Rydex|SGI announced last Friday that it will close 12 of its 14 leveraged and inverse ETFs. Inverse ETFs essentially short an index and try to earn the negative return of the index it tracks. Leveraged ETFs seek to provide 200% or 300% of an index’s daily return or negative return.
“The premium reason is they hadn’t garnered a significant amount of investor interest,” said Richard Goldman, the chief executive officer of Rydex|SGI, in an interview with ETFsForTheLongRun. “It was a small percentage of the ETF assets under management.”
Including the affected funds, the Rockville, Md., firm offers a lineup of 40 exchange traded products (ETPs). The 12 funds held approximately $129 million in assets, or less than 2% of Rydex|SGI’s total $7 billion in ETF assets under management. Typically, an ETF needs $50 million in assets to remain viable. The ETP division represents 29% of Rydex’s total $24 billion under management. Closing these funds will allow Rydex to focus resources on the products with the most demand.
The consolidation is a bit of an ego bruise for Rydex as it invented the leveraged and inverse mutual fund. Even though Rydex was an early entrant in the ETF market, launching its first fund in 2003, Goldman acknowledged it had lost the first mover advantage on the inverse and leveraged funds. Because ETFs are sold on the stock exchange and not through financial advisors like mutual funds, there’s little need for replicating another fund’s strategy. Thus the first fund to track a market typically garners the most name recognition and hence, assets. ProShares, the market leader, launched its first inverse and leveraged ETFs in 2006. Direxion is the other main player in this space.
“I won’t say universally we’re getting out of the leveraged and inverse business,” said Goldman. “We leaving options open and won’t constrain ourselves to not participate in that space. The overall leveraged ETF business is still strong and there’s not a lot of degredation in the asset base.”
Goldman said that Rydex’s recent purchase by Guggenheim Partners had nothing to do with the closing of the funds, or problems at the firm. He said almost all the Rydex products had strong positive net inflows in 2009 and that total ETP assets grew about 30%. Rydex mutual funds also saw net cash inflows for the year, with tremendous growth in alternative investment strategies packaged as mutual funds, fundamental alpha strategies and fixed income formats.
The CEO added that he doesn’t believe Guggenheim has plans to merge Rydex with Claymore, the ETF firm Guggenheim bought last year. “We’re committed to growing our franchise and it’s an important growing piece of the business.”
Friday, May 21, will be the last day of trading on NYSE Arca for the following 12 funds.
Rydex 2x Russell 2000 ETF (RRY)
Rydex 2x S&P MidCap 400 ETF (RMM)
Rydex Inverse 2x Russell 2000 ETF (RRZ)
Rydex Inverse 2x S&P MidCap 400 ETF (RMS)
Rydex 2x S&P Select Sector Energy ETF (REA)
Rydex 2x S&P Select Sector Financial ETF (RFL)
Rydex 2x S&P Select Sector Health Care ETF (RHM)
Rydex 2x S&P Select Sector Technology ETF (RTG)
Rydex Inverse 2x Select Sector Energy ETF (REC)
Rydex Inverse 2x Select Sector Financial ETF (RFN)
Rydex Inverse 2x Select Sector Health Care ETF (RHO)
Rydex Inverse 2x Select Sector Technology ETF (RTW)
Between the close of trading on May 21, and May 28, the affected funds will liquidate their portfolio assets. Shares still held on May 28 will be redeemed automatically. Investors will receive a cash distribution equal to the net asset value of their shares as of the close of trading May 28. This amount includes any accrued capital gains and dividends, minus the costs to close the fund.