Rydex Global Advisors, Inc.
9601 Blackwell Road, Suite 500
Rockville, Maryland 20850
Toll Free: 800.258.4332
January 31, 2002
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: Actively Managed Exchange-Traded Funds (File No. S7-20-01)
Dear Mr. Katz:
Rydex Global Advisors, along with its affiliates Rydex Fund Services, Inc. and Rydex Distributors, Inc. (collectively, "Rydex"), appreciates the opportunity to comment on the Securities and Exchange Commission's (the "Commission") recent concept release seeking comment on various issues related to actively managed exchange-traded funds ("ETFs"). Rydex has long been a leader in the development of innovative investment products designed to meet the needs of knowledgeable investors. While Rydex supports the Commission's efforts to gain a better understanding of the concept of actively managed ETFs, and generally supports the continue development of ETFs as an investment product, we strongly disagree with the Commission's assumptions as to what should constitute active management for purposes of regulating ETFs.
In the Commission's concept release, it states, "actively managed ETFs would include, for example, an ETF that seeks to achieve a multiple (or the reverse) of the performance of a market index." As the sponsor of several open-end funds that seek to do exactly that, seek to match the performance of a benchmark that is a multiple of the performance of a market index, we believe that such a management style when applied to an ETF is more akin to what the Commission has labeled an "index-based" ETF. In fact, the attributes of an ETF that is managed to match a benchmark that is index-based (a "benchmark-based ETF") are identical to those of an ETF that is managed to match an index (an "index-based ETF").
In fact, a benchmark-based ETF is essentially no different from an index-based ETF that uses a sampling technique rather than full replication. We note that current index-based ETFs have received exemptive relief from the Commission that permits them to (i) invest in derivatives, (ii) lend securities, and (iii) accept cash, rather than in-kind, investments. We believe similar relief would allow benchmark-based ETFs to operate in a manner consistent with currently existing ETFs.
In short, we believe that the differences between the current index-based ETFs and a benchmark-based ETF are negligible. The potential abuses that the Commission identified in the concept release for an actively managed ETF, such as front running, do not exist for a benchmark-based ETF where the benchmark is based on a securities index. The essential question is, to what extent will the benchmark-based ETF be able to maintain a level of transparency necessary to create an effective arbitrage mechanism. Again, we believe that benchmark-based ETF can maintain the same level of transparency that currently exist for index-based ETFs. Because such a benchmark-based ETF would necessarily invest to a greater extent in instruments that can not currently be transferred in kind, such as swap agreements and futures contracts, cash would likely constitute a greater portion of the creation basket than in most existing ETFs. However, that does not necessarily mean that such a fund's portfolio holdings would not be disclosed.
We believe that there is no meaningful distinction between index-based ETFs and benchmark-based ETFs. Instead, we believe the primary distinction should be whether or not the ETF is transparent, allowing for an effective arbitrage mechanism.
We thank the Commission for the opportunity to provide comments of this issue. If you have any questions concerning these comments, please contact Noah Hamman at 301-296-5316 or Peter Ewing at 301-296-5150.
Rydex Global Advisors
by: Robert M. Steele
Executive Vice President