ETF Talk: Rydex Raises The Ante

Investors who want alternatives to going long in stocks or equity-based ETFs, and are willing to take a gamble, now have eight new funds to consider.

Rydex Investments began offering shares of the new leveraged and inverse ETFs on Thursday, June 12, targeting four key industry sectors: energy, financial, technology and healthcare. The funds offer investors magnified and inverse exposure to those four industries through matching Select Sector SPDR indices.

Leveraged ETFs magnify exposure to a benchmark index. For example, Rydex offers double the exposure of a long investment to give investors twice the gain or loss that they otherwise would incur. Inverse ETFs simply move in the opposite direction of an index.

Competition among ETF players in the leveraged and inverse niches is so fierce that it reminds me of the Hatfields and the McCoys, a pair of feuding families that waged a bloody battle in 1881 that still is remembered generations later. Relatives of both families have learned to live in peace along the border between West Virginia and Kentucky but Rydex and its big rival ProShares keep firing away at each other with new product introductions. That competition may well benefit you, the investor.

Rydex officials tout that the Select Sectors are the industry’s largest and most liquid indices for sector investing, with more than $25 billion in benchmarked assets. Financial professionals have shown growing interest in leveraged and inverse strategies that offer the potential to help capitalize on directional market moves or hedge an investment portfolio, said Carl Verboncoeur, Rydex’s CEO.

On a daily basis, Rydex’s leveraged Select Sector ETFs aim to double their benchmark exposures to an index, without needing to use additional capital. In contrast, Rydex’s inverse Select Sector ETFs seek to move in the opposite direction of their specific benchmarks to let investors profit during sector downturns. These new ETFs, shown in the table below, are designed to be more convenient for investors than margin accounts or options.

The new Rydex leveraged and inverse Select Sector ETFs are intended to complement the investment firm’s existing lineup of leveraged and inverse ETFs that provide broad market exposure to small-, large- and mid-cap indices. Rydex introduced its first six leveraged and inverse ETFs in November 2007, said Lori Winkler, a Rydex spokeswoman.

Rival ProShares offers its own family of leveraged ETFs. But Rydex has differentiated itself by holding down the annual expenses it charges investors to 70 basis points, compared to the 95 basis points that ProShares ETFs charges annually. As a result, Rydex’s ETFs are "more affordable" to investors than its competitors, Winkler said.

I currently am not recommending these new ETFs, but an investor who is aggressive and sophisticated may want to consider including leveraged and inverse funds in a diversified portfolio. If that description fits you, and you choose to buy leveraged and inverse ETFs, only put a small portion of your overall assets in leveraged or inverse funds.

If you have any questions about ETFs that you’d like me to answer, or that you think might interest the rest of my readers, click here and I may be able to do so in an upcoming ETF Talk feature.