10-K: ProShares Trust II Navigates Market Volatility in 2024, Focus Remains on Leveraged and Inverse Strategies

ProShares Trust II reports on its 2024 financial activities, highlighting its leveraged and inverse investment strategies across various commodity, currency, and volatility-linked ETFs, while addressing regulatory compliance and risk management.

Summary

• ProShares Trust II, a Delaware statutory trust, operates sixteen series of funds as of December 31, 2024, focusing on leveraged, inverse, and matching investment strategies.
• The funds invest in financial instruments like futures, swaps, and forwards to gain exposure to various benchmarks, including commodity, currency, and volatility indices.
• Several share splits, both forward and reverse, were executed across different funds to adjust share prices and outstanding shares.
• The report details the investment objectives and principal strategies of the funds, emphasizing the use of mathematical approaches and full investment in financial instruments.
• The document outlines the use of swap agreements, forward contracts, and futures contracts, including associated risks and regulatory considerations.
• The report includes a description of the Bloomberg Commodity IndexSM and its sub-indexes, as well as the currencies benchmarks and VIX Futures Indexes.
• The creation and redemption of shares are limited to Authorized Participants in Creation Units, with specific procedures and fees outlined.
• The report details the fees and expenses, including management fees, licensing fees, and routine operational costs.
• The document includes a comprehensive discussion of risk factors, including those specific to geared funds, currency funds, precious metals funds, natural gas funds, oil funds, and VIX funds.
• The report also addresses risks related to all funds, such as correlation risks, illiquid markets, counterparty risks, and regulatory changes.
• The report discusses the impact of natural disasters and public health disruptions, such as the COVID-19 pandemic, on the performance of the funds.
• The report also discusses the impact of the Russia-Ukraine conflict and other geopolitical events on the funds.
• The report includes a discussion of the funds' exposure to cyber-attacks and the measures taken to mitigate these risks.
• The report includes a discussion of the funds' compliance with extensive legal and regulatory requirements.
• The report includes a discussion of the funds' tax liabilities and the potential for the IRS to adjust or reallocate items of income, gain, deduction, loss and credit with respect to the Shares.
• The report includes a discussion of the funds' insider trading policy and code of ethics.
• The report includes a discussion of the funds' management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
• The report includes a discussion of the funds' remediation plan for material weakness with respect to controls related to the classification of the Futures Commission Merchant (FCM) Accounts (Futures accounts).

Sentiment

Score: 6

Explanation: The document is largely neutral, presenting factual information about the funds' operations and performance. The inclusion of risk factors and the discussion of a material weakness in internal control over financial reporting temper the overall sentiment.

Positives

• The funds offer a range of investment strategies, including leveraged, inverse, and matching approaches.
• The report provides detailed information on the funds' investment objectives, strategies, and risk factors.
• The report highlights the funds' efforts to manage risk through collateralization and counterparty monitoring.
• The report highlights the funds' compliance with extensive legal and regulatory requirements.

Negatives

• The report emphasizes the potential for total loss of investment in geared funds due to leveraged, inverse, or inverse leveraged positions.
• The report discusses the potential negative impact of rolling futures positions and the risks associated with contango and backwardation.
• The report highlights the potential for regulatory changes and actions to negatively impact the operations and profitability of the funds.
• The report discusses the potential impact of natural disasters and public health disruptions, such as the COVID-19 pandemic, on the performance of the funds.
• The report also discusses the impact of the Russia-Ukraine conflict and other geopolitical events on the funds.
• The report highlights the existence of a material weakness in internal control over financial reporting.

Risks

• The report emphasizes the potential for total loss of investment in geared funds due to leveraged, inverse, or inverse leveraged positions.
• The report discusses the potential negative impact of rolling futures positions and the risks associated with contango and backwardation.
• The report highlights the potential for regulatory changes and actions to negatively impact the operations and profitability of the funds.
• The report discusses the potential impact of natural disasters and public health disruptions, such as the COVID-19 pandemic, on the performance of the funds.
• The report also discusses the impact of the Russia-Ukraine conflict and other geopolitical events on the funds.
• The report highlights the existence of a material weakness in internal control over financial reporting.
• The report discusses the potential for cyber-attacks to disrupt the operations of the funds.
• The report discusses the potential for the IRS to adjust or reallocate items of income, gain, deduction, loss and credit with respect to the Shares.

Future Outlook

The document does not provide a specific future outlook beyond the ongoing management and operation of the funds.

Industry Context

This announcement reflects the ongoing trends in the ETF industry, particularly the use of leveraged and inverse strategies to provide specific investment outcomes. The document also highlights the increasing regulatory scrutiny and compliance requirements for commodity pool operators and investment advisors.

Comparison to Industry Standards

• The expense ratios detailed in the document are comparable to other leveraged and inverse ETFs in the market.
• The use of financial instruments such as swap agreements, forward contracts, and futures contracts is a common practice among ETFs seeking to track specific indices or achieve leveraged or inverse returns.
• The risk management practices described in the document, such as collateralization and counterparty monitoring, are consistent with industry standards for managing derivatives exposure.
• The discussion of regulatory compliance and the impact of the Dodd-Frank Act reflects the ongoing challenges and complexities faced by ETFs operating in the derivatives markets.

Stakeholder Impact

• Shareholders are exposed to the risks associated with leveraged and inverse investment strategies.
• Authorized Participants are responsible for the creation and redemption of Creation Units.
• Service providers, such as the administrator, custodian, and distributor, play a key role in the funds' operations.
• The sponsor is responsible for managing the funds and ensuring compliance with all applicable regulations.

Next Steps

• The funds will continue to operate in accordance with their investment objectives and principal strategies.
• The sponsor will continue to monitor and manage the funds' risk exposures.
• The sponsor will continue to comply with all applicable legal and regulatory requirements.
• The sponsor will continue to implement and test a business continuity plan and a disaster recovery plan designed to address circumstances such as those above.

Key Dates

Keywords

ProShares, leveraged ETFs, inverse ETFs, financial instruments, futures contracts, swap agreements, risk factors, financial reporting, VIX, Bloomberg, commodities, currencies, volatility, ETFs, funds