Business is booming.

ProShares draws record inflows as investors bet on volatility

ProShares notched up record inflows despite providing some of the worst-performing index trackers in the industry in 2022, as investors chased high returns in the most volatile markets.

The ETF provider said it expected to set a new record for growth in 2022 with more than $17bn in net inflows. ProShares, which has $58bn in assets under management, is the second most popular midsized ETF provider after Dimensional, which had $22bn in inflows.

“ETFs are designed to give investors a benchmark return, and they are successful when they do that,” said Michael Sapir, chief executive of ProShares.

“No one criticises an S&P 500 fund when the S&P 500 is down 20 per cent and the fund is down 20 per cent,” Sapir said.

The ETF provider is best known for its leveraged and “short” ETFs, which use derivatives to allow investors to make leveraged bets on market moves or hedge against down markets.

In the autumn of 2021, ProShares boasted the most successful ETF in the history of the product. TQQQ, an ETF that amplified gains and losses in the Nasdaq 100 index by three, was up more than 20,000 per cent since 2010. Retail investors rushed to buy, pushing the TQQQ to the top of most-traded lists. Assets in the ETF rose fivefold during 2020 and 2021 to more than $22bn by 2022.

But the value of TQQQ halved in 2022 to $11.8bn. The ETF’s share price has dropped more than 76 per cent as the underlying tech-heavy index has taken a beating. But ProShares says its ETFs, for better or for worse, are doing exactly what they are supposed to do. Don’t hate the index tracker — hate the index, experts say.

The ETF provider is consistently a top buy for retail investors looking for easy exposure to volatile corners of the market. Despite the poor performance in some of its largest flagship products, inflows and trading volumes have been strong.

On Monday, the only share with more trading volume than TQQQ was Tesla, with SQQQ in third. A quarter of all trades in ETFs in the US were ProShares products, the most of any single provider, ProShares said.

Line chart of The triple levered ETF has tumbled in the last year showing TQQQ’s wild ride

Another ProShares ETF, which offers liquid exposure to bitcoin, was the fastest ETF to reach $1bn AUM after launching in October 2021, according to Morningstar. But BITO’s value has also plummeted 73 per cent as the cryptocurrency market tumbled, wiping out $1.3bn in investor cash since inception.

“We feel very good about BITO. It is designed to reflect the performance of bitcoin futures contracts, which it did, and it ended up very, very closely tracking the performance of spot bitcoin,” Sapir said.

The poor performance of some of the underlying indices of ProShares’ ETFs has come as rising interest rates has caused growth companies to contract. Inflation and various scandals have also weighed on digital assets. But for ProShares, that is the point.

“Their legacy core franchise relies on volatility,” said Ben Johnson, formerly director of ETF research and now head of client solutions at Morningstar. TQQQ is still ProShares’ biggest ETF by size.

ProShares also offers opposite versions of its worst-performing ETF products, which investors use to hedge the market, “like insurance”, Johnson said. ProShares’ third largest ETF, SQQQ, shorts the underlying Nasdaq 100 with triple leverage — and has had a bumper year. It also offers short and leveraged short exposure to the S&P 500.

Line chart of Crashing crypto market wipes out the underlying index ($mn) showing ProShares bitcoin ETF assets tumble

However, analysts said that leveraged ETFs were often popular with retail investors who could not access leverage or derivatives trading outright and might not understand the associated risks.

“That’s a traditional clientele for these sorts of products: individuals or intermediaries who are prohibited from obtaining leverage by other means,” Johnson said.

But wild price swings also help underpin the ETF providers’ popularity with retail punters. “For retail traders to be attracted to a stock, it has to grab their attention,” said Peng Cheng, an analyst at JPMorgan specialising in retail investors. “Their universe is not 5,000 stocks, it is stocks that get their attention: things that move a lot, things with high volatility. And leverage gets them that volatility.”

ProShares has tried to distance itself from its reputation as the pre-eminent provider of leveraged and inverse ETF products, which profit from declining value, by diversifying offerings into more conventional arenas. However, it has not been able to shake the fact that those products make up the majority of its business, analysts said.

Bar chart of The ETF provider is second best in class, despite poor index performance showing ProShares inflows remain strong

ProShares’ leveraged ETFs use derivatives to synthesise leverage across their underlying index, which can often result in higher management fees for investors — taking a bite out of potential returns. TQQQ has a gross expense ratio of 0.98 per cent, nearly five times the cost of the unleveraged QQQ ETF, which tracks the Nasdaq 100, of 0.2 per cent.

ProShares maintains that the product is for sophisticated investors and not intended to be bought and held. The broker offers ETFs that are unleveraged, or more typically found in an average portfolio.

“They’re not just a risk-on player in the ETF marketplace,” said Todd Rosenbluth, head of research at VettaFi. “Their products are designed for the more tactical, short-term-trading-oriented investor, as opposed to BlackRock or Vanguard and State Street, that are used as the core of a portfolio. This is for the tactical part of the portfolio.”

Volatility is likely to continue in 2023 and with it, ProShares’ popularity with bold traders eager to take big bets and willing to stomach big losses.

Johnson said that tracking volatile performance is not ProShares’ sole intention, it is what investors are looking for. “Those products are for making turbocharged directional bets.”

“Children shouldn’t juggle with chainsaws,” he added.

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