The Nifty Fifty, A Rydex Redux

May 10, 2005

Analysts say Rydex picked an auspicious time to launch its mega-cap ETF. The question is: will investors agree?

Rydex Investments likes to put new twists on familiar indexing puzzles.  The innovative fund developers are famous for their leveraged funds, which offer twice the return of major market indexes, and for their "inverse" funds, which offer short exposure.

This morning, the company rolled out their latest brainchild, a play on the traditional market capitalization categories.  You've heard of small cap, mid cap and large cap … Rydex wants to introduce you to "mega cap" investing.

The new fund, called the Rydex Russell Top 50 exhange-traded fund (ETF), offers investors exposure to the 50 largest companies in the U.S.  The ETF tracks a new Russell index especially designed for the purpose.  In today's era of rising interest rates and increasing global competition, the fund offers investors a chance to bet that the world's corporate behemoths will trump the little guys.

And that's just what many analysts think will happen.  Analysts from Salomon Brothers, Standard and Poor's, UBS and others have all hit the streets recently calling for a return to large cap prominence.  In fact, that return to prominence is already happening: After six years of trailing small caps, large cap stocks (as measured by the Russell 1000) outperformed small caps (Russell 200) by more than seven percent so far in 2005.

"As we move deeper into 2005, large caps continue to solidify a leadership position over small caps," said Steve Swartley, managing research analyst at Russell.

Mega caps are leading the charge.  In April, Russell's Top 50 index was the best performing of Russell's family of 22 U.S. stock indexes. Although the Top 50 lost one percent of its value on the month, that looked pretty good compared to a 6.4 percent decline for the Russell 2000 Growth Index.

A Return to the 1970s?

While mega-caps have been out of favor with investors for quite some time, there is precedent for their outperformance.  Mega caps were popular in the early stages of the 1990s Internet rally, and they were all the rage in the 1970s, when the so-called "Nifty Fifty" drove the U.S. stock market to (then) record peaks.

In fact, Rydex and Russell's choice of fifty stocks harkens back directly to the Nifty Fifty, which dominated the market for years, until "stagflation" reared its ugly head and brought the entire market to its knees.

Interestingly, only nine of the original Nifty Fifty now qualify for the Rydex mega-cap ETF.  My, how times have changed.

Building the Rydex ETF Brand

The Top 50 is just the second Rydex ETF to hit the market, following on the modest success of its S&P 500 Equal Weight Fund (RSP). Launched in 2003, RSP currently has over $700 million in assets.  The fund, which tracks the performance of an equally-weighted version of the S&P 500, has done well for investors, beating the traditional S&P 500 by more than three percent over the past year.

Of course, Rydex won't see a lot overlap in terms of investors holding both funds, since they work at course purposes.  Maybe investors will take advantage of their differences to make a pairs trade - say, long the Top 50 and short RSP, as a leveraged bet that small caps will trail their larger cousins.

The fund carries an expense ratio of 0.20 percent and trades under the ticker symbol "XLG."  The full prospectus is available here.

Find your next ETF

Reset All