Strange Stuff in Double Inverse ETF Land

I get the RSS feed from IndexUniverse.com and a weird thing happened to an article I was interested in yesterday. The article was about the fact that the the Rydex Inverse 2X S&P Select Sector Energy ETF (REC) went ex-distribution with a 86% distribution. The link stopped working as I went from page 1 to page 2 of the article.

I used the search function on the Index Universe website for “REC” and only found an article referencing planned distributions on 12/19. It appears the article I was reading has been taken down. I took another look at the site and the article is back up. You can read it here.

Too bad. I have completed a little research on REC and it looks like shareholders of record Wednesday got hosed. Rydex declared a short term capital gain distribution of $86.48 per share. REC shares closed on Wednesday $88.23 below the ending price on Tuesday. Pity the uninformed shareholders.

REC started trading on June 10, 2008 at a NAV of $75. In the last 6 months the shares have traded between (before going ex) $70 and $258. Wednesday’s price ($12.05) plus the distribution equals $98.53, so there are exactly zero shareholders out there who will receive the distribution and actually made 86% on their investment. I would really like to find the guy who bought at $200+ and still holds the shares, has lost half his investment and has to pay full income tax on 86% of what’s left.

ETFs are supposed to be tax friendly investments, but it is obvious there are some issues with these double down / up types. Before the Index Universe article disappeared, there was a chart listing a couple of other Rydex ETFs that distributed 50%+ gains. Traders in these things need to keep a careful eye on distribution dates.

Comments

[User 318121:]

Your article has a horrific slant! ETFs are 1940 Act products. They HAVE to distribute their gains. Your tone implies that somehow the provider "hosed" its clients. It's the nature of the investment, and investors should be quite clear on the tax implications of such funds. As for the "tax efficiency" - you would think someone having their articles published online would know that any ETFs getting inverse exposure through SWAP agreements don't benefit from the in-kind Creation/Redemption process that most ETFs benefit from. They are cash transactions. It really has nothing to do with the "double" up or down, as a 1:1 Inverse fund would be equally tax inefficient.

And you are an expert you say? Do your homework. By the way, I'm 27...

2008 Dec 12 08:22 AM

[User 318121:]

Your article has a horrific slant! ETFs are 1940 Act products. They HAVE to distribute their gains. Your tone implies that somehow the provider "hosed" its clients. It's the nature of the investment, and investors should be quite clear on the tax implications of such funds. As for the "tax efficiency" - you would think someone having their articles published online would know that any ETFs getting inverse exposure through SWAP agreements don't benefit from the in-kind Creation/Redemption process that most ETFs benefit from. They are cash transactions. It really has nothing to do with the "double" up or down, as a 1:1 Inverse fund would be equally tax inefficient.

And you are an expert you say? Do your homework. By the way, I'm 27...

2008 Dec 12 08:22 AM

[tinman:]

Isn't this why God gave us the Roth and 401k?

2008 Dec 13 08:16 AM