Deal puts Guggenheim squarely in ETF frame

Guggenheim Partners LLC’s announced last week that its acquisition of Rydex SGI will bring together a variety of products, including 77 mutual funds. But it is the new family of 104 ETFs that is expected to see the greatest level of development and innovation.

After months of speculation, Rydex SGI is being absorbed by Guggenheim Partners, creating a $119 billion asset management firm and the 10th-largest exchange-traded-fund shop, at nearly $19 billion.

The deal, which was announced Wednesday morning, follows Guggenheim’s September 2010 re-branding of Claymore Group Inc. to become Guggenheim Investments.

The newly combined entity, which will operate under that name as well, will be headquartered in New York and Santa Monica, Calif.

“We’re certainly looking to expand the [ETF] product line, and we think we could move up the ranks [beyond 10th-largest] rather quickly,” said Tony Davidow, a managing director and portfolio strategist at Rydex. “We’re definitely in growth mode and there’s quite a bit more we can do from here.”

Financial advisers familiar with the Rydex ETF lineup said that the combined entity is a positive but that the changes likely will come slowly.

“Out of all the groups that have controlled Rydex, none is more powerful or has more money than Guggenheim,” said Paul Schatz, president of Heritage Capital LLC, a $110 million advisory firm.

“I don’t think we’ll immediately see hundreds of new ETFs come out of this, but they will be able to build out the product lineup,” he said. “Guggenheim’s push should help to increase liquidity to some of the thinner ETFs and those ETFs will start to get more traction under the re-branding.”

The re-branding effort will help to establish Guggenheim as “one of the ETF providers with a diversified product line,” said Tom Lydon, president of Global Trends Investments.

Mr. Lydon, who also serves on the fund board at Rydex, added: “As the whole thing gets fully integrated, the picture will be clear that investor education is a big part of the plan.”

While the ETF space has experienced tremendous growth over the past several years, there is still room for fine-tuning more specialized and specific strategies, according to David Elliott, president and owner of D.G. Elliott Financial Services Inc., a $15 million advisory shop that relies heavily on ETFs in building client portfolios.

“I think mutual funds could go away entirely over the next five or 10 years because of the high operating cost,” he said. “If I was an ETF manager, I would want to be where the action is, and that’s something that is constantly changing.”

The consolidation and product re-branding, which will take place gradually over the next few months, brings together into one ETF family product lines and thematic series, including RydexShares and CurrencyShares from Rydex, and BulletShares from Guggenheim.

The ETF family also will include about 30 products from Claymore Canada.

“We view the product lines as being completely complementary and we feel like we’re in the sweet spot of financial adviser and client needs,” said Marc Zeitoun, head of intermediary distribution at Rydex.

Part of what is expected to make the transition a smooth one is the fact that Guggenheim and Rydex have been working collaboratively for the past several years.

In 2009, Guggenheim took over management of Rydex parent Security Benefit Corp.’s $4 billion general account. And in February 2010, Guggenheim was the lead investor in buying a controlling interest in Security Benefit.

Through the deal announced last week, Guggenheim, which continues to hold a controlling interest in Security Benefit, essentially will acquire Rydex in exchange for making Security Benefit the largest institutional shareholder in Guggenheim.

Specific dollar-value terms of the deal are not being made public.

“In many ways, this is a different kind of transaction,” said Richard Goldman, who is coming from Rydex and will be chief operating officer of the combined firm.

“This is an expansion of the Guggenheim asset management capabilities, and we’re excited about the complementary nature of the businesses,” he added. “Over the past few years of working together, we have collaborated on product development, marketing and sales, and now we’re taking the expansion to the next level.”

Even though the combined entity will be ranked 10th in the world (and seventh-largest in the U.S.), a $19 billion ETF business could still be considered a fledgling by some measures, according to Paul Justice, an ETF analyst at Morningstar Inc.

By way of comparison, the top spot is held by BlackRock Inc., which holds a 42% market share with $446 billion in ETF assets.

State Street Global Advisors is in second place with a 25% share and $267 billion under management, followed by The Vanguard Group Inc., which has a 16% share of the market and $167 billion under management.

According to Mr. Justice, one upside of not being a gigantic ETF provider is that the re-branding strategy will be easier to execute.

“Neither Rydex nor Claymore have names that pack a lot of punch with consumers, and there’s also not substantial product overlap, which means there will be a broad product line offering,” he said. “The bigger footprint can help to rationalize the marketing and distribution efforts, and brand recognition can beget success.”

LITTLE OVERLAP

Bill Belden, managing director and head of product development from Guggenheim, confirmed that nobody is expecting to see a lot of consolidation among the ETFs that are being brought together under the Guggenheim banner.

“We’ve been looking at the Rydex ETF product line and there is not a lot of redundancy or overlap,” he said.

“We’ve all been eagerly awaiting this because there’s so much we can do together, and scale really does help,” Mr. Davidow said.

The Rydex deal brings Guggenheim’s assets-under-management figure to more than three times what it was in 2007, and creates a company with more than 800 employees.

In addition to Mr. Goldman as COO, the top-level management team will include Todd Boehly, president, Scott Minerd, chief investment officer, and Don Cacciapaglia, chief administrative officer.

Email Jeff Benjamin at [email protected]

Related Topics: E*Trade Financial Corp.