Frequently Asked Questions

Other
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ABOUT FACTORSHARES

1) What is FactorShares?

FactorShares is the first family of spread exchange traded funds (ETFs) enabling investors to track two S&P® indices, one long and one short, in one convenient and cost-effective position. Each dollar invested in a Fund provides approximately two dollars of exposure to a long futures benchmark and two dollars to a short futures benchmark, upon daily rebalancing. FactorShares may be bought or sold on the NYSE Arca through any brokerage account. Current offerings are:

a) FactorShares 2X: S&P500 Bull/TBond Bear (NYSE Arca: FSE)
b) FactorShares 2X: TBond Bull/S&P500 Bear (NYSE Arca: FSA)
c) FactorShares 2X: S&P500 Bull/USD Bear (NYSE Arca: FSU)
d) FactorShares 2X: Oil Bull/S&P500 Bear (NYSE Arca: FOL)
e) FactorShares 2X: Gold Bull/S&P500 Bear (NYSE Arca: FSG)

2) What is a Factor ETF™ product?

A Factor ETF™ product is a new type of ETF based on long/short investment techniques. A Factor ETF™ product provides for a unique investment that is derived from macroeconomic indicators, company specific characteristics or statistical measures. A Factor ETF™ portfolio seeks to track a specific investment while minimizing overlapping exposure to one or more other investment risks. For example, a long position in oil combined with a short position in U.S. equities constitutes a unique source of risk associated with investing in oil that is devoid of indirect exposure to U.S. equities. The FactorShares 2X: Oil Bull/S&P500 Bear is based on tracking a long position in oil and a short position in U.S. equities.

The FactorShares^® products are the first family of Factor ETF™ products.

3) What is a Spread ETF™ product and how does it differ from a Factor ETF™ product?

A Spread ETF™ investment product combines two indexed positions - one long and one short - into a single ETF. A Spread ETF™ product is a type of Factor ETF™ product that is distinguished by the number of underlying positions. Whereas a Factor ETF™ investment may hold several long positions and several short positions, a Spread ETF™ product typically tracks one long position and one short position. The FactorShares^®products are the first family of Spread ETF™ products.

4) What is spread trading?

Spread trading is the purchase of one market segment and the simultaneous sale of another market segment. Spread traders seek a profit based on the difference in return between two market segments. Spread trading is commonly executed using a pair of futures contracts, stocks, options, and/or ETFs, and now can be done in one position with FactorShares.

5) Who should invest in FactorShares?

FactorShares are intended for sophisticated investors who believe one market segment will increase in value relative to another market segment, in one day or less. FactorShares are not suitable for all investors and are intended for investors who: i) understand leverage risk; ii) understand the consequences of seeking daily leveraged investment results; and iii) intend to actively monitor and manage their investments.

Before making an investment decision, you should carefully consider the risk factors and other information included in the Prospectus.

6) What are S&P Factor Indices?

The Standard & Poor's (S&P) Factor Index Series reflect the daily spreads, or the differences in the relative return, between a long sub-index and a short sub-index, plus the return on a risk free component. Each sub-index tracks a near-month futures contract. The objective of each S&P Factor Index is to track the difference in daily return between a long futures contract and a short futures contract, plus the return on a risk free component.

Each Fund seeks to track, before fees and expenses, approximately +200% or -200%, as applicable, of the daily return of an S&P Factor Index. There is no guarantee that any FactorShares ETF will meet its daily investment objective.

7) Will each Fund match +200% or -200%, as applicable, the return of its respective S&P Factor Index for a period longer than one trading day?

The return of a 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 approximately twice (either +200% or -200%) the return of such Fund's corresponding Index for that period. Due to a number of reasons as described throughout the Prospectus, including, but not limited to, mathematical compounding, daily rebalancing, the differences between the NAV Calculation Time and the Index Calculation Time, leverage and volatility, each Fund will not track its corresponding Index for a period longer than a single trading day and may experience tracking error intra-day.

8) Will each Fund match +200% or -200%, as applicable, the difference in return between its long Sub-Index and its short Sub-Index for a period longer than one trading day?

Each Fund experiences a compounding effect and tracking error due to leverage, daily rebalancing, the differences between the NAV Calculation Time and the Index Calculation Time, fees, expenses and interest income. Consequently, as an investor's holding period increases, the probability increases that a Fund's return will not correspond to +200% or -200%, as applicable, of the difference in return between its Long Sub-Index and Short Sub-Index. Shareholders should actively monitor their investments.

9) How much leverage does each Fund use?

Each Fund targets a leverage ratio of approximately 4:1 upon daily rebalancing since each dollar invested provides approximately two dollars of long exposure to one benchmark futures contract and two dollars of short exposure to another benchmark futures contract. Prior to rebalancing, however, the leverage ratio could be higher or lower than an approximately 4:1 leverage ratio.

10) Why do FactorShares ETFs rebalance every day?

Each FactorShares ETF is rebalanced daily in order to continue to pursue a daily investment objective. Each Fund will typically rebalance by either buying or selling Long Index Futures Contracts and Short Index Futures Contracts around the NAV Calculation Time. Immediately after rebalancing, each Fund would be positioned to return approximately +200% or -200%, as applicable, the difference in return between its Long Sub-Index and Short Sub-Index over the following trading day.

11) What are the fees associated with owning FactorShares ETFs?

The Management Fee for each FactorShares ETF is 0.75% per annum. Other fees apply including brokerage commissions. See "Breakeven Table" in the Prospectus for more information.

12) How are FactorShares ETFs organized?

FactorShares are commodity pools as defined in the Commodity Exchange Act and the applicable regulations of the Commodities Futures Trading Commission (CFTC). The funds are organized as Delaware statutory trusts and registered under the Securities Act of 1933, as amended. The Funds are not mutual funds or any other type of investment company within the meaning of the Investment Company Act of 1940, as amended, and are not subject to regulation thereunder.

13) Who is the Managing Owner of FactorShares?

Factor Capital Management, LLC, a wholly owned subsidiary of Factor Advisors, LLC, is the Managing Owner of each Fund. The Managing Owner was formed on November 2, 2009 and serves as the commodity pool operator of each Fund. The Managing Owner has been registered with the CFTC as a commodity pool operator and has been a member of the National Futures Association (NFA) since December 17, 2009.

14) Will FactorShares be impacted by 'contangoed' or 'backwardated' markets?

Each fund holds futures contracts that are periodically rolled and may be adversely or favorably impacted by contango or backwardated markets. See the Prospectus for more information.

CREATION AND REDEMPTION

15) Who is eligible to create or redeem units of FactorShares ETFs?

Baskets may be created or redeemed only by Authorized Participants (APs). Each AP must: (1) be a registered broker dealer or other securities market participant such as a bank or other financial institution which is not required to register as a broker dealer to engage in securities transactions, (2) be a participant in DTC, and (3) have entered into an agreement with each Fund and the Managing Owner. For more information about becoming an AP, please email info@factoradvisors.com

16) How many shares comprise one creation/redemption unit?

One Basket is a block of 100,000 shares.

17) What is the cutoff time for creation/redemption orders?

Creation and redemption orders must be placed by no later than 5 hours prior to the close of the NYSE Arca, which would normally be 11:00 a.m ET.

18) How do creation/redemption orders settle?

Baskets are created and redeemed continuously as of noon Eastern Time, on the business day immediately following the date on which a valid order is accepted by a Fund (t+1). Shares of each Fund will be sold or bought at the Net Asset Value of 100,000 shares as of the NAV calculation time (see below), on the date that a valid order to create a Basket is accepted by the applicable Fund.

19) What does it cost?

Authorized Participants pay a transaction fee of $500 in connection with each order to create or redeem one or more Baskets

TAX TREATMENT

20) Why do investors receive a Schedule K-1?

Each Fund will be classified as a partnership for U.S. federal income tax purposes. Each beneficial owner of Shares of a Fund will be required to take into account its allocable share of the Fund's income, gain, loss, deduction and other items for the Fund's taxable year ending with or within the owner's taxable year.

Each Schedule K-1 provided to a Shareholder will set forth the Shareholder's share of the Fund's tax items in a manner sufficient for a U.S. Shareholder to complete its tax return with respect to its investment in Shares of each Fund.

21) Will there be distributions?

Each Fund will make distributions at the discretion of the Managing Owner. To the extent that a Fund's actual and projected interest income from its holdings of 3-month U.S. Treasury bills and other high credit quality short-term fixed income securities exceeds the actual and projected fees and expenses of such Fund, the Managing Owner expects periodically to make distributions of the amount of such excess. The Funds currently do not expect to make distributions with respect to capital gains.

22) When will investors receive their K-1?

Tax information will be provided to Shareholders on Schedule K-1 for each calendar year as soon as practicable after the end of such taxable year.

OTHER FAQs

23) What time is the Net Asset Value calculated for FactorShares ETFs?

The Net Asset Value (NAV) of each FactorShares ETF is calculated as of the first to settle of the corresponding Index Futures Contracts that underlie the fund. For example, the settlement time for the E-Mini S&P 500 Stock Price Index Futures and the US Treasury Bond Futures which underlie the FactorShares 2x: S&P 500 Bull/TBond Bear ETF is 4:15pm (ET) and 3:00pm (ET), respectively. Therefore, the FactorShares 2X: S&P500 Bull/TBond Bear fund will calculate its NAV, or NAV Calculation Time, as of 3:00 p.m. (ET).

The NAV Calculation Times for each Fund is:

a) FactorShares 2X: S&P500 Bull/TBond Bear - 3:00 p.m. (ET)
b) FactorShares 2X: TBond Bull/S&P500 Bear - 3:00 p.m. (ET)
c) FactorShares 2X: S&P500 Bull/USD Bear - 3:00 p.m. (ET)
d) FactorShares 2X: Oil Bull/S&P500 Bear - 2:30 p.m. (ET)
e) FactorShares 2X: Gold Bull/S&P500 Bear - 1:30 p.m. (ET)

An investment in the Funds involves risk, including the possible loss of principal. Leverage and/or short positions should be considered speculative and are not suitable for all investors. Commodities and futures trading are volatile and even a small movement in market price could cause large losses. The risks involved with each Fund are detailed in the prospectus and on the risk disclosure links on each Fund's web page.

Leveraged funds should be utilized only by sophisticated investors who understand leverage risk, consequences of seeking daily leveraged investment results and intend to actively monitor and manage their investments. Leveraged ETFs are not designed to track the underlying index over a longer period of time.