ProShares Trust II (KOLD)

KOLD bets that the price of natural gas will fall. It trades on the NASDAQ, but it is not a company. It is an exchange-traded fund — a financial product issued by ProShares that lets investors bet against natural gas prices through a mechanism of daily-rebalanced short futures positions. When natural gas gets cheaper, KOLD rises. When natural gas gets more expensive, KOLD falls. It is the inverse bet to a simple long natural gas fund.

The inverse-bet market and why KOLD exists

ProShares built a product portfolio around the observation that markets move in both directions, and professional traders and hedgers often need convenient tools to express bearish views. A utility company that uses natural gas to generate electricity might buy KOLD to hedge against falling gas prices eating into its profit margins. A trader convinced that natural gas has been overpriced might buy KOLD to express that conviction. Energy producers might use it tactically to protect against downside moves. The product exists because the economic demand for that bet exists, and ProShares monetizes it by collecting management fees.

KOLD launched in 2010, the same year as SVXY and several other ProShares inverse and leveraged funds. The strategy is straightforward but mechanically complex: the fund holds short positions in natural gas futures contracts (bets that the price will fall) and rebalances daily. That daily rebalancing is critical to how the fund is marketed — it is supposed to amplify returns in a declining gas-price environment. If gas falls steadily, each day’s rebalancing boosts the fund’s position, compounding gains. If gas price bounces around without a clear trend, the rebalancing erodes returns through what is known as decay drag, much like SVXY experiences in choppy volatility markets.

Capital structure: investors fund the bet, ProShares collects fees

All the capital in KOLD comes from investors who buy shares. When you buy 1,000 shares at a price of 25 dollars, you send 25,000 dollars to the fund. That money becomes the fund’s assets under management. ProShares does not invest a single dollar of its own capital. Instead, ProShares acts as the fund manager and custodian: it takes the pooled capital from shareholders and uses it to establish and maintain the short positions in natural gas futures. For this service, ProShares charges an annual expense ratio of roughly 0.8% to 1.0%, regardless of whether the bet works out.

The pricing is built into the fund’s daily net asset value. If KOLD has a hundred million dollars in assets and ProShares charges 0.9% annually, that is roughly 900,000 dollars per year flowing to the management company. The bigger the fund grows (through new investors buying in), the larger the total fee pool, creating a strong incentive for ProShares to market inverse and leveraged funds aggressively. The firm does not benefit from the fund performing well or poorly — it benefits from the fund existing and being large.

How the daily rebalancing works and what it costs

Every day at close, KOLD rebalances its short position. The mechanism is designed to maintain a constant notional dollar amount of short exposure. If gas prices fall and the short position has gained value, the fund reduces the position (sells some contracts), locking in gains and reducing exposure. If gas prices rise and the position has lost value, the fund increases the position (buys more contracts to short), averaging into the loss.

This sounds simple but has real financial consequences. In a market that moves one direction steadily (falling gas prices), the daily rebalancing supercharges returns — you are locking in gains every day and reinvesting them. In a choppy market where gas bounces between higher and lower, the rebalancing mechanism force-sells at local highs and force-buys at local lows, which is exactly backwards. The net effect is a slow bleed of value that compounds over time. An investor holding KOLD for years in a sideways natural gas market might lose money despite being directionally “right” that gas should remain weak.

Revenue resilience despite product volatility

The interesting asymmetry in KOLD’s capital structure is that ProShares’ revenue is decoupled from the fund’s investment performance. In 2010–2012, when natural gas prices crashed, KOLD was a phenomenal investment and the fund likely grew substantially as traders piled in to profit from the decline. ProShares’ fee base swelled accordingly. In 2022, when natural gas spiked during Europe’s energy crisis and KOLD crashed, new investors stopped buying and existing investors began redeeming. The fee base shrank. But ProShares still collected its management fee on the remaining assets.

This structure means ProShares has built a revenue stream that is stable but dependent on keeping the fund in existence and persuading investors that betting against natural gas remains worthwhile. If the fund became tiny — if nearly everyone sold — the fee revenue would become negligible. But for as long as enough investors believe natural gas is overpriced or want to hedge their energy exposure, KOLD persists and ProShares collects.

The risks embedded in the product

KOLD carries several layers of risk. The first is directional: if you think natural gas will fall and it rises instead, you lose money, potentially sharply. Natural gas is volatile; an unexpected cold snap, supply disruption, or shift in power generation mix can swing prices violently. A trader or hedger using KOLD is betting against some macro scenario, and if that scenario fails to materialize, they are simply on the wrong side.

The second risk is the structural decay drag. Even if you are right about the long-term direction, the daily rebalancing might eat enough of your gains that you under-perform a simpler short position held through a derivatives broker. This is especially true if the market is choppy.

The third risk is leverage and duration. Unlike buying and holding a short position through direct futures trading, KOLD is rebalanced daily, which means it behaves very differently from a simple short bet over long holding periods. Many investors buy KOLD thinking they are making a simple directional bet but end up holding it longer than the product is designed for, experiencing performance drag they did not anticipate.

Funding and lifecycle

KOLD is capitalized by its shareholders and managed by ProShares. The fund will exist as long as there is investor demand for the bet and as long as ProShares determines the fee pool is large enough to justify maintaining the fund. If the fund shrank to a few million dollars in assets, ProShares might shut it down. Until then, it continues to collect fees and manage the daily rebalancing, indifferent to whether natural gas is rising or falling — the fund’s fate depends on the market’s appetite for the bearish bet, not on the bet’s correctness.