Finally! We Get Some Leverage!

After languishing at the Securities and Exchange Commission (SEC) for a half-decade, eight "ProShares" exchange-traded funds (ETFs) finally made their debut on the American Stock Exchange (Amex) on Wednesday, June 21.

The eight new funds include four ETFs offering leveraged (2X) exposure to four major U.S. market indexes (the Dow Jones Industrial Average, Nasdaq-100, S&P MidCap 400 and S&P 500), as well as four funds offering inverse exposure to the same benchmarks. The leveraged funds - or "Ultra PowerShares" -- aim to double the return of their underlying index, while the inverse funds - or "Short ProShares" - aim to rise when their index falls (and vice-versa).

The funds were created by the ETF arm of ProFunds, which has sold similar open-end mutual funds for years.

Dow Jones Industrial Average
Ultra Dow30 ProShares (DDM)
Short Dow30 ProShares (DOG)

After waiting so long to hit the market, the new ProShares picked an auspicious day for their debut, with the S&P 500 rising nearly 1 percent and the Nasdaq-100 jumping 1.58 percent. Those big moves were amplified by the leveraged ProShares: An investor who bought the new Ultra QQQ ProShares ETF this morning would have seen his investment rise 3.16 percent on the day.

Of course, that same return could fall by 3.16 percent tomorrow - or more! - but that's another story.

The new ETFs charge 95 basis points in annual expenses, which sounds like quite a bit. In fact, it's a new record for equity ETFs, part of an unfortunate trend of rising expenses in the index and ETF industries.

Nonetheless, 95 basis points is a bargain compared to the expense ratios of comparable open-end mutual funds. ProFunds itself, for instance, charges 1.44 percent for their open-end leveraged S&P 500 fund; Rydex offers a similar fund that charges 1.67 percent.

Beyond the expense comparison, the ETFs offer the "joys" of intraday trading. Also, compared to other methods of achieving leveraged exposure - options, futures, or margin accounts - the ETFs are blessedly easy.

ProFunds has huge expectations for these funds, and for good reason. In an ironic twist for an index product, these ETF could become the home for "hot money" on the market. If you're a short-term trader who thinks the market is headed up, why buy an individual company with its attendant corporate risk when you can instead buy 2X exposure to the market with ProShares?

For its part, ProFunds isn't recommending that the funds be used for speculative purposes, but rather, as part of a sophisticated trading strategy.

"We look at ProShares as the start of a whole new chapter in the development of ETFs," said Michael Sapir, CEO of ProShare Advisors LLC, part of ProFunds Group. "By providing built-in short and magnified exposure to the indexes, ProShares make it much easier to execute a number of powerful strategies … (such as) hedging to manage risk. Now, to execute that strategy, (investors) no longer have to go through the process of setting up margin accounts or covering margin calls---they can simply trade ProShares."

One curious question is the utility of the inverse funds. With some important qualifications, ETFs are generally shortable, and it's not clear exactly what benefit is gained from buying the more expensive inverse ProShare vs. selling a less expensive traditional ETF.

ProShares has filed for the right to launch so-called "UltraShort" funds, which would provide 2X leveraged inverse exposure to the indexes. The SEC, however, hasn't sanctioned those funds, yet.

Volume Update

The market certainly seems to be embracing the Ultra (long) shares much more rapidly than the inverse shares. On their first day of trading, the Ultra Dow 30 traded over 226,000 shares; the Short Dow 30 traded just 400 shares. A similar volume discrepancy broke across all four indexes.