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Rydex/SGI Will Close Most Leveraged and Reverse ETFs

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Richard Goldman, Rydex/SGI’s chief executive, explained that the closings would allow the firm to focus resources on products that have generated consumer interest. “This consolidation will enable us to position our exchange-traded product family for future growth opportunities, including new product development,” he said in the statement.

Besides its leveraged and reverse ETFs, Rydex/SGI lists a bevy of funds in other categories on its Web site: 10 equal-weight funds, nine currency funds, six pure style funds and one mega cap fund. In February this year, Rydex/SGI’s parent Security Benefit Corp. and Guggenheim Partners announced that a group led by Guggenheim would take a controlling interest in Security Benefit, with the deal expected to close in the third quarter.

Guggenheim, as it turns out, bought ETF producer Claymore Securities in August 2009. Claymore specializes in niche products as well as international funds, such as the $1 billion Claymore/BNY Mellon BRIC ETF (EEB). According to the National Stock Exchange, the combined Rydex/SGI and Claymore ETF assets would have been $9.4 billion as of the end of March 2010.

The two Rydex/SGI leveraged ETFs that will remain open-the Rydex 2x S&P 500 ETF (RSU) and Rydex Inverse 2x S&P 500 ETF (RSW)-had assets of $112 million and $86 million, respectively, as of April 28, according to the firm’s Web site.

Leveraged ETFs, which have become popular in recent years, are considered by many to be problematical for investors who hold the products over multiple trading periods, rather than buy them at the open and sell them at the close. In trending markets, they can outperform. In March, for example, ProShares Ultra S&P 500 SPDR, which aims for twice the daily return of the S&P 500 index, outperformed its tamer S&P 500 SPDR sibling 12.4% to 5.7%, or about 2.2 times, according to ETF Database. However, in oscillating markets, such as the September 2008 to March 2009 period, leveraged funds can produce deep losses.

Since the onset of the financial crisis in 2008, leveraged ETFs have come in for sharp scrutiny by regulatory agencies. Last August, the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) issued an Investor Alert warning retail investors of the risks associated with investing in “highly complex” leveraged and inverse ETFs. The Investor Alert followed on the heels of a FINRA Regulatory Notice.


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