As managing director, portfolio strategist for Rydex|SGI's asset allocation and target beta fund line-up, Carl Resnick provides strategic guidance with respect to product management, new business development and product-line profitability within the institutional marketplace.
Prior to this role, Carl served as Rydex|SGI's National Sales Manager of ETF and Institutional sales, where he was responsible for managing ETF distribution resources throughout the firm. Before joining the firm, he worked in several capacities at Fidelity Investments.
Carl recently took the time to sit down with Seeking Alpha's Jonathan Liss to field questions on Rydex|SGI's line of current ETFs and talk about the firm's plans for the future.
Seeking Alpha (SA): Which of Rydex|SGI's ETF launches would you say was most surprising in terms of how successful it has been? Which has surprised you most in terms of not really being where you expected it to be in terms of assets and trading volume?
Carl Resnick (CR): We have seen the most demand for our CurrencyShares suite, which offered investors first-time access to currency via an exchange traded product structure with the launch of CurrencyShares Euro Trust (FXE) in December 2005. Today we offer nine CurrencyShares with more than $2.5 billion in assets. We believe CurrencyShares have been successful based on the fact that they offer pure-play exposure to currency as an asset class. The pure-play exposure comes from us being able to hold the physical currency within a Grantor Trust structure. We have seen increased interest among financial advisors who are seeking the potential diversification benefits of adding currency to a portfolio. These products are also popular among advisors and traders who wish to express a specific view on a foreign currency relative to the U.S. dollar.
The Rydex Leveraged and Inverse ETFs, on the other, have not attracted the marketplace interest that we would have expected. “First to market” is a tremendous advantage when it comes to ETFs.
SA: Rydex|SGI currently has 9 funds with under $10M in assets and another 11 with between $10-$20M in assets. That's nearly half the funds you have on the market at well below the level most funds need to be profitable for the issuer. In your assessment, has Rydex|SGI 's foray into the ETF business been a failure, or is it too early to judge? Are any of your funds at risk of being shuttered?
CR: Rydex|SGI has been an innovator within the ETF industry, introducing the first alternatively-weighted ETF with Rydex S&P Equal Weight ETF (RSP) in 2003 and the first currency-based exchange traded product with CurrencyShares Euro Trust in 2005. Today RSP has approximately $1.6 billion in assets, and the CurrencyShares suite has more than $2.5 billion in assets. We have also seen interest in Rydex Russell Top 50 ETF (XLG), which has approximately $325 million in assets. While some of our ETF products have definitely attracted more interest than others, our ETF business grew by approximately 36% in 2009 to $5.7 billion in assets. As always, we will continue to assess the marketplace demand for our products and make business decisions that we feel are in the best interests of the funds and our investors.
SA: Your most successful fund to date has easily been RSP, the Rydex S&P 500 Equal Weight ETF. What about the mechanics of this fund specifically make it such a good alternative to standard cap-weighted S&P 500 Index funds like SPY or IVV?
CR: We position Rydex S&P Equal Weight ETF (RSP) as a complement to rather than a replacement for traditional cap-weighted strategies. By providing equal weight exposure to the S&P 500, RSP offers greater exposure to some of the smaller companies within the index, which have historically outperformed their large-cap counterparts over time. The equal weight approach may also help mitigate single-stock risk/over-concentration and features a built-in rebalancing mechanism--selling the winners and buying the losers on a quarterly basis which may help provide disciplined diversification.
Equal weighting is also factor indifferent. It randomizes factor mispricing and thus is an attractive option for proponents of the theory that the market is inefficient and at times misprices factors. Lastly, RSP will have different sector exposure within the S&P 500 versus SPY or IVV. The sector weights in RSP are determined at each rebalancing by the number of stocks in each sector in the S&P 500.
SA: Looking at RSP's performance vs. benchmarks like SPY and IVV, the outperformance both over the shorter and longer term (it's up 19% over the recent 12-month period vs. SPY and IVV, closer to 33% over the life of the fund, which is coming up on 7 years this May) has been significant. How far back does the back-testing go on these funds and do you see any reason this strategy shouldn't continue to outperform standard cap-weighted index funds in the future?
CR: Standard and Poor's has back testing data for the S&P 500 Equal Weight Index (EWI), beginning December 29, 1989 through December 31, 2007. Standard and Poor's has live data for the S&P 500 EWI from January 9, 2003.
Obviously it is tough to predict what will happen in the future, and historical performance is not an indication of future performance. The level of out-performance versus market cap weighting has varied considerably under different market conditions. Although the historical data for the S&P 500 EWI comprises only one major bull market and correction, the performance of the index over time suggests that equal weighting may under-perform relative to market cap weighting during strong bull markets, but will correspondingly hold up better during bear markets.
SA: One possible negative is that Rydex |SGI 's Equal Weight funds appear to be more volatile than Market Cap-Weighted funds. Why is this so and is this cause for more conservative investors to avoid these funds despite their long-term out-performance?
CR: At times, the equal weight funds may experience higher volatility compared to their cap-weighted counterparts due to increased exposure to smaller market capitalization securities. However, it is important to note that the securities held within these funds are representative of the S&P 500 Index which is a large capitalization index. Again, we view the equal weight strategy as a complement to traditional cap-weighted strategies within an overall asset allocation strategy--similarly to how investors might view mid-cap and international stocks as complements to a large-cap portfolio. As with any investment decision, it is important to take into consideration an investor’s risk tolerance, goals, objectives and investing timeframe when considering investing in RSP. An investment in Rydex S&P Equal Weight ETF should be considered within the context of one’s entire portfolio. Just because an investor might be a conservative investor, does not necessarily mean that they should not invest in RSP.
SA: Moving on to your leveraged and leveraged short ETFs, what advantages do Rydex funds offer over alternatives from ProShares? Despite being significantly cheaper (for example, RSU charges 70 bps in expenses vs. 95 bps for ProShares' SSO), Rydex's leveraged funds have failed to attract the sort of assets that ProShares has. How do you explain this?
CR: In addition to offering investors a choice in providers, the Rydex leveraged ETFs provide leveraged and inverse exposure to the S&P Select Sectors, which are more widely traded indices. The modest assets in these products, however, underscore the importance of being first to market in the ETF industry. 'First to market' is a tremendous advantage when it comes to ETFs, and we believe it will take some time for the Rydex leveraged and inverse ETFs to gain marketshare. (The majority of our leveraged/inverse ETFs launched in June 2008--just prior to the financial crisis).
SA: Rydex's Pure Value and Pure Growth ETFs have also significantly outperformed similar benchmarks over the past year. What sets these funds apart from run of the mill Value and Growth Index funds in terms of stock selection methodology and weighting?
CR: The Pure Style ETFs are based on identifying approximately a third (1/3) of the market of the index as pure growth, and a third (1/3) as pure value. There are no overlapping stocks, and stocks are weighted by their style attractiveness. The Style indices measure growth and value along two separate dimensions, with three factors each used to measure growth and value.
The Growth Factors are 1) Three-year change in Earnings per Share over Price per Share 2) Three-year Sales per Share Growth Rate 3) Momentum (12-month % price change)
The Value Factors are 1) Book Value to Price Ratio 2) Earnings to Price Ratio 3) Sales to Price Ratio
It is important to note, that all Style Scores are capped at 2% in the Pure Style indices in order to avoid stocks with outlying high Style Scores having a very large weight in the index.
SA: Your most successful line of ETFs has been the CurrencyShares ETFs. Which fund or funds do you think have the greatest chance for appreciation against the dollar in the current environment and why? Where have you seen the greatest inflows and outflows in these funds over the last year?
CR: In 2009, CurrencyShares Canadian Dollar Trust (FXC) and CurrencyShares Australian Dollar Trust (FXA) had the great inflows while the CurrencyShares Japanese Yen Trust (FXY) and CurrencyShares Euro Trust (FXE) saw the greatest outflows.
One of the benefits of investing in Currencies is they can be used in several different manners. Based on an investor's objectives, one could consider investing in our CurrencyShares exchange traded products for the following strategies: Diversifying cash, Alpha strategies, speculation, International hedging.
SA: What does Rydex|SGI have planned for the future in terms of its next round of ETF launches?
CR: Rydex|SGI has been a pioneer in bringing alternative investments mainstream, and we are continuing to commit resources and focus on product development in this area. While we do not have any ETF launches on the immediate horizon, we are agnostic when it comes to product packaging. That is to say it is our goal to deliver investment strategies within the structure that makes the most sense--whether that may be an exchange traded fund format or a traditional mutual fund package.