PHILADELPHIA — Rydex Investments is emphasizing its exchange traded funds in talks with firms interested in acquiring the company, according to sources.
The idea is that the Rockville, Md., asset manager will be able to fetch a higher price than if it were sold just as a mutual fund shop, according to two executives, who asked not to be identified. The executives’ companies were involved in talks to acquire Rydex but pulled out within the past few months.
The asking price for Rydex is thought to be between $800 million and $1 billion, sources said.
A spokeswoman for Rydex declined to comment.
It wouldn’t surprise industry experts if Rydex were trying to parlay its ETF lineup into a higher asking price.
“I think it’s very likely that they realize timing is everything and that right now is a pretty interesting time to be in the ETF business,” said Jim Lowell, Needham, Mass.-based editor of Forbes ETF Advisor, a monthly newsletter.
Some issues
During the 12-month period through April, overall ETF assets increased by $121.94 billion, or 35.4%, to $466.55 billion, according to the most recent data available from the Investment Company Institute of Washington.
But a look at Rydex reveals that it has a few problems as an ETF shop, according to industry experts.
Rydex has more than 90 leveraged and inverse ETFs in registration.
But rival ProShare Advisors LLC of Bethesda, Md., was first to market with such ETFs a year ago and has launched more than 50.
The “first mover” advantage in the ETF world is hard to overcome, Mr. Lowell said.
But it could be overcome if Rydex is acquired by a firm with some distribution muscle, he said.
Rydex’s lineup of ETFs, however, has its own set of problems.
The company probably is best known in the ETF market for its equal-weighted portfolios, specifically its $2.29 billion Rydex S&P Equal Weight ETF.
The concept behind the ETFs — they equally weight each of the stocks in the Standard & Poor’s 500 stock index and its sector indexes, eliminating the bias toward large-cap companies — is solid, said Robert D. Williams, director of research for Sage Advisory Services Ltd. Co. in Austin, Texas.
But the trouble with the Rydex S&P Equal Weight ETF, he said, is that although it has been out a long time, it doesn’t have the liquidity Sage Advisory Services needs to make it a core investment in the firm’s ETF portfolios.
Some financial advisers said that equal-weighted indexes have a small-capitalization-stock bias.
That hasn’t been a problem in recent years when small-caps have been in favor, but it could become a problem as large-cap stocks come into vogue, said Marvin Appel, chief executive of Appel Asset Management Corp. in Great Neck, N.Y.
Of course, Rydex has other ETF products.
The company offers six pure-style ETFs based on the S&P/
Citigroup Pure Style indexes.
Those ETFs follow indexes that divide the S&P 500, S&P MidCap 400 and S&P SmallCap 600 indexes into subindexes designed specifically to track the growth and value portions of each index.
The biggest of the pure-style ETFs is the $56.17 million Rydex S&P 500 Pure Growth ETF.
The pure-style ETFs are unique and may add value to an investor’s portfolio, said Mike Woods, chief executive of XTF Advisors LLC in New York.
But it may take a while for the ETFs — which were launched last year — to catch on, he added.
Finally, Rydex offers eight currency exchange traded products, but while those products may be good for the sophisticated investor, they probably aren’t a good idea for the retail investor, said Sonya Morris, editor of Morningstar ETFInvestor, a newsletter published by Morningstar Inc. of Chicago.
“They can be extremely volatile, and investors don’t tend to use volatile funds well,” she said.
