From the December 2011 issue of Research Magazine • Subscribe!

Vying for Growth

When Guggenheim Partners entered the ETF market, it wanted to make a permanent impression. Over the past year and a half, the firm acquired Claymore ETFs and Rydex SGI. The moves have vaulted Guggenheim to become one of the top 10 providers of ETFs worldwide, offering more than 100 ETFs and ETPs. Guggenheim’s consolidated ETF lineup now includes BulletShares, CurrencyShares and RydexShares. All three will be marketed in the U.S. under the Guggenheim name.

To discuss what lies ahead for Guggenheim and the U.S. ETF market, Research magazine sat down with Bill Belden, managing director, head of product development and management at Guggenheim Funds. Excerpts of the interview are below.

What changes should investors expect by combining Guggenheim Funds and Rydex SGI ETFs under the Guggenheim brand?

We’re excited about the prospects of our combined ETF businesses, and over time, the Rydex ETF products will be rebranded to Guggenheim. Our product lines are very complementary to each other and together, we’re better positioned than ever to deliver a broad array of strategic and tactical investment options to investors that can potentially improve their portfolio performance.

For example, the strength of the equal-weighted suite of ETFs at Rydex, combined with the Guggenheim lineup of emerging market exposures, delivers a powerful combination of equity strategies covering the globe. Add the unique and innovative Guggenheim BulletShares ETFs and the 10 Rydex CurrencyShares products, and you’ve got the building blocks for a great ETF lineup. Beyond that, however, Guggenheim Investments’ longstanding ability to apply our intellectual capital to creating opportunity for clients enables our ETF business to deliver solutions that capitalize on these opportunities. 

What is the basic strategy behind the BulletShares and who might they appeal to?

The market has long delivered products — mutual funds, UITs, SMAs, ETFs, etc. — that provide investors an avenue through which they can obtain fixed income exposure. While these packaged products offer benefits over holding individual bonds, a significant number of investors are willing to take on the additional risks associated with investing in individual bonds. Seeing this caused us to ask the question, “What do individual bonds provide that is not obtained through traditional fixed income packaged products?”

We believe the answer is permanence and definition — an anticipated yield to maturity when purchased, a prescribed date of maturity at which time a final distribution is made to the holder, a continually declining duration and the ability to fine-tune or specifically target maturity exposure. This premise served as the basis for developing the Guggenheim BulletShares ETFs. Based upon a simple concept, a product that provides an investment and cash-flow profile similar to holding an individual bond, BulletShares ETFs are able to do that while also providing the benefits and advantages inherent in an ETF — exchange listed, diversified, transparent, tax efficient, etc.

Guggenheim’s actively managed ETFs are currently focused on bonds. Do you see active ETF strategies opening up in other asset classes?

While our existing actively managed ETFs are fixed-income focused, we believe there are opportunities for other assets classes within an actively managed ETF wrapper. The argument often made is that active managers, especially equity managers, are hesitant to disclose portfolio holdings daily because they don’t want others to know how they’ve positioned their portfolio. The fact of the matter is, however, that while portfolio holdings are disclosed daily, the portfolio must be disclosed prior to the open of the next trading day, which allows for trades to be executed by the portfolio manager prior to disclosing the new positions. This theoretically allows for positions to be disposed of and acquired prior to acknowledging to the market what trading activity has occurred so that the fund isn’t subjected to front-running. As active managers come to better understand this notion and fully appreciate the other structural benefits that ETFs provide, there will be many opportunities to launch successful actively managed ETFs in other asset classes

It seems like the defensive equity sectors like utilities and consumer staples have been holding up better than the broader market. What are some ETF strategies for this trend?

One strategy to obtain this exposure would be through ETFs that track indexes covering these specific sectors. While potentially providing near-term opportunities, this tactical approach requires diligent oversight to know when future shifts may be warranted. An alternative method can be achieved through a fund like the Guggenheim Defensive Equity ETF (DEF). DEF tracks an index that represents a “defensive” portfolio with the potential to outperform broad equity market benchmarks on a risk-adjusted basis during periods of market weakness, while still providing the potential for positive returns during strong market periods. The 100 stocks included in the index represent a group of companies that generally have low relative valuations, conservative accounting practices, a history of dividend payments and have historically outperformed during bearish market periods.

Does Guggenheim see ETFs inside the 401(k) retirement plans market as a future opportunity?

We view the low penetration rate of ETFs within 401(k)s as a significant opportunity for the future growth of ETFs, which we believe will likely come from a combination of demand pull from investors and a supply push from fiduciaries overseeing 401(k) plans. [A] recent survey indicated that 44 percent of investors plan to allocate more of their assets to ETFs in the next 12 months. Given that many investors have the most significant portion of their investable assets in 401(k) plans, we believe investors are beginning to appreciate the benefits ETFs provide and will start demanding plans to offer ETFs as an alternative. This will require plan sponsors to either rework with “plumbing” that supports 401(k)plans so that ETFs can be efficiently purchased in the open market and allocated to client accounts or they will need to offer directed brokerage programs within the 401(k) plan to extend the opportunity for investors to access ETFs.

Where are we at in terms of the ETF maturation cycle?

Based upon the number of ETFs and the assets invested in them, many may tell you that we are in the second half of the maturation cycle, but we would strongly argue that we are in the late first or early second quarter. Product innovation continues to be a driving force in the growth of the ETF marketplace, and we believe that will continue for the foreseeable future. As the line of ETF market entrants continues to grow, along with the number of investors looking to ETFs to meet their needs, our commitment to the space is stronger than ever. New structures delivering new asset classes and strategies heretofore only available to institutional investors (if at all) are coming online daily. Additionally, the ETF continues to deliver exposure to international markets in an efficient manner that aligns beautifully with the ongoing globalization of the world’s economy. There’s no question that the ETF market is increasingly dynamic, and there will be winners and losers over the longer run. A look at our product lineup, and more so at our product pipeline reinforces our belief that the ETF maturation cycle is much closer to its beginning than its end. •

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