A Sector Of Equals

October 27, 2006

Rydex readies a major expansion of its equal-weighted line of ETFs, with a full slate of sector SPDR funds on tap.

Rydex Investments plans to roll out nine new equal-weighted sector exchange-traded funds (ETFs) on Tuesday, November 7, as it looks to build on the success of its popular S&P 500 Equal-Weight ETF (AMEX: RSP).  The new funds track Standard and Poor's (S&P) indexes covering nine of the ten traditional Global Industry Classification System (GICS) sectors:

  • Consumer Discretionary
  • Consumer Staples
  • Energy
  • Financial
  • Health Care
  • Industrial
  • Materials
  • Technology
  • Utilities

The Telecommunications sector is left out, as it is in many sector fund families, presumably because too few companies operate in that space to meet various diversification rules.

The prospectus for the fund is available here.

The new ETFs represent the first major expansion of Rydex's equal-weighted ETF line, which is anchored by the aforementioned RSP.  RSP launched in April of 2003 and has attracted over $1.6 billion in assets.  Thanks to its mid-cap tilt, the fund has handily outperformed the traditional S&P 500 index by nearly 3.5 percent per year over the past three years. In fact, it earned Morningstar's highest rating for a mutual fund --five stars-- for its three-year performance.

Rydex hopes the new funds can echo that performance record, and also appeal to investors looking for a more diversified approach to sector investing.  Many sector indexes are dominated by just a few names: for instance, two names represent nearly 41 percent of the iShares Dow Jones U.S. Energy Sector Index Fund (NYSE: IYE): Exxon-Mobil at 23.7 percent and Chevron at 17.1 percent. The new funds will let investors spread their bets more broadly across sector components.

Importantly, while the funds will tilt toward mid-cap, they should not be considered small-cap funds.  Components will be drawn from the S&P 500 and S&P MidCap 400 indexes only; S&P SmallCap 600 names will not be considered.  (For comparison, the popular Sector SPDR ETFs draw only on S&P 500 components.)

 As with RSP, components will be rebalanced on a quarterly basis.

Too Late?

The question on many people's minds is whether Rydex is coming late to the party. While RSP was launched during the heart of one of the best runs for mid-cap stocks in recent memory, many analysts believe that large-cap stocks are ready to take their turn at the leadership.  At the very least, small- and mid-cap stocks are not undervalued in the same way they have been in the past.

Still, the funds will likely do well with investors, who have embraced RSP and have been waiting for more equal-weight funds from Rydex.  At the very least, their diversification and regular rebalancing schedule will appeal to investors who think the small- and mid-cap run still has some life.  At best, the funds can be viewed as another in the growing array of index tools meant to mitigate the tendency of cap-weighted indexes to overweight the stocks at the largest cap end of the spectrum.

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