investment objective of the Fund in which an investor has invested, even if such Fund’s benchmark subsequently moves in an opposite direction, eliminating all or a portion of the movement. This would be the case with upward single-day or intraday movements in the underlying benchmark of the UltraShort Funds or downward single-day or intraday movements in the underlying benchmark of the Ultra Funds, even if the underlying benchmark maintains a level greater than zero at all times.

Inverse positions can also result in the total loss of an investor’s investment. For the Short Funds, a single-day or intraday increase in the level of the Fund’s benchmark approaching 100% could result in the total loss or almost total loss of an investor’s investment even if such Fund’s benchmark subsequently moves lower.

Risks Specific to the Managed Futures Fund

The level of the S&P Strategic Futures Index (the “SFI”) and the returns attributable to the underlying SFI index components (the “SFI Futures Contracts”) depend on whether a particular SFI Futures Contract is positioned long or short.

The impact of changes in the prices of the SFI Futures Contracts will affect the Managed Futures Fund differently depending upon whether such SFI Futures Contract is positioned long or short. Increases in the price of an underlying SFI Futures Contract will negatively impact the Managed Futures Fund’s performance when the SFI Futures Contract is positioned short and decreases in the price of an underlying SFI Futures Contract will negatively impact the Managed Futures Fund’s performance when the SFI Futures Contract is positioned long.

Short positions should be considered to be speculative and could result in the total loss of an investor’s investment.

The Managed Futures Fund may take short positions in the SFI Futures Contracts. Because the holder of a short position is exposed to losses upon any increase in price, and a price increase is potentially unlimited, short positions will expose the Managed Futures Fund to potentially unlimited losses, which could result in a total loss of investment.

 

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Monthly repositioning may expose the Managed Futures Fund to increased losses in volatile markets.

The SFI is designed to potentially capture the economic benefit derived from both rising and declining trends in futures prices. In order to accomplish this, the SFI positions are rebalanced and repositioned, either long or short, on a monthly basis. Long positions or short positions in each SFI Futures Contract are determined based on price movements over the past seven months. In volatile markets, this may result in the SFI Futures Contracts frequently being repositioned from long to short and vice versa. If the price movements that caused a particular SFI Futures Contract to be repositioned subsequently reverse themselves, the Managed Futures Fund’s index will be negatively impacted. For example, if Gold is positioned long for the month of March, and the underlying SFI Futures Contracts decline in price, the SFI will experience losses. Depending on the magnitude of the price decline, Gold may reposition itself to short at month end. If, in April, the market reverses and appreciates in price, Gold will again experience losses, even if the price of Gold futures contracts measured across both months is flat from a performance perspective. Such activity can cause the Managed Futures Fund to lose more, and possibly significantly more, than an investment focused only on long or short positions in the same futures contracts.

The Managed Futures Fund has a limited operating history, and, as a result, investors have a limited performance history to serve as a factor for evaluating an investment in the Managed Futures Fund.

The Managed Futures Fund has a limited performance history upon which to evaluate an investor’s investment in the Managed Futures Fund. Although past performance is not necessarily indicative of future results, if the Managed Futures Fund had a longer performance history, such performance history might (or might not) provide investors with more information on which to evaluate an investment in the Managed Futures Fund. Likewise, the SFI has a limited history which might (or might not) provide investors with more information on which to evaluate an investment in the Managed Futures Fund.

Risks Specific to the Managed Futures Fund, the Commodity Index Funds, the Commodity Funds, the Currency Funds and the VIX Funds.

With regard to the Managed Futures Fund, the Commodity Index Funds and the Commodity Fund, several factors may affect the price of commodities and, in turn, the Financial Instruments and other assets, if any, owned by such a Fund, including, but not limited to:

 

    Significant increases or decreases in the available supply of a physical commodity due to natural or technological factors. Natural factors would include depletion of known cost-effective sources for a commodity or the impact of severe weather on the ability to produce or distribute the commodity. Technological factors, such as increases in availability created by new or improved extraction, refining and processing equipment and methods or decreases caused by failure or unavailability of major refining and processing equipment (for example, shutting down or constructing oil refineries), also materially influence the supply of commodities.

 

    Significant increases or decreases in the demand for a physical commodity due to natural or technological factors. Natural factors would include such events as unusual climatological conditions impacting the demand for commodities. Technological factors may include such developments as substitutes for particular commodities.

 

    A significant change in the attitude of speculators and investors towards a commodity. Should the speculative community take a negative or positive view towards any given commodity, it could cause a change in world prices of any given commodity and the price of Shares based upon a benchmark related to that commodity will be affected.

 

    Large purchases or sales of physical commodities by the official sector. Governments and large institutions have large commodities holdings or may establish major commodities positions. For example, a significant portion of the aggregate world gold holdings is owned by governments, central banks and related institutions. Similarly, nations with centralized or nationalized oil production and organizations such as the Organization of Petroleum Exporting Countries control large physical quantities of crude oil. If one or more of these institutions decides to buy or sell any commodity in amounts large enough to cause a change in world prices, the price of Shares based upon a benchmark related to that commodity will be affected.

 

    Other political factors. In addition to the organized political and institutional trading-related activities described above, peaceful political activity such as imposition of regulations or entry into trade treaties, as well as political disruptions caused by societal breakdown, insurrection and/or war may greatly influence commodities prices.

 

 

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    A significant increase or decrease in commodity hedging activity by commodity producers. Should there be an increase or decrease in the level of hedge activity of commodity producing companies, countries and/or organizations, it could cause a change in world prices of any given commodity, causing the price of Shares based upon a benchmark related to that commodity to be affected.

 

    The recent proliferation of commodity-linked products and their unknown effect on the commodity markets.

With regard to the Managed Futures Fund and the Currency Funds, several factors may affect the value of foreign currencies or the U.S. dollar and, in turn, Financial Instruments and other assets, if any, owned by a Fund, including, but not limited to:

 

    Debt level and trade deficit of the relevant foreign countries;

 

    Inflation rates of the United States and the relevant foreign countries and investors’ expectations concerning inflation rates;

 

    Interest rates of the United States and the relevant foreign countries and investors’ expectations concerning interest rates;

 

    Investment and trading activities of mutual funds, hedge funds and currency funds;

 

    Global or regional political, economic or financial events and situations;

 

    Sovereign action to set or restrict currency conversion; and

 

    Monetary policies and other related activities of central banks within the U.S. and other relevant foreign markets.

With regard to the Managed Futures Fund, several factors may affect the value of U.S. Treasury securities and, in turn, certain Financial Instruments and related assets, if any, owned by the Managed Futures Fund, including, but not limited to:

 

    Perception of risk, or the lack thereof, in assets other than U.S. Treasury securities;

 

    Debt level and trade deficit of the United States;

 

    Inflation rates of the United States and the relevant foreign countries and investors’ expectations concerning inflation rates;

 

    Interest rates of the United States and the relevant foreign countries and investors’ expectations concerning interest rates;

 

    Fluctuations in the value of the U.S. dollar relative to other currencies; and

 

    Fluctuations in the supply of, and demand for, the underlying U.S. Treasury securities.

 

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With regard to the VIX Funds, several factors may affect the price and/or liquidity of VIX futures contracts and other assets, if any, owned by a VIX Fund, including, but not limited to:

 

    Prevailing market prices and forward volatility levels of the U.S. stock markets, the S&P 500, the equity securities included in the S&P 500 and prevailing market prices of options on the S&P 500, the VIX, options on the VIX, the relevant VIX futures contracts, or any other financial instruments related to the S&P 500 and the VIX or VIX futures contracts;

 

    Interest rates;

 

    Inflation rates and investors’ expectations concerning inflation rates;

 

    Economic, financial, political, regulatory, geographical, biological or judicial events that affect the level of the Index or the market price or forward volatility of the U.S. stock markets, the equity securities included in the S&P 500, the S&P 500, the VIX or the relevant futures or option contracts on the VIX;

 

    Supply and demand as well as hedging activities in the listed and OTC equity derivatives markets;

 

    Disruptions in trading of the S&P 500, futures contracts on the S&P 500 or options on the S&P 500; and

 

    The level of contango or backwardation in the VIX futures contracts market.

These factors interrelate in complex ways, and the effect of one factor on the market value of a Fund may offset or enhance the effect of another factor. In addition, the impact of changes in the level of a commodity index or the value of a commodity or currency will affect investors differently depending upon the Managed Futures Fund, Commodity Index Fund, Commodity Fund, Currency Fund or VIX Fund in which an investor invests. Daily increases in the level of a commodity index or a VIX futures index or the value of a commodity or currency will negatively impact the daily performance of Shares of the Short and UltraShort Commodity Index, Commodity, Currency or VIX Funds.

The Managed Futures Fund and the Commodity Index Funds are linked to indexes comprised of commodity futures contracts and/or financial futures contracts, and are not directly linked to the “spot” prices of the underlying physical commodities or financial assets. Futures contracts may perform very differently from the spot price of the underlying physical commodities or financial assets.

The Managed Futures Fund and each Commodity Index Fund are designed to correspond (before fees and expenses) to the performance of, or a multiple or an inverse multiple of, the daily performance of its applicable benchmark, which is intended to reflect the performance of the prices of futures contracts on certain physical commodities and/or financial assets. The Managed Futures Fund and the Commodity Index Funds are not directly linked to the “spot” price of the physical commodities. While prices of swaps, futures contracts and other derivatives contracts are, as a rule, related to the prices of an underlying cash market, they are not perfectly correlated and often can perform very differently. It is possible that during certain time periods, the performance of different derivatives contracts may be substantially lower or higher than cash market prices for the underlying commodity or financial asset due to differences in derivatives contract terms or as supply, demand or other economic or regulatory factors become more pronounced in either the cash or derivatives markets. Depending upon the direction and level of the benchmark changes, the Funds may underperform or outperform a portfolio of cash market commodities or financial assets.

 

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Risks specific to ProShares UltraShort Euro, ProShares Short Euro and ProShares Ultra Euro

The European financial markets and the value of the euro have experienced significant volatility, in part related to unemployment, budget deficits and economic downturns. In addition, several member countries of the Economic and Monetary Union of the EU have experienced credit rating downgrades, rising government debt levels and, for certain EU member countries (including Greece, Spain, Portugal, Ireland and Italy), weaknesses in sovereign debt. These events, along with decreasing imports or exports, changes in governmental or EU regulations on trade, the default or threat of default by an EU member country on its sovereign debt and/or an economic recession in an EU member country may continue to cause prolonged volatility in euro-related investments.

In addition, given recent events, it is possible that the euro could be abandoned in the future by countries that have already adopted its use. If this were to occur, the value of the euro could fluctuate or decline drastically. Increased volatility related to the euro could exacerbate the effects of daily compounding on the performance of each of ProShares UltraShort Euro, ProShares Short Euro and ProShares Ultra Euro over periods longer than a single day. If the euro is abandoned by all countries that have adopted its use, the Fund may be forced to switch benchmarks or liquidate.

Risks Specific to the VIX Funds

In addition to the risks described elsewhere in this “Risk Factors” section, the following risks apply to the VIX Funds.

The VIX Funds are benchmarked to a VIX Futures Index. They are not benchmarked to the VIX or actual realized volatility of the S&P 500.

The level of each VIX Futures Index is based on the value of the relevant VIX futures contracts based on the Chicago Board Options Exchange, Incorporated Volatility Index (the “VIX”) comprising the applicable VIX Futures Index. Each VIX Fund is benchmarked to its respective VIX Futures Index. The VIX Funds are not linked to the VIX (which is a measure of implied volatility of the S&P 500 over the next 30 days derived from option prices), to realized volatility of the S&P 500 or to the options that underlie the VIX calculation. Each VIX Fund should be expected to perform very differently from the VIX over all periods of time. In many cases, the VIX Futures Indexes will significantly underperform the VIX.

VIX futures contracts are not directly based on a tradable underlying asset.

The VIX is not directly investable. The settlement price at maturity of VIX futures contracts are based on the calculation that determines the level of the VIX. As a result, the behavior of the VIX futures contracts may be different from traditional futures contracts whose settlement price is based on a specific tradable asset.

The level of the VIX has historically reverted to a long-term mean level and is subject to the risk associated with reversion to its mean. Accordingly, investors should not expect the VIX Funds to retain any appreciation in value over extended periods of time.

In the past, the level of the VIX has typically reverted over the longer term to a historical mean, and its absolute level has been constrained within a band. As such, the potential upside of long or short exposure to VIX futures contracts may be limited, and any gains may be subject to sharp reversals during such reversions to the mean.

When economic uncertainty increases and there is an associated increase in expected volatility, the value of VIX futures contracts will likely also increase and the potential upside of an investment in a VIX Short Fund will correspondingly be limited as a result. Similarly, when economic uncertainty recedes, and there is an associated decrease in expected volatility, the value of VIX futures contracts will likely also decrease and the potential upside of an investment in a VIX Ultra Fund or a Matching VIX Fund will correspondingly be limited as a result.

 

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Risks Related to All Funds

Correlation Risks for all Funds.

While the Funds seek to meet their investment objectives, there is no guarantee they will do so. Factors that may affect a Fund’s ability to meet its investment objective include: (1) the Sponsor’s ability to purchase and sell Financial Instruments in a manner that correlates to a Fund’s objective; (2) an imperfect correlation between the performance of the Financial Instruments held by a Fund and the performance of the applicable benchmark; (3) bid-ask spreads on such Financial Instruments; (4) fees, expenses, transaction costs, financing costs associated with the use of Financial Instruments and commission costs; (5) holding Financial Instruments traded in a market that has become illiquid or disrupted; (6) a Fund’s Share prices being rounded to the nearest cent and/or valuation methodologies; (7) changes to a benchmark 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) 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; (10) accounting standards; and (11) differences caused by a Fund obtaining exposure to only a representative sample of the components of a benchmark, overweighting or underweighting certain components of a benchmark or obtaining exposure to assets that are not included in a benchmark.

Being materially over- or under-exposed to its benchmark may prevent such Funds from achieving a high degree of correlation with their applicable underlying benchmark. Market disruptions or closures, large movements of assets into or out of a Fund, regulatory restrictions or extreme market volatility will adversely affect such Fund’s ability to maintain a high degree of correlation. The number of components included in the applicable benchmark index across which a Fund needs to allocate, and the frequency at which it rebalances its portfolio (and related costs), may also impact correlation.

Each Fund seeks to provide investment results that correspond (before fees and expenses) to the performance of, or a multiple of, the inverse or an inverse multiple the daily performance of a benchmark at all times, even during periods when the applicable benchmark is flat as well as when the benchmark is moving in a manner which causes the Fund’s NAV to decline, thereby causing losses to such Fund.

Other than for cash management purposes, the Funds are not actively managed by traditional methods (e.g., by effecting changes in the composition of a portfolio on the basis of judgments relating to economic, financial and market considerations with a view toward obtaining positive results under all market conditions). Rather, the sponsor seeks to cause the NAV to track the daily performance of a benchmark in accordance with each Fund’s investment objective, even during periods in which the benchmark is flat or moving in a manner which causes the NAV of a Fund to decline. It is possible to lose money over time regardless of the performance of an underlying benchmark, due to the effects of daily rebalancing, volatility and compounding, as applicable (see “Correlation Risks Specific to the Geared Funds” in this Annual Report on Form 10-K for additional details).

The assets that the Funds invest in can be highly volatile and the Funds may experience large losses when buying, selling or holding such instruments.

Investments linked to volatility, commodity, currency or fixed income markets can be highly volatile compared to investments in traditional securities and the Funds may experience large losses. The value of these investments may be affected by changes in overall market movements, commodity or currency benchmarks (as the case may be), volatility, changes in interest rates, changes in inflation rates and investors’ expectations concerning inflation rates or factors affecting a particular industry, commodity or currency. For example, commodity futures contracts (as may be held by the Managed Futures Fund or the Commodity Index Funds) may be affected by numerous factors, including drought, floods, fires, weather, livestock diseases, pipeline ruptures or spills, embargoes, tariffs and international, economic, political or regulatory developments. In particular, trading in VIX futures contracts and trading in natural gas futures contracts (or other Financial Instruments linked to natural gas) have been very volatile and can be expected to be very volatile in the future. High volatility may have an adverse impact on the Funds beyond the impact of any performance-based losses of the underlying benchmark.

Potential negative impact from rolling futures positions.

Certain of the Funds invest in or have exposure to futures contracts and are subject to risks related to rolling. The contractual obligations of a buyer or seller holding a futures contract to expiration may generally be satisfied by settling in cash as designated in the contract specifications. Alternatively, futures contracts may be closed out prior

 

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to expiration by making an offsetting sale or purchase of an identical futures contract on the same or linked exchange before the designated date of settlement. Once this date is reached, the futures contract “expires.” As the futures contracts held by a Fund near expiration, they are generally closed out and replaced by contracts with a later expiration. This process is referred to as “rolling.” The Funds do not intend to hold futures contracts through expiration, but instead to “roll” their respective positions.

When the market for these contracts is such that the prices are higher in the more distant delivery months than in the nearer delivery months, the sale during the course of the “rolling process” of the more nearby contract would take place at a price that is lower than the price of the more distant contract. This pattern of higher futures prices for longer expiration futures contracts is often referred to as “contango.” Alternatively, when the market for these contracts is such that the prices are higher in the nearer months than in the more distant months, the sale during the course of the “rolling process” of the more nearby contract would take place at a price that is higher than the price of the more distant contract. This pattern of higher futures prices for shorter expiration futures contracts is referred to as “backwardation.”

The presence of contango in certain futures contracts at the time of rolling would be expected to adversely affect the relevant Funds with long positions, and positively affect the Funds with short positions. Similarly, the presence of backwardation in certain futures contracts at the time of rolling such contracts would be expected to adversely affect the Funds with short positions and positively affect the Funds with long positions.

There have been extended periods in which contango or backwardation has existed in the futures contract markets for various types of futures contracts, and such periods can be expected to occur in the future. These extended periods have in the past and can in the future cause significant losses for the Funds, and the periods can have as much or more impact over time than movements in the level of a Fund’s benchmark.

The Commodity Funds do not invest in bullion itself as certain other exchange-traded products do. Rather, the Commodity Funds use Financial Instruments to gain exposure to these precious metals. Not investing directly in bullion may introduce additional tracking error and these Commodity Funds are subject to the effects of contango and backwardation described above.

Using Financial Instruments such as forwards and futures in an effort to replicate the performance (or inverse performance) of gold and silver bullion may introduce tracking error to the performance of the Commodity Funds. While prices of Financial Instruments are, as a rule, related to the prices of an underlying cash market, they are not perfectly correlated. In addition, the use of Financial Instruments causes the need to roll futures or forward contracts as described above and the resulting possibility that contango or backwardation can occur Gold and silver historically exhibit contango markets during most periods. The existence of historically prevalent contango markets would be expected to adversely impact the Ultra Funds. Alternatively, the existence of historically prevalent backwardated markets would be expected to adversely impact the Ultra Funds.

Credit and liquidity risks associated with collateralized repurchase agreements.

A portion of each Fund’s assets may be held in cash and/or U.S. Treasury securities, agency securities, or other high credit quality short-term fixed-income or similar securities (such as shares of money market funds and collateralized repurchase agreements). These securities may be used for direct investment or serve as collateral for such Fund’s trading in Financial Instruments, as applicable, and may include collateralized repurchase agreements. Collateralized repurchase agreements involve an agreement to purchase a security and to sell that security back to the original seller at an agreed-upon price. The resale price reflects the purchase price plus an agreed-upon incremental amount which is unrelated to the coupon rate or maturity of the purchased security. As protection against the risk that the original seller will not fulfill its obligation, the buyer receives collateral marked-to-market daily, and maintained at a value at least equal to the sale price plus the accrued incremental amount. Although the collateralized repurchase agreements that the Funds enter into require that counterparties (which act as original sellers) over-collateralize the amount owed to a Fund with U.S. Treasury securities and/or agency securities, there is a risk that such collateral could decline in price at the same time that the counterparty defaults on its obligation to repurchase the security. If this occurs, a Fund may incur losses or delays in receiving proceeds. To minimize these risks, the Funds typically enter into transactions only with major global financial institutions.

 

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Possible illiquid markets may exacerbate losses.

Financial Instruments cannot always be liquidated at the desired price. It is difficult to execute a trade at a specific price when there is a relatively small volume of buy and sell orders in a market. A market disruption can also make it difficult to liquidate a position or find a swap or forward contract counterparty at a reasonable cost.

Market illiquidity may cause losses for the Funds. The large size of the positions which the Funds may acquire increases the risk of illiquidity by both making their positions more difficult to liquidate and increasing the losses incurred while trying to do so. Any type of disruption or illiquidity will potentially be exacerbated due to the fact that the Funds will typically invest in Financial Instruments related to one benchmark, which in many cases is highly concentrated.

It may not be possible to gain exposure to the benchmarks using exchange-traded Financial Instruments in the future.

The Funds may utilize exchange-traded Financial Instruments. It may not be possible to gain exposure to the benchmarks with these Financial Instruments in the future. If these Financial Instruments cease to be traded on regulated exchanges, they may be replaced with Financial Instruments traded on trading facilities that are subject to lesser degrees of regulation or, in some cases, no substantive regulation. As a result, trading in such Financial Instruments, and the manner in which prices and volumes are reported by the relevant trading facilities, may not be subject to the provisions of, and the protections afforded by, the Commodity Exchange Act (the “CEA”), or other applicable statutes and related regulations, that govern trading on regulated U.S. futures exchanges, or similar statutes and regulations that govern trading on regulated U.K. futures exchanges. In addition, many electronic trading facilities have only recently initiated trading and do not have significant trading histories. As a result, the trading of contracts on such facilities, and the inclusion of such contracts in a benchmark, may be subject to certain risks not presented by U.S. or U.K. exchange-traded futures contracts, including risks related to the liquidity and price histories of the relevant contracts.

Fees are charged regardless of a Fund’s returns and may result in depletion of assets.

The Funds are subject to the fees and expenses described herein which are payable irrespective of a Fund’s returns, as well as the effects of commissions, trading spreads, and embedded financing, borrowing costs and fees associated with applicable swaps, forwards, futures contracts, and costs relating to the purchase of U.S. Treasury securities or similar high credit quality, short-term fixed-income or similar securities. Additional charges may include other fees as applicable.

For the Funds linked to an index, changes implemented by the index provider or the CBOE that affect the composition and valuation of the index could adversely affect the value of an investment in a Fund’s Shares.

The VIX Fund, the Managed Futures Fund and the Commodity Index Funds are linked to indexes maintained by an index provider, either Standard & Poor’s (“S&P”) or Bloomberg, as applicable, each of which is unaffiliated with the Funds or the Sponsor. The policies implemented by each index provider concerning the calculation of the level of an index or the composition of an index could affect the level of an index and, therefore, the value of the corresponding Fund’s Shares. An index provider may change the composition of the indexes, or make other methodological changes that could change the level of an index. Additionally, an index provider may alter, discontinue or suspend calculation or dissemination of an index. Any of these actions could adversely affect the value of Shares of a Fund using that index as a benchmark. An index provider has no obligation to consider Fund shareholder interests in calculating or revising an index. In addition, for the VIX Fund, the CBOE can make methodological changes to the calculation of the VIX that could affect the value of VIX futures contracts and, consequently, the value of the VIX Fund’s Shares. There can be no assurance that the CBOE will not change the VIX calculation methodology in a way which may affect the value of the VIX Fund’s Shares. The CBOE may also alter, discontinue or suspend calculation or dissemination of the VIX and/or exercise settlement value. Any of these actions could adversely affect the value of such Fund’s Shares.

Calculation of an index may not be possible or feasible under certain events or circumstances that are beyond the reasonable control of the Sponsor, which in turn may adversely impact both the index and/or the Shares, as applicable. Additionally, index calculations may be disrupted by rollover disruptions, rebalancing disruptions and/or market emergencies, which may have an adverse effect on the value of the Shares.

 

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The Funds may be subject to counterparty risks.

Certain of the Funds will use swap agreements and/or forward contracts as a means to achieve their respective investment objectives. Such Funds will use either swap agreements and/or forward contracts referencing their respective benchmarks or in other swap agreements or forward contracts if such instruments tend to exhibit trading prices or returns that correlate with its benchmark or a component of the benchmark and will further the investment objective of the Fund. Each of the other Funds may invest in swap agreements (for the Managed Futures Fund, the VIX Funds and the Natural Gas Funds) or forward contracts (for the other Currency Funds: ProShares Short Euro, and ProShares UltraShort Australian Dollar) if position accountability rules or position limits are reached with respect to specific futures contracts or the market for a specific futures contract experiences emergencies (e.g., natural disaster, terrorist attack or an act of God) or disruptions (e.g., a trading halt or a flash crash) that prevent such Fund from obtaining the appropriate amount of investment exposure to the affected futures contract or certain other futures contracts. Although unlikely, the Funds, under these circumstances, could have 100% exposure to swap agreements or forward contracts, as applicable.

Swap agreements and forward contracts are generally traded in over-the–counter markets and have only recently become subject to regulation by the by the Commodity Futures Trading Commission (the “CFTC”). CFTC rules, however, do not cover all types of swap agreements and forward contracts. Investors, therefore, may not receive the protection of CFTC regulation or the statutory scheme of the CEA in connection with each Fund’s swap agreements or forward contracts. The lack of regulation in these markets could expose investors to significant losses under certain circumstances, including in the event of trading abuses or financial failure by participants.

The Funds will be subject to credit risk with respect to the counterparties to the derivatives contracts (whether a clearing corporation in the case of cleared instruments or another third party in the case of OTC uncleared instruments). Unlike in futures contracts, the counterparty to uncleared swap agreements or forward contracts is generally a single bank or other financial institution, rather than a clearing organization backed by a group of financial institutions. As a result, a Fund is subject to increased credit risk with respect to the amount it expects to receive from counterparties to uncleared swaps and forward contracts entered into as part of that Fund’s principal investment strategy. If a counterparty becomes bankrupt or otherwise fails to perform its obligations due to financial difficulties, a Fund could suffer significant losses on these contracts and the value of an investor’s investment in a Fund may decline.

The Funds have sought to mitigate these risks by generally requiring that the counterparties for each Fund agree to post collateral for the benefit of the Fund, marked to market daily, subject to certain minimum thresholds; however there are no limitations on the percentage of its assets each Fund may invest in swap agreements or forward contracts with a particular counterparty. To the extent any such collateral is insufficient or there are delays in accessing the collateral, the Funds will be exposed to counterparty risk as described above, including possible delays in recovering amounts as a result of bankruptcy proceedings. The Funds typically enter into transactions only with major, global financial institutions.

OTC swaps and forward contracts of the type that may be utilized by the Funds are less liquid than futures contracts because they are not traded on an exchange, do not have uniform terms and conditions, and are generally entered into based upon the creditworthiness of the parties and the availability of credit support, such as collateral, and in general, are not transferable without the consent of the counterparty. These agreements contain various conditions, events of default, termination events, covenants and representations. The triggering of certain events or the default on certain terms of the agreement could allow a party to terminate a transaction under the agreement and request immediate payment in an amount equal to the net positions owed the party under the agreement. For example, if the level of the Fund’s benchmark has a dramatic intraday move that would cause a material decline in the Fund’s NAV, the terms of the swap may permit the counterparty to immediately close out the transaction with the Fund. In that event, it may not be possible for the Fund to enter into another swap agreement or to invest in other Financial Instruments necessary to achieve the desired exposure consistent with the Fund’s objective. This, in turn, may prevent the Fund from achieving its investment objective, particularly if the level of the Fund’s benchmark reverses all or part of its intraday move by the end of the day. In addition, cleared derivatives transactions benefit from daily

 

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marking-to-market and settlement, and segregation and minimum capital requirements applicable to intermediaries. Transactions entered into directly between two counterparties generally do not benefit from such protections. This exposes the Funds to the risk that a counterparty will not settle a transaction in accordance with its terms and conditions because of a dispute over the terms of the contract (whether or not bona fide) or because of a credit or liquidity problem, thus causing the Funds to suffer a loss.

As of December 31, 2015, the Funds’ approved counterparties for swap agreements and forward contracts are: Deutsche Bank AG, Citibank N.A., UBS AG, Goldman Sachs International and Société Générale. The Sponsor regularly reviews the performance of its counterparties for, among other things, creditworthiness and execution quality. In addition, the Sponsor periodically considers the addition of new counterparties. Thus, the list of counterparties noted above may change at any time. Each day, the Funds disclose their portfolio holdings as of the prior Business Day (as such term is defined in “Creation and Redemption of Shares-Creation Procedures” in Part I, Item 1 of this Annual Report on Form 10-K). Each Fund’s portfolio holdings identifies its counterparties, as applicable. This portfolio holdings information may be accessed through the web on the Sponsor’s website at www.ProShares.com.

More information about Deutsche Bank AG, including its current financial statements, may be found on the SEC’s EDGAR website under Central Index Key No (“CIK No.”) 0001159508 (for Deutsche Bank AG). More information about Citibank N.A., including its current financial statements, may also be found on the SEC’s EDGAR website under CIK No. 0000036684 (for Citibank N.A.). More information about UBS AG, including its current financial statements, may also be found on the SEC’s EDGAR website under CIK No. 0001114446 (for UBS AG). More information about Goldman Sachs International, a U.K. broker-dealer and subsidiary of The Goldman Sachs Group, Inc., may also be found on the SEC’s EDGAR website under CIK No. 0000886982 (for The Goldman Sachs Group, Inc.). The Goldman Sachs Group, Inc. consolidates the financial statements of each of its subsidiaries, including Goldman Sachs International, with its own. More information about Société Générale, a French public limited company, including its current financial statements as filed with the AMF (the French securities regulator), may be found on Société Générale’s website. Please note that the references to third-party websites have been provided solely for informational purposes. Neither the Funds nor the Sponsor endorses or is responsible for the content or information contained on any third-party website, including with respect to any financial statements. In addition, neither the Funds nor the Sponsor makes any warranty, express or implied or assumes any legal liability or responsibility for the accuracy, completeness or usefulness of any such information.

Each counterparty and/or any of its affiliates may be an Authorized Participant or shareholder of a Fund, subject to applicable law.

The counterparty risk for cleared derivatives transactions is generally lower than for uncleared OTC derivatives since generally a clearing organization becomes substituted for each counterparty to a cleared derivatives contract and, in effect, guarantees the parties’ performance under the contract as each party to a trade looks only to the clearing house for performance of financial obligations. However, there can be no assurance that the clearing house, or its members, will satisfy its obligations to the Fund.

Historical correlation trends between Fund benchmarks and other asset classes may not continue or may reverse, limiting or eliminating any potential diversification or other benefit from owning a Fund.

To the extent that an investor purchases a Fund seeking diversification benefits based on the historic correlation (whether positive or negative) between the returns of that Fund or its underlying benchmark and other asset classes, such historic correlation may not continue or may reverse itself. In this circumstance, the diversification or other benefits sought may be limited or nonexistent.

Investors cannot be assured of the Sponsor’s continued services, the discontinuance of which may be detrimental to the Funds.

Investors cannot be assured that the Sponsor will be able to continue to service the Funds for any length of time. If the Sponsor discontinues its activities on behalf of the Funds, the Funds may be adversely affected, as there may be no entity servicing the Funds for a period of time. If the Sponsor’s registrations with the CFTC or memberships in the NFA were revoked or suspended, the Sponsor would no longer be able to provide services and/or to render

 

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advice to the Funds. If the Sponsor were unable to provide services and/or advice to the Funds, the Funds would be unable to pursue their investment objectives unless and until the Sponsor’s ability to provide services and advice to the Funds was reinstated or a replacement for the Sponsor as commodity pool operator could be found. Such an event could result in termination of the Funds.

The lack of active trading markets for any of the Shares of the Funds may result in losses on investors’ investments at the time of disposition of such Shares.

Although the Shares of the Funds are publicly listed and traded on the applicable Exchange, there can be no guarantee that an active trading market for the Shares of any Fund will develop or be maintained. In this regard, if a Fund is not able to meet the continued listing standards of NYSE Arca and is delisted, there will not be an active trading market for such Fund’s Shares. If investors need to sell their Shares at a time when no active market for them exists, the price investors receive for their Shares, assuming that investors are able to sell them, likely will be lower than the price that investors would receive if an active market did exist. In addition, if there is no active trading market for the Shares of a Fund for an extended period of time, the Fund would likely be forced to liquidate.

A Fund may terminate and liquidate at a time that is disadvantageous to shareholders.

If a Fund lacks the demand necessary to remain open, then the Fund will likely be terminated and liquidated. For example, the ProShares Ultra Australian Dollar Fund was terminated and liquidated in June 2015 because it lacked the demand necessary to remain open. Termination and liquidation of a Fund could occur at a time that is disadvantageous to shareholders. When the Fund’s assets are sold as part of the Fund’s liquidation, the resulting proceeds distributed to shareholders may be less than those that may be realized in a sale outside of a liquidation context.

Investors may be adversely affected by redemption or creation orders that are subject to postponement, suspension or rejection under certain circumstances.

A Fund may, in its discretion, suspend the right of creation or redemption or may postpone the redemption or purchase settlement date, for (1) any period during which the NYSE Arca, NYSE, Chicago Mercantile Exchange (including the Chicago Board of Trade and the New York Mercantile Exchange), the Intercontinental Exchange, CBOE, CFE or any other exchange, marketplace or trading center, deemed to affect the normal operations of the Funds, is closed, or when trading is restricted or suspended or restricted on such exchanges in any of the Funds’ futures contracts, (2) any period during which an emergency exists as a result of which the fulfillment of a purchase order or the redemption distribution is not reasonably practicable, or (3) such other period as the Sponsor determines to be necessary for the protection of the shareholders of the Funds. In addition, a Fund will reject a redemption order if the order is not in proper form as described in the Authorized Participant Agreement or if the fulfillment of the order might be unlawful. Any such postponement, suspension or rejection could adversely affect a redeeming Authorized Participant. For example, the resulting delay may adversely affect the value of the Authorized Participant’s redemption proceeds if the NAV of the Funds decline during the period of delay. The Funds disclaim any liability for any loss or damage that may result from any such suspension or postponement. Suspension of creation privileges may adversely impact how the Shares are traded and arbitraged on the applicable Exchange, which could cause them to trade at levels materially different (premiums and discounts) from the fair value of their underlying holdings.

The NAV may not always correspond to market price and, as a result, investors may be adversely affected by the creation or redemption of Creation Units at a value that differs from the market price of the Shares.

The NAV per Share of a Fund changes as fluctuations occur in the market value of a Fund’s portfolio. Investors should be aware the public trading price per Share of a Fund may be different from the NAV per Share of the Fund (i.e., the secondary market price may trade at a premium or discount to NAV). Consequently, an Authorized Participant may be able to create or redeem a Creation Unit of a Fund at a discount or a premium to the public trading price per Share of that Fund.

 

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Authorized Participants or their clients or customers may have an opportunity to realize a profit if they can purchase a Creation Unit at a discount to the public trading price of the Shares of a Fund or can redeem a Creation Unit at a premium over the public trading price of the Shares of a Fund. The Sponsor expects that the exploitation of such arbitrage opportunities by Authorized Participants and their clients and customers will tend to cause the public trading price to track the NAV per Share of the Funds closely over time.

The value of a Share may be influenced by non-concurrent trading hours between the applicable Exchange and the market in which the Financial Instruments (or related reference assets) held by a Fund are traded. The Shares of each Fund trade on the applicable Exchange, from 9:30 a.m. to 4:00 p.m. (Eastern Time). The Financial Instruments (and/or the related reference assets) held by a particular Fund, however, may have different fixing or settlement times. Consequently, liquidity in the Financial Instruments (and/or the reference assets) may be reduced after such fixing or settlement time. As a result, during the time when the applicable Exchange is open but after the applicable fixing or settlement time of an underlying component, trading spreads and the resulting premium or discount on the Shares of a Fund may widen, and, therefore, may increase the difference between the price of the Shares of a Fund and the NAV of such Shares. Furthermore, the NAVs for certain Funds are determined prior to the close of the applicable Exchange, and the NAVs for certain Funds are determined at 4:15 p.m. (Eastern Time) after the close of its applicable Exchange. Consequently, for those Funds, the closing market price per Share may differ from the NAV per Share at the end of each day. Also, during the time when the Exchange is open but the Fund’s NAV has already been determined (or, in the case of a VIX Fund, closed but before the determination of its NAV), there could be market developments or other events that cause or exacerbate the difference between the price of the Shares of such Funds and the NAV of such Shares.

The number of underlying components included in a Fund’s benchmark may impact volatility, which could adversely affect an investment in the Shares.

The number of underlying components in a Fund’s benchmark may also impact volatility, which could adversely affect an investment in the Shares. For example, each of the indexes for the Commodity Index Funds is concentrated in terms of the number and type of commodities represented, and some of the subindexes are solely concentrated in a single commodity futures contract. In addition, the benchmarks for the Currency Funds are concentrated solely on a single currency and the benchmarks for the VIX Funds are concentrated solely in VIX futures contracts. Investors should be aware that other benchmarks are more diversified in terms of both the number and variety of investments included. Concentration in fewer underlying components may result in a greater degree of volatility in a benchmark and the NAV of the Fund which corresponds to that benchmark under specific market conditions and over time.

Trading on exchanges outside the United States is generally not subject to U.S. regulation and may result in different or diminished investor protections.

Some of the Funds’ trading may be conducted on exchanges outside the United States. Trading on such exchanges is generally not regulated by any U.S. governmental agency and may involve certain risks not applicable to trading on U.S. exchanges, including different or diminished investor protections. In trading contracts denominated in currencies other than U.S. dollars, the Shares are subject to the risk of adverse exchange rate movements between the dollar and the functional currencies of such contracts. Investors could incur substantial losses from trading on foreign exchanges which such investors would not have otherwise been subject had the Funds’ trading been limited to U.S. markets.

Competing claims of intellectual property rights may adversely affect the Funds and an investment in the Shares.

Although the Sponsor does not anticipate that such claims will adversely impact the Funds, it is impossible to provide definite assurances that no such negative impact will occur. The Sponsor believes that it has properly licensed or obtained the appropriate consent of all necessary parties with respect to intellectual property rights. However, other third parties could allege ownership as to such rights and may bring an action in asserting their claims. To the extent any action is brought by a third party asserting such rights, the expenses in litigating, negotiating, cross-licensing or otherwise settling such claims may adversely affect the Funds.

 

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Investors may be adversely affected by an overstatement or understatement of the NAV calculation of the Funds due to the valuation method employed on the date of the NAV calculation.

Calculating the NAV of the Funds includes, in part, any unrealized profits or losses on open Financial Instrument positions. Under normal circumstances, the NAV of a Fund reflects the value of the Financial Instruments held by a Fund, as of the time the NAV is calculated. However, if any of the Financial Instruments held by a Fund could not be purchased or sold on a day when a Fund is accepting creation and redemption orders (due to the operation of daily limits or other rules of an exchange or otherwise), a Fund may be improperly exposed which could cause it to fail to meet its stated investment objective. Alternatively, a Fund may attempt to calculate the fair value of such Financial Instruments. In such a situation, there is a risk that the calculation of the relevant benchmark, and therefore, the NAV of the applicable Fund on such day, may not accurately reflect the realizable market value of the Financial Instruments underlying such benchmark.

The liquidity of the Shares may also be affected by the withdrawal from participation of Authorized Participants, which could adversely affect the market price of the Shares.

In the event that one or more Authorized Participants which have substantial interests in the Shares withdraw from participation, the liquidity of the Shares will likely decrease, which could adversely affect the market price of the Shares and result in investors incurring a loss on their investment.

Shareholders that are not Authorized Participants may only purchase or sell their Shares in secondary trading markets, and the conditions associated with trading in secondary markets may adversely affect investors’ investment in the Shares.

Only Authorized Participants may create or redeem Creation Units. All other investors that desire to purchase or sell Shares must do so through the NYSE Arca or in other markets, if any, in which the Shares may be traded. Shares may trade at a premium or discount to NAV per Share.

The applicable Exchange may halt trading in the Shares of a Fund which would adversely impact investors’ ability to sell Shares.

Trading in Shares of a Fund may be halted due to market conditions or, in light of the applicable Exchange rules and procedures, for reasons that, in the view of the applicable Exchange, make trading in Shares of a Fund inadvisable. In addition, trading is subject to trading halts caused by extraordinary market volatility pursuant to “circuit breaker” rules that require trading to be halted for a specified period based on a specified decline or rise in a market index (e.g., the Dow Jones Industrial Average) or in the price of a Fund’s Shares. Additionally, the ability to short sell a Fund’s Shares may be restricted when there is a 10% or greater change from the previous day’s official closing price. There can be no assurance that the requirements necessary to maintain the listing of the Shares of a Fund will continue to be met or will remain unchanged.

Shareholders do not have the protections associated with ownership of shares in an investment company registered under the 1940 Act.

None of the Funds are subject to registration or regulation under the 1940 Act. Consequently, shareholders do not have the regulatory protections provided to investors in investment companies.

Shareholders do not have the rights enjoyed by investors in certain other vehicles and may be adversely affected by a lack of statutory rights and by limited voting and distribution rights.

The Shares have limited voting and distribution rights. For example, shareholders do not have the right to elect directors, the Funds may enact splits or reverse splits without shareholder approval and the Funds are not required to pay regular distributions, although the Funds may pay distributions at the discretion of the Sponsor.

The value of the Shares will be adversely affected if the Funds are required to indemnify the Trustee.

Under the Amended and Restated Trust Agreement of the Trust, as may be further amended and restated from time to time (the “Trust Agreement”), the Trustee has the right to be indemnified for any liability or expense incurred without gross negligence or willful misconduct. That means the Sponsor may require the assets of a Fund to be sold in order to cover losses or liability suffered by it or by the Trustee. Any sale of that kind would reduce the NAV of one or more of the Funds.

 

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Although the Shares of the Funds are limited liability investments, certain circumstances such as bankruptcy of a Fund will increase a shareholder’s liability.

The Shares of the Funds are limited liability investments; investors may not lose more than the amount that they invest plus any profits recognized on their investment. However, shareholders could be required, as a matter of bankruptcy law, to return to the estate of a Fund any distribution they received at a time when such Fund was in fact insolvent or in violation of the Trust Agreement.

Failure of the FCMs to segregate assets may increase losses in the Funds.

The CEA requires a clearing broker to segregate all funds received from customers from such broker’s proprietary assets. There is a risk that assets deposited by the Sponsor on behalf of the Funds as margin with the FCMs may, in certain circumstances, be used to satisfy losses of other clients of the FCMs. If an FCM fails to segregate the funds received from the Sponsor, the assets of the Funds might not be fully protected in the event of the FCM’s bankruptcy. Furthermore, in the event of an FCM’s bankruptcy, Fund Shares could be limited to recovering only a pro rata share of all available funds segregated on behalf of the FCM’s combined customer accounts, even though certain property specifically traceable to a particular Fund was held by the FCM. Each FCM may, from time to time, be the subject of certain regulatory and private causes of action.

Similarly, the CEA requires a clearing organization approved by the CFTC as a derivatives clearing organization to segregate all funds and other property received from a clearing member’s clients in connection with domestic futures and options contracts from any funds held at the clearing organization to support the clearing member’s proprietary trading. Nevertheless, customer funds held at a clearing organization in connection with any futures or options contracts may be held in a commingled omnibus account, which may not identify the name of the clearing member’s individual customers. With respect to futures and options contracts, a clearing organization may use assets of a non-defaulting customer held in an omnibus account at the clearing organization to satisfy payment obligations of a defaulting customer of the clearing member to the clearing organization. As a result, in the event of a default of the clearing FCM’s other clients or the clearing FCM’s failure to extend its own funds in connection with any such default, a Fund may not be able to recover the full amount of assets deposited by the clearing FCM on behalf of the Fund with the clearing organization.

In the event of a bankruptcy or insolvency of any exchange or a clearing house, a Fund could experience a loss of the funds deposited through its FCM as margin with the exchange or clearing house, a loss of any profits on its open positions on the exchange, and the loss of unrealized profits on its closed positions on the exchange.

A court could potentially conclude that the assets and liabilities of one Fund are not segregated from those of another Fund and may thereby potentially expose assets in a Fund to the liabilities of another Fund.

Each Fund is a separate series of a Delaware statutory trust and not itself a separate legal entity. Section 3804(a) of the Delaware Statutory Trust Act, as amended (the “DSTA”) provides that if certain provisions are in the formation and governing documents of a statutory trust organized in series, and if separate and distinct records are maintained for any series and the assets associated with that series are held in separate and distinct records (directly or indirectly, including through a nominee or otherwise) and accounted for in such separate and distinct records separately from the other assets of the statutory trust, or any series thereof, then the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to a particular series are enforceable against the assets of such series only, and not against the assets of the statutory trust generally or any other series thereof, and none of the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to the statutory trust generally or any other series thereof shall be enforceable against the assets of such series. The Sponsor is not aware of any court case that has interpreted Section 3804(a) of the DSTA or provided any guidance as to what is required for compliance. The Sponsor maintains separate and distinct records for each Fund and accounts for them separately, but it is possible a court could conclude that the methods used did not satisfy Section 3804(a) of the DSTA and thus potentially expose assets in a Fund to the liabilities of another Fund.

 

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There may be circumstances that could prevent a Fund from being operated in a manner consistent with its investment objective and principal investment strategies.

There may be circumstances outside the control of the Sponsor and/or a Fund that make it, for all practical purposes, impossible to re-position such Fund and/or to process a purchase or redemption order. Examples of such circumstances include: natural disasters; public service disruptions or utility problems such as those caused by fires, floods, extreme weather conditions, and power outages resulting in telephone, telecopy, and computer failures; market conditions or activities causing trading halts; systems failures involving computer or other information systems affecting the aforementioned parties, as well as the Depository Trust Company (“DTC”), the National Securities Clearing Corporation (“NSCC”), or any other participant in the purchase process; and similar extraordinary events. Accordingly, while the Sponsor has implemented and tested a business continuity plan that transfers functions of any disrupted facility to another location and has effected a disaster recovery plan, circumstances, such as those above, may prevent a Fund from being operated in a manner consistent with its investment objective and/or principal investment strategies.

Due to the increased use of technologies, intentional and unintentional cyber attacks pose operational and information security risks.

With the increased use of technologies such as the Internet and the dependence on computer systems to perform necessary business functions, the Funds are susceptible to operational and information security risks. In general, cyber incidents can result from deliberate attacks or unintentional events. Cyber attacks include, but are not limited to gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption. Cyber attacks may also be carried out in a manner that does not require gaining unauthorized access, such as causing denial-of-service attacks on websites. Cyber security failures or breaches of a Fund’s third party service provider (including, but not limited to, index providers, the administrator and transfer agent) or the issuers of securities in which the Funds invest, have the ability to cause disruptions and impact business operations, potentially resulting in financial losses, the inability of Fund shareholders to transact business, violations of applicable privacy and other laws, regulatory fines, penalties, reputational damage, reimbursement or other compensation costs, and/or additional compliance costs. In addition, substantial costs may be incurred in order to prevent any cyber incidents in the future. The Funds and their shareholders could be negatively impacted as a result. While the Funds have established business continuity plans and systems to prevent such cyber attacks, there are inherent limitations in such plans and systems including the possibility that certain risks have not been identified. Furthermore, the Funds cannot control the cyber security plans and systems put in place by issuers in which the Funds invest.

Shareholders’ tax liability will exceed cash distributions on the Shares.

Shareholders of each Fund are subject to U.S. federal income taxation and, in some cases, state, local, or foreign income taxation on their share of the Fund’s taxable income, whether or not they receive cash distributions from the Fund. Each Fund does not currently expect to make distributions with respect to capital gains or ordinary income.

Accordingly, shareholders of a Fund will not receive cash distributions equal to their share of the Fund’s taxable income or the tax liability that results from such income. A Fund’s income, gains, losses and deductions are allocated to shareholders on a monthly basis. If you own Shares in a Fund at the beginning of a month and sell them during the month, you are generally still considered a shareholder through the end of that month.

The U.S. Internal Revenue Service (“IRS”) could adjust or reallocate items of income, gain, deduction, loss and credit with respect to the Shares if the IRS does not accept the assumptions or conventions utilized by the Fund.

U.S. federal income tax rules applicable to partnerships, which each Fund is anticipated to be treated as under the Internal Revenue Code of 1986, as amended (the “Code”), are complex and their application is not always clear. Moreover, the rules generally were not written for, and in some respects are difficult to apply to, publicly traded interests in partnerships. The Funds apply certain assumptions and conventions intended to comply with the intent of the rules and to report income, gain, deduction, loss and credit to shareholders in a manner that reflects the shareholders’ economic gains and losses, but these assumptions and conventions may not comply with all aspects of the applicable regulations. It is possible therefore that the IRS will successfully assert that these assumptions or conventions do not satisfy the technical requirements of the Code or the Treasury regulations promulgated thereunder and will require that items of income, gain, deduction, loss and credit be adjusted or reallocated in a manner that could be adverse to investors.

Shareholders will receive partner information tax returns on Schedule K-1, which could increase the complexity of tax returns.

The partner information tax returns on Schedule K-1 which the Funds will distribute to shareholders will contain information regarding the income items and expense items of the Funds. If you have not received Schedule K-1s from other investments, you may find that preparing your tax return may require additional time, or it may be necessary for you to retain an accountant or other tax preparer, at an additional expense to you, to assist you in the preparation of your return.

Investors could be adversely affected if the current treatment of long-term capital gains under current U.S. federal income tax law is changed or repealed in the future.

Under current law, long-term capital gains are taxed to non-corporate investors at a maximum U.S. federal income tax rate of 20%. This tax treatment may be adversely affected, changed or repealed by future changes in tax laws at any time.

 

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Shareholders of each Fund may recognize significant amounts of ordinary income and short-term capital gain.

Due to the investment strategy of the Funds, the Funds may realize and pass-through to Shareholders significant amounts of ordinary income and short-term capital gains as opposed to long-term capital gains, which generally are taxed at a preferential rate. A Fund’s income, gains, losses and deductions are allocated to shareholders on a monthly basis. If you own shares in a Fund at the beginning of a month and sell them during the month, you are generally still considered a shareholder through the end of that month.

INVESTORS ARE STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISERS AND COUNSEL WITH RESPECT TO THE POSSIBLE TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE SHARES OF A FUND; SUCH TAX CONSEQUENCES MAY DIFFER IN RESPECT OF DIFFERENT INVESTORS.

Regulatory changes or actions, including the implementation of new legislation, may alter the operations and profitability of the Funds.

The U.S. derivatives markets and market participants have been subject to comprehensive regulation, not only by the CFTC but also by self-regulatory organizations, including the NFA and the exchanges on which the derivatives contracts are traded and/or cleared. As with any regulated activity, changes in regulations may have unexpected results. For example, changes in the amount or quality of the collateral that traders in derivatives contracts are required to provide to secure their open positions, or in the limits on number or size of positions that a trader may have open at a given time, may adversely affect the ability of the Funds to enter into certain transactions that could otherwise present lucrative opportunities. Considerable regulatory attention has been focused on non-traditional investment pools which are publicly distributed in the United States. 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.

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, forwards 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.

In particular, the Dodd-Frank Act was signed into law on July 21, 2010. The Dodd-Frank Act has made and will continue to make sweeping changes to 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 certain Financial Instruments, such as swaps, in which certain of 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 the requirement that position limits on commodity futures contracts be established; 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 mandatory use of clearinghouse mechanisms for many OTC derivatives transactions.

The CFTC, the SEC and other federal regulators have been tasked with developing the rules and regulations enacting the provisions of the Dodd-Frank Act. While certain regulations have been promulgated and are already in effect, the full impact of the Dodd-Frank Act on any of the Funds remains uncertain. The legislation and the related regulations that have been and may be promulgated in the future may negatively impact a Fund’s ability to meet its investment objective either through limits on its investments or requirements imposed on it or any of its counterparties. In particular, new requirements, including capital requirements and mandatory clearing of OTC derivatives transactions, which may increase derivative counterparties’ costs and are expected to generally be passed through to other market participants in the form of higher upfront and mark-to-market margin, less favorable trade pricing, and the imposition of new or increased fees, including clearinghouse account maintenance fees, may increase the cost of a Fund’s investments and the cost of doing business, which could adversely affect investors.

 

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Regulatory and exchange accountability levels may restrict the creation of Creation Units and the operation of the Trust.

Many U.S. commodities exchanges and boards of trade limit the amount of fluctuation permitted in futures contract prices during a single trading day by regulations referred to as “daily price fluctuation limits” or “daily limits.” 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 trading day. In addition, the CFTC, U.S. futures exchanges and certain non-U.S. exchanges have established limits referred to as “speculative position limits” or “accountability levels” on the maximum net long or short futures positions that any person may hold or control in derivatives traded on such exchanges.

In connection with these limits, the Dodd-Frank Act has required the CFTC to adopt regulations establishing speculative position limits applicable to regulated futures and OTC derivatives and impose aggregate speculative position limits across regulated U.S. futures, OTC positions and certain futures contracts traded on non-U.S. exchanges.

On November 5, 2013, the CFTC re-proposed regulations on position limits with respect to the 28 physical delivery commodity futures and options contracts, as well as to swaps that are economically equivalent to such contracts. The proposed position limits would apply with respect to contracts traded on all U.S. and certain foreign exchanges on an aggregate basis. In addition, the CFTC proposed amendments to the requirement of U.S. commodities exchanges to establish corresponding speculative position limits. Under the proposed CFTC regulations, all accounts owned or managed by an entity that is responsible for such accounts’ trading decisions, their principals and their affiliates would be combined for position limit purposes. Although it is unclear what future position limit rules will be, the Sponsor is subject to current position and accountability limits established by the CFTC and exchanges. Accordingly, it may be required to reduce the size of outstanding positions or not enter into new positions that would otherwise be taken for the Funds or not trade certain markets on behalf of the Funds in order to comply with those limits or any future limits established by the CFTC and the relevant exchanges. Derivatives contract prices could move to a limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of derivatives positions and potentially subjecting the Funds to substantial losses or periods in which such Funds do not create additional Creation Units. Modification of trades made by the Trust, if required, could adversely affect the Trust’s operations and profitability and significantly limit the Trust’s ability to reinvest income in additional contracts, create additional Creation Units, or add to existing positions in the desired amount.

In addition, the Sponsor may be required to liquidate certain open positions in order to ensure compliance with the speculative position limits at unfavorable prices, which may result in substantial losses for the relevant Funds. There also can be no assurance that the Sponsor will liquidate positions held on behalf of all the Sponsor’s accounts, including any proprietary accounts, in a proportionate manner. In the event the Sponsor chooses to liquidate a disproportionate number of positions held on behalf of any of the Funds at unfavorable prices, such Funds may incur substantial losses and the value of the Shares may be adversely affected.

Further, in October 2012, a new CFTC rule became effective, which requires each registered FCM to establish risk-based limits on position and order size. As a result, the Trust’s FCMs may be required to reduce their internal limits on the size of the positions they will execute or clear for the Funds, and the Trust may seek to use additional FCMs, which may increase the costs for the Funds and adversely affect the value of the Shares.

 

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The Trust may apply to the CFTC or to the relevant exchanges for relief from certain position limits. If the Trust is unable to obtain such relief, a Fund’s ability to issue new Creation Units, or the Fund’s ability to reinvest income in additional futures contracts, may be limited to the extent these activities cause the Trust to exceed applicable position limits. Limiting the size of a Fund may affect the correlation between the price of the Shares, as traded on an exchange, and the net asset value of the Fund. Accordingly, the inability to create additional Creation Units or add to existing positions in the desired amount could result in Shares trading at a premium or discount to NAV.

Margin for Non-cleared Swap and Forward Transactions

In 2015, the regulators adopted, and in 2016 the CFTC adopted new mandatory margin requirements for non-cleared swap and foreign currency forward transactions and new requirements for the holding of collateral by derivative dealers. These requirements, which are still pending final adoption, may increase the amount of collateral a Fund is required to provide to derivative dealers for non-cleared swaps and foreign currency forwards.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

Not applicable.

Item 3. Legal Proceedings.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Part II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

a) Eight of the Funds, ProShares UltraShort Bloomberg Commodity, ProShares UltraShort Bloomberg Crude Oil, ProShares UltraShort Euro, ProShares UltraShort Yen, ProShares Ultra Bloomberg Commodity, ProShares Ultra Bloomberg Crude Oil, ProShares Ultra Euro and ProShares Ultra Yen, commenced trading on the NYSE Arca on November 25, 2008. Four of the Funds, ProShares UltraShort Gold, ProShares UltraShort Silver, ProShares Ultra Gold, and ProShares Ultra Silver, commenced trading on the NYSE Arca on December 3, 2008. Two of the Funds, ProShares VIX Short-Term Futures ETF and ProShares VIX Mid-Term Futures ETF, commenced trading on the NYSE Arca on January 3, 2011. Two of the Funds, ProShares Ultra VIX Short-Term Futures ETF and ProShares Short VIX Short-Term Futures ETF, commenced trading on the NYSE Arca on October 3, 2011. Two of the Funds, ProShares UltraShort Bloomberg Natural Gas and ProShares Ultra Bloomberg Natural Gas, commenced trading on the NYSE Arca on October 4, 2011. One of the Funds, ProShares Short Euro, commenced trading on the NYSE Arca on June 26, 2012. One of the Funds, ProShares UltraShort Australian Dollar, commenced trading on the NYSE Arca on July 17, 2012. One of the Funds, ProShares Managed Futures Strategy, commenced trading on the NYSE Arca on October 1, 2014. The following tables set forth the ranges of reported high and low sales prices of each Fund’s Shares as reported on the NYSE Arca for the periods indicated below.

 

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Fiscal Year 2015

 

Fund

   High      Low  

ProShares Managed Futures Strategy

     

First Quarter

     22.22         20.62   

Second Quarter

     22.00         16.20   

Third Quarter

     22.00         19.00   

Fourth Quarter

     22.00         19.00   

ProShares VIX Short-Term Futures ETF

     

First Quarter

     24.83         16.38   

Second Quarter

     17.56         11.22   

Third Quarter

     20.97         10.32   

Fourth Quarter

     17.68         11.79   

ProShares VIX Mid-Term Futures ETF

     

First Quarter

     69.26         59.40   

Second Quarter

     62.14         51.80   

Third Quarter

     70.77         49.07   

Fourth Quarter

     64.15         51.90   

ProShares Short VIX Short-Term Futures ETF

     

First Quarter

     70.77         48.51   

Second Quarter

     98.13         65.84   

Third Quarter

     97.13         41.63   

Fourth Quarter

     64.74         43.08   

ProShares Ultra VIX Short-Term Futures ETF*

     

First Quarter

     170.05         70.00   

Second Quarter

     80.05         31.33   

Third Quarter

     91.25         24.34   

Fourth Quarter

     59.86         23.83   

ProShares UltraShort Bloomberg Commodity

     

First Quarter

     98.25         72.42   

Second Quarter

     96.33         85.85   

Third Quarter

     183.29         88.96   

Fourth Quarter

     150.26         106.66   

ProShares UltraShort Bloomberg Crude Oil

     

First Quarter

     110.94         66.52   

Second Quarter

     86.07         50.90   

Third Quarter

     137.18         58.79   

Fourth Quarter

     147.69         69.91   

ProShares UltraShort Bloomberg Natural Gas

     

First Quarter

     93.75         61.00   

Second Quarter

     98.87         62.50   

Third Quarter

     97.89         68.51   

Fourth Quarter

     222.91         94.00   

ProShares UltraShort Gold

     

First Quarter

     105.58         81.59   

Second Quarter

     100.58         90.40   

Third Quarter

     115.85         98.09   

Fourth Quarter

     118.85         93.48   

ProShares UltraShort Silver*

     

First Quarter

     60.89         42.25   

Second Quarter

     56.51         43.25   

Third Quarter

     66.70         53.43   

Fourth Quarter

     66.29         47.04   

ProShares Short Euro

     

First Quarter

     46.16         40.29   

 

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Fund

   High      Low  

Second Quarter

     45.59         41.93   

Third Quarter

     44.21         40.26   

Fourth Quarter

     45.14         41.52   

ProShares UltraShort Australian Dollar

     

First Quarter

     58.62         50.07   

Second Quarter

     58.17         49.70   

Third Quarter

     66.91         55.24   

Fourth Quarter

     64.60         57.40   

ProShares UltraShort Euro

     

First Quarter

     28.58         21.84   

Second Quarter

     27.88         23.55   

Third Quarter

     26.20         22.26   

Fourth Quarter

     27.18         23.04   

ProShares UltraShort Yen

     

First Quarter

     91.49         84.06   

Second Quarter

     97.60         86.80   

Third Quarter

     96.20         83.73   

Fourth Quarter

     93.23         85.29   

ProShares Ultra Bloomberg Commodity*

     

First Quarter

     52.08         36.80   

Second Quarter

     52.84         13.04   

Third Quarter

     48.18         34.15   

Fourth Quarter

     40.31         27.80   

ProShares Ultra Bloomberg Crude Oil*

     

First Quarter

     51.80         29.45   

Second Quarter

     53.60         34.35   

Third Quarter

     43.92         17.05   

Fourth Quarter

     27.45         11.56   

ProShares Ultra Bloomberg Natural Gas*

     

First Quarter

     78.48         45.00   

Second Quarter

     58.64         38.40   

Third Quarter

     48.70         31.70   

Fourth Quarter

     32.75         12.42   

ProShares Ultra Gold

     

First Quarter

     46.85         35.69   

Second Quarter

     40.93         36.54   

Third Quarter

     37.18         31.30   

Fourth Quarter

     37.75         29.06   

ProShares Ultra Silver

     

First Quarter

     52.29         35.37   

Second Quarter

     46.83         35.47   

Third Quarter

     37.17         28.40   

Fourth Quarter

     38.32         26.55   

ProShares Ultra Euro

     

First Quarter

     19.65         14.80   

Second Quarter

     17.62         14.96   

Third Quarter

     18.19         15.63   

Fourth Quarter

     17.48         14.67   

ProShares Ultra Yen*

     

First Quarter

     59.88         54.16   

Second Quarter

     57.16         50.86   

Third Quarter

     58.07         51.08   

Fourth Quarter

     56.88         52.07   

 

* See Note 1 of the Notes to Financial Statements in Item 15 of Part IV in this Annual Report on Form 10-K.

 

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Fiscal Year 2014

 

Fund

   High      Low  

ProShares Managed Futures Strategy**

     

First Quarter

   $ —        $ —    

Second Quarter

     —          —    

Third Quarter

     —          —    

Fourth Quarter

     22.15         19.50   

ProShares VIX Short-Term Futures ETF

     

First Quarter

   $ 36.91       $ 26.66   

Second Quarter

     30.88         18.84   

Third Quarter

     23.51         17.86   

Fourth Quarter

     29.68         17.06   

ProShares VIX Mid-Term Futures ETF*

     

First Quarter

   $ 84.92       $ 73.56   

Second Quarter

     76.08         61.60   

Third Quarter

     67.20         58.20   

Fourth Quarter

     77.84         59.05   

ProShares Short VIX Short-Term Futures ETF*

     

First Quarter

   $ 71.80       $ 49.80   

Second Quarter

     89.20         55.86   

Third Quarter

     93.33         68.65   

Fourth Quarter

     80.94         48.29   

ProShares Ultra VIX Short-Term Futures ETF*

     

First Quarter

   $ 108.41       $ 58.40   

Second Quarter

     71.72         26.06   

Third Quarter

     39.11         22.22   

Fourth Quarter

     56.28         17.62   

ProShares UltraShort Bloomberg Commodity

     

First Quarter

   $ 63.49       $ 52.13   

Second Quarter

     55.31         49.66   

Third Quarter

     72.95         52.47   

Fourth Quarter

     87.44         67.37   

ProShares UltraShort Bloomberg Crude Oil

     

First Quarter

   $ 36.64       $ 27.10   

Second Quarter

     30.02         24.06   

Third Quarter

     31.78         24.31   

Fourth Quarter

     80.24         29.57   

ProShares UltraShort Bloomberg Natural Gas

     

First Quarter

   $ 76.94       $ 34.00   

Second Quarter

     45.82         35.39   

Third Quarter

     56.10         40.03   

Fourth Quarter

     84.00         37.00   

ProShares UltraShort Gold

     

First Quarter

   $ 100.84       $ 76.83   

Second Quarter

     94.80         82.11   

Third Quarter

     98.69         80.41   

Fourth Quarter

     109.22         91.01   

ProShares UltraShort Silver

     

First Quarter

   $ 92.60       $ 68.26   

Second Quarter

     93.00         71.66   

Third Quarter

     110.00         69.36   

Fourth Quarter

     131.34         97.46   

ProShares Short Euro

     

First Quarter

   $ 36.30       $ 35.15   

Second Quarter

     36.17         35.06   

Third Quarter

     38.56         35.60   

 

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Fund

   High      Low  

Fourth Quarter

     40.04         37.15   

ProShares UltraShort Australian Dollar

     

First Quarter

   $ 48.89       $ 42.22   

Second Quarter

     42.80         40.26   

Third Quarter

     46.23         39.55   

Fourth Quarter

     52.36         43.86   

ProShares UltraShort Euro

     

First Quarter

   $ 17.74       $ 16.50   

Second Quarter

     17.51         16.50   

Third Quarter

     20.09         17.03   

Fourth Quarter

     21.61         19.11   

ProShares UltraShort Yen

     

First Quarter

   $ 70.50       $ 64.61   

Second Quarter

     68.77         64.74   

Third Quarter

     75.85         64.63   

Fourth Quarter

     92.61         69.51   

ProShares Ultra Bloomberg Commodity

     

First Quarter

   $ 23.50       $ 18.51   

Second Quarter

     23.65         20.76   

Third Quarter

     21.93         17.00   

Fourth Quarter

     19.13         12.86   

ProShares Ultra Bloomberg Crude Oil

     

First Quarter

   $ 36.71       $ 27.62   

Second Quarter

     40.17         32.79   

Third Quarter

     39.69         29.52   

Fourth Quarter

     32.35         9.84   

ProShares Ultra Bloomberg Natural Gas

     

First Quarter

   $ 64.36       $ 34.86   

Second Quarter

     54.35         42.94   

Third Quarter

     45.60         31.59   

Fourth Quarter

     41.19         15.45   

ProShares Ultra Gold

     

First Quarter

   $ 54.53       $ 41.80   

Second Quarter

     49.85         43.15   

Third Quarter

     50.43         40.30   

Fourth Quarter

     43.54         35.98   

ProShares Ultra Silver*

     

First Quarter

   $ 80.77       $ 60.50   

Second Quarter

     72.07         56.25   

Third Quarter

     74.31         45.20   

Fourth Quarter

     50.18         36.62   

ProShares Ultra Euro

     

First Quarter

   $ 26.75       $ 24.93   

Second Quarter

     26.61         25.07   

Third Quarter

     25.80         21.72   

Fourth Quarter

     26.10         19.80   

ProShares Ultra Yen

     

First Quarter

   $ 20.25       $ 18.71   

Second Quarter

     20.15         18.95   

Third Quarter

     20.05         16.96   

Fourth Quarter

     18.75         13.73   

 

* See Note 1 of the Notes to Financial Statements in Item 15 of Part IV in this Annual Report on Form 10-K.
** Fund commenced investment operations on October 1, 2014.

 

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The approximate number of holders of the Shares of each Fund as of December 31, 2015 was as follows:

 

Fund

   Number of Holders  

ProShares Managed Futures Strategy

     171   

ProShares VIX Short-Term Futures ETF

     7,262   

ProShares VIX Mid-Term Futures ETF

     2,184   

ProShares Short VIX Short-Term Futures ETF

     14,523   

ProShares Ultra VIX Short-Term Futures ETF

     30,834   

ProShares UltraShort Bloomberg Commodity

     218   

ProShares UltraShort Bloomberg Crude Oil

     4,320   

ProShares UltraShort Bloomberg Natural Gas

     432   

ProShares UltraShort Gold

     3,063   

ProShares UltraShort Silver

     3,767   

ProShares Short Euro

     598   

ProShares UltraShort Australian Dollar

     462   

ProShares UltraShort Euro

     17,045   

ProShares UltraShort Yen

     7,578   

ProShares Ultra Bloomberg Commodity

     390   

ProShares Ultra Bloomberg Crude Oil

     56,982   

ProShares Ultra Bloomberg Natural Gas

     4,408   

ProShares Ultra Gold

     7,452   

ProShares Ultra Silver

     25,889   

ProShares Ultra Euro

     1,867   

ProShares Ultra Yen

     365   

Total:

     189,810   

The Funds made no distributions to Shareholders during the fiscal year ended December 31, 2015 The Funds have no obligation to make periodic distributions to Shareholders.

b) The Trust initially registered Shares on its Registration Statement on Form S-1 (File No. 333-146801), which was declared effective on November 21, 2008, and registered additional Shares on its Registration Statement on Form S-1 (File No. 333-156888), which was declared effective on February 13, 2009. The Trust terminated these two offerings before the sale of all registered Shares and re-allocated the remaining amount of the registered Shares among the Funds listed on its Registration Statement on Form S-3 (File No. 333-163511), which became effective on December 4, 2009. It then registered additional Shares and/or added Funds pursuant to post-effective amendments to that Registration Statement on Form S-3, which became effective on May 28, 2010, November 5, 2010, December 23, 2010 and April 13, 2011, as well as on a Registration Statement on Form S-1 (File No. 333-178707), which became effective on June 25, 2012. On June 26, 2012, a post-effective amendment to the Registration Statement on Form S-3 (File No. 333-163511) was declared effective, which registered additional Shares for ProShares Ultra Bloomberg Crude Oil and terminated the offerings for certain publicly offered Funds and certain Funds that had never been publicly offered. New offerings for those Funds that had been publicly offered were registered on an accompanying Registration Statement on Form S-1 (File No. 333-176878), which was also declared effective on June 26, 2012. On September 24, 2012, a Registration Statement on Form S-1 (File No. 333-183672) was declared effective, which registered additional Shares for ProShares Ultra VIX Short-Term Futures ETF, ProShares VIX Short-Term Futures ETF and ProShares Short VIX Short-Term Futures ETF. This registration statement (File No. 333-183672) was a combined prospectus and acted as a post-effective amendment to the Form S-1 (File No. 333-176878). On September 27, 2012, a Registration Statement on Form S-3 (File No. 333-183674) was declared effective, which registered additional Shares for ProShares Ultra Bloomberg Crude Oil, ProShares UltraShort Bloomberg Crude Oil and ProShares UltraShort Euro. This registration statement was a combined prospectus and acted as a post-effective amendment to the Form S-3 (File No. 333-163511). On September 28, 2012, a post-effective amendment to a Registration Statement on Form S-1 (File No. 333-178707) was declared effective, terminating the proposed offerings of several unlaunched currency funds. On January 30, 2013, a Registration Statement on Form S-1 (File No. 333-185288) was declared effective. That registration statement, which registered additional Shares to ProShares Short VIX Short-Term Futures ETF, acted as a combined prospectus and post-effective amendment to the Trust’s Form S-1 Registration Statements (File Nos. 333-183672 and 333-178707).

 

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Also, on January 30, 2013, a Registration Statement on Form S-3 (File No. 333-185289) was declared effective. That registration statement, which registered additional Shares to ProShares Ultra Bloomberg Crude Oil, ProShares UltraShort Euro, ProShares Ultra VIX Short-Term Futures ETF and ProShares VIX Short-Term Futures ETF, acted as a combined prospectus and post-effective amendment to the Trust’s Form S-1 Registration Statement (File No. 333-193672) and Form S-3 Registration Statement (File No. 333-183674). On April 24, 2013, a post-effective amendment to the Form S-1 Registration Statement (File No. 333-185288) was declared effective, terminating the registered but unlaunched offerings related to: ProShares UltraPro Short Euro, ProShares Managed Futures Strategy and ProShares Commodity Managed Futures Strategy. On April 29, 2013, a Registration Statement on Form S-3 (File No. 333-187820) was declared effective, which registered additional Shares for ProShares Ultra Bloomberg Crude Oil, ProShares UltraShort Bloomberg Crude Oil, ProShares Ultra Silver, ProShares UltraShort Silver, ProShares UltraShort Euro, ProShares UltraShort Yen, ProShares Ultra VIX Short-Term Futures ETF and ProShares VIX Short-Term Futures ETF. That registration statement was a combined prospectus and acted as a post-effective amendment to the Form S-3 (File No. 333-185289). On May 21, 2013, a Registration Statement on Form S-1 (File 333-188215) was declared effective, which registered additional Shares for ProShares Ultra Bloomberg Natural Gas, ProShares UltraShort Bloomberg Natural Gas, ProShares Short VIX Short-Term Futures ETF and ProShares VIX Mid-Term Futures ETF. That registration statement was a combined prospectus and acted as a post-effective amendment to the Form S-1 (File No. 333-185288). On July 30, 2013, a Registration Statement on Form S-3 (File No. 333-189967) was declared effective, which registered additional Shares for ProShares Bloomberg Crude Oil and ProShares UltraShort Yen and partially terminated registered and unissued Shares of ProShares Ultra Bloomberg Crude Oil, ProShares Ultra Silver, ProShares UltraShort Silver, ProShares UltraShort Euro and ProShares VIX Short-Term Futures ETF. That registration statement was a combined prospectus and acted as a post-effective amendment to the Form S-3 (File No. 333-187820). On May 6, 2014, a post-effective amendment to the Form S-1 Registration Statement (File No. 333-188215) was declared effective, updating the Form S-1 Registration Statement by, among other things, incorporating by reference the audited financial statements for the fiscal year ended December 31, 2013. The post-effective amendment did not register any additional shares. On July 30, 2014, a Registration Statement on Form S-1 (File No. 333-196884) was declared effective, which partially terminated registered and unissued Shares of ProShares VIX Mid-Term Futures ETF, ProShares Ultra Bloomberg Commodity, ProShares Ultra Euro, ProShares Ultra Yen and ProShares UltraShort Bloomberg Commodity. That registration statement was a combined prospectus and acted as a post-effective amendment to two Form S-1 registration statements (File Nos. 333-188215 and 333-185288). On July 30, 2014, a Registration Statement on Form S-3 (File No. 333-196885) was also declared effective, which registered additional Shares for ProShares Ultra Bloomberg Crude Oil, ProShares UltraShort Bloomberg Crude Oil and ProShares UltraShort Euro and partially terminated registered and unissued Shares of ProShares Ultra Gold, ProShares Ultra Silver and ProShares UltraShort Silver. That Registration Statement also was a combined prospectus and acted as a post-effective amendment to the Form S-3 (File No. 333-189967). Through the July 30, 2014 filings, ProShares Short VIX Short-Term Futures ETF was transferred from the Form S-1 to the Form S-3. On September 29, 2014, a Registration Statement on Form S-1 (File No. 333-198189) was declared effective, which registered a new offering of the Managed Futures Fund and acted as a post-effective amendment to the Form S-1 Registration Statement (File No. 333-196884). On November 25, 2014, a Registration Statement on Form S-1 (File No. 333-199642) was declared effective, which registered additional Shares for ProShares Ultra Bloomberg Natural Gas, ProShares UltraShort Bloomberg Natural Gas and ProShares UltraShort Silver. That registration statement was a combined prospectus and acted as a post-effective amendment to the Form S-1 registration statement (File No. 333-198189) and the Form S-3 registration statement (333-196885). On November 25, 2014, a Registration Statement on Form S-3 (File No. 333-199641) was also declared effective, which registered additional Shares for ProShares Ultra Bloomberg Crude Oil, ProShares Ultra Gold, ProShares UltraShort Gold, ProShares Ultra Silver, ProShares UltraShort Euro, ProShares UltraShort Yen, ProShares Ultra VIX Short-Term Futures ETF, ProShares Short VIX Short-Term Futures ETF and ProShares VIX Short-Term Futures ETF. That Registration Statement also was a combined prospectus and acted as a post-effective amendment to the Form S-3 (File No. 333-196885). Through the November 25, 2014 filings, ProShares UltraShort Silver was transferred from the Form S-3 to the Form S-1. On March 31, 2015, a Registration Statement on Form S-1 (File No. 333-202724) was declared effective, which registered additional Shares for ProShares VIX Mid-Term Futures ETF,

 

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ProShares Managed Futures Strategy, ProShares Ultra Bloomberg Commodity, ProShares Ultra Bloomberg Natural Gas, ProShares UltraShort Bloomberg Natural Gas, ProShares UltraShort Silver, ProShares Ultra Australian Dollar, ProShares UltraShort Australian Dollar, ProShares Ultra Euro, ProShares Short Euro and ProShares Ultra Yen. That registration statement was a combined prospectus and acted as a post-effective amendment to the Form S-1 registration statement (File No. 333-199642). On March 31, 2015, a Registration Statement on Form S-3 (File No. 333-202725) was also declared effective, which registered additional Shares for ProShares Ultra Bloomberg Crude Oil, ProShares UltraShort Bloomberg Crude Oil, ProShares Ultra Gold, ProShares UltraShort Gold, ProShares Ultra Silver, ProShares UltraShort Euro, ProShares UltraShort Yen, ProShares Ultra VIX Short-Term Futures ETF, ProShares Short VIX Short-Term Futures ETF and ProShares VIX Short-Term Futures ETF. That Registration Statement also was a combined prospectus and acted as a post-effective amendment to the Form S-3 (File No. 333-199641). On August 11, 2015, a Registration Statement on Form S-1 (File No. 333-202724) was declared effective which removed ProShares Ultra Australian Dollar from the Form S-1. No additional shares were registered. That registration statement was a combined prospectus and acted as a pre-effective amendment to post-effective amendment No. 1 of the Form S-1. Thus, as of December 31, 2015, the Trust continued to have two effective registration statements outstanding: 1) a Form S-1 Registration Statement (No. 333-202724); and 2) a Form S-3 Registration Statement (No. 333-199641).

Substantially all of the proceeds received by each Fund from the issuance and sale of Shares to Authorized Participants are used by each Fund to enter into Financial Instruments relating to that Fund’s benchmark in combination with cash or cash equivalents and/or U.S. Treasury securities or other high credit quality, short-term fixed-income or similar securities (such as shares of money market funds and collateralized repurchase agreements) that may in part be used for direct investment or deposited with the FCMs as margin in connection with futures contracts or in segregated accounts at the Funds’ custodian bank as collateral for swap agreements or forward contracts, as applicable. The Managed Futures Fund and each Geared Fund continuously offers and redeems its Shares in blocks of 50,000 Shares, and each Matching VIX Fund continuously offers and redeems Shares in blocks of 25,000 Shares.

 

Title of

Securities Registered

   Amount
Registered
As of
December 31,
2015
     Shares Sold
For the
Three
Months
Ended

December 31,
2015
     Sale Price of
Shares

Sold For the
Three Months
Ended

December 31,
2015
     Shares Sold
For the Year
Ended

December 31,
2015
     Sale Price of
Shares
Sold For the Year
Ended
December 31,
2015
 

ProShares Managed Futures Strategy Common Units of Beneficial Interest

   $ 509,027,538         150,000       $ 3,096,161         550,000       $ 11,524,992   

ProShares VIX Short-Term Futures ETF Common Units of Beneficial Interest

   $ 2,068,623,063         1,925,000       $ 25,251,144         12,475,000       $ 187,659,682   

ProShares VIX Mid-Term Futures ETF Common Units of Beneficial Interest

   $ 619,302,925         25,000       $ 1,447,922         325,000       $ 19,318,111   

ProShares Short VIX Short-Term Futures ETF Common Units of Beneficial Interest

   $ 3,589,767,641         5,400,000       $ 257,452,762         24,100,000       $ 1,403,231,166   

ProShares Ultra VIX Short-Term Futures ETF Common Units of Beneficial Interest*

   $ 4,255,550,774         27,400,000       $ 802,932,366         72,180,000       $ 3,192,766,319   

 

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Table of Contents

Title of

Securities Registered

   Amount
Registered
As of
December 31,
2015
     Shares Sold
For the
Three
Months
Ended

December 31,
2015
     Sale Price of
Shares

Sold For the
Three Months
Ended

December 31,
2015
     Shares Sold
For the Year
Ended

December 31,
2015
     Sale Price of
Shares
Sold For the Year
Ended
December 31,
2015
 

ProShares UltraShort Bloomberg Commodity Common Units of Beneficial Interest

   $ 172,839,931         —         $ —           —         $ —     

ProShares UltraShort Bloomberg Crude Oil Common Units of Beneficial Interest

   $ 2,114,776,247         600,000       $ 49,768,085         10,800,000       $ 796,070,368   

ProShares UltraShort Bloomberg Natural Gas Common Units of Beneficial Interest

   $ 412,030,981         50,000       $ 7,753,058         450,000       $ 37,204,187   

ProShares UltraShort Gold Common Units of Beneficial Interest

   $ 503,545,611         50,000       $ 4,859,925         150,000       $ 13,383,255   

ProShares UltraShort Silver Common Units of Beneficial Interest*

   $ 2,083,528,399         550,000       $ 28,700,095         1,650,000       $ 84,272,164   

ProShares Short Euro Common Units of Beneficial Interest

   $ 174,672,977         —         $ —           550,000       $ 23,563,492   

ProShares UltraShort Australian Dollar Common Units of Beneficial Interest

   $ 172,771,084         —         $ —           50,000       $ 2,764,167   

ProShares UltraShort Euro Common Units of Beneficial Interest

   $ 1,888,450,946         700,000       $ 17,798,452         12,600,000       $ 328,253,174   

ProShares UltraShort Yen Common Units of Beneficial Interest

   $ 951,962,134         —         $ —           1,350,000       $ 124,524,909   

ProShares Ultra Bloomberg Commodity Common Units of Beneficial Interest*

   $ 129,604,130         150,000       $ 5,583,484         225,000       $ 8,571,369   

ProShares Ultra Bloomberg Crude Oil Common Units of Beneficial Interest*

   $ 3,838,773,188         32,300,000       $ 564,704,767         86,830,000       $ 2,505,616,928   

ProShares Ultra Bloomberg Natural Gas Common Units of Beneficial Interest*

   $ 540,275,387         450,000       $ 8,582,442         2,137,500       $ 83,526,876   

ProShares Ultra Gold Common Units of Beneficial Interest

   $ 683,270,223         50,000       $ 1,549,917         150,000       $ 5,401,300   

ProShares Ultra Silver Common Units of Beneficial Interest

   $ 2,251,471,600         700,000       $ 20,094,769         2,700,000       $ 96,078,803   

ProShares Ultra Euro Common Units of Beneficial Interest

   $ 126,652,323         150,000       $ 2,376,043         950,000       $ 15,916,613   

ProShares Ultra Yen Common Units of Beneficial Interest*

   $ 138,726,333         —         $ —           75,000       $ 4,285,016   

Total:

   $ 27,225,623,435         70,650,000       $ 1,801,951,392         230,297,500       $ 8,943,932,891   

 

c) From October 1, 2015 through December 31, 2015, the number of Shares redeemed and average price per Share for each Fund were as follows:

 

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Table of Contents

Fund

   Total Number of
Shares Redeemed
     Average Price
Per Share
 

ProShares Managed Futures Strategy

     

10/01/15 to 10/31/15

     100,000       $ 20.29   

11/01/15 to 11/30/15

     100,000       $ 20.38   

12/01/15 to 12/31/15

     50,000       $ 20.52   

ProShares VIX Short-Term Futures ETF

     

10/01/15 to 10/31/15

     —         $ —     

11/01/15 to 11/30/15

     —         $ —     

12/01/15 to 12/31/15

     400,000       $ 14.09   

ProShares VIX Mid-Term Futures ETF

     

10/01/15 to 10/31/15

     —         $ —     

11/01/15 to 11/30/15

     —         $ —     

12/01/15 to 12/31/15

     —         $ —     

ProShares Short VIX Short-Term Futures ETF

     

10/01/15 to 10/31/15

     2,850,000       $ 59.54   

11/01/15 to 11/30/15

     1,000,000       $ 59.27   

12/01/15 to 12/31/15

     2,250,000       $ 53.32   

ProShares Ultra VIX Short-Term Futures ETF

     

10/01/15 to 10/31/15

     100,000       $ 29.53   

11/01/15 to 11/30/15

     2,150,000       $ 33.87   

12/01/15 to 12/31/15

     11,500,000       $ 34.65   

ProShares UltraShort Bloomberg Commodity

     

10/01/15 to 10/31/15

     —         $ —     

11/01/15 to 11/30/15

     —         $ —     

12/01/15 to 12/31/15

     —         $ —     

ProShares UltraShort Bloomberg Crude Oil

     

10/01/15 to 10/31/15

     600,000       $ 83.17   

11/01/15 to 11/30/15

     400,000       $ 93.81   

12/01/15 to 12/31/15

     500,000       $ 127.33   

ProShares UltraShort Bloomberg Natural Gas

     

10/01/15 to 10/31/15

     50,000       $ 126.67   

11/01/15 to 11/30/15

     50,000       $ 139.16   

12/01/15 to 12/31/15

     —         $ —     

ProShares UltraShort Gold

     

10/01/15 to 10/31/15

     —         $ —     

11/01/15 to 11/30/15

     50,000       $ 112.46   

12/01/15 to 12/31/15

     50,000       $ 115.59   

ProShares UltraShort Silver*

     

10/01/15 to 10/31/15

     100,000       $ 51.49   

11/01/15 to 11/30/15

     250,000       $ 62.55   

12/01/15 to 12/31/15

     250,000       $ 62.02   

ProShares Short Euro

     

10/01/15 to 10/31/15

     400,000       $ 42.75   

11/01/15 to 11/30/15

     —         $ —     

12/01/15 to 12/31/15

     —         $ —     

ProShares UltraShort Australian Dollar

     

10/01/15 to 10/31/15

     —         $ —     

11/01/15 to 11/30/15

     —         $ —     

12/01/15 to 12/31/15

     —         $ —     

ProShares UltraShort Euro

     

10/01/15 to 10/31/15

     500,000       $ 24.09   

11/01/15 to 11/30/15

     2,000,000       $ 26.14   

12/01/15 to 12/31/15

     200,000       $ 25.54   

ProShares UltraShort Yen

     

10/01/15 to 10/31/15

     50,000       $ 87.76   

11/01/15 to 11/30/15

     350,000       $ 91.79   

12/01/15 to 12/31/15

     350,000       $ 88.69   

ProShares Ultra Bloomberg Commodity

     

10/01/15 to 10/31/15

     —         $ —     

11/01/15 to 11/30/15

     —         $ —     

12/01/15 to 12/31/15

     —         $ —     

ProShares Ultra Bloomberg Crude Oil

     

10/01/15 to 10/31/15

     3,450,000       $ 24.86   

11/01/15 to 11/30/15

     1,550,000       $ 24.48   

12/01/15 to 12/31/15

     200,000       $ 12.57   

ProShares Ultra Bloomberg Natural Gas

     

10/01/15 to 10/31/15

     —         $ —     

11/01/15 to 11/30/15

     —         $ —     

12/01/15 to 12/31/15

     —         $ —     

ProShares Ultra Gold

     

10/01/15 to 10/31/15

     150,000       $ 36.05   

11/01/15 to 11/30/15

     —         $ —     

12/01/15 to 12/31/15

     —         $ —     

ProShares Ultra Silver

     

10/01/15 to 10/31/15

     350,000       $ 35.28   

11/01/15 to 11/30/15

     250,000       $ 30.91   

12/01/15 to 12/31/15

     —         $ —     

ProShares Ultra Euro

     

10/01/15 to 10/31/15

     —         $ —     

11/01/15 to 11/30/15

     —         $ —     

12/01/15 to 12/31/15

     100,000       $ 15.70   

ProShares Ultra Yen

     

10/01/15 to 10/31/15

     —         $ —     

11/01/15 to 11/30/15

     —         $ —     

12/01/15 to 12/31/15

     —         $ —     

Total:

     32,700,000       $ 41.39   

 

* See Note 1 of the Notes to Financial Statements in Item 15 of Part IV in this Annual Report on Form 10-K regarding the reverse Share splits for ProShares Ultra VIX Short-Term Futures ETF, ProShares Ultra Bloomberg Commodity, ProShares Ultra Bloomberg Crude Oil, ProShares Ultra Bloomberg Natural Gas and ProShares Ultra Yen and the Share split for ProShares UltraShort Silver.

 

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Table of Contents

Item 6. Selected Financial Data.

Financial Highlights for the years ended December 31, 2015, 2014, 2013, 2012 and 2011 for each Fund, as applicable, are summarized below and should be read in conjunction with the Funds’ audited financial statements, and the notes and schedules related thereto, which are included in this Annual Report on Form 10-K.

PROSHARES MANAGED FUTURES STRATEGY

 

    

Year ended

December 31, 2015

    

October 1, 2014 (Inception)

through December 31, 2014

 

Total assets

   $ 7,211,467      $ 6,406,630  

Total shareholders’ equity at end of period

     7,187,022        6,340,845  

Net investment income (loss)

     (71,554      (7,531 )

Net realized and unrealized gain (loss)

     (325,345 )      213,333  

Net income (loss)

     (396,899 )      205,802  

Net increase (decrease) in net asset value per share

     (0.60 )      1.14  

PROSHARES VIX SHORT-TERM FUTURES ETF

 

     Year ended
December 31,
2015
    Year ended
December 31,
2014
    Year ended
December 31,
2013
    Year ended
December 31,
2012
    Year ended
December 31,
2011
 

Total assets

   $ 105,350,240     $ 111,540,076     $ 279,169,502     $ 183,678,945     $ 30,574,178  

Total shareholders’ equity at end of period

     105,272,823       111,459,325       270,398,554       137,657,464       30,549,903  

Net investment income (loss)

     (1,150,794     (1,118,548     (1,584,119     (1,053,112     (282,569

Net realized and unrealized gain (loss)

     (26,753,742 )     22,228,972       (161,051,480     (159,588,720     2,157,514  

Net income (loss)

     (27,904,536 )     21,110,424       (162,635,599     (160,641,832     1,874,945  

Net increase (decrease) in net asset value per share

     (7.69     (7.61     (55.40     (297.93     (18.13

 

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Table of Contents

PROSHARES VIX MID-TERM FUTURES ETF

 

     Year ended
December 31,
2015
    Year ended
December 31,
2014
    Year ended
December 31,
2013
    Year ended
December 31,
2012
    Year ended
December 31,
2011
 

Total assets

   $ 27,671,016     $ 29,430,266     $ 56,501,754     $ 89,824,581     $ 90,821,428  

Total shareholders’ equity at end of period

     27,650,638       21,459,575       51,134,323       37,302,992       90,821,428  

Net investment income (loss)

     (240,600     (386,478     (546,566     (786,167     (117,121

Net realized and unrealized gain (loss)

     (3,939,933     (9,219,527     (31,648,251     (70,590,582     (6,632,431

Net income (loss)

     (4,180,533     (9,606,005     (32,194,817     (71,376,749     (6,749,552

Net increase (decrease) in net asset value per share

     (9.64     (13.58     (61.62     (157.76     (23.44

PROSHARES SHORT VIX SHORT-TERM FUTURES ETF

 

     Year ended
December 31,
2015
    Year ended
December 31,
2014
    Year ended
December 31,
2013
    Year ended
December 31,
2012
    April 5, 2011
(Inception)
through

December 31,
2011
 

Total assets

   $ 674,236,256     $ 541,342,389     $ 141,868,875     $ 95,411,974     $ 7,795,104  

Total shareholders’ equity at end of period

     642,811,361       506,556,124       141,751,202       82,663,633       7,760,424  

Net investment income (loss)

     (5,798,200     (4,285,469     (1,328,369     (437,699     (16,333

Net realized and unrealized gain (loss)

     96,936,157        52,474,493       96,687,035       11,731,268       1,446,017  

Net income (loss)

     91,137,957        48,189,024       95,358,666       11,293,569       1,429,684  

Net increase (decrease) in net asset value per share

     (10.59     (6.10     34.43        20.13        2.93   

PROSHARES ULTRA VIX SHORT-TERM FUTURES ETF

 

     Year ended
December 31,
2015
    Year ended
December 31,
2014
    Year ended
December 31,
2013
    Year ended
December 31,
2012
    April 5, 2011
(Inception)
through

December 31,
2011
 

Total assets

   $ 560,771,363     $ 358,364,869     $ 229,779,878     $ 156,387,315     $ 11,767,107  

Total shareholders’ equity at end of period

     547,708,740       351,789,953       226,233,584       84,716,132       9,881,113  

Net investment income (loss)

     (7,410,148     (5,359,486     (4,828,761     (3,001,646     (16,778

Net realized and unrealized gain (loss)

     (419,888,086     (75,812,141     (432,159,208     (506,284,763     (4,287,543

Net income (loss)

     (427,298,234     (81,171,627     (436,987,969     (509,286,409     (4,304,321

Net increase (decrease) in net asset value per share

     (97.38     (209.96     (3691.01     (144,182.85     (331,848.32

 

67


Table of Contents

PROSHARES ULTRASHORT BLOOMBERG COMMODITY

 

     Year ended
December 31,
2015
    Year ended
December 31,
2014
    Year ended
December 31,
2013
    Year ended
December 31,
2012
    Year ended
December 31,
2011
 

Total assets

   $ 8,574,050     $ 5,268,573     $ 3,828,135     $ 3,248,525     $ 9,114,501  

Total shareholders’ equity at end of period

     8,514,039       5,264,706       3,797,427       3,245,965       9,107,146  

Net investment income (loss)

     (56,626     (34,070     (32,130     (47,749     (133,153

Net realized and unrealized gain (loss)

     3,305,959       1,501,349       583,592       340,212       (2,775,425

Net income (loss)

     3,249,333       1,467,279       551,462       292,463       (2,908,578

Net increase (decrease) in net asset value per share

     54.16        24.46        9.19        (2.82     8.92   

PROSHARES ULTRASHORT BLOOMBERG CRUDE OIL

 

     Year ended
December 31,
2015
    Year ended
December 31,
2014
    Year ended
December 31,
2013
    Year ended
December 31,
2012
    Year ended
December 31,
2011
 

Total assets

   $ 96,858,373     $ 173,193,149     $ 258,594,876     $ 96,137,916     $ 144,499,971  

Total shareholders’ equity at end of period

     95,897,894       169,210,110       256,060,149       89,481,266       144,389,893  

Net investment income (loss)

     (2,166,211     (2,415,841     (2,544,628     (1,078,664     (1,211,735

Net realized and unrealized gain (loss)

     57,732,875       145,729,447       (6,221,827     35,047,625       36,113,078  

Net income (loss)

     55,566,664       143,313,606       (8,766,455     33,968,961       34,901,343  

Net increase (decrease) in net asset value per share

     55.22        46.25        (8.58     1.49        (12.03

PROSHARES ULTRASHORT BLOOMBERG NATURAL GAS

 

     Year ended
December 31,
2015
    Year ended
December 31,
2014
    Year ended
December 31,
2013
    Year ended
December 31,
2012
    April 5, 2011
(Inception)
through

December 31,
2011
 

Total assets

   $ 11,260,804     $ 14,698,814     $ 22,744,708     $ 12,780,598     $ 7,174,003  

Total shareholders’ equity at end of period

     10,462,856       14,688,564       22,734,767       12,768,340       7,142,310  

Net investment income (loss)

     (177,124     (460,907     (209,360     (196,407     (15,612

Net realized and unrealized gain (loss)

     8,800,372       11,696,119       (1,952,152     241,864       3,157,122  

Net income (loss)

     8,623,248       11,235,212       (2,161,512     45,457       3,141,510  

Net increase (decrease) in net asset value per share

     55.64        13.99        (32.18     6.92        41.89   

 

68


Table of Contents

PROSHARES ULTRASHORT GOLD

 

     Year ended
December 31,
2015
    Year ended
December 31,
2014
    Year ended
December 31,
2013
    Year ended
December 31,
2012
    Year ended
December 31,
2011
 

Total assets

   $ 75,031,735     $ 84,214,601     $ 154,835,279     $ 92,495,298     $ 198,423,144  

Total shareholders’ equity at end of period

     74,971,764       81,861,762       139,436,456       92,416,742       198,298,571  

Net investment income (loss)

     (703,582     (857,817     (1,175,860     (1,106,213     (1,043,199

Net realized and unrealized gain (loss)

     16,807,446        (13,246,612     63,024,399       (39,758,386     (8,458,117

Net income (loss)

     16,103,864        (14,104,429     61,848,539       (40,864,599     (9,501,316

Net increase (decrease) in net asset value per share

     19.23        (6.87     39.65        (18.84     (30.77

PROSHARES ULTRASHORT SILVER

 

     Year ended
December 31,
2015
    Year ended
December 31,
2014
    Year ended
December 31,
2013
    Year ended
December 31,
2012
    Year ended
December 31,
2011
 

Total assets

   $ 56,035,123     $ 53,254,791     $ 115,311,683     $ 105,882,964     $ 267,497,929  

Total shareholders’ equity at end of period

     55,987,938       53,007,867       112,989,686       100,656,703       246,813,921  

Net investment income (loss)

     (516,464     (585,841     (973,304     (1,403,142     (3,388,013

Net realized and unrealized gain (loss)

     14,943,700       17,926,873       91,898,519       (51,826,102     (117,764,498

Net income (loss)

     14,427,236       17,341,032       90,925,215       (53,229,244     (121,152,511

Net increase (decrease) in net asset value per share

     6.77        12.92        19.19        (12.64     (61.39

PROSHARES SHORT EURO

 

     Year ended
December 31,
2015
    Year ended
December 31,
2014
    Year ended
December 31,
2013
    Year ended
December 31,
2012
    December 12, 2011
(Inception)
through

December 31,
2011
 

Total assets

   $ 17,524,993     $ 14,032,932     $ 8,903,836     $ 3,804,040     $ 41,200  

Total shareholders’ equity at end of period

     17,510,898       14,021,804       8,896,842       3,763,040       200  

Net investment income (loss)

     (178,761     (118,247     (51,170     (17,891     —    

Net realized and unrealized gain (loss)

     1,417,580       2,011,540       (359,542     (219,269     —    

Net income (loss)

     1,238,819       1,893,293       (410,712     (237,160     —    

Net increase (decrease) in net asset value per share

     3.72        4.48        (2.04     (2.37     —    

 

69


Table of Contents

PROSHARES ULTRASHORT AUSTRALIAN DOLLAR

 

     Year ended
December 31,
2015
    Year ended
December 31,
2014
    Year ended
December 31,
2013
    Year ended
December 31,
2012
    December 12,
2011

(Inception)
through

December 31,
2011
 

Total assets

   $ 20,477,446     $ 23,139,187     $ 28,091,462     $ 3,832,949     $ 41,200  

Total shareholders’ equity at end of period

     20,460,679       23,120,790       27,983,279       3,780,999       200  

Net investment income (loss)

     (209,987     (213,183     (159,424     (16,229     —    

Net realized and unrealized gain (loss)

     3,166,384       2,121,121       3,553,299       (202,972     —    

Net income (loss)

     2,956,397       1,907,938       3,393,875       (219,201     —    

Net increase (decrease) in net asset value per share

     7.08        4.74        8.83        (2.19     —    

PROSHARES ULTRASHORT EURO

 

     Year ended
December 31,
2015
    Year ended
December 31,
2014
    Year ended
December 31,
2013
    Year ended
December 31,
2012
    Year ended
December 31,
2011
 

Total assets

   $ 556,539,359     $ 519,833,940     $ 438,217,450     $ 553,957,981     $ 1,101,007,056  

Total shareholders’ equity at end of period

     522,306,518       517,191,349       418,001,115       526,778,026       1,100,159,546  

Net investment income (loss)

     (5,000,587     (3,994,145     (4,375,512     (7,447,508     (5,907,849

Net realized and unrealized gain (loss)

     86,176,969       114,182,807       (48,644,550     (33,586,639     85,179,270  

Net income (loss)

     81,176,382       110,188,662       (53,020,062     (41,034,147     79,271,421  

Net increase (decrease) in net asset value per share

     3.95        4.53        (1.96     (1.32     0.05   

PROSHARES ULTRASHORT YEN

 

     Year ended
December 31,
2015
    Year ended
December 31,
2014
    Year ended
December 31,
2013
    Year ended
December 31,
2012
    Year ended
December 31,
2011
 

Total assets

   $ 261,207,696     $ 534,061,601     $ 590,489,940     $ 409,067,507     $ 225,676,364  

Total shareholders’ equity at end of period

     237,372,900       531,471,873       588,121,516       408,563,630       221,131,994  

Net investment income (loss)

     (3,623,678     (3,741,601     (4,398,231     (2,184,694     (2,642,134

Net realized and unrealized gain (loss)

     (3,541,134 )     96,873,706       155,319,469       69,835,696       (38,262,661

Net income (loss)

     (7,164,812 )     93,132,105       150,921,238       67,651,002       (40,904,795

Net increase (decrease) in net asset value per share

     (1.39     18.47        20.11        9.80        (6.06

 

70


Table of Contents

PROSHARES ULTRA BLOOMBERG COMMODITY

 

     Year ended
December 31,
2015
    Year ended
December 31,
2014
    Year ended
December 31,
2013
    Year ended
December 31,
2012
    Year ended
December 31,
2011
 

Total assets

   $ 7,328,066     $ 2,940,584     $ 2,917,408     $ 6,408,497     $ 9,773,138  

Total shareholders’ equity at end of period

     7,105,984       2,606,920       2,915,034       6,097,211       9,058,529  

Net investment income (loss)

     (33,542     (30,991     (38,477     (73,484     (145,601

Net realized and unrealized gain (loss)

     (2,805,455     (1,412,039     (933,021     (134,794     (4,514,955

Net income (loss)

     (2,838,997     (1,443,030     (971,498     (208,278     (4,660,556

Net increase (decrease) in net asset value per share

     (23.71     (25.59     (19.82     (5.97     (41.97

PROSHARES ULTRA BLOOMBERG CRUDE OIL

 

     Year ended
December 31,
2015
    Year ended
December 31,
2014
    Year ended
December 31,
2013
    Year ended
December 31,
2012
    Year ended
December 31,
2011
 

Total assets

   $ 859,276,004     $ 532,881,413     $ 143,904,994     $ 499,982,244     $ 261,618,033  

Total shareholders’ equity at end of period

     783,922,475       450,562,988       142,773,429       483,508,964       251,395,322  

Net investment income (loss)

     (8,473,155     (1,766,364     (2,196,281     (3,248,430     (3,186,369

Net realized and unrealized gain (loss)

     (863,611,244     (368,561,922     68,042,170       (17,357,813     87,943,855  

Net income (loss)

     (872,084,399     (370,328,286     65,845,889       (20,606,243     84,757,486  

Net increase (decrease) in net asset value per share

     (38.16     (109.71     13.48        (57.44     (45.60

PROSHARES ULTRA BLOOMBERG NATURAL GAS

 

     Year ended
December 31,
2015
    Year ended
December 31,
2014
    Year ended
December 31,
2013
    Year ended
December 31,
2012
    April 5, 2011
(Inception)
through

December 31,
2011
 

Total assets

   $ 38,879,917     $ 80,051,311     $ 68,626,038     $ 77,963,078     $ 4,107,427  

Total shareholders’ equity at end of period

     38,851,184       70,433,207       62,915,779       73,019,370       4,079,349  

Net investment income (loss)

     (761,335     (528,581     (821,690     (566,310     (10,459

Net realized and unrealized gain (loss)

     (59,570,610     (37,694,009     41,585,400       (5,825,840     (2,307,329

Net income (loss)

     (60,331,945     (38,222,590     40,763,710       (6,392,150     (2,317,788

Net increase (decrease) in net asset value per share

     (43.08     (93.70     (0.84     (251.71     (392.08

 

71


Table of Contents

PROSHARES ULTRA GOLD

 

     Year ended
December 31,
2015
    Year ended
December 31,
2014
    Year ended
December 31,
2013
    Year ended
December 31,
2012
    Year ended
December 31,
2011
 

Total assets

   $ 72,172,441     $ 104,091,956     $ 141,039,466     $ 350,986,079     $ 407,538,760  

Total shareholders’ equity at end of period

     69,864,815       102,003,345       132,017,405       335,054,752       326,399,360  

Net investment income (loss)

     (796,424     (1,157,348     (1,925,215     (3,169,265     (2,975,486

Net realized and unrealized gain (loss)

     (22,915,651     (784,329     (156,804,545     31,641,746       10,169,127  

Net income (loss)

     (23,712,075     (1,941,677     (158,729,760     28,472,481       7,193,641  

Net increase (decrease) in net asset value per share

     (10.27     (1.25     (42.51     7.85        6.69   

PROSHARES ULTRA SILVER

 

     Year ended
December 31,
2015
    Year ended
December 31,
2014
    Year ended
December 31,
2013
    Year ended
December 31,
2012
    Year ended
December 31,
2011
 

Total assets

   $ 239,160,686     $ 305,793,515     $ 468,353,977     $ 894,123,114     $ 786,720,628  

Total shareholders’ equity at end of period

     216,416,642       291,169,743       465,479,519       747,725,400       606,824,420  

Net investment income (loss)

     (2,507,859     (3,968,608     (5,280,707     (6,918,157     (7,956,212

Net realized and unrealized gain (loss)

     (88,492,326     (165,444,157     (558,275,777     (32,752,438     (438,094,409

Net income (loss)

     (91,000,185     (169,412,765     (563,556,484     (39,670,595     (446,050,621

Net increase (decrease) in net asset value per share

     (12.31     (23.96     (108.56     (0.87     (139.81

PROSHARES ULTRA EURO

 

     Year ended
December 31,
2015
    Year ended
December 31,
2014
    Year ended
December 31,
2013
    Year ended
December 31,
2012
    Year ended
December 31,
2011
 

Total assets

   $ 12,437,492     $ 3,089,736     $ 2,626,494     $ 4,876,503     $ 10,079,176  

Total shareholders’ equity at end of period

     10,857,730       2,981,441       2,603,827       4,870,316       9,554,748  

Net investment income (loss)

     (104,071     (22,247     (35,024     (60,126     (75,102

Net realized and unrealized gain (loss)

     (1,274,395     (625,043     224,084       207,279       (512,495

Net income (loss)

     (1,378,466     (647,290     189,060       147,153       (587,597

Net increase (decrease) in net asset value per share

     (4.36     (6.16     1.68        0.46        (1.87

PROSHARES ULTRA YEN

 

     Year ended
December 31,
2015
    Year ended
December 31,
2014
    Year ended
December 31,
2013
    Year ended
December 31,
2012
    Year ended
December 31,
2011
 

Total assets

   $ 5,483,876     $ 2,135,192     $ 2,960,724     $ 4,739,474     $ 5,475,400  

Total shareholders’ equity at end of period

     5,473,848       2,118,028       2,795,026       4,227,995       5,471,075  

Net investment income (loss)

     (44,423     (20,862     (31,774     (44,440     (39,572

Net realized and unrealized gain (loss)

     (196,091     (396,529     (1,544,017     (1,198,640     383,849  

Net income (loss)

     (240,514     (417,391     (1,575,791