As Filed with the U.S. Securities and Exchange Commission on February 28, 2008
File Nos. 333-101625 and 811-21261
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (X)
Pre-Effective Amendment No.___ ( )
Post-Effective Amendment No. 10 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 (X)
Amendment No. 11 (X)
RYDEX ETF TRUST
(Exact Name of Registrant as Specified in Charter)
9601 Blackwell Road, Suite 500, Rockville, Maryland 20850
(Address of Principal Executive Offices) (Zip Code)
(301)296-5100
(Registrant's Telephone Number, Including Area Code)
Carl G. Verboncoeur
9601 Blackwell Road
Suite 500
Rockville, Maryland 20850
(Name and Address of Agent for Service of Process)
Copies to:
W. John McGuire
Morgan, Lewis & Bockius LLP
1111 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b) of rule 485
[X] on March 1, 2008 pursuant to paragraph (b)(1)(v) of rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1) of rule 485
[ ] on (date) pursuant to paragraph (a)(1) of rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2) of rule 485
[ ] on (date) pursuant to paragraph (a)(2) of rule 485
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RYDEX ETF TRUST
MARCH 1, 2008
RYDEX S&P EQUAL WEIGHT ETF
RYDEX RUSSELL TOP 50((R)) ETF
RYDEX S&P PURE STYLE ETFS
RYDEX S&P 500 PURE VALUE ETF
RYDEX S&P 500 PURE GROWTH ETF
RYDEX S&P MIDCAP 400 PURE VALUE ETF
RYDEX S&P MIDCAP 400 PURE GROWTH ETF
RYDEX S&P SMALLCAP 600 PURE VALUE ETF
RYDEX S&P SMALLCAP 600 PURE GROWTH ETF
RYDEX S&P EQUAL WEIGHT SECTOR ETFS
RYDEX S&P EQUAL WEIGHT CONSUMER DISCRETIONARY ETF
RYDEX S&P EQUAL WEIGHT CONSUMER STAPLES ETF
RYDEX S&P EQUAL WEIGHT ENERGY ETF
RYDEX S&P EQUAL WEIGHT FINANCIALS ETF
RYDEX S&P EQUAL WEIGHT HEALTH CARE ETF
RYDEX S&P EQUAL WEIGHT INDUSTRIALS ETF
RYDEX S&P EQUAL WEIGHT MATERIALS ETF
RYDEX S&P EQUAL WEIGHT TECHNOLOGY ETF
RYDEX S&P EQUAL WEIGHT UTILITIES ETF
[LOGO] RYDEXINVESTMENTS
ESSENTIAL FOR MODERN MARKETS(R)
The U.S. Securities and Exchange Commission has not approved or disapproved the
Trust's shares or passed upon the accuracy or adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
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ii
TABLE OF CONTENTS
RYDEX ETF TRUST OVERVIEW ................................................. 1
RYDEX S&P EQUAL WEIGHT ETF ............................................... 2
RYDEX RUSSELL TOP 50((R))ETF ............................................. 3
RYDEX S&P PURE STYLE ETFS
RYDEX S&P 500 PURE VALUE ETF .......................................... 4
RYDEX S&P 500 PURE GROWTH ETF ......................................... 5
RYDEX S&P MIDCAP 400 PURE VALUE ETF ................................... 6
RYDEX S&P MIDCAP 400 PURE GROWTH ETF .................................. 7
RYDEX S&P SMALLCAP 600 PURE VALUE ETF ................................. 8
RYDEX S&P SMALLCAP 600 PURE GROWTH ETF ................................ 9
RYDEX S&P EQUAL WEIGHT SECTOR ETFS
RYDEX S&P EQUAL WEIGHT CONSUMER DISCRETIONARY ETF ..................... 10
RYDEX S&P EQUAL WEIGHT CONSUMER STAPLES ETF ........................... 11
RYDEX S&P EQUAL WEIGHT ENERGY ETF ..................................... 12
RYDEX S&P EQUAL WEIGHT FINANCIALS ETF ................................. 13
RYDEX S&P EQUAL WEIGHT HEALTH CARE ETF ................................ 14
RYDEX S&P EQUAL WEIGHT INDUSTRIALS ETF ................................ 15
RYDEX S&P EQUAL WEIGHT MATERIALS ETF .................................. 16
RYDEX S&P EQUAL WEIGHT TECHNOLOGY ETF ................................. 17
RYDEX S&P EQUAL WEIGHT UTILITIES ETF .................................. 18
PRINCIPAL RISKS OF INVESTING IN THE FUNDS ................................ 19
DESCRIPTIONS OF PRINCIPAL RISKS .......................................... 23
FUND PERFORMANCE ......................................................... 29
FUND FEES AND EXPENSES ................................................... 48
MORE INFORMATION ABOUT THE FUNDS ......................................... 59
BENCHMARKS AND INVESTMENT METHODOLOGY .................................... 59
SHAREHOLDER INFORMATION .................................................. 64
DISTRIBUTION PLAN ........................................................ 68
DIVIDENDS AND DISTRIBUTIONS .............................................. 69
TAX INFORMATION .......................................................... 69
MANAGEMENT OF THE FUNDS .................................................. 71
FINANCIAL HIGHLIGHTS ..................................................... 75
INDEX PUBLISHERS INFORMATION ............................................. 84
SUPPLEMENTAL INFORMATION ................................................. 87
ADDITIONAL INFORMATION ................................................... 103
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PROSPECTUS 1
RYDEX ETF TRUST
9601 BLACKWELL ROAD, SUITE 500, ROCKVILLE, MARYLAND 20850
800.820.0888 o 301.296.5100 o WWW.RYDEXINVESTMENTS.COM
RYDEX S&P EQUAL WEIGHT ETF
RYDEX RUSSELL TOP 50(R) ETF
RYDEX S&P PURE STYLE ETFS
RYDEX S&P EQUAL WEIGHT SECTOR ETFS
Rydex ETF Trust (the "Trust") is an investment company offering a number of
professionally managed investment portfolios (funds) that are grouped into
several categories according to each fund's investment strategy. This Prospectus
describes shares of the following funds (the "Funds") which are grouped into the
following categories:
RYDEX S&P EQUAL WEIGHT ETF - Rydex S&P Equal Weight ETF
RYDEX RUSSELL TOP 50(R) ETF - Rydex Russell Top 50(R) ETF
RYDEX S&P PURE STYLE ETFs - Rydex S&P 500 Pure Value ETF, Rydex S&P 500 Pure
Growth ETF, Rydex S&P MidCap 400 Pure Value ETF, Rydex S&P MidCap 400 Pure
Growth ETF, Rydex S&P SmallCap 600 Pure Value ETF, and Rydex S&P SmallCap 600
Pure Growth ETF
RYDEX S&P EQUAL WEIGHT SECTOR ETFs - Rydex S&P Equal Weight Consumer
Discretionary ETF, Rydex S&P Equal Weight Consumer Staples ETF, Rydex S&P Equal
Weight Energy ETF, Rydex S&P Equal Weight Financials ETF, Rydex S&P Equal Weight
Health Care ETF, Rydex S&P Equal Weight Industrials ETF, Rydex S&P Equal Weight
Materials ETF, Rydex S&P Equal Weight Technology ETF, and Rydex S&P Equal Weight
Utilities ETF
The shares of the Funds are listed for trading on the American Stock Exchange
(the "Exchange"). Market prices for a Fund's shares may be different from its
net asset value per share ("NAV"). The Funds issue and redeem shares on a
continuous basis at NAV only in blocks of 50,000 shares, or multiples thereof,
called a "Creation Unit." Creation Units of a Fund are issued and redeemed
principally in-kind for securities included in the Fund's underlying index. As a
practical matter, only institutions or large investors purchase or redeem
Creation Units. Once created, shares of a Fund generally trade in the secondary
market in amounts less than a Creation Unit. For a more detailed discussion, see
the "Creations and Redemptions" section herein. EXCEPT WHEN AGGREGATED IN
CREATION UNITS, SHARES OF EACH FUND ARE NOT REDEEMABLE SECURITIES.
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2
RYDEX S&P EQUAL WEIGHT ETF (RSP)
FUND OBJECTIVE
The Rydex S&P Equal Weight ETF's investment objective is to replicate as closely
as possible, before fees and expenses, the performance of the S&P Equal Weight
Index (the "Underlying Index"). The investment objective of the Rydex S&P Equal
Weight ETF is non-fundamental and may be changed without shareholder approval.
PRINCIPAL INVESTMENT STRATEGY
The Rydex S&P Equal Weight ETF uses a passive management strategy, known as
"replication," to track the performance of the Underlying Index. "Replication"
refers to investing in substantially all of the securities in the Underlying
Index in approximately the same proportions as in the Underlying Index. The
Advisor expects that, over time, the correlation between the Fund's performance,
before fees and expenses, and that of the Underlying Index will be 95% or
better. A figure of 100% would indicate perfect correlation.
PRINCIPAL RISKS
The Rydex S&P Equal Weight ETF is subject to a number of risks that may affect
the value of its shares, including:
o Early Closing Risk
o Large-Capitalization Securities Risk
o Liquidity Risk
o Market Risk
o Tracking Error Risk
o Trading Risk
Please see "Descriptions of Principal Risks" on page 23 for a discussion of each
of the principal risks that apply to the Fund.
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PROSPECTUS 3
RYDEX RUSSELL TOP 50(R) ETF (XLG)
FUND OBJECTIVE
The Rydex Russell Top 50(R) ETF's investment objective is to replicate as
closely as possible, before fees and expenses, the performance of the Russell
Top 50(R) Index (the "Underlying Index"). The investment objective of the Rydex
Russell Top 50(R) ETF is non-fundamental and may be changed without shareholder
approval.
PRINCIPAL INVESTMENT STRATEGY
The Rydex Russell Top 50(R) ETF uses a passive management strategy, known as
"replication," to track the performance of the Underlying Index. The Fund offers
investors access to the largest capitalization segment in the U.S. equity
universe representing approximately 40% of the U.S. stock market. "Replication"
refers to investing in substantially all of the securities in the Underlying
Index in approximately the same proportions as in the Underlying Index. The
Advisor expects that, over time, the correlation between the Fund's performance
and that of the Underlying Index, before fees and expenses, will be 95% or
better. A figure of 100% would indicate perfect correlation.
PRINCIPAL RISKS
The Rydex Russell Top 50(R) ETF is subject to a number of risks that may affect
the value of its shares, including:
o Early Closing Risk
o Large-Capitalization Securities Risk
o Liquidity Risk
o Market Risk
o Non-Diversification Risk
o Tracking Error Risk
o Trading Risk
Please see "Descriptions of Principal Risks" on page 23 for a discussion of each
of the principal risks that apply to the Fund.
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4
RYDEX S&P 500 PURE VALUE ETF (RPV)
FUND OBJECTIVE
The Rydex S&P 500 Pure Value ETF's investment objective is to replicate as
closely as possible, before fees and expenses, the performance of the S&P
500/Citigroup Pure Value Index (the "Underlying Index"). The investment
objective of the Rydex S&P 500 Pure Value ETF is non-fundamental and may be
changed without shareholder approval.
PRINCIPAL INVESTMENT STRATEGY
The Rydex S&P 500 Pure Value ETF uses a passive management strategy, known as
"replication," to track the performance of the Underlying Index. "Replication"
refers to investing in substantially all of the securities in the Underlying
Index in approximately the same proportions as in the Underlying Index. The
Advisor expects that, over time, the correlation between the Fund's performance
and that of the Underlying Index, before fees and expenses, will be 95% or
better. A figure of 100% would indicate perfect correlation.
PRINCIPAL RISKS
The Rydex S&P 500 Pure Value ETF is subject to a number of risks that may affect
the value of its shares, including:
o Early Closing Risk
o Large-Capitalization Securities Risk
o Liquidity Risk
o Market Risk
o Tracking Error Risk
o Trading Risk
Please see "Descriptions of Principal Risks" on page 23 for a discussion of each
of the principal risks that apply to the Fund.
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PROSPECTUS 5
RYDEX S&P 500 PURE GROWTH ETF (RPG)
FUND OBJECTIVE
The Rydex S&P 500 Pure Growth ETF's investment objective is to replicate as
closely as possible, before fees and expenses, the performance of the S&P
500/Citigroup Pure Growth Index (the "Underlying Index"). The investment
objective of the Rydex S&P 500 Pure Growth ETF is non-fundamental and may be
changed without shareholder approval.
PRINCIPAL INVESTMENT STRATEGY
The Rydex S&P 500 Pure Growth ETF uses a passive management strategy, known as
"replication," to track the performance of the Underlying Index. "Replication"
refers to investing in substantially all of the securities in the Underlying
Index in approximately the same proportions as in the Underlying Index. The
Advisor expects that, over time, the correlation between the Fund's performance
and that of the Underlying Index, before fees and expenses, will be 95% or
better. A figure of 100% would indicate perfect correlation.
PRINCIPAL RISKS
The Rydex S&P 500 Pure Growth ETF is subject to a number of risks that may
affect the value of its shares, including:
o Early Closing Risk
o Large-Capitalization Securities Risk
o Liquidity Risk
o Market Risk
o Tracking Error Risk
o Trading Risk
Please see "Descriptions of Principal Risks" on page 23 for a discussion of each
of the principal risks that apply to the Fund.
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6
RYDEX S&P MIDCAP 400 PURE VALUE ETF (RFV)
FUND OBJECTIVE
The Rydex S&P MidCap 400 Pure Value ETF's investment objective is to replicate
as closely as possible, before fees and expenses, the performance of the S&P
MidCap 400/Citigroup Pure Value Index (the "Underlying Index"). The investment
objective of the Rydex S&P MidCap 400 Pure Value ETF is non-fundamental and may
be changed without shareholder approval.
PRINCIPAL INVESTMENT STRATEGY
The Rydex S&P MidCap 400 Pure Value ETF uses a passive management strategy,
known as "replication," to track the performance of the Underlying Index.
"Replication" refers to investing in substantially all of the securities in the
Underlying Index in approximately the same proportions as in the Underlying
Index. The Advisor expects that, over time, the correlation between the Fund's
performance and that of the Underlying Index, before fees and expenses, will be
95% or better. A figure of 100% would indicate perfect correlation.
PRINCIPAL RISKS
The Rydex S&P MidCap 400 Pure Value ETF is subject to a number of risks that may
affect the value of its shares, including:
o Early Closing Risk
o Liquidity Risk
o Market Risk
o Mid-Capitalization Securities Risk
o Tracking Error Risk
o Trading Risk
Please see "Descriptions of Principal Risks" on page 23 for a discussion of each
of the principal risks that apply to the Fund.
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PROSPECTUS 7
RYDEX S&P MID CAP 400 PURE GROWTH ETF (RFG)
FUND OBJECTIVE
The Rydex S&P MidCap 400 Pure Growth ETF's investment objective is to replicate
as closely as possible, before fees and expenses, the performance of the S&P
MidCap 400/Citigroup Pure Growth Index (the "Underlying Index"). The investment
objective of the Rydex S&P MidCap 400 Pure Growth ETF is non-fundamental and may
be changed without shareholder approval.
PRINCIPAL INVESTMENT STRATEGY
The Rydex S&P MidCap 400 Pure Growth ETF uses a passive management strategy,
known as "replication," to track the performance of the Underlying Index.
"Replication" refers to investing in substantially all of the securities in the
Underlying Index in approximately the same proportions as in the Underlying
Index. The Advisor expects that, over time, the correlation between the Fund's
performance and that of the Underlying Index, before fees and expenses, will be
95% or better. A figure of 100% would indicate perfect correlation.
PRINCIPAL RISKS
The Rydex S&P MidCap 400 Pure Growth ETF is subject to a number of risks that
may affect the value of its shares, including:
o Early Closing Risk
o Liquidity Risk
o Market Risk
o Mid-Capitalization Securities Risk
o Tracking Error Risk
o Trading Risk
Please see "Descriptions of Principal Risks" on page 23 for a discussion of each
of the principal risks that apply to the Fund.
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8
RYDEX S&P SMALLCAP 600 PURE VALUE ETF (RZV)
FUND OBJECTIVE
The Rydex S&P SmallCap 600 Pure Value ETF's investment objective is to replicate
as closely as possible, before fees and expenses, the performance of the S&P
SmallCap 600/Citigroup Pure Value Index (the "Underlying Index"). The investment
objective of the Rydex S&P SmallCap 600 Pure Value ETF is non-fundamental and
may be changed without shareholder approval.
PRINCIPAL INVESTMENT STRATEGY
The Rydex S&P SmallCap 600 Pure Value ETF uses a passive management strategy,
known as "replication," to track the performance of the Underlying Index.
"Replication" refers to investing in substantially all of the securities in the
Underlying Index in approximately the same proportions as in the Underlying
Index. The Advisor expects that, over time, the correlation between the Fund's
performance and that of the Underlying Index, before fees and expenses, will be
95% or better. A figure of 100% would indicate perfect correlation.
PRINCIPAL RISKS
The Rydex S&P SmallCap 600 Pure Value ETF is subject to a number of risks that
may affect the value of its shares, including:
o Early Closing Risk
o Liquidity Risk
o Market Risk
o Small-Capitalization Securities Risk
o Tracking Error Risk
o Trading Risk
Please see "Descriptions of Principal Risks" on page 23 for a discussion of each
of the principal risks that apply to the Fund.
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PROSPECTUS 9
RYDEX S&P SMALLCAP 600 PURE GROWTH ETF (RZG)
FUND OBJECTIVE
The Rydex S&P SmallCap 600 Pure Growth ETF's investment objective is to
replicate as closely as possible, before fees and expenses, the performance of
the S&P SmallCap 600/Citigroup Pure Growth Index (the "Underlying Index"). The
investment objective of the Rydex S&P SmallCap 600 Pure Growth ETF is
non-fundamental and may be changed without shareholder approval.
PRINCIPAL INVESTMENT STRATEGY
The Rydex S&P SmallCap 600 Pure Growth ETF uses a passive management strategy,
known as "replication," to track the performance of the Underlying Index.
"Replication" refers to investing in substantially all of the securities in the
Underlying Index in approximately the same proportions as in the Underlying
Index. The Advisor expects that, over time, the correlation between the Fund's
performance and that of the Underlying Index, before fees and expenses, will be
95% or better. A figure of 100% would indicate perfect correlation.
PRINCIPAL RISKS
The Rydex S&P SmallCap 600 Pure Growth ETF is subject to a number of risks that
may affect the value of its shares, including:
o Early Closing Risk
o Liquidity Risk
o Market Risk
o Small-Capitalization Securities Risk
o Tracking Error Risk
o Trading Risk
Please see "Descriptions of Principal Risks" on page 23 for a discussion of each
of the principal risks that apply to the Fund.
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10
RYDEX S&P EQUAL WEIGHT CONSUMER DISCRETIONARY ETF (RCD)
FUND OBJECTIVE
The Rydex S&P Equal Weight Consumer Discretionary ETF's investment objective is
to replicate as closely as possible, before fees and expenses, the performance
of the S&P Equal Weight Index Consumer Discretionary (the "Underlying Index").
The investment objective of the Rydex S&P Equal Weight Consumer Discretionary
ETF is non-fundamental and may be changed without shareholder approval.
PRINCIPAL INVESTMENT STRATEGY
The Rydex S&P Equal Weight Consumer Discretionary ETF uses a passive management
strategy, known as "replication," to track the performance of the Underlying
Index. "Replication" refers to investing in substantially all of the securities
in the Underlying Index in approximately the same proportions as in the
Underlying Index. The Advisor expects that over time, the correlation between
the Fund's performance and that of the Underlying Index, before fees and
expenses, will be 95% or better. A figure of 100% would indicate perfect
correlation.
PRINCIPAL RISKS
The Rydex S&P Equal Weight Consumer Discretionary ETF is subject to a number of
risks that may affect the value of its shares, including:
o Consumer Discretionary Sector Concentration Risk
o Early Closing Risk
o Liquidity Risk
o Market Risk
o Non-Diversification Risk
o Tracking Error Risk
o Trading Risk
Please see "Descriptions of Principal Risks" on page 23 for a discussion of each
of the principal risks that apply to the Fund.
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PROSPECTUS 11
RYDEX S&P EQUAL WEIGHT CONSUMER STAPLES ETF (RHS)
FUND OBJECTIVE
The Rydex S&P Equal Weight Consumer Staples ETF's investment objective is to
replicate as closely as possible, before fees and expenses, the performance of
the S&P Equal Weight Index Consumer Staples (the "Underlying Index"). The
investment objective of the Rydex S&P Equal Weight Consumer Staples ETF is
non-fundamental and may be changed without shareholder approval.
PRINCIPAL INVESTMENT STRATEGY
The Rydex S&P Equal Weight Consumer Staples ETF uses a passive management
strategy, known as "replication," to track the performance of the Underlying
Index. "Replication" refers to investing in substantially all of the securities
in the Underlying Index in approximately the same proportions as in the
Underlying Index. The Advisor expects that over time the correlation between the
Fund's performance and that of the Underlying Index, before fees and expenses,
will be 95% or better. A figure of 100% would indicate perfect correlation.
PRINCIPAL RISKS
The Rydex S&P Equal Weight Consumer Staples ETF is subject to a number of risks
that may affect the value of its shares, including:
o Consumer Staples Sector Concentration Risk
o Early Closing Risk
o Liquidity Risk
o Market Risk
o Non-Diversification Risk
o Tracking Error Risk
o Trading Risk
Please see "Descriptions of Principal Risks" on page 23 for a discussion of each
of the principal risks that apply to the Fund.
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12
RYDEX S&P EQUAL WEIGHT ENERG YETF (RYE)
FUND OBJECTIVE
The Rydex S&P Equal Weight Energy ETF's investment objective is to replicate as
closely as possible, before fees and expenses, the performance of the S&P Equal
Weight Index Energy (the "Underlying Index"). The investment objective of the
Rydex S&P Equal Weight Energy ETF is non-fundamental and may be changed without
shareholder approval.
PRINCIPAL INVESTMENT STRATEGY
The Rydex S&P Equal Weight Energy ETF uses a passive management strategy, known
as "replication," to track the performance of the Underlying Index.
"Replication" refers to investing in substantially all of the securities in the
Underlying Index in approximately the same proportions as in the Underlying
Index. The Advisor expects that over time the correlation between the Fund's
performance and that of the Underlying Index, before fees and expenses, will be
95% or better. A figure of 100% would indicate perfect correlation.
PRINCIPAL RISKS
The Rydex S&P Equal Weight Energy ETF is subject to a number of risks that may
affect the value of its shares, including:
o Early Closing Risk
o Energy Sector Concentration Risk
o Liquidity Risk
o Market Risk
o Non-Diversification Risk
o Tracking Error Risk
o Trading Risk
Please see "Descriptions of Principal Risks" on page 23 for a discussion of each
of the principal risks that apply to the Fund.
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PROSPECTUS 13
RYDEX S&P EQUAL WEIGHT FINANCIALS ETF (RYF)
FUND OBJECTIVE
The Rydex S&P Equal Weight Financials ETF's investment objective is to replicate
as closely as possible, before fees and expenses, the performance of the S&P
Equal Weight Index Financials (the "Underlying Index"). The investment objective
of the Rydex S&P Equal Weight Financials ETF is non-fundamental and may be
changed without shareholder approval.
PRINCIPAL INVESTMENT STRATEGY
The Rydex S&P Equal Weight Financials ETF uses a passive management strategy,
known as "replication," to track the performance of the Underlying Index.
"Replication" refers to investing in substantially all of the securities in the
Underlying Index in approximately the same proportions as in the Underlying
Index. The Advisor expects that over time the correlation between the Fund's
performance and that of the Underlying Index, before fees and expenses, will be
95% or better. A figure of 100% would indicate perfect correlation.
PRINCIPAL RISKS
The Rydex S&P Equal Weight Financials ETF is subject to a number of risks that
may affect the value of its shares, including:
o Early Closing Risk
o Financials Sector Concentration Risk
o Liquidity Risk
o Market Risk
o Non-Diversification Risk
o Tracking Error Risk
o Trading Risk
Please see "Descriptions of Principal Risks" on page 23 for a discussion of each
of the principal risks that apply to the Fund.
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14
RYDEX S&P EQUAL WEIGHT HEALTH CARE ETF (RYH)
FUND OBJECTIVE
The Rydex S&P Equal Weight Health Care ETF's investment objective is to
replicate as closely as possible, before fees and expenses, the performance of
the S&P Equal Weight Index Health Care (the "Underlying Index"). The investment
objective of the Rydex S&P Equal Weight Health Care ETF is non-fundamental and
may be changed without shareholder approval.
PRINCIPAL INVESTMENT STRATEGY
The Rydex S&P Equal Weight Health Care ETF uses a passive management strategy,
known as "replication," to track the performance of the Underlying Index.
"Replication" refers to investing in substantially all of the securities in the
Underlying Index in approximately the same proportions as in the Underlying
Index. The Advisor expects that over time the correlation between the Fund's
performance and that of the Underlying Index, before fees and expenses, will be
95% or better. A figure of 100% would indicate perfect correlation.
PRINCIPAL RISKS
The Rydex S&P Equal Weight Health Care ETF is subject to a number of risks that
may affect the value of its shares, including:
o Early Closing Risk
o Health Care Sector Concentration Risk
o Liquidity Risk
o Market Risk
o Non-Diversification Risk
o Tracking Error Risk
o Trading Risk
Please see "Descriptions of Principal Risks" on page 23 for a discussion of each
of the principal risks that apply to the Fund.
[GRAPHIC OMITTED]
PROSPECTUS 15
RYDEX S&P EQUAL WEIGHT INDUSTRIALS ETF (RGI)
FUND OBJECTIVE
The Rydex S&P Equal Weight Industrials ETF's investment objective is to
replicate as closely as possible, before fees and expenses, the performance of
the S&P Equal Weight Index Industrials (the "Underlying Index"). The investment
objective of the Rydex S&P Equal Weight Industrials ETF is non-fundamental and
may be changed without shareholder approval.
PRINCIPAL INVESTMENT STRATEGY
The Rydex S&P Equal Weight Industrials ETF uses a passive management strategy,
known as "replication," to track the performance of the Underlying Index.
"Replication" refers to investing in substantially all of the securities in the
Underlying Index in approximately the same proportions as in the Underlying
Index. The Fund's Advisor expects that over time the correlation between the
Fund's performance and that of the Underlying Index, before fees and expenses,
will be 95% or better. A figure of 100% would indicate perfect correlation.
PRINCIPAL RISKS
The Rydex S&P Equal Weight Industrials ETF is subject to a number of risks that
may affect the value of its shares, including:
o Early Closing Risk
o Industrials Sector Concentration Risk
o Liquidity Risk
o Market Risk
o Non-Diversification Risk
o Tracking Error Risk
o Trading Risk
Please see "Descriptions of Principal Risks" on page 23 for a discussion of each
of the principal risks that apply to the Fund.
[GRAPHIC OMITTED]
16
RYDEX S&P EQUAL WEIGHT MATERIALS ETF (RTM)
FUND OBJECTIVE
The Rydex S&P Equal Weight Materials ETF's investment objective is to replicate
as closely as possible, before fees and expenses, the performance of the S&P
Equal Weight Index Materials (the "Underlying Index"). The investment objective
of the Rydex S&P Equal Weight Materials ETF is non-fundamental and may be
changed without shareholder approval.
PRINCIPAL INVESTMENT STRATEGY
The Rydex S&P Equal Weight Materials ETF uses a passive management strategy,
known as "replication," to track the performance of the Underlying Index.
"Replication" refers to investing in substantially all of the securities in the
Underlying Index in approximately the same proportions as in the Underlying
Index. The Fund's Advisor expects that over time the correlation between the
Fund's performance and that of the Underlying Index, before fees and expenses,
will be 95% or better. A figure of 100% would indicate perfect correlation.
PRINCIPAL RISKS
The Rydex S&P Equal Weight Materials ETF is subject to a number of risks that
may affect the value of its shares, including:
o Early Closing Risk
o Liquidity Risk
o Market Risk
o Materials Sector Concentration Risk
o Non-Diversification Risk
o Tracking Error Risk
o Trading Risk
Please see "Descriptions of Principal Risks" on page 23 for a discussion of each
of the principal risks that apply to the Fund.
[GRAPHIC OMITTED]
PROSPECTUS 17
RYDEX S&P EQUAL WEIGHT TECHNOLOGY ETF (RYT)
FUND OBJECTIVE
The Rydex S&P Equal Weight Technology ETF's investment objective is to replicate
as closely as possible, before fees and expenses, the performance of the S&P
Equal Weight Index Technology (the "Underlying Index"). The investment objective
of the Rydex S&P Equal Weight Technology ETF is non-fundamental and may be
changed without shareholder approval.
PRINCIPAL INVESTMENT STRATEGY
The Rydex S&P Equal Weight Technology ETF uses a passive management strategy,
known as "replication," to track the performance of the Underlying Index.
"Replication" refers to investing in substantially all of the securities in the
Underlying Index in approximately the same proportions as in the Underlying
Index. The Fund's Advisor expects that over time the correlation between the
Fund's performance and that of the Underlying Index, before fees and expenses,
will be 95% or better. A figure of 100% would indicate perfect correlation.
PRINCIPAL RISKS
The Rydex S&P Equal Weight Technology ETF is subject to a number of risks that
may affect the value of its shares, including:
o Early Closing Risk
o Liquidity Risk
o Market Risk
o Non-Diversification Risk
o Technology Sector
Concentration Risk
o Tracking Error Risk
o Trading Risk
Please see "Descriptions of Principal Risks" on page 23 for a discussion of each
of the principal risks that apply to the Fund.
[GRAPHIC OMITTED]
18
RYDEX S&P EQUAL WEIGHT UTILITIES ETF (RYU)
FUND OBJECTIVE
The Rydex S&P Equal Weight Utilities ETF's investment objective is to replicate
as closely as possible, before fees and expenses, the performance of the S&P
Equal Weight Index Utilities (the "Underlying Index"). The investment objective
of the Rydex S&P Equal Weight Utilities ETF is non-fundamental and may be
changed without shareholder approval.
PRINCIPAL INVESTMENT STRATEGY
The Rydex S&P Equal Weight Utilities ETF uses a passive management strategy,
known as "replication," to track the performance of the Underlying Index.
"Replication" refers to investing in substantially all of the securities in the
Underlying Index in approximately the same proportions as in the Underlying
Index. The Fund's Advisor expects that over time the correlation between the
Fund's performance and that of the Underlying Index, before fees and expenses,
will be 95% or better. A figure of 100% would indicate perfect correlation.
PRINCIPAL RISKS
The Rydex S&P Equal Weight Utilities ETF is subject to a number of risks that
may affect the value of its shares, including:
o Early Closing Risk
o Liquidity Risk
o Market Risk
o Non-Diversification Risk
o Tracking Error Risk
o Trading Risk
o Utilities Sector Concentration Risk
Please see "Descriptions of Principal Risks" on page 23 for a discussion of each
of the principal risks that apply to the Fund.
[GRAPHIC OMITTED]
PROSPECTUS 19
PRINCIPAL RISKS OF INVESTING IN THE FUNDS
As indicated below, the Funds are subject to a number of risks that may affect
the value of the Funds' shares. Please see "Descriptions of Principal Risks"
immediately following the table for more detailed information about the
principal risks of the Funds.
--------------------------------------------------------------------------------------
RYDEX RYDEX RYDEX S&P RYDEX S&P RYDEX S&P
S&P EQUAL RUSSELL 500 PURE 500 PURE MIDCAP 400
WEIGHT TOP 50(R) VALUE GROWTH PURE VALUE
ETF ETF ETF ETF ETF
--------------------------------------------------------------------------------------
Early Closing Risk X X X X X
--------------------------------------------------------------------------------------
Large-Capitalization
Securities Risk X X X X
--------------------------------------------------------------------------------------
Liquidity Risk X X X X X
--------------------------------------------------------------------------------------
Market Risk X X X X X
--------------------------------------------------------------------------------------
Mid-Capitalization
Securities Risk X
--------------------------------------------------------------------------------------
Non-Diversification
Risk X
--------------------------------------------------------------------------------------
Sector Concentration
Risk (for each Fund's
specific Sector
Concentration Risk
see "Descriptions of
Principal Risks" below)
--------------------------------------------------------------------------------------
Small-Capitalization
Securities Risk
--------------------------------------------------------------------------------------
Tracking Error Risk X X X X X
--------------------------------------------------------------------------------------
Trading Risk X X X X X
--------------------------------------------------------------------------------------
|
[GRAPHIC OMITTED]
20
--------------------------------------------------------------------------------------
RYDEX S&P RYDEX S&P
RYDEX S&P RYDEX S&P RYDEX S&P EQUAL EQUAL
MIDCAP SMALLCAP SMALLCAP WEIGHT WEIGHT
400 PURE 600 PURE 600 PURE CONSUMER CONSUMER
GROWTH VALUE GROWTH PRODUCTS STAPLES
ETF ETF ETF ETF ETF
--------------------------------------------------------------------------------------
Early Closing Risk X X X X X
--------------------------------------------------------------------------------------
Large-Capitalization
Securities Risk
--------------------------------------------------------------------------------------
Liquidity Risk X X X X X
--------------------------------------------------------------------------------------
Market Risk X X X X X
--------------------------------------------------------------------------------------
Mid-Capitalization
Securities Risk X
--------------------------------------------------------------------------------------
Non-Diversification
Risk X X
--------------------------------------------------------------------------------------
Sector Concentration
Risk (for each Fund's
specific Sector
Concentration Risk
see "Descriptions of
Principal Risks" below) X X
--------------------------------------------------------------------------------------
Small-Capitalization
Securities Risk X X
--------------------------------------------------------------------------------------
Tracking Error Risk X X X X X
--------------------------------------------------------------------------------------
Trading Risk X X X X X
--------------------------------------------------------------------------------------
|
[GRAPHIC OMITTED]
PROSPECTUS 21
----------------------------------------------------------------------------------------
RYDEX S&P RYDEX S&P RYDEX S&P RYDEX S&P RYDEX S&P
EQUAL EQUAL EQUAL EQUAL EQUAL
WEIGHT WEIGHT WEIGHT WEIGHT WEIGHT
ENERGY FINANCIALS HEALTH CARE INDUSTRIALS MATERIALS
ETF ETF ETF ETF ETF
----------------------------------------------------------------------------------------
Early Closing Risk X X X X X
----------------------------------------------------------------------------------------
Large-Capitalization
Securities Risk
----------------------------------------------------------------------------------------
Liquidity Risk X X X X X
----------------------------------------------------------------------------------------
Market Risk X X X X X
----------------------------------------------------------------------------------------
Mid-Capitalization
Securities Risk
----------------------------------------------------------------------------------------
Non-Diversification
Risk X X X X X
----------------------------------------------------------------------------------------
Sector Concentration
Risk (for each Fund's
specific Sector
Concentration Risk
see "Descriptions of
Principal Risks" below) X X X X X
----------------------------------------------------------------------------------------
Small-Capitalization
Securities Risk
----------------------------------------------------------------------------------------
Tracking Error Risk X X X X X
----------------------------------------------------------------------------------------
Trading Risk X X X X X
----------------------------------------------------------------------------------------
|
[GRAPHIC OMITTED]
22
------------------------------------------------------------------------------------
RYDEX S&P EQUAL WEIGHT RYDEX S&P EQUAL
TECHNOLOGY ETF WEIGHT UTILITIES ETF
------------------------------------------------------------------------------------
Early Closing Risk X X
------------------------------------------------------------------------------------
Large-Capitalization Securities Risk
------------------------------------------------------------------------------------
Liquidity Risk X X
------------------------------------------------------------------------------------
Market Risk X X
------------------------------------------------------------------------------------
Mid-Capitalization Securities Risk
------------------------------------------------------------------------------------
Non-Diversification Risk X X
------------------------------------------------------------------------------------
Sector Concentration Risk (for each
Fund's specific Sector Concentration
Risk see "Descriptions of Principal
Risks" below) X X
------------------------------------------------------------------------------------
Small-Capitalization Securities Risk
------------------------------------------------------------------------------------
Tracking Error Risk X X
------------------------------------------------------------------------------------
Trading Risk X X
------------------------------------------------------------------------------------
|
[GRAPHIC OMITTED]
PROSPECTUS 23
DESCRIPTIONS OF PRINCIPAL RISKS
EARLY CLOSING RISK - The Fund is subject to the risk that unanticipated
early closings of securities exchanges and other financial markets may
result in the Fund's inability to buy or sell securities or other
financial instruments on that day. If an exchange or market closes early
on a day when the Fund needs to execute a high volume of trades late in a
trading day, the Fund might incur substantial trading losses.
LARGE-CAPITALIZATION SECURITIES RISK - The Fund is subject to the risk
that large-capitalization stocks may underperform other segments of the
equity market or the equity market as a whole.
LIQUIDITY RISK - Trading in shares may be halted because of market
conditions or for reasons that, in the view of the Exchange, make trading
in shares inadvisable. In addition, trading in shares is subject to
trading halts caused by extraordinary market volatility pursuant to
"circuit breaker" rules. There can be no assurance that the requirements
necessary to maintain the listing of the shares of the Fund will continue
to be met or will remain unchanged.
MARKET RISK - The Fund may invest in public and privately issued equity
securities, which may include common and preferred stocks, bonds,
warrants, and rights, as well as derivatives and financial instruments
that attempt to track the price movement of equity securities. Investments
in securities and derivatives in general are subject to market risks that
may cause their prices to fluctuate over time. The Fund's investments may
decline in value due to factors affecting securities markets generally, or
particular segments, economic sectors, industries or companies within
those markets. The value of a security may decline due to general economic
and market conditions which are not specifically related to a particular
issuer, such as real or perceived adverse economic conditions or changes
in interest or currency rates. The value of securities convertible into
equity securities, such as warrants or convertible debt, is also affected
by prevailing interest rates, the credit quality of the issuer and any
call provision. Fluctuations in the value of securities and financial
instruments in which the Fund invests will cause the net asset value of
the Fund to fluctuate. Historically, the markets have moved in cycles, and
the value of the Fund's securities and derivatives may fluctuate
drastically from day to day.
MID-CAPITALIZATION SECURITIES RISK - In comparison to securities of
companies with large capitalizations, securities of medium-capitalization
companies may have more price volatility, greater spreads between their
bid and ask prices, significantly lower trading volumes, and cyclical or
static growth prospects. Medium-capitalization companies often have
limited product lines, markets or financial resources, and may therefore
be more vulnerable to adverse developments than large-capitalization
companies. These securities may or may not pay dividends. The Fund is
subject to the risk that medium-capitalization stocks
[GRAPHIC OMITTED]
24
may underperform other segments of the equity market of the equity market as a
whole.
NON-DIVERSIFICATION RISK - Because the Fund is non-diversified, it may invest in
the securities of a limited number of issuers. To the extent that the Fund
invests a significant percentage of its assets in a limited number of issuers,
the Fund is subject to the risks of investing in those few issuers, and may be
more susceptible to a single adverse economic or regulatory occurrence. As a
result, changes in the market value of a single security could cause greater
fluctuations in the value of Fund shares than would occur in a diversified fund.
SECTOR CONCENTRATION RISK - The Sector Concentration Risk applicable to each
Fund is as follows:
CONSUMER DISCRETIONARY SECTOR CONCENTRATION RISK - The risk that the
securities of issuers in the consumer discretionary sector that the Rydex
S&P Equal Weight Consumer Discretionary ETF purchases will underperform
the market as a whole. To the extent that the Rydex S&P Equal Weight
Consumer Discretionary ETF's investments are concentrated in issuers
conducting business in the consumer discretionary sector, the Rydex S&P
Equal Weight Consumer Discretionary ETF is subject to legislative or
regulatory changes, adverse market conditions and/or increased competition
affecting the consumer discretionary sector. The performance of consumer
discretionary companies has historically been closely tied to the
performance of the overall economy, and is also affected by interest
rates, competition, consumer confidence and relative levels of disposable
household income and seasonal consumer spending. Changes in demographics
and consumer tastes can also affect the demand for, and success of,
consumer products in the marketplace.
CONSUMER STAPLES SECTOR CONCENTRATION RISK - The risk that the securities
of issuers in the consumer staples sector that the Rydex S&P Equal Weight
Consumer Staples ETF purchases will underperform the market as a whole. To
the extent that the Rydex S&P Equal Weight Consumer Staple ETF's
investments are concentrated in issuers conducting business in the
consumer staples sector, the Rydex S&P Equal Weight Consumer Staples ETF
is subject to legislative or regulatory changes, adverse market conditions
and/or increased competition affecting the consumer staples sector.
Consumer staples companies are subject to government regulation affecting
the permissibility of using various food additives and production methods,
which regulations could affect company profitability. Tobacco companies
may be adversely affected by the adoption of proposed legislation and/or
by litigation. Also, the success of food and soft drinks may be strongly
affected by fads, marketing campaigns and other factors affecting supply
and demand.
[GRAPHIC OMITTED]
PROSPECTUS 25
ENERGY SECTOR CONCENTRATION RISK - The risk that the securities of issuers
in the energy sector that the Rydex S&P Equal Weight Energy ETF purchases
will underperform the market as a whole. To the extent that the Rydex S&P
Equal Weight Energy ETF's investments are concentrated in issuers
conducting business in the energy sector, the Rydex S&P Equal Weight
Energy ETF is subject to legislative or regulatory changes, adverse market
conditions and/or increased competition affecting the energy sector. The
prices of the securities of energy and energy services companies may
fluctuate widely due to the supply and demand for both their specific
products or services and energy products in general. The prices of energy
product securities may be affected by changes in value and dividend yield,
which depend largely on the price and supply of energy fuels,
international political events relating to oil producing countries, energy
conservation, the success of exploration projects, and tax and other
governmental regulatory policies.
FINANCIALS SECTOR CONCENTRATION RISK - The risk that the securities of
issuers in the financials sector that the Rydex S&P Equal Weight
Financials ETF purchases will underperform the market as a whole. To the
extent that the Rydex S&P Equal Weight Financials ETF's investments are
concentrated in issuers conducting business in the financials sector, the
Rydex S&P Equal Weight Financials ETF is subject to legislative or
regulatory changes, adverse market conditions and/or increased competition
affecting the financials sector. Financial companies are subject to
extensive governmental regulation, which may limit both the amounts and
types of loans and other financial commitments they can make, and the
rates and fees that they can charge. Profitability is largely dependent on
the availability and cost of capital, and can fluctuate significantly when
interest rates change. Credit losses resulting from financial difficulties
of borrowers also can negatively impact the sector.
HEALTH CARE SECTOR CONCENTRATION RISK - The risk that the securities of
issuers in the health care sector that the Rydex S&P Equal Weight Health
Care ETF purchases will underperform the market as a whole. To the extent
that the Rydex S&P Equal Weight Health Care ETF's investments are
concentrated in issuers conducting business in the health care sector, the
Rydex S&P Equal Weight Health Care Fund is subject to legislative or
regulatory changes, adverse market conditions and/or increased competition
affecting the health care sector. The prices of the securities of health
care companies may fluctuate widely due to government regulation and
approval of their products and services, which can have a significant
effect on their price and availability. Furthermore, the types of products
or services produced or provided by these companies may quickly become
[GRAPHIC OMITTED]
26
obsolete. Moreover, liability for products that are later alleged to be
harmful or unsafe may be substantial, and may have a significant impact on
a health care company's market value and/or share price.
INDUSTRIALS SECTOR CONCENTRATION RISK - The risk that the securities of
issuers in the industrials sector that the Rydex S&P Equal Weight
Industrials ETF purchases will underperform the market as a whole. To the
extent that the Rydex S&P Equal Weight Industrials ETF's investments are
concentrated in issuers conducting business in the industrials sector, the
Fund is subject to legislative or regulatory changes, adverse market
conditions and/or increased competition affecting the industrials sector.
The prices of securities of industrials companies may fluctuate widely due
to the level and volatility of commodity prices, the exchange value of the
dollar, import controls, worldwide competition, liability for
environmental damage, depletion of resources, and mandated expenditures
for safety and pollution control devices. Further, the prices of
securities of industrial companies, specifically transportation companies,
may fluctuate widely due to their cyclical nature, occasional sharp price
movements that may result from changes in the economy, fuel prices, labor
agreement, and insurance costs, the recent trend of government
deregulation, and increased competition from foreign companies, many of
which are partially funded by foreign governments and which may be less
sensitive to short term economic pressures.
MATERIALS SECTOR CONCENTRATION RISK - The risk that the securities of
issuers in the materials sector that the Rydex S&P Equal Weight Materials
ETF purchases will underperform the market as a whole. To the extent that
the Rydex S&P Equal Weight Materials ETF's investments are concentrated in
issuers conducting business in the materials sector, the Rydex S&P Equal
Weight Materials ETF is subject to legislative or regulatory changes,
adverse market conditions and/or increased competition affecting the
materials sector. The prices of securities of materials companies may
fluctuate widely due to the level and volatility of commodity prices, the
exchange value of the dollar, import controls, worldwide competition,
liability for environmental damage, depletion of resources, and mandated
expenditures for safety and pollution control devices.
TECHNOLOGY SECTOR CONCENTRATION RISK - The risk that the securities of
issuers in the technology sector that the Rydex S&P Equal Weight
Technology ETF purchases will underperform the market as a whole. To the
extent that the Rydex S&P Equal Weight Technology ETF's investments are
concentrated in issuers conducting business in the technology sector, the
Rydex S&P Equal Weight Technology ETF is subject to legislative or
regulatory changes, adverse market conditions and/or increased competition
[GRAPHIC OMITTED]
PROSPECTUS 27
affecting the technology sector. The prices of the securities of
technology companies may fluctuate widely due to competitive pressures,
increased sensitivity to short product cycles and aggressive pricing,
problems relating to bringing their products to market, very high
price/earnings ratios, and high personnel turnover due to severe labor
shortages for skilled technology professionals. Similarly, the prices of
the securities of telecommunications companies may fluctuate widely due to
both federal and state regulations governing rates of return and services
that may be offered, fierce competition for market share, and competitive
challenges in the U.S. from foreign competitors engaged in strategic joint
ventures with U.S. companies, and in foreign markets from both U.S. and
foreign competitors. In addition, recent industry consolidation trends may
lead to increased regulation of telecommunications companies in their
primary markets.
UTILITIES SECTOR CONCENTRATION RISK - The risk that the securities of
issuers in the utilities sector that the Rydex S&P Equal Weight Utilities
ETF purchases will underperform the market as a whole. To the extent that
the Rydex S&P Equal Weight Utilities ETF's investments are concentrated in
issuers conducting business in the utilities sector, the Rydex S&P Equal
Weight Utilities ETF is subject to legislative or regulatory changes,
adverse market conditions and/or increased competition affecting the
utilities sector. The prices of the securities of utilities companies may
fluctuate widely due to: government regulation; the effect of interest
rates on capital financing; competitive pressures due to deregulation in
the utilities industry; supply and demand for services; increased
sensitivity to the cost of natural resources required for energy
production; and environmental factors such as conservation of natural
resources or pollution control.
SMALL-CAPITALIZATION SECURITIES RISK - In comparison to companies with larger
capitalizations, securities of small-capitalization companies may have more
price volatility, greater spreads between their bid and ask prices,
significantly lower trading volumes, and cyclical or static growth prospects.
Small-capitalization companies often have limited product lines, markets or
financial resources, and may therefore be more vulnerable to adverse
developments than larger capitalization companies. These securities may or may
not pay dividends. The Fund is subject to the risk that small-capitalization
stocks may underperform other segments of the equity market or the equity market
as a whole.
TRACKING ERROR RISK - Tracking error risk refers to the risk that the Fund's
investment advisor, Rydex Investments, may not be able to cause the Fund's
performance to match or correlate to that of the Fund's Underlying Index, either
on a daily or aggregate basis. Factors such as Fund expenses, imperfect
correlation between the Fund's investments and those of its Underlying Index,
[GRAPHIC OMITTED]
28
rounding of share prices, changes to the composition of the Underlying Index,
regulatory policies, high portfolio turnover rate and the use of leverage all
contribute to tracking error. Tracking error risk may cause the Fund's
performance to be less than you expect.
TRADING RISK - Shares may trade below their NAV. The NAV of shares will
fluctuate with changes in the market value of the Fund's holdings. The trading
prices of shares will fluctuate in accordance with changes in NAV as well as
market supply and demand. However, given that shares can be created and redeemed
only in Creation Units at NAV (unlike shares of many closed-end funds, which
frequently trade at appreciable discounts from, and sometimes premiums to, their
NAVs), the Fund's investment adviser, Rydex Investments, does not believe that
large discounts or premiums to NAV will exist for extended periods of time. In
addition, although the Fund's shares are listed on the Exchange, there can be no
assurance that an active trading market for shares will develop or be
maintained.
[GRAPHIC OMITTED]
PROSPECTUS 29
FUND PERFORMANCE
The following bar charts show the performance of the shares of each Fund
from year to year. The variability of performance over time provides an
indication of the risks of investing in the Funds. The following tables
show the performance of the shares of each Fund as an average over
different periods of time in comparison to the performance of a broad
market index. The figures in the bar charts and tables assume the
reinvestment of dividends and capital gains distributions. The after-tax
returns are calculated using the highest historical federal income and
capital gains tax rates, and do not reflect the impact of state and local
taxes. Actual after-tax returns depend on the investor's tax situation and
may differ from those shown. Returns After Taxes on Distributions assume a
continued investment in a Fund and show the effect of taxes on Fund
distributions. Returns After Taxes on Distributions and Sale of Fund
Shares assume all shares were redeemed at the end of each measurement
period, and show the effect of any taxable gain (or offsetting loss) on
redemption, as well as the effects of taxes on Fund distributions.
After-tax returns are not relevant to investors who hold their Fund shares
through tax-deferred arrangements such as 401(k) plans or individual
retirement accounts. Of course, this past performance (before and after
taxes) does not necessarily indicate how a Fund will perform in the
future. Supplemental information about the Funds' performance is shown
under the heading "Total Return Information" in the section "Supplemental
Information" at the back of this Prospectus.
[GRAPHIC OMITTED]
30
RYDEX S&P EQUAL WEIGHT ETF
THE PERFORMANCE INFORMATION SHOWN BELOW FOR THE FUND'S SHARES IS BASED ON A
CALENDAR YEAR.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
2004 2005 2006 2007
-----------------------------
16.50% 7.65% 15.32% 1.11%
Highest Quarter Return Lowest Quarter Return
(quarter ended 12/31/2004) 12.19% (quarter ended 12/31/2007) -5.01%
AVERAGE ANNUAL TOTAL RETURN
(FOR PERIODS ENDED DECEMBER 31, 2007)
Since Inception
Past 1 Year (4/24/2003)
-------------------------------------------------------------------------------
Return Before Taxes 1.11% 15.60%
Return After Taxes on Distributions 0.93% 15.32%
Return After Taxes on Distributions
and Sale of Fund Shares 0.99% 13.79%
S&P 500 Index 1 5.49% 12.76%
S&P Equal Weight Index 2 1.53% 16.09%
|
1 THE S&P 500(R) INDEX IS AN UNMANAGED CAPITALIZATION-WEIGHTED INDEX
COMPRISED OF 500 COMMON STOCKS, WHICH ARE CHOSEN BY STANDARD & POOR'S, A
DIVISION OF THE MCGRAW-HILL COMPANY ("S&P") ON A STATISTICAL BASIS.
RETURNS REFLECT NO DEDUCTION FOR FEES, EXPENSES OR TAXES.
2 THE S&P EQUAL WEIGHT INDEX IS AN UNMANAGED EQUAL-WEIGHTED VERSION OF THE
S&P 500(R) INDEX. RETURNS REFLECT NO DEDUCTION FOR FEES, EXPENSES, OR
TAXES.
[GRAPHIC OMITTED]
PROSPECTUS 31
RYDEX RUSSELL TOP 50(R) ETF
THE PERFORMANCE INFORMATION SHOWN BELOW FOR THE FUND'S SHARES IS BASED ON A
CALENDAR YEAR.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
2006 2007
-------------
17.86% 4.65%
Highest Quarter Return Lowest Quarter Return
(quarter ended 09/30/2006) 8.27% (quarter ended 12/31/2007) -3.20%
AVERAGE ANNUAL TOTAL RETURN
(FOR PERIODS ENDED DECEMBER 31, 2007)
Since Inception
Past 1 Year (5/4/2005)
-------------------------------------------------------------------------------
Return Before Taxes 4.65% 9.35%
Return After Taxes on Distributions 4.34% 9.03%
Return After Taxes on Distributions
and Sale of Fund Shares 3.43% 7.99%
Russell Top 50(R) Index 3 4.92% 9.64%
|
3 THE RUSSELL TOP 50(R) INDEX IS AN UNMANAGED CAPITALIZATION-WEIGHTED INDEX
COMPRISED OF THE 50 LARGEST COMPANIES IN THE RUSSELL 3000(R) INDEX. THE
RUSSELL 3000(R) INDEX IS AN UNMANAGED CAPITALIZATION-WEIGHTED INDEX THAT
OFFERS INVESTORS ACCESS TO THE BROAD U.S. EQUITY UNIVERSE REPRESENTING
APPROXIMATELY 98% OF THE U.S. EQUITY MARKET. RETURNS REFLECT NO DEDUCTION
FOR FEES, EXPENSES OR TAXES.
[GRAPHIC OMITTED]
32
RYDEX S&P 500 PURE VALUE ETF
THE PERFORMANCE INFORMATION SHOWN BELOW FOR THE FUND'S SHARES IS BASED ON A
CALENDAR YEAR.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
2007
------
-4.10%
Highest Quarter Return Lowest Quarter Return
(quarter ended 12/31/2006) 8.12% (quarter ended 12/31/2007) -6.78%
AVERAGE ANNUAL TOTAL RETURN
(FOR PERIODS ENDED DECEMBER 31, 2007)
Since Inception
Past 1 Year (3/1/2006)
-------------------------------------------------------------------------------
Return Before Taxes -4.10% 5.37%
Return After Taxes on Distributions -4.63% 4.92%
Return After Taxes on Distributions
and Sale of Fund Shares -2.29% 4.49%
S&P 500/Citigroup Pure Value Index 4 -3.69% 5.82%
|
4 THE S&P 500/CITIGROUP PURE VALUE INDEX IS NARROW IN FOCUS, CONTAINING ONLY
THOSE S&P 500 COMPANIES WITH STRONG VALUE CHARACTERISTICS. RETURNS REFLECT
NO DEDUCTION FOR FEES, EXPENSES OR TAXES.
[GRAPHIC OMITTED]
PROSPECTUS 33
RYDEX S&P 500 PURE GROWTH ETF
THE PERFORMANCE INFORMATION SHOWN BELOW FOR THE FUND'S SHARES IS BASED ON A
CALENDAR YEAR.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
2007
-----
6.34%
Highest Quarter Return Lowest Quarter Return
(quarter ended 06/30/2007) 5.69% (quarter ended 06/30/2006) -5.04%
AVERAGE ANNUAL TOTAL RETURN
(FOR PERIODS ENDED DECEMBER 31, 2007)
Since Inception
Past 1 Year (3/1/2006)
-------------------------------------------------------------------------------
Return Before Taxes 6.34% 5.91%
Return After Taxes on Distributions 6.24% 5.83%
Return After Taxes on Distributions
and Sale of Fund Shares 4.25% 5.04%
S&P 500/Citigroup Pure Growth Index 5 6.64% 6.28%
|
5 THE S&P 500/CITIGROUP PURE GROWTH INDEX IS NARROW IN FOCUS, CONTAINING
ONLY THOSE S&P 500 COMPANIES WITH STRONG GROWTH CHARACTERISTICS. RETURNS
REFLECT NO DEDUCTION FOR FEES, EXPENSES OR TAXES.
[GRAPHIC OMITTED]
34
RYDEX S&P MIDCAP 400 PURE VALUE ETF
THE PERFORMANCE INFORMATION SHOWN BELOW FOR THE FUND'S SHARES IS BASED ON A
CALENDAR YEAR.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
2007
------
-3.19%
Highest Quarter Return Lowest Quarter Return
(quarter ended 12/31/2006) 10.26% (quarter ended 09/30/2007) -5.73%
AVERAGE ANNUAL TOTAL RETURN
(FOR PERIODS ENDED DECEMBER 31, 2007)
Since Inception
Past 1 Year (3/1/2006)
-------------------------------------------------------------------------------
Return Before Taxes -3.19% 4.29%
Return After Taxes on Distributions -3.51% 3.96%
Return After Taxes on Distributions
and Sale of Fund Shares -1.64% 3.66%
S&P MidCap 400/Citigroup Pure Value Index 6 -3.20% 4.50%
|
6 THE S&P MIDCAP 400/CITIGROUP PURE VALUE INDEX IS NARROW IN FOCUS,
CONTAINING ONLY THOSE S&P MIDCAP 400 COMPANIES WITH STRONG VALUE
CHARACTERISTICS. RETURNS REFLECT NO DEDUCTION FOR FEES, EXPENSES OR TAXES.
[GRAPHIC OMITTED]
PROSPECTUS 35
RYDEX S&P MIDCAP 400 PURE GROWTH ETF
THE PERFORMANCE INFORMATION SHOWN BELOW FOR THE FUND'S SHARES IS BASED ON A
CALENDAR YEAR.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
2007
-----
9.95%
Highest Quarter Return Lowest Quarter Return
(quarter ended 12/31/2006) 8.02% (quarter ended 06/30/2006) -6.63%
AVERAGE ANNUAL TOTAL RETURN
(FOR PERIODS ENDED DECEMBER 31, 2007)
Since Inception
Past 1 Year (3/1/2006)
-------------------------------------------------------------------------------
Return Before Taxes 9.95% 4.51%
Return After Taxes on Distributions 9.86% 4.42%
Return After Taxes on Distributions
and Sale of Fund Shares 6.58% 3.82%
S&P MidCap 400/Citigroup Pure Growth Index 7 10.30% 4.86%
|
7 THE S&P MIDCAP 400/CITIGROUP PURE GROWTH INDEX IS NARROW IN FOCUS,
CONTAINING ONLY THOSE S&P MIDCAP 400 COMPANIES WITH STRONG GROWTH
CHARACTERISTICS. RETURNS REFLECT NO DEDUCTION FOR FEES, EXPENSES OR TAXES.
[GRAPHIC OMITTED]
36
RYDEX S&P SMALLCAP 600 PURE VALUE ETF
THE PERFORMANCE INFORMATION SHOWN BELOW FOR THE FUND'S SHARES IS BASED ON A
CALENDAR YEAR.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
2007
-------
-18.84%
Highest Quarter Return Lowest Quarter Return
(quarter ended 12/31/2006) 10.67% (quarter ended 09/30/2007) -12.39%
AVERAGE ANNUAL TOTAL RETURN
(FOR PERIODS ENDED DECEMBER 31, 2007)
Since Inception
Past 1 Year (3/1/2006)
-------------------------------------------------------------------------------
Return Before Taxes -18.84% -6.00%
Return After Taxes on Distributions -19.05% -6.24%
Return After Taxes on Distributions
and Sale of Fund Shares -11.92% -5.05%
S&P SmallCap 600/Citigroup Pure Value Index 8 -18.61% -5.73%
|
8 THE S&P SMALLCAP 600/CITIGROUP PURE VALUE INDEX IS NARROW IN FOCUS,
CONTAINING ONLY THOSE S&P SMALLCAP 600 COMPANIES WITH STRONG VALUE
CHARACTERISTICS. RETURNS REFLECT NO DEDUCTION FOR FEES, EXPENSES OR TAXES.
[GRAPHIC OMITTED]
PROSPECTUS 37
RYDEX S&P SMALLCAP 600 PURE GROWTH ETF
THE PERFORMANCE INFORMATION SHOWN BELOW FOR THE FUND'S SHARES IS BASED ON A
CALENDAR YEAR.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
2007
--------
1.28%
Highest Quarter Return Lowest Quarter Return
(quarter ended 12/31/2006) 8.70% (quarter ended 12/31/2007) -6.41%
AVERAGE ANNUAL TOTAL RETURN
(FOR PERIODS ENDED DECEMBER 31, 2007)
Since Inception
Past 1 Year (3/1/2006)
-------------------------------------------------------------------------------
Return Before Taxes 1.28% 2.25%
Return After Taxes on Distributions 1.27% 2.24%
Return After Taxes on Distributions
and Sale of Fund Shares 0.83% 1.91%
S&P SmallCap 600/Citigroup Pure Growth Index 9 1.49% 2.54%
|
9 THE S&P SMALLCAP 600/CITIGROUP PURE GROWTH INDEX IS NARROW IN FOCUS,
CONTAINING ONLY THOSE S&P SMALLCAP 600 COMPANIES WITH STRONG GROWTH
CHARACTERISTICS. RETURNS REFLECT NO DEDUCTION FOR FEES, EXPENSES OR TAXES.
[GRAPHIC OMITTED]
38
RYDEX S&P EQUAL WEIGHT CONSUMER DISCRETIONARY ETF
THE PERFORMANCE INFORMATION SHOWN BELOW FOR THE FUND'S SHARES IS BASED ON A
CALENDAR YEAR.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
2007
--------
-16.12%
Highest Quarter Return Lowest Quarter Return
(quarter ended 06/30/2007) 4.07% (quarter ended 12/31/2007) -11.89%
AVERAGE ANNUAL TOTAL RETURN
(FOR PERIODS ENDED DECEMBER 31, 2007)
Since Inception
Past 1 Year (11/1/2006)
-------------------------------------------------------------------------------
Return Before Taxes -16.12% -10.83%
Return After Taxes on Distributions -16.27% -10.98%
Return After Taxes on Distributions
and Sale of Fund Shares -10.31% -9.18%
S&P Equal Weight Index Consumer
Discretionary 10 -15.59% -10.32%
|
10 THE S&P EQUAL WEIGHT INDEX CONSUMER DISCRETIONARY IS AN UNMANAGED EQUAL
WEIGHTED VERSION OF THE S&P 500 CONSUMER DISCRETIONARY INDEX. THE S&P 500
CONSUMER DISCRETIONARY INDEX CONSISTS OF THE COMMON STOCKS OF THE
FOLLOWING INDUSTRIES: AUTOMOBILES AND COMPONENTS, CONSUMER DURABLES,
APPAREL, HOTELS, RESTAURANTS, LEISURE, MEDIA AND RETAILING THAT COMPRISE
THE CONSUMER DISCRETIONARY SECTOR OF THE S&P 500 INDEX. RETURNS REFLECT NO
DEDUCTION FOR FEES, EXPENSES, OR TAXES.
[GRAPHIC OMITTED]
PROSPECTUS 39
RYDEX S&P EQUAL WEIGHT CONSUMER STAPLES ETF
THE PERFORMANCE INFORMATION SHOWN BELOW FOR THE FUND'S SHARES IS BASED ON A
CALENDAR YEAR.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
2007
--------
8.46%
Highest Quarter Return Lowest Quarter Return
(quarter ended 03/31/2007) 3.54% (quarter ended 09/30/2007) -1.11%
AVERAGE ANNUAL TOTAL RETURN
(FOR PERIODS ENDED DECEMBER 31, 2007)
Since Inception
Past 1 Year (11/1/2006)
-------------------------------------------------------------------------------
Return Before Taxes 8.46% 9.31%
Return After Taxes on Distributions 8.13% 8.99%
Return After Taxes on Distributions and
Sale of Fund Shares 5.92% 7.91%
S&P Equal Weight Index Consumer Staples 11 9.21% 10.07%
|
11 THE S&P EQUAL WEIGHT INDEX CONSUMER STAPLES IS AN UNMANAGED EQUAL WEIGHTED
VERSION OF THE S&P 500 CONSUMER STAPLES INDEX. THE S&P 500 CONSUMER
STAPLES INDEX CONSISTS OF THE COMMON STOCKS OF THE FOLLOWING INDUSTRIES:
FOOD AND DRUG RETAILING, BEVERAGES, FOOD PRODUCTS, TOBACCO, HOUSEHOLD
PRODUCTS AND PERSONAL PRODUCTS THAT COMPRISE THE CONSUMER STAPLES SECTOR
OF THE S&P 500 INDEX. RETURNS REFLECT NO DEDUCTION FOR FEES, EXPENSES, OR
TAXES.
[GRAPHIC OMITTED]
40
RYDEX S&P EQUAL WEIGHT ENERGY ETF
THE PERFORMANCE INFORMATION SHOWN BELOW FOR THE FUND'S SHARES IS BASED ON A
CALENDAR YEAR.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
2007
--------
41.19%
Highest Quarter Return Lowest Quarter Return
(quarter ended 06/30/2007) 15.60% (quarter ended 09/30/2007) -5.25%
AVERAGE ANNUAL TOTAL RETURN
(FOR PERIODS ENDED DECEMBER 31, 2007)
Since Inception
Past 1 Year (11/1/2006)
-------------------------------------------------------------------------------
Return Before Taxes 41.19% 38.59%
Return After Taxes on Distributions 40.55% 38.02%
Return After Taxes on Distributions
and Sale of Fund Shares 27.61% 32.90%
S&P Equal Weight Index Energy 12 41.98% 39.47%
|
12 THE S&P EQUAL WEIGHT INDEX ENERGY IS AN UNMANAGED EQUAL WEIGHTED VERSION
OF THE S&P 500 ENERGY INDEX. THE S&P 500 ENERGY INDEX CONSISTS OF THE
COMMON STOCKS OF THE FOLLOWING INDUSTRIES: OIL AND GAS EXPLORATION,
PRODUCTION, MARKETING, REFINING AND/OR TRANSPORTATION AND ENERGY EQUIPMENT
AND SERVICES INDUSTRIES THAT COMPRISE THE ENERGY SECTOR OF THE S&P 500
INDEX. RETURNS REFLECT NO DEDUCTION FOR FEES, EXPENSES, OR TAXES.
[GRAPHIC OMITTED]
PROSPECTUS 41
RYDEX S&P EQUAL WEIGHT FINANCIALS ETF
THE PERFORMANCE INFORMATION SHOWN BELOW FOR THE FUND'S SHARES IS BASED ON A
CALENDAR YEAR.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
2007
--------
-18.26%
Highest Quarter Return Lowest Quarter Return
(quarter ended 06/30/2007) 1.88% (quarter ended 12/31/2007) -13.86%
AVERAGE ANNUAL TOTAL RETURN
(FOR PERIODS ENDED DECEMBER 31, 2007)
Since Inception
Past 1 Year (11/1/2006)
-------------------------------------------------------------------------------
Return Before Taxes -18.26% -12.22%
Return After Taxes on Distributions -18.51% -12.55%
Return After Taxes on Distributions
and Sale of Fund Shares -11.56% -10.39%
S&P Equal Weight Index Financials 13 -17.69% -11.65%
|
13 THE S&P EQUAL WEIGHT INDEX FINANCIALS IS AN UNMANAGED EQUAL WEIGHTED
VERSION OF THE S&P 500 FINANCIALS INDEX. THE S&P 500 FINANCIALS INDEX
CONSISTS OF THE COMMON STOCKS OF THE FOLLOWING INDUSTRIES: BANKS,
DIVERSIFIED FINANCIALS, BROKERAGE, ASSET MANAGEMENT INSURANCE AND REAL
ESTATE, INCLUDING INVESTMENT TRUSTS THAT COMPRISE THE FINANCIALS SECTOR OF
THE S&P 500 INDEX. RETURNS REFLECT NO DEDUCTION FOR FEES, EXPENSES, OR
TAXES.
[GRAPHIC OMITTED]
42
RYDEX S&P EQUAL WEIGHT HEALTH CARE ETF
THE PERFORMANCE INFORMATION SHOWN BELOW FOR THE FUND'S SHARES IS BASED ON A
CALENDAR YEAR.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
2007
--------
10.81%
Highest Quarter Return Lowest Quarter Return
(quarter ended 06/30/2007) 6.50% (quarter ended 12/31/2007) -1.14%
AVERAGE ANNUAL TOTAL RETURN
(FOR PERIODS ENDED DECEMBER 31, 2007)
Since Inception
Past 1 Year (11/1/2006)
-------------------------------------------------------------------------------
Return Before Taxes 10.81% 12.06%
Return After Taxes on Distributions 10.78% 12.03%
Return After Taxes on Distributions
and Sale of Fund Shares 7.07% 10.27%
S&P Equal Weight Index Health Care 14 12.69% 13.90%
|
14 THE S&P EQUAL WEIGHT INDEX HEALTH CARE IS AN UNMANAGED EQUAL WEIGHTED
VERSION OF THE S&P 500 HEALTH CARE INDEX. THE S&P 500 HEALTH CARE INDEX
CONSISTS OF THE COMMON STOCKS OF THE FOLLOWING INDUSTRIES: HEALTH CARE
EQUIPMENT AND SUPPLIES, HEALTH CARE PROVIDERS AND SERVICES, AND
BIOTECHNOLOGY AND PHARMACEUTICALS THAT COMPRISE THE HEALTH CARE SECTOR OF
THE S&P 500 INDEX. RETURNS REFLECT NO DEDUCTION FOR FEES, EXPENSES, OR
TAXES.
[GRAPHIC OMITTED]
PROSPECTUS 43
RYDEX S&P EQUAL WEIGHT INDUSTRIALS ETF
THE PERFORMANCE INFORMATION SHOWN BELOW FOR THE FUND'S SHARES IS BASED ON A
CALENDAR YEAR.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
2007
--------
15.52%
Highest Quarter Return Lowest Quarter Return
quarter ended 06/30/2007) 11.22% (quarter ended 12/31/2007) -1.72%
AVERAGE ANNUAL TOTAL RETURN
(FOR PERIODS ENDED DECEMBER 31, 2007)
Since Inception
Past 1 Year (11/1/2006)
-------------------------------------------------------------------------------
Return Before Taxes 15.52% 16.39%
Return After Taxes on Distributions 14.82% 15.74%
Return After Taxes on Distributions
and Sale of Fund Shares 11.01% 13.95%
S&P Equal Weight Index Industrials 15 15.75% 16.72%
|
15 THE S&P EQUAL WEIGHT INDEX INDUSTRIALS IS AN UNMANAGED EQUAL WEIGHTED
VERSION OF THE S&P 500 INDUSTRIALS INDEX. THE S&P 500 INDUSTRIALS INDEX
CONSISTS OF THE COMMON STOCKS OF THE FOLLOWING INDUSTRIES: AEROSPACE AND
DEFENSE, BUILDING PRODUCTS, CONSTRUCTION AND ENGINEERING, ELECTRICAL
EQUIPMENT, CONGLOMERATES, MACHINERY, COMMERCIAL SERVICES AND SUPPLIES, AIR
FREIGHT AND LOGISTICS, AIRLINES, AND MARINE, ROAD AND RAIL TRANSPORTATION
INFRASTRUCTURE THAT COMPRISE THE INDUSTRIALS SECTOR OF THE S&P 500 INDEX.
RETURNS REFLECT NO DEDUCTION FOR FEES, EXPENSES, OR TAXES.
[GRAPHIC OMITTED]
44
RYDEX S&P EQUAL WEIGHT MATERIALS ETF
THE PERFORMANCE INFORMATION SHOWN BELOW FOR THE FUND'S SHARES IS BASED ON A
CALENDAR YEAR.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
2007
------
10.16%
Highest Quarter Return Lowest Quarter Return
(quarter ended 03/31/2007) 7.90% (quarter ended 12/31/2007) -4.05%
AVERAGE ANNUAL TOTAL RETURN
(FOR PERIODS ENDED DECEMBER 31, 2007)
Since Inception
Past 1 Year (11/1/2006)
-------------------------------------------------------------------------------
Return Before Taxes 10.16% 15.02%
Return After Taxes on Distributions 9.84% 14.65%
Return After Taxes on Distributions
and Sale of Fund Shares 7.03% 12.75%
S&P Equal Weight Index Materials 16 11.16% 16.06%
|
16 THE S&P EQUAL WEIGHT INDEX MATERIALS IS AN UNMANAGED EQUAL WEIGHTED
VERSION OF THE S&P 500 MATERIALS INDEX. THE S&P 500 MATERIALS INDEX
CONSISTS OF THE COMMON STOCKS OF THE FOLLOWING INDUSTRIES: CHEMICALS,
CONSTRUCTION MATERIALS, CONTAINERS AND PACKAGING, METALS AND MINING, AND
PAPER AND FOREST PRODUCTS THAT COMPRISE THE MATERIALS SECTOR OF THE S&P
500 INDEX. RETURNS REFLECT NO DEDUCTION FOR FEES, EXPENSES, OR TAXES.
[GRAPHIC OMITTED]
PROSPECTUS 45
RYDEX S&P EQUAL WEIGHT TECHNOLOGY ETF
THE PERFORMANCE INFORMATION SHOWN BELOW FOR THE FUND'S SHARES IS BASED ON A
CALENDAR YEAR.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
2007
-----
1.81%
Highest Quarter Return Lowest Quarter Return
(quarter ended 06/30/2007) 7.99% (quarter ended 12/31/2007) -5.80%
AVERAGE ANNUAL TOTAL RETURN
(FOR PERIODS ENDED DECEMBER 31, 2007)
Since Inception
Past 1 Year (11/1/2006)
-------------------------------------------------------------------------------
Return Before Taxes 1.81% 4.30%
Return After Taxes on Distributions 1.81% 4.29%
Return After Taxes on Distributions
and Sale of Fund Shares 1.18% 3.65%
S&P Equal Weight Index Technology 17 1.91% 4.49%
|
17 THE S&P EQUAL WEIGHT INDEX TECHNOLOGY IS AN UNMANAGED EQUAL WEIGHTED
VERSION OF THE S&P 500 INFORMATION TECHNOLOGY INDEX. THE S&P 500
INFORMATION TECHNOLOGY INDEX CONSISTS OF THE COMMON STOCKS OF THE
FOLLOWING INDUSTRIES: INTERNET EQUIPMENT, COMPUTERS AND PERIPHERALS,
ELECTRONIC EQUIPMENT, OFFICE ELECTRONICS AND INSTRUMENTS, SEMICONDUCTOR
EQUIPMENT AND PRODUCTS, DIVERSIFIED TELECOMMUNICATION SERVICES, AND
WIRELESS TELECOMMUNICATION SERVICES THAT COMPRISE THE INFORMATION
TECHNOLOGY SECTOR OF THE S&P 500 INDEX. RETURNS REFLECT NO DEDUCTION FOR
FEES, EXPENSES, OR TAXES.
[GRAPHIC OMITTED]
46
RYDEX S&P EQUAL WEIGHT UTILITIES ETF
THE PERFORMANCE INFORMATION SHOWN BELOW FOR THE FUND'S SHARES IS BASED ON A
CALENDAR YEAR.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
2007
------
10.32%
Highest Quarter Return Lowest Quarter Return
(quarter ended 03/31/2007) 7.47% (quarter ended 09/30/2007) 0.17%
AVERAGE ANNUAL TOTAL RETURN
(FOR PERIODS ENDED DECEMBER 31, 2007)
Since Inception
Past 1 Year (11/1/2006)
-------------------------------------------------------------------------------
Return Before Taxes 10.32% 12.84%
Return After Taxes on Distributions 9.85% 12.29%
Return After Taxes on Distributions
and Sale of Fund Shares 7.33% 10.86%
S&P Equal Weight Index Utilities 18 14.33% 16.38%
|
18 THE S&P EQUAL WEIGHT INDEX UTILITIES IS AN UNMANAGED EQUAL WEIGHTED
VERSION OF THE S&P 500 UTILITIES INDEX. THE S&P 500 UTILITIES INDEX
CONSISTS OF THE COMMON STOCKS OF THE FOLLOWING INDUSTRIES: ELECTRIC
UTILITIES, GAS UTILITIES, MULTI-UTILITIES AND UNREGULATED POWER AND WATER
UTILITIES, TELECOMMUNICATION SERVICE COMPANIES, INCLUDING FIXED-LINE,
CELLULAR, WIRELESS, HIGH BANDWIDTH AND FIBER-OPTIC CABLE NETWORKS THAT
COMPRISE THE UTILITIES SECTOR OF THE S&P 500 INDEX. RETURNS REFLECT NO
DEDUCTION FOR FEES, EXPENSES, OR TAXES.
[GRAPHIC OMITTED]
PROSPECTUS 47
THIS PAGE INTENTIONALLY LEFT BLANK.
[GRAPHIC OMITTED]
48
FUND FEES AND EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Funds described in this Prospectus.
RYDEX
S&P RYDEX
EQUAL RUSSELL
WEIGHT TOP 50(R)
--------------------------------------------------------------------------------
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)(A)
A. CREATION TRANSACTION FEES(B)
Through NSCC $2,000 $500
Outside NSCC up to $8,000 up to $2,000
B. REDEMPTION TRANSACTION FEES(C)
Through NSCC $2,000 $500
Outside NSCC up to $8,000 up to $2,000
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)(D)
Management Fees 0.40% 0.20%
Distribution (12b-1) Fees(E) NONE NONE
Other Expenses(F),(G) NONE NONE
---------------------------
Total Annual Fund Operating Expenses 0.40% 0.20%
===========================
A) MOST INVESTORS WILL INCUR CUSTOMARY BROKERAGE COMMISSIONS WHEN BUYING OR
SELLING SHARES OF THE FUND.
|
B) THE CREATION TRANSACTION FEE IS THE SAME REGARDLESS OF THE NUMBER OF
CREATION UNITS PURCHASED PURSUANT TO ANY ONE CREATION ORDER. ONE CREATION
UNIT CONSISTS OF 50,000 SHARES.
C) THE REDEMPTION TRANSACTION FEE IS THE SAME REGARDLESS OF THE NUMBER OF
CREATION UNITS REDEEMED PURSUANT TO ANY ONE REDEMPTION ORDER.
D) EXPRESSED AS A PERCENTAGE OF NET ASSETS.
E) THE FUNDS HAVE ADOPTED A DISTRIBUTION (12b-1) PLAN PURSUANT TO WHICH THE
FUNDS MAY BE SUBJECT TO AN ANNUAL 12b-1 FEE OF UP TO 0.25%. HOWEVER, NO
SUCH FEE IS CURRENTLY CHARGED TO THE FUNDS AND NO SUCH FEES WILL BE
CHARGED PRIOR TO MARCH 1, 2009.
F) THE ADVISOR HAS CONTRACTUALLY AGREED TO PAY ALL OPERATING EXPENSES OF THE
FUND, EXCLUDING THE MANAGEMENT FEES, INTEREST EXPENSE AND TAXES (EXPECTED
TO BE DE MINIMIS), BROKERAGE COMMISSIONS AND OTHER EXPENSES CONNECTED WITH
THE EXECUTION OF PORTFOLIO TRANSACTIONS, ANY FUTURE DISTRIBUTION FEES OR
EXPENSES, EXPENSES OF THE INDEPENDENT TRUSTEES (INCLUDING ANY TRUSTEES'
COUNSEL FEES) AND EXTRAORDINARY EXPENSES. OTHER EXPENSES ARE THEREFORE
ESTIMATED TO BE LESS THAN 0.01% FOR THE FISCAL YEAR ENDING OCTOBER 31,
2008.
G) THE FUNDS INVEST IN A MONEY MARKET FUND PURSUANT TO A CASH SWEEP
AGREEMENT. AS A SHAREHOLDER IN A MONEY MARKET FUND (THE "ACQUIRED FUND"),
THE FUNDS WILL INDIRECTLY BEAR THEIR PROPORTIONATE SHARE OF THE FEES AND
EXPENSES OF THE ACQUIRED FUND. THE ACQUIRED FUND'S FEES AND EXPENSES
AMOUNT TO LESS THAN .001%.
[GRAPHIC OMITTED]
PROSPECTUS 49
RYDEX RYDEX RYDEX RYDEX
RYDEX RYDEX S&P S&P S&P S&P
S&P 500 S&P 500 MIDCAP MIDCAP SMALLCAP SMALLCAP
PURE PURE 400 PURE 400 PURE 600 PURE 600 PURE
VALUE GROWTH VALUE GROWTH VALUE GROWTH
------------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)(A)
A. CREATION TRANSACTION FEES(B)
Through NSCC $1,000 $1,000 $750 $750 $1,000 $1,000
Outside NSCC up to $4,000 up to $4,000 up to $3,000 up to $3,000 up to $4,000 up to $4,000
B. REDEMPTION TRANSACTION FEES(C)
Through NSCC $1,000 $1,000 $750 $750 $1,000 $1,000
Outside NSCC up to $4,000 up to $4,000 up to $3,000 up to $3,000 up to $4,000 up to $4,000
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)(D)
Management Fees 0.35% 0.35% 0.35% 0.35% 0.35% 0.35%
Distribution (12b-1) Fees(E) NONE NONE NONE NONE NONE NONE
Other Expenses(F),(G) NONE NONE NONE NONE NONE NONE
----------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.35% 0.35% 0.35% 0.35% 0.35% 0.35%
==================================================================================
|
[GRAPHIC OMITTED]
50
FUND FEES AND EXPENSES (CONTINUED)
The table below describes the fees and expenses that you may pay
if you buy and hold shares of the Funds described in this
Prospectus.
RYDEX RYDEX
S&P EQUAL S&P EQUAL
WEIGHT WEIGHT
CONSUMER CONSUMER
DISCRETIONARY STAPLES
--------------------------------------------------------------------------------------
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)(A)
A. CREATION TRANSACTION FEES(B)
Through NSCC $750 $500
Outside NSCC up to $3,000 up to $2,000
B. REDEMPTION TRANSACTION FEES(C)
Through NSCC $750 $500
Outside NSCC up to $3,000 up to $2,000
ANNUAL FUND OPERATING
EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)(D)
Management Fees 0.50% 0.50%
Distribution (12b-1) Fees(E) NONE NONE
Other Expenses(F),(G) NONE NONE
-----------------------------
Total Annual Fund Operating Expenses 0.50% 0.50%
=============================
|
A) MOST INVESTORS WILL INCUR CUSTOMARY BROKERAGE COMMISSIONS WHEN BUYING OR
SELLING SHARES OF THE FUND.
B) THE CREATION TRANSACTION FEE IS THE SAME REGARDLESS OF THE NUMBER OF
CREATION UNITS PURCHASED PURSUANT TO ANY ONE CREATION ORDER. ONE CREATION
UNIT CONSISTS OF 50,000 SHARES.
C) THE REDEMPTION TRANSACTION FEE IS THE SAME REGARDLESS OF THE NUMBER OF
CREATION UNITS REDEEMED PURSUANT TO ANY ONE REDEMPTION ORDER.
D) EXPRESSED AS A PERCENTAGE OF NET ASSETS.
E) THE FUNDS HAVE ADOPTED A DISTRIBUTION (12B-1) PLAN PURSUANT TO WHICH THE
FUNDS MAY BE SUBJECT TO AN ANNUAL 12B-1 FEE OF UP TO 0.25%. HOWEVER, NO
SUCH FEE IS CURRENTLY CHARGED TO THE FUNDS AND NO SUCH FEES WILL BE
CHARGED PRIOR TO MARCH 1, 2009.
F) THE ADVISOR HAS CONTRACTUALLY AGREED TO PAY ALL OPERATING EXPENSES OF THE
FUND, EXCLUDING THE MANAGEMENT FEES, INTEREST EXPENSE AND TAXES (EXPECTED
TO BE DE MINIMIS), BROKERAGE COMMISSIONS AND OTHER EXPENSES CONNECTED WITH
THE EXECUTION OF PORTFOLIO TRANSACTIONS, ANY FUTURE DISTRIBUTION FEES OR
EXPENSES, EXPENSES OF THE INDEPENDENT TRUSTEES (INCLUDING ANY TRUSTEES'
COUNSEL FEES) AND EXTRAORDINARY EXPENSES. OTHER EXPENSES ARE THEREFORE
ESTIMATED TO BE LESS THAN 0.01% FOR THE FISCAL YEAR ENDING OCTOBER 31,
2008.
G) THE FUNDS INVEST IN A MONEY MARKET FUND PURSUANT TO A CASH SWEEP
HAGREEMENT. AS A SHAREHOLDER IN A MONEY MARKET FUND (THE "ACQUIRED FUND"),
THE FUNDS WILL INDIRECTLY BEAR THEIR PROPORTIONATE SHARE OF THE FEES AND
EXPENSES OF THE ACQUIRED FUND. THE ACQUIRED FUND'S FEES AND EXPENSES
AMOUNT TO LESS THAN .001%.
[GRAPHIC OMITTED]
PROSPECTUS 51
RYDEX RYDEX RYDEX RYDEX RYDEX
S&P S&P S&P S&P S&P
EQUAL EQUAL EQUAL EQUAL EQUAL
WEIGHT WEIGHT WEIGHT WEIGHT WEIGHT
ENERGY FINANCIALS HEALTH CARE INDUSTRIALS MATERIALS
-----------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)(A)
A. CREATION TRANSACTION FEES(B)
Through NSCC $500 $750 $500 $500 $500
Outside NSCC up to $2,000 up to $3,000 up to $2,000 up to $2,000 up to $2,000
B. REDEMPTION TRANSACTION FEES(C)
Through NSCC $500 $750 $500 $500 $500
Outside NSCC up to $2,000 up to $3,000 up to $2,000 up to $2,000 up to $2,000
ANNUAL FUND OPERATING
EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)(D)
Management Fees 0.50% 0.50% 0.50% 0.50% 0.50%
Distribution (12b-1) Fees(E) NONE NONE NONE NONE NONE
Other Expenses(F),(G) NONE NONE NONE NONE NONE
--------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.50% 0.50% 0.50% 0.50% 0.50%
==========================================================================
|
[GRAPHIC OMITTED]
52
FUND FEES AND EXPENSES (CONTINUED)
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Funds described in this Prospectus.
RYDEX RYDEX
S&P EQUAL S&P EQUAL
WEIGHT WEIGHT
TECHNOLOGY UTILITIES
--------------------------------------------------------------------------------
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)(A)
A. CREATION TRANSACTION FEES(B)
Through NSCC $750 $500
Outside NSCC up to $3,000 up to $2,000
B. REDEMPTION TRANSACTION FEES(C)
Through NSCC $750 $500
Outside NSCC up to $3,000 up to $2,000
|
ANNUAL FUND OPERATING
EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)(D)
Management Fees 0.50% 0.50%
Distribution (12b-1) Fees(E) NONE NONE
Other Expenses(F),(G) NONE NONE
---------------------------
Total Annual Fund Operating Expenses 0.50% 0.50%
---------------------------
A) MOST INVESTORS WILL INCUR CUSTOMARY BROKERAGE COMMISSIONS WHEN BUYING OR
SELLING SHARES OF THE FUND.
|
B) THE CREATION TRANSACTION FEE IS THE SAME REGARDLESS OF THE NUMBER OF
CREATION UNITS PURCHASED PURSUANT TO ANY ONE CREATION ORDER. ONE
CREATION UNIT CONSISTS OF 50,000 SHARES.
C) THE REDEMPTION TRANSACTION FEE IS THE SAME REGARDLESS OF THE NUMBER OF
CREATION UNITS REDEEMED PURSUANT TO ANY ONE REDEMPTION ORDER.
D) EXPRESSED AS A PERCENTAGE OF NET ASSETS.
E) THE FUNDS HAVE ADOPTED A DISTRIBUTION (12B-1) PLAN PURSUANT TO WHICH THE
FUNDS MAY BE SUBJECT TO AN ANNUAL 12B-1 FEE OF UP TO 0.25%. HOWEVER, NO
SUCH FEE IS CURRENTLY CHARGED TO THE FUNDS AND NO SUCH FEES WILL BE
CHARGED PRIOR TO MARCH 1, 2009.
F) THE ADVISOR HAS CONTRACTUALLY AGREED TO PAY ALL OPERATING EXPENSES OF THE
FUND, EXCLUDING THE MANAGEMENT FEES, INTEREST EXPENSE AND TAXES (EXPECTED
TO BE DE MINIMIS), BROKERAGE COMMISSIONS AND OTHER EXPENSES CONNECTED WITH
THE EXECUTION OF PORTFOLIO TRANSACTIONS, ANY FUTURE DISTRIBUTION FEES OR
EXPENSES, EXPENSES OF THE INDEPENDENT TRUSTEES (INCLUDING ANY TRUSTEES'
COUNSEL FEES) AND EXTRAORDINARY EXPENSES. OTHER EXPENSES ARE THEREFORE
ESTIMATED TO BE LESS THAN 0.01% FOR THE FISCAL YEAR ENDING OCTOBER 31,
2008.
G) THE FUNDS INVEST IN A MONEY MARKET FUND PURSUANT TO A CASH SWEEP
AGREEMENT. AS A SHAREHOLDER IN A MONEY MARKET FUND (THE "ACQUIRED FUND"),
THE FUNDS WILL INDIRECTLY BEAR THEIR PROPORTIONATE SHARE OF THE FEES AND
EXPENSES OF THE ACQUIRED FUND. THE ACQUIRED FUND'S FEES AND EXPENSES
AMOUNT TO LESS THAN .001%.
[GRAPHIC OMITTED]
PROSPECTUS 53
EXAMPLE
The Examples that follow are intended to help you compare the cost of investing
in shares of the Funds with the cost of investing in other mutual funds. The
Examples do not take into account creation or redemption transaction fees, or
the brokerage commissions that you pay when purchasing or selling shares of the
Funds. If the commissions were included, your costs would be higher.
The Examples assume that you invest $10,000 in the Funds for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Funds' operating expenses remain the same. Although your actual costs may be
higher or lower, the Examples reflect your cost based on these assumptions.
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------------------------------------------------------------------------------------
RYDEX S&P EQUAL WEIGHT ETF $41 $129 $225 $508
RYDEX RUSSELL TOP 50(R) ETF $21 $65 $113 $257
RYDEX S&P 500 PURE VALUE ETF $36 $113 $197 $446
RYDEX S&P 500 PURE GROWTH ETF $36 $113 $197 $446
RYDEX S&P MIDCAP 400 PURE VALUE ETF $36 $113 $197 $446
RYDEX S&P MIDCAP 400 PURE GROWTH ETF $36 $113 $197 $446
RYDEX S&P SMALLCAP 600 PURE VALUE ETF $36 $113 $197 $446
RYDEX S&P SMALLCAP 600 PURE GROWTH ETF $36 $113 $197 $446
RYDEX S&P EQUAL WEIGHT CONSUMER DISCRETIONARY ETF $51 $161 $281 $632
RYDEX S&P EQUAL WEIGHT CONSUMER STAPLES ETF $51 $161 $281 $632
RYDEX S&P EQUAL WEIGHT ENERGY ETF $51 $161 $281 $632
RYDEX S&P EQUAL WEIGHT FINANCIALS ETF $51 $161 $281 $632
RYDEX S&P EQUAL WEIGHT HEALTH CARE ETF $51 $161 $281 $632
RYDEX S&P EQUAL WEIGHT INDUSTRIALS ETF $51 $161 $281 $632
RYDEX S&P EQUAL WEIGHT MATERIALS ETF $51 $161 $281 $632
RYDEX S&P EQUAL WEIGHT TECHNOLOGY ETF $51 $161 $281 $632
RYDEX S&P EQUAL WEIGHT UTILITIES ETF $51 $161 $281 $632
|
CREATION TRANSACTION FEES AND REDEMPTION TRANSACTION FEES
The Funds issue and redeem shares at NAV only in large blocks of 50,000 shares
or multiples thereof. As a practical matter, only institutions or large
investors purchase or redeem these Creation Units. A standard creation
transaction fee ("Creation Transaction Fee") or redemption transaction fee
("Redemption Transaction Fee"), as applicable, will be assessed per transaction,
which is intended to approximate the issuance or redemption transaction costs
incurred by the Funds. The Creation Transaction Fee and Redemption Transaction
Fee for each Fund are listed below. An additional charge of up to four (4) times
the standard transaction fee may be imposed for creations and redemptions
effected outside the National Securities Clearing Corporation's ("NSCC") usual
clearing process or for cash. Shareholders who hold Creation Units will also pay
the annual Fund operating expenses described in the table above.
[GRAPHIC OMITTED]
54
RYDEX S&P EQUAL WEIGHT ETF
The Creation Transaction Fee per transaction is $2,000 and the Redemption
Transaction Fee per transaction is $2,000. Assuming an investment in a Creation
Unit of $2,365,000 and a 5% return each year, and assuming that creations and
redemptions are effected through the NSCC and the Fund's operating expenses
remain the same, the total costs would be $11,701 if the Creation Unit is
redeemed after one year, and $30,487 if the Creation Unit is redeemed after
three years. If creations and redemptions are effected outside of the NSCC, the
total costs would increase to $19,701 if the Creation Unit is redeemed after one
year, and $38,487 if the Creation Unit is redeemed after three years.
RYDEX RUSSELL TOP 50(R) ETF
The Creation Transaction Fee per transaction is $500 and the Redemption
Transaction Fee per transaction is $500. Assuming an investment in a Creation
Unit of $5,531,000 and a 5% return each year, and assuming that creations and
redemptions are effected through the NSCC and the Fund's operating expenses
remain the same, the total costs would be $11,844 if the Creation Unit is
redeemed after one year, and $35,722 if the Creation Unit is redeemed after
three years. If creations and redemptions are effected outside of the NSCC, the
total costs would increase to $13,844 if the Creation Unit is redeemed after one
year, and $37,722 if the Creation Unit is redeemed after three years.
RYDEX S&P 500 PURE VALUE ETF
The Creation Transaction Fee per transaction is $1,000 and the Redemption
Transaction Fee per transaction is $1,000. Assuming an investment in a Creation
Unit of $1,579,500 and a 5% return each year, and assuming that creations and
redemptions are effected through the NSCC and the Fund's operating expenses
remain the same, the total costs would be $6,669 if the Creation Unit is
redeemed after one year, and $17,825 if the Creation Unit is redeemed after
three years. If creations and redemptions are effected outside of the NSCC, the
total costs would increase to $10,669 if the Creation Unit is redeemed after one
year, and $21,825 if the Creation Unit is redeemed after three years.
RYDEX S&P 500 PURE GROWTH ETF
The Creation Transaction Fee per transaction is $1,000 and the Redemption
Transaction Fee per transaction is $1,000. Assuming an investment in a Creation
Unit of $1,895,000 and a 5% return each year, and assuming that creations and
redemptions are effected through the NSCC and the Fund's oper-
[GRAPHIC OMITTED]
PROSPECTUS 55
ating expenses remain the same, the total costs would be $7,801 if the Creation
Unit is redeemed after one year, and $21,386 if the Creation Unit is redeemed
after three years. If creations and redemptions are effected outside of the
NSCC, the total costs would increase to $11,801 if the Creation Unit is redeemed
after one year, and $25,386 if the Creation Unit is redeemed after three years.
RYDEX S&P MIDCAP 400 PURE VALUE ETF
The Creation Transaction Fee per transaction is $750 and the Redemption
Transaction Fee per transaction is $750. Assuming an investment in a Creation
Unit of $1,640,500 and a 5% return each year, and assuming that creations and
redemptions are effected through the NSCC and the Fund's operating expenses
remain the same, the total costs would be $6,638 if the Creation Unit is
redeemed after one year, and $18,514 if the Creation Unit is redeemed after
three years. If creations and redemptions are effected outside of the NSCC, the
total costs would increase to $9,638 if the Creation Unit is redeemed after one
year, and $21,514 if the Creation Unit is redeemed after three years.
RYDEX S&P MIDCAP 400 PURE GROWTH ETF
The Creation Transaction Fee per transaction is $750 and the Redemption
Transaction Fee per transaction is $750. Assuming an investment in a Creation
Unit of $2,829,000 and a 5% return each year, and assuming that creations and
redemptions are effected through the NSCC and the Fund's operating expenses
remain the same, the total costs would be $10,904 if the Creation Unit is
redeemed after one year, and $31,926 if the Creation Unit is redeemed after
three years. If creations and redemptions are effected outside of the NSCC, the
total costs would increase to $13,904 if the Creation Unit is redeemed after one
year, and $34,926 if the Creation Unit is redeemed after three years.
RYDEX S&P SMALLCAP 600 PURE VALUE ETF
The Creation Transaction Fee per transaction is $1,000 and the Redemption
Transaction Fee per transaction is $1,000. Assuming an investment in a Creation
Unit of $1,669,000 and a 5% return each year, and assuming that creations and
redemptions are effected through the NSCC and the Fund's operating expenses
remain the same, the total costs would be $6,990 if the Creation Unit is
redeemed after one year, and $18,835 if the Creation Unit is redeemed after
three years. If creations and redemptions are effected outside of the NSCC, the
total costs would increase to $10,990 if the Creation Unit is redeemed after one
year, and $22,835 if the Creation Unit is redeemed after three years.
[GRAPHIC OMITTED]
56
RYDEX S&P SMALLCAP 600 PURE GROWTH ETF
The Creation Transaction Fee per transaction is $1,000 and the Redemption
Transaction Fee per transaction is $1,000. Assuming an investment in a Creation
Unit of $2,047,000 and a 5% return each year, and assuming that creations and
redemptions are effected through the NSCC and the Fund's operating expenses
remain the same, the total costs would be $8,347 if the Creation Unit is
redeemed after one year, and $23,101 if the Creation Unit is redeemed after
three years. If creations and redemptions are effected outside of the NSCC, the
total costs would increase to $12,347 if the Creation Unit is redeemed after one
year, and $27,101 if the Creation Unit is redeemed after three years.
RYDEX S&P EQUAL WEIGHT CONSUMER DISCRETIONARY ETF
The Creation Transaction Fee per transaction is $750 and the Redemption
Transaction Fee per transaction is $750. Assuming an investment in a Creation
Unit of $1,944,000 and a 5% return each year, and assuming that creations and
redemptions are effected through the NSCC and the Fund's operating expenses
remain the same, the total costs would be $10,718 if the Creation Unit is
redeemed after one year, and $31,294 if the Creation Unit is redeemed after
three years. If creations and redemptions are effected outside of the NSCC, the
total costs would increase to $13,718 if the Creation Unit is redeemed after one
year, and $34,294 if the Creation Unit is redeemed after three years.
RYDEX S&P EQUAL WEIGHT CONSUMER STAPLES ETF
The Creation Transaction Fee per transaction is $500 and the Redemption
Transaction Fee per transaction is $500. Assuming an investment in a Creation
Unit of $2,611,000 and a 5% return each year, and assuming that creations and
redemptions are effected through the NSCC and the Fund's operating expenses
remain the same, the total costs would be $13,888 if the Creation Unit is
redeemed after one year, and $42,031 if the Creation Unit is redeemed after
three years. If creations and redemptions are effected outside of the NSCC, the
total costs would increase to $15,888 if the Creation Unit is redeemed after one
year, and $44,031 if the Creation Unit is redeemed after three years.
RYDEX S&P EQUAL WEIGHT ENERGY ETF
The Creation Transaction Fee per transaction is $500 and the Redemption
Transaction Fee per transaction is $500. Assuming an investment in a Creation
Unit of $3,426,000 and a 5% return each year, and assuming that creations and
redemptions are effected through the NSCC and the Fund's operating
[GRAPHIC OMITTED]
PROSPECTUS 57
expenses remain the same, the total costs would be $18,066 if the Creation Unit
is redeemed after one year, and $55,150 if the Creation Unit is redeemed after
three years. If creations and redemptions are effected outside of the NSCC, the
total costs would increase to $20,066 if the Creation Unit is redeemed after one
year, and $57,150 if the Creation Unit is redeemed after three years.
RYDEX S&P EQUAL WEIGHT FINANCIALS ETF
The Creation Transaction Fee per transaction is $750 and the Redemption
Transaction Fee per transaction is $750. Assuming an investment in a Creation
Unit of $2,039,000 and a 5% return each year, and assuming that creations and
redemptions are effected through the NSCC and the Fund's operating expenses
remain the same, the total costs would be $11,205 if the Creation Unit is
redeemed after one year, and $32,823 if the Creation Unit is redeemed after
three years. If creations and redemptions are effected outside of the NSCC, the
total costs would increase to $14,205 if the Creation Unit is redeemed after one
year, and $35,823 if the Creation Unit is redeemed after three years.
RYDEX S&P EQUAL WEIGHT HEALTH CARE ETF
The Creation Transaction Fee per transaction is $500 and the Redemption
Transaction Fee per transaction is $500. Assuming an investment in a Creation
Unit of $2,818,000 and a 5% return each year, and assuming that creations and
redemptions are effected through the NSCC and the Fund's operating expenses
remain the same, the total costs would be $14,949 if the Creation Unit is
redeemed after one year, and $45,363 if the Creation Unit is redeemed after
three years. If creations and redemptions are effected outside of the NSCC, the
total costs would increase to $16,949 if the Creation Unit is redeemed after one
year, and $47,363 if the Creation Unit is redeemed after three years.
RYDEX S&P EQUAL WEIGHT INDUSTRIALS ETF
The Creation Transaction Fee per transaction is $500 and the Redemption
Transaction Fee per transaction is $500. Assuming an investment in a Creation
Unit of $2,807,000 and a 5% return each year, and assuming that creations and
redemptions are effected through the NSCC and the Fund's operating expenses
remain the same, the total costs would be $14,893 if the Creation Unit is
redeemed after one year, and $45,186 if the Creation Unit is redeemed after
three years. If creations and redemptions are effected outside of the NSCC, the
total costs would increase to $16,893 if the Creation Unit is redeemed after one
year, and $47,186 if the Creation Unit is redeemed after three years.
[GRAPHIC OMITTED]
58
RYDEX S&P EQUAL WEIGHT MATERIALS ETF
The Creation Transaction Fee per transaction is $500 and the Redemption
Transaction Fee per transaction is $500. Assuming an investment in a Creation
Unit of $2,788,500 and a 5% return each year, and assuming that creations and
redemptions are effected through the NSCC and the Fund's operating expenses
remain the same, the total costs would be $14,798 if the Creation Unit is
redeemed after one year, and $44,888 if the Creation Unit is redeemed after
three years. If creations and redemptions are effected outside of the NSCC, the
total costs would increase to $16,798 if the Creation Unit is redeemed after one
year, and $46,888 if the Creation Unit is redeemed after three years.
RYDEX S&P EQUAL WEIGHT TECHNOLOGY ETF
The Creation Transaction Fee per transaction is $750 and the Redemption
Transaction Fee per transaction is $750. Assuming an investment in a Creation
Unit of $2,509,500 and a 5% return each year, and assuming that creations and
redemptions are effected through the NSCC and the Fund's operating expenses
remain the same, the total costs would be $13,617 if the Creation Unit is
redeemed after one year, and $40,397 if the Creation Unit is redeemed after
three years. If creations and redemptions are effected outside of the NSCC, the
total costs would increase to $16,617 if the Creation Unit is redeemed after one
year, and $43,397 if the Creation Unit is redeemed after three years.
RYDEX S&P EQUAL WEIGHT UTILITIES ETF
The Creation Transaction Fee per transaction is $500 and the Redemption
Transaction Fee per transaction is $500. Assuming an investment in a Creation
Unit of $3,056,000 and a 5% return each year, and assuming that creations and
redemptions are effected through the NSCC and the Fund's operating expenses
remain the same, the total costs would be $16,169 if the Creation Unit is
redeemed after one year, and $49,194 if the Creation Unit is redeemed after
three years. If creations and redemptions are effected outside of the NSCC, the
total costs would increase to $18,169 if the Creation Unit is redeemed after one
year, and $51,194 if the Creation Unit is redeemed after three years.
For more information, see "Creations and Redemptions" and "Transaction Fees."
[GRAPHIC OMITTED]
PROSPECTUS 59
MORE INFORMATION ABOUT THE FUNDS:
BENCHMARKS AND INVESTMENT METHODOLOGY
Each Fund seeks to provide investment results that match, before fees and
expenses, the performance of a specific benchmark on a daily basis. The current
benchmark used by each Fund is set forth below:
FUND BENCHMARK
--------------------------------------------------------------------------------
RYDEX S&P EQUAL WEIGHT ETF S&P EQUAL WEIGHT INDEX
RYDEX RUSSELL TOP 50(R) ETF RUSSELL TOP 50(R) INDEX
RYDEX S&P 500 PURE VALUE ETF S&P 500/CITIGROUP PURE VALUE
|
INDEX
RYDEX S&P 500 PURE GROWTH ETF S&P 500/CITIGROUP PURE
GROWTH INDEX
RYDEX S&P MIDCAP 400 PURE S&P MIDCAP 400/CITIGROUP
VALUE ETF PURE VALUE INDEX
RYDEX S&P MIDCAP 400 PURE S&P MIDCAP 400/CITIGROUP
GROWTH ETF PURE GROWTH INDEX
RYDEX S&P SMALLCAP 600 PURE S&P SMALLCAP 600/CITIGROUP
VALUE ETF PURE VALUE INDEX
RYDEX S&P SMALLCAP 600 PURE S&P SMALLCAP 600/CITIGROUP
GROWTH ETF PURE GROWTH INDEX
RYDEX S&P EQUAL WEIGHT S&P EQUAL WEIGHT INDEX
CONSUMER DISCRETIONARY ETF CONSUMER DISCRETIONARY
RYDEX S&P EQUAL WEIGHT S&P EQUAL WEIGHT INDEX
CONSUMER STAPLES ETF CONSUMER STAPLES
RYDEX S&P EQUAL WEIGHT S&P EQUAL WEIGHT INDEX
ENERGY ETF ENERGY
RYDEX S&P EQUAL WEIGHT S&P EQUAL WEIGHT INDEX
FINANCIALS ETF FINANCIALS
RYDEX S&P EQUAL WEIGHT HEALTH S&P EQUAL WEIGHT INDEX
CARE ETF HEALTH CARE
RYDEX S&P EQUAL WEIGHT S&P EQUAL WEIGHT INDEX
INDUSTRIALS ETF INDUSTRIALS
RYDEX S&P EQUAL WEIGHT S&P EQUAL WEIGHT INDEX
MATERIALS ETF MATERIALS
RYDEX S&P EQUAL WEIGHT S&P EQUAL WEIGHT INDEX
TECHNOLOGY ETF TECHNOLOGY
RYDEX S&P EQUAL WEIGHT S&P EQUAL WEIGHT INDEX
UTILITIES ETF UTILITIES
|
A BRIEF GUIDE TO THE UNDERLYING INDICES
RUSSELL TOP 50(R) INDEX. The Russell Top 50(R) Index is an unmanaged
capitalization-weighted index comprised of the 50 largest companies in the
Russell 3000(R) Index. The Russell 3000(R) Index is an unmanaged
capitalization-weighted index that offers investors access to the broad U.S.
equity universe representing approximately 98% of the U.S. equity market. As of
December 31, 2007, the Russell Top 50(R) Index included companies with a
capitalization range of $7.2 billion to $527 billion.
S&P 500 EQUAL WEIGHT INDEX. The S&P 500 Equal Weight Index is an unmanaged
equal-weighted version of the S&P 500 Index, which is an unmanaged
capitalization-weighted index comprised of 500 common stocks, which are chosen
by S&P on a statistical basis. Unlike the S&P 500, in which each constituent
stock's weight is proportionate to its market value, each stock in the S&P 500
Equal Weight Index will be rebalanced quarterly to have the same target
weighting as every other stock in the Underlying Index. As of December 31, 2007,
the S&P 500 Equal Weight Index included companies with a capitalization range of
$708 million to $512 billion.
S&P 500/CITIGROUP PURE GROWTH INDEX. The S&P 500/Citigroup Pure Growth Index is
narrow in focus, containing only those S&P 500 companies with strong growth
characteristics as selected by S&P. As of December 31, 2007, the S&P
500/Citigroup Pure Growth Index included 147 of the constituents that comprise
the S&P 500. As of December 31, 2007, the S&P 500/Citigroup Pure Growth Index
included companies with a capitalization range of $1.9 billion to $512 billion.
S&P 500/CITIGROUP PURE VALUE INDEX. The S&P 500/Citigroup Pure Value Index is
narrow in focus, containing only those S&P 500 companies with strong value
characteristics as selected by S&P. As of December 31, 2007, the S&P
500/Citigroup Pure Value Index included 127 of the constituents that comprise
the S&P 500. As of December 31, 2007, the S&P 500/Citigroup Pure Value Index
included companies with a capitalization range of $708 million to $252 billion.
S&P EQUAL WEIGHT INDEX CONSUMER DISCRETIONARY. The S&P Equal Weight Index
Consumer Discretionary is an unmanaged equal weighted version of the S&P 500
Consumer Discretionary Index that consists of the common stocks of the following
industries: automobiles and components, consumer durables, apparel, hotels,
restaurants, leisure, media and retailing that comprise the Consumer
Discretionary sector of the S&P 500 Index. As of December 31, 2007, the S&P
Equal Weight Index Consumer Discretionary included companies with a
capitalization range of $71 million to $70 billion.
[GRAPHIC OMITTED]
PROSPECTUS 61
S&P EQUAL WEIGHT INDEX CONSUMER STAPLES. The S&P Equal Weight Index Consumer
Staples is an unmanaged equal weighted version of the S&P 500 Consumer Staples
Index that consists of the common stocks of the following industries: food and
drug retailing, beverages, food products, tobacco, household products and
personal products that comprise the Consumer Staples sector of the S&P 500
Index. As of December 31, 2007, the S&P Equal Weight Index Consumer Staples
included companies with a capitalization range of $3.4 billion to $228 billion.
S&P EQUAL WEIGHT INDEX ENERGY. The S&P Equal Weight Index Energy is an unmanaged
equal weighted version of the S&P 500 Energy Index that consists of the common
stocks of the following industries: oil and gas exploration, production,
marketing, refining and/or transportation and energy equipment and services
industries that comprise the Energy sector of the S&P 500 Index. As of December
31, 2007, the S&P Equal Weight Index Energy included companies with a
capitalization range of $4.4 billion to $512 billion.
S&P EQUAL WEIGHT INDEX FINANCIALS. The S&P Equal Weight Index Financials is an
unmanaged equal weighted version of the S&P 500 Financials Index that consists
of the common stocks of the following industries: banks, diversified financials,
brokerage, asset management insurance and real estate, including investment
trusts that comprise the Financials sector of the S&P 500 Index. As of December
31, 2007, the S&P Equal Weight Index Financials included companies with a
capitalization range of $1.5 billion to $183 billion.
S&P EQUAL WEIGHT INDEX HEALTH CARE. The S&P Equal Weight Index Health Care is an
unmanaged equal weighted version of the S&P 500 Health Care Index that consists
of the common stocks of the following industries: health care equipment and
supplies, health care providers and services, and biotechnology and
pharmaceuticals that comprise the Health Care sector of the S&P 500 Index. As of
December 31, 2007, the S&P Equal Weight Index Health Care included companies
with a capitalization range of $2.4 billion to $191 billion.
S&P EQUAL WEIGHT INDEX INDUSTRIALS. The S&P Equal Weight Index Industrials is an
unmanaged equal weighted version of the S&P 500 Industrials Index that consists
of the common stocks of the following industries: aerospace and defense,
building products, construction and engineering, electrical equipment,
conglomerates, machinery; commercial services and supplies, air freight and
logistics, airlines, and marine, road and rail transportation infrastructure
that comprise the Industrials sector of the S&P 500 Index. As of December 31,
2007, the S&P Equal Weight Index Industrials included companies with a
capitalization range of $2.7 billion to $374.6 billion.
[GRAPHIC OMITTED]
62
S&P EQUAL WEIGHT INDEX MATERIALS. The S&P Equal Weight Index Materials is an
unmanaged equal weighted version of the S&P 500 Materials Index that consists of
the common stocks of the following industries: chemicals, construction
materials, containers and packaging, metals and mining, and paper and forest
products that comprise the Materials sector of the S&P 500 Index. As of December
31, 2007, the S&P Equal Weight Index Materials included companies with a
capitalization range of $2.2 billion to $61.1 billion.
S&P EQUAL WEIGHT INDEX TECHNOLOGY. The S&P Equal Weight Index Technology is an
unmanaged equal weighted version of the S&P 500 Information Technology Index
that consists of the common stocks of the following industries: internet
equipment, computers and peripherals, electronic equipment, office electronics
and instruments, semiconductor equipment and products, diversified
telecommunication services, and wireless telecommunication services that
comprise the Information Technology sector of the S&P 500 Index. As of December
31, 2007, the S&P Equal Weight Index Technology included companies with a
capitalization range of $1.6 billion to $286.4 billion.
S&P EQUAL WEIGHT INDEX UTILITIES. The S&P Equal Weight Index Utilities is an
unmanaged equal weighted version of the S&P 500 Utilities Index that consists of
the common stocks of the following industries: electric utilities, gas
utilities, multi-utilities and unregulated power and water utilities,
telecommunication service companies, including fixed-line, cellular, wireless,
high bandwidth and fiber-optic cable networks that comprise the Utilities sector
of the S&P 500 Index. As of December 31, 2007, the S&P Equal Weight Index
Utilities included companies with a capitalization range of $1.9 billion to
$53.9 billion.
S&P MIDCAP 400/CITIGROUP PURE GROWTH INDEX. The S&P MidCap 400/Citigroup Pure
Growth Index is narrow in focus, containing only those S&P MidCap 400 companies
with strong growth characteristics as selected by S&P. As of December 31, 2007,
the S&P MidCap 400/Citigroup Pure Growth Index included 106 of the constituents
that comprise the S&P MidCap 400. As of December 31, 2007, the S&P MidCap
400/Citigroup Pure Growth Index included companies with a capitalization range
of $560 million to $12 billion.
S&P MIDCAP 400/CITIGROUP PURE VALUE INDEX. The S&P MidCap 400/Citigroup Pure
Value Index is narrow in focus, containing only those S&P MidCap 400 companies
with strong value characteristics as selected by S&P. As of December 31, 2007,
the S&P MidCap 400/Citigroup Pure Value Index included 119 of the constituents
that comprise the S&P MidCap 400. As of December 31, 2007, the S&P MidCap
400/Citigroup Pure Value Index included companies with a capitalization range of
$361 million to $6 billion.
[GRAPHIC OMITTED]
PROSPECTUS 63
S&P SMALLCAP 600/CITIGROUP PURE GROWTH INDEX. The S&P SmallCap 600/Citigroup
Pure Growth Index is narrow in focus, containing only those S&P SmallCap 600
companies with strong growth characteristics as selected by S&P. As of December
31, 2007, the S&P SmallCap 600/Citigroup Pure Growth Index included 151 of the
constituents that comprise the S&P SmallCap 600. As of December 31, 2007, the
S&P SmallCap 600/Citigroup Pure Growth Index included companies with a
capitalization range of $98 million to $4.9 billion.
S&P SMALLCAP 600/CITIGROUP PURE VALUE INDEX. The S&P SmallCap 600/Citigroup Pure
Value Index is narrow in focus, containing only those S&P SmallCap 600 companies
with strong value characteristics as selected by S&P. As of December 31, 2007,
the S&P SmallCap 600/Citigroup Pure Value Index included 177 of the constituents
that comprise the S&P SmallCap 600. As of December 31, 2007, the S&P SmallCap
600/Citigroup Pure Value Index included companies with a capitalization range of
$88 million to $3.5 billion.
ADDITIONAL INVESTMENT STRATEGIES
Although the Advisor intends to use a replication strategy, each Fund may hold
up to 10% of its assets in securities not included in its Underlying Index. For
example, a Fund may invest in securities not included in its Underlying Index in
order to reflect various corporate actions (such as mergers) and other changes
in its Underlying Index (such as reconstitutions, additions and deletions).
Nonetheless, each Fund intends to always invest at least 90% of its assets in
the securities of its Underlying Index. As long as the Funds invest at least 90%
of their total assets in the securities of their respective Underlying Indices,
the Funds may invest their other assets in futures contracts, options on futures
contracts, options, and swaps related to their respective Underlying Indices, as
well as cash and cash equivalents. This is a non-fundamental policy that can be
changed by the Funds upon 60 days' prior notice to shareholders.
PORTFOLIO HOLDINGS
A description of the Funds' policies and procedures with respect to the
disclosure of Fund portfolio securities is available in the Statement of
Additional Information ("SAI").
[GRAPHIC OMITTED]
64
INVESTING WITH RDEX:
For more information on how to buy and sell shares of the Funds, call Rydex
Client Services at 800.820.0888 or 301.296.5100 or visit
www.rydexinvestments.com.
SHAREHOLDER INFORMATION
BUYING AND SELLING SHARES
Most investors will buy and sell shares of the Funds in secondary market
transactions through brokers. Shares can be bought and sold throughout the
trading day like other publicly traded securities. Most investors will incur
customary brokerage commissions and charges when buying or selling shares
through a broker.
Shares may be acquired and redeemed from the Funds only in Creation Units of
50,000 shares, or multiples thereof, as discussed in the "Creations and
Redemptions" section.
BOOK ENTRY
Shares are held in book-entry form, which means that no stock certificates are
issued. Depository Trust Company ("DTC"), or its nominee, is the record owner of
all outstanding shares of the Funds and is recognized as the owner of all
shares.
Investors owning shares of the Funds are beneficial owners as shown on the
records of DTC or its participants. DTC serves as the securities depository for
all shares. Participants in DTC include securities brokers and dealers, banks,
trust companies, clearing corporations and other institutions that directly or
indirectly maintain a custodial relationship with DTC. As a beneficial owner of
shares, you are not entitled to receive physical delivery of stock certificates
or to have shares registered in your name, and you are not considered a
registered owner of shares. Therefore, to exercise any right as an owner of
shares, you must rely upon the procedures of DTC and its participants (E.G.,
broker-dealers, banks, trust companies, or clearing companies). These procedures
are the same as those that apply to any stocks that you hold in book entry or
"street name" through your brokerage account.
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PROSPECTUS 65
CALCULATING NAV
Each Fund calculates its NAV by:
o Taking the current market value of its total assets
o Subtracting any liabilities
o Dividing that amount by the total number of shares owned by shareholders
The Funds calculate NAV once each Business Day as of the regularly scheduled
close of normal trading on the New York Stock Exchange ("NYSE") (normally, 4:00
p.m., Eastern Time).
In calculating NAV, each Fund generally values its investment portfolio at
market price. If market prices are unavailable or a Fund thinks that they are
unreliable, or when the value of a security has been materially affected by
events occurring after the relevant market closes, the Fund will price those
securities at fair value as determined in good faith using methods approved by
the Board of Trustees. Because the Funds invest substantially all of their
assets in the component securities included in their respective Underlying
Indices, and these securities are selected for their market size, liquidity and
industry group representation, it is expected that there would be limited
circumstances in which the Funds would use fair value pricing - for example, if
the exchange on which a portfolio security is primarily traded closed early or
if trading in a particular security was halted during the day and did not resume
prior to the time a Fund calculated its NAV.
If a Fund uses fair value pricing to value its securities, it may value those
securities higher or lower than another fund that uses market quotations or its
own fair value procedures to price the same securities.
SHARE TRADING PRICES
The trading prices of a Fund's shares listed on the Exchange may differ from the
Fund's daily NAV and can be affected by market forces of supply and demand,
economic conditions and other factors. The Exchange intends to disseminate the
approximate value of the portfolio underlying a share of a Fund every fifteen
seconds. This approximate value should not be viewed as a "real-time" update of
the NAV of a Fund because the approximate value may not be calculated in the
same manner as the NAV, which is computed once a day. The Funds are not involved
in, or responsible for, the calculation or dissemination of such values and make
no warranty as to their accuracy.
CREATIONS AND REDEMPTIONS
The shares of each Fund that trade on the Exchange are "created" at their NAV by
market makers, large investors and institutions only in block-size Creation
[GRAPHIC OMITTED]
66
Units of 50,000 shares or more. A "creator" enters into an authorized
participant agreement (a "Participant Agreement") with Rydex Distributors, Inc.,
the Funds' distributor (the "Distributor"), and deposits into a Fund a portfolio
of securities closely approximating the holdings of the Fund and a specified
amount of cash, together totaling the NAV of the Creation Unit(s), in exchange
for 50,000 shares of the Fund (or multiples thereof).
Similarly, shares can only be redeemed in Creation Units, generally 50,000
shares, principally in-kind for a portfolio of securities held by a Fund and a
specified amount of cash together totaling the NAV of the Creation Unit(s).
Shares are not redeemable from a Fund except when aggregated in Creation Units.
The prices at which creations and redemptions occur are based on the next
calculation of NAV after an order is received in a form prescribed in the
Participant Agreement.
Creations and redemptions must be made through an authorized firm that is either
a member of the Continuous Net Settlement System of the NSCC or a DTC
Participant, and in each case, must have executed a Participant Agreement with
the Distributor with respect to creations and redemptions of Creation Units.
Information about the procedures for the creation and redemption of Creation
Units can be found in the SAI.
Because new shares may be created and issued on an ongoing basis, at any point
during the life of a Fund, a "distribution," as such term is used in the
Securities Act of 1933 (the "Securities Act"), may be occurring. Broker-dealers
and other persons are cautioned that some activities on their part may,
depending on the circumstances, result in their being deemed participants in a
distribution in a manner that could render them statutory underwriters and
subject to the prospectus-delivery and liability provisions of the Securities
Act. Nonetheless, any determination of whether one is an underwriter must take
into account all the relevant facts and circumstances of each particular case.
Broker-dealers should also note that dealers who are not "underwriters," but are
participating in a distribution (in contrast to ordinary secondary
transactions), and thus dealing with shares that are part of an "unsold
allotment" within the meaning of Section 4(3)(C) of the Securities Act, would be
unable to take advantage of the prospectus delivery exemption provided by
Section 4(3) of the Securities Act.
TRANSACTION FEES
Each Fund will impose a Creation Transaction Fee and a Redemption Transaction
Fee to offset the Fund's transfer and other transaction costs associated with
the issuance and redemption of Creation Units of shares. The
[GRAPHIC OMITTED]
PROSPECTUS 67
Creation and Redemption Transaction Fees for creations and redemptions are as
follows:
CREATION AND
FUND REDEMPTION TRANSACTION FEES
--------------------------------------------------------------------------------
Rydex S&P Equal Weight ETF $ 2,000
Rydex Russell Top 50(R) ETF $ 500
Rydex S&P 500 Pure Value ETF $ 1,000
Rydex S&P 500 Pure Growth ETF $ 1,000
Rydex S&P MidCap 400 Pure Value ETF $ 750
Rydex S&P MidCap 400 Pure Growth ETF $ 750
Rydex S&P SmallCap 600 Pure Value ETF $ 1,000
Rydex S&P SmallCap 600 Pure Growth ETF $ 1,000
Rydex S&P Equal Weight Consumer Discretionary ETF $ 750
Rydex S&P Equal Weight Consumer Staples ETF $ 500
Rydex S&P Equal Weight Energy ETF $ 500
Rydex S&P Equal Weight Financials ETF $ 750
Rydex S&P Equal Weight Health Care ETF $ 500
Rydex S&P Equal Weight Industrials ETF $ 500
Rydex S&P Equal Weight Materials ETF $ 500
Rydex S&P Equal Weight Technology ETF $ 750
Rydex S&P Equal Weight Utilities ETF $ 500
|
An additional charge of up to four (4) times the fixed transaction fee may be
imposed on purchases or redemptions outside the NSCC's usual clearing process or
for cash. Investors who use the services of a broker or other such intermediary
may pay additional fees for these services.
The chart below shows the approximate value of one Creation Unit for the Funds
as of December 31, 2007.
APPROXIMATE VALUE
FUND OF ONE CREATION UNIT
--------------------------------------------------------------------------------
Rydex S&P Equal Weight ETF $ 2,365,000
Rydex Russell Top 50(R) ETF $ 5,531,000
Rydex S&P 500 Pure Value ETF $ 1,579,500
Rydex S&P 500 Pure Growth ETF $ 1,895,000
Rydex S&P MidCap 400 Pure Value ETF $ 1,640,500
Rydex S&P MidCap 400 Pure Growth ETF $ 2,829,000
|
[GRAPHIC OMITTED]
68
APPROXIMATE VALUE
FUND OF ONE CREATION UNIT
--------------------------------------------------------------------------------
Rydex S&P SmallCap 600 Pure Value ETF $ 1,669,000
Rydex S&P SmallCap 600 Pure Growth ETF $ 2,047,000
Rydex S&P Equal Weight Consumer Discretionary ETF $ 1,944,000
Rydex S&P Equal Weight Consumer Staples ETF $ 2,611,000
Rydex S&P Equal Weight Energy ETF $ 3,426,000
Rydex S&P Equal Weight Financials ETF $ 2,039,000
Rydex S&P Equal Weight Health Care ETF $ 2,818,000
Rydex S&P Equal Weight Industrials ETF $ 2,807,000
Rydex S&P Equal Weight Materials ETF $ 2,788,500
Rydex S&P Equal Weight Technology ETF $ 2,509,500
Rydex S&P Equal Weight Utilities ETF $ 3,056,000
|
More information on the creation and redemption process is included in the SAI.
ACTIVE INVESTORS AND MARKET TIMING
Shares of the Funds are listed for trading on the Exchange, which allows retail
investors to purchase and sell individual shares at market prices throughout the
trading day similar to other publicly traded securities. The Trust's Board of
Trustees has determined not to adopt policies and procedures designed to prevent
or monitor for frequent purchases and redemptions of the Funds' shares because
the Funds sell and redeem their shares at NAV only in Creation Units pursuant to
the terms of a Participant Agreement between the authorized participant and the
Distributor, principally in exchange for a basket of securities that mirrors the
composition of each Fund's portfolio and a specified amount of cash. The Funds
also impose a transaction fee on such Creation Unit transactions that is
designed to offset the Funds' transfer and other transaction costs associated
with the issuance and redemption of the Creation Unit shares.
DISTRIBUTION PLAN
The Funds have adopted a Distribution Plan (the "Plan") that allows the Funds to
pay distribution fees to the Distributor and other firms that provide
distribution services ("Service Providers"). If a Service Provider provides
distribution services, the Funds will pay distribution fees to the Distributor
at an annual rate not to exceed 0.25% of average daily net assets, pursuant to
Rule 12b-1 under the Investment Company Act of 1940. The Distributor will, in
turn, pay the Service Provider out of its fees.
[GRAPHIC OMITTED]
PROSPECTUS 69
No distribution fees are currently charged to the Funds; there are no plans to
impose these fees, and no such fees will be charged prior to March 1, 2009.
However, in the event that 12b-1 fees are charged in the future, because the
Funds pay these fees out of assets on an ongoing basis, over time these fees may
cost you more than other types of sales charges and will increase the cost of
your investment.
DIVIDENDS AND DISTRIBUTIONS
The Funds pay out dividends to shareholders at least annually. Each Fund
distributes its net capital gains, if any, to shareholders annually.
TAX INFORMATION
The following is a summary of some important tax issues that affect the Funds
and their shareholders. The summary is based on current tax laws, which may be
changed by legislative, judicial or administrative action. You should not
consider this summary to be a detailed explanation of the tax treatment of the
Funds, or the tax consequences of an investment in the Funds. MORE INFORMATION
ABOUT TAXES IS LOCATED IN THE SAI. YOU ARE URGED TO CONSULT YOUR TAX ADVISER
REGARDING SPECIFIC QUESTIONS AS TO FEDERAL, STATE AND LOCAL INCOME TAXES.
TAX STATUS OF EACH FUND
Each Fund is treated as a separate entity for federal tax purposes, and intends
to qualify for the special tax treatment afforded to regulated investment
companies. As long as a Fund qualifies as a regulated investment company, it
pays no federal income tax on the earnings it distributes to shareholders.
TAX STATUS OF DISTRIBUTIONS
o Each Fund will, at least annually, distribute substantially all of
its net investment income and net capital gains income.
o The income dividends and short-term capital gains distributions you
receive from the Funds will be taxed as either ordinary income or
qualified dividend income.
o Dividends that are designated as qualified dividend income are
eligible for the reduced maximum rate to individuals of 15% (5% for
individuals in lower tax brackets) to the extent that a Fund
receives qualified dividend income and subject to certain
limitations.
o Long-term capital gains distributions will result from gains on the
sale or exchange of capital assets held by a Fund for more than one
year. Any long-term capital gains distributions you receive from a
Fund are taxable as long-term capital gains regardless of how long
you have owned your
[GRAPHIC OMITTED]
70
shares. Long-term capital gains are currently taxed at a maximum
rate of 15%.
o Absent further legislation, the maximum 15% tax rate on qualified
dividend income and long-term capital gains will cease to apply to
taxable years beginning after December 31, 2010.
o Dividends and distributions are generally taxable to you whether you
receive them in cash or in additional shares.
o Corporate shareholders may be entitled to a dividends-received
deduction for the portion of dividends they receive that is
attributable to dividends received by a Fund from U.S. corporations,
subject to certain limitations.
o Distributions paid in January, but declared by a Fund in October,
November or December of the previous year may be taxable to you in
the previous year.
o The Funds will inform you of the amount of your ordinary income
dividends, qualified dividend income, and capital gains
distributions shortly after the close of each calendar year.
o If you hold your shares in a tax-qualified retirement account, you
generally will not be subject to federal taxation on Fund
distributions until you begin receiving distributions from your
retirement account. You should consult your tax adviser regarding
the tax rules that apply to your retirement account.
TAX STATUS OF SHARE TRANSACTIONS
Currently, any capital gain or loss upon a sale of Fund shares is generally
treated as a long-term gain or loss if the shares have been held for more than
one year and as short-term gain or loss if held for one year or less. Any
capital loss on the sale of Fund shares held for six months or less is treated
as long-term capital loss to the extent that any capital gain distributions were
paid with respect to such shares. An exchange of a Fund's shares for shares of
another Fund will be treated as a sale of the Fund's shares and any gain on the
transaction may be subject to federal income tax.
STATE TAX CONSIDERATIONS
A Fund is not liable for any income or franchise tax in Delaware as long as it
qualifies as a regulated investment company for federal income tax purposes. In
addition to federal taxes, distributions by the Funds and ownership of Fund
shares may be subject to state and local taxes. You should consult your tax
adviser regarding how state and local tax laws affect your investment in Fund
shares.
[GRAPHIC OMITTED]
PROSPECTUS 71
TAXES ON CREATIONS AND REDEMPTIONS OF CREATION UNITS
A person who purchases a Creation Unit by exchanging securities in-kind
generally will recognize a gain or loss equal to the difference between the
market value of the Creation Units at the time, and the purchaser's aggregate
basis in the securities surrendered and any net cash paid. A person who redeems
Creation Units and receives securities in-kind from a Fund will generally
recognize a gain or loss equal to the difference between the redeemer's basis in
the Creation Units, and the aggregate market value of the securities received
and any net cash received. The Internal Revenue Service, however, may assert
that a loss realized upon an in-kind exchange of securities for Creation Units
or an exchange of Creation Units for securities cannot be deducted currently
under the rules governing "wash sales," or on the basis that there has been no
significant change in economic position. Persons effecting in-kind creations or
redemptions should consult their own tax adviser with respect to these matters.
MANAGEMENT OF THE FUNDS
INVESTMENT ADVISOR
PADCO Advisors II, Inc., which operates under the name Rydex Investments, is
located at 9601 Blackwell Road, Suite 500, Rockville, Maryland 20850, and serves
as investment adviser of the Funds. The Advisor has served as the investment
adviser of the Rydex Funds since each Rydex Fund's inception.
The Advisor makes investment decisions for the assets of the Funds and
continuously reviews, supervises, and administers each Fund's investment
program. The Board of Trustees of the Trust supervises the Advisor and
establishes policies that the Advisor must follow in its day-to-day management
activities. Pursuant to an investment advisory agreement between the Trust and
the Advisor, the Funds paid the Advisor a fee at an annualized rate for the
fiscal year ended October 31, 2007, based on the average daily net assets of
each Fund, as set forth below:
FUND ADVISORY FEE
--------------------------------------------------------------------------------
RYDEX S&P EQUAL WEIGHT ETF 0.40%
RYDEX RUSSELL TOP 50(R) ETF 0.20%
RYDEX S&P 500 PURE VALUE ETF 0.35%
RYDEX S&P 500 PURE GROWTH ETF 0.35%
RYDEX S&P MIDCAP 400 PURE VALUE ETF 0.35%
RYDEX S&P MIDCAP 400 PURE GROWTH ETF 0.35%
RYDEX S&P SMALLCAP 600 PURE VALUE ETF 0.35%
|
[GRAPHIC OMITTED]
72
RYDEX S&P SMALLCAP 600 PURE GROWTH ETF 0.35%
RYDEX S&P EQUAL WEIGHT CONSUMER
DISCRETIONARY ETF 0.50%
RYDEX S&P EQUAL WEIGHT CONSUMER STAPLES ETF 0.50%
RYDEX S&P EQUAL WEIGHT ENERGY ETF 0.50%
RYDEX S&P EQUAL WEIGHT FINANCIALS ETF 0.50%
RYDEX S&P EQUAL WEIGHT HEALTH CARE ETF 0.50%
RYDEX S&P EQUAL WEIGHT INDUSTRIALS ETF 0.50%
RYDEX S&P EQUAL WEIGHT MATERIALS ETF 0.50%
RYDEX S&P EQUAL WEIGHT TECHNOLOGY ETF 0.50%
RYDEX S&P EQUAL WEIGHT UTILITIES ETF 0.50%
|
The Advisor bears all of its own costs associated with providing these advisory
services and the expenses of the members of the Board of Trustees who are
affiliated with the Advisor. The Advisor may make payments from its own
resources to broker-dealers and other financial institutions in connection with
the sale of Fund shares.
As part of its agreement with the Trust, the Advisor has contractually agreed to
pay all expenses of the Fund, including the cost of transfer agency, custody,
fund administration, legal, audit and other services, except interest expense,
taxes (expected to be de minimis), brokerage commissions and other expenses
connected with execution of portfolio transactions, short dividend expenses,
expenses of the Independent Trustees (including any Trustees' counsel fees), and
extraordinary expenses.
A discussion regarding the basis for the Board's August 2007 approval of the
Funds' investment advisory agreement is available in the Funds' October 31, 2007
Annual Report to Shareholders, which covers the period November 1, 2006 to
October 31, 2007.
PORTFOLIO MANAGEMENT
Mike Byrum, President and Chief Investment Officer ("CIO") of Rydex Investments,
leads the Portfolio Department. Mr. Byrum's senior management team, called the
Investment Leadership Team ("ILT"), consists of five investment professionals
that are responsible for overseeing different functions within the Portfolio
Department. Those members include Michael Dellapa as the Director of Research,
Douglas Holmes as the Strategic Advisor, James King as the Director of Portfolio
Management, David Reilly as the head of Portfolio Strategies, and Stephen Sachs
as the Director of Trading. The role of the ILT is to set the overall policies
of the Portfolio Department with respect to investment strategies and business
development. The remainder of the Portfolio
[GRAPHIC OMITTED]
PROSPECTUS 73
Department reports to the members of the ILT, and consists of a team of
approximately 16 investment professionals that focus on research, trading, and
implementing the portfolios.
On a day-to-day basis the following three individuals are jointly and primarily
responsible for the management of the Funds.
MICHAEL P. BYRUM, CFA, President and CIO of Rydex Investments - As the CIO, Mr.
Byrum has ultimate responsibility of the management of the Funds. He has been
associated with Rydex Investments since the Advisor was founded in 1993. Mr.
Byrum was named the President of Rydex Investments in 2004 and has served as
Chief Investment Officer of Rydex Investments since 2000. During this time, he
has played a key role in the development of the firm's investment strategies and
product offerings. As Senior Portfolio Manager, Mr. Byrum was instrumental in
the launch of the OTC, Precious Metals, Government Long Bond 1.2x Strategy,
Inverse Government Long Bond Strategy, Inverse S&P 500 Strategy and Inverse OTC
Strategy Funds, and helped to create the Sector Funds, all of which are offered
in a separate prospectus. He was named Vice President of Portfolio for Rydex
Investments in 1998, and Executive Vice President in 2000. Prior to joining
Rydex Investments, Mr. Byrum worked for Money Management Associates, the
investment adviser for Rushmore Funds, Inc. He holds a degree in finance from
Miami University of Ohio and is a member of the CFA Institute and the Washington
Society of Investment Analysts. Mr. Byrum has co-managed each Fund since its
inception.
JAMES R. KING, CFA, Director of Portfolio Management - Mr. King is responsible
for a team of portfolio managers who manage all of the Rydex Funds. He joined
Rydex Investments in 1996 and was promoted to assistant portfolio manager in
1997. In 1998, he became a portfolio manager and was promoted in 2001 to senior
portfolio manager and currently serves as director of portfolio management.
Prior to joining Rydex Investments, Mr. King worked as a registered
representative at DMG Securities. He holds a degree in finance from the
University of Maryland. Mr. King has co-managed each Fund since its inception.
MICHAEL J. DELLAPA, CFA, Director of Investment Research - Mr. Dellapa joined
Rydex Investments in 2000 as a Research Analyst and was promoted to portfolio
manager in 2003. During his tenure as a portfolio manager, he had direct
oversight for the Russell 2000(R) 1.5x Strategy, Healthcare, Biotechnology, and
Consumer Products Funds, all of which are offered in a separate prospectus. In
2005, Mr. Dellapa became Director of Investment Research. Since joining Rydex
Investments, Mr. Dellapa has played a key role in developing research processes
and systems to enhance current funds and develop new investment products. Prior
to joining Rydex Investments, he worked as an
[GRAPHIC OMITTED]
74
equity analyst for Invista Capital and systems analyst for Accenture. He holds
an engineering degree from the University of Maryland and MBA from the
University of Chicago. Previously, he was owner/consultant of Dellapa Consulting
Inc. as well as a senior consultant and an analyst at Andersen Consulting. Mr.
Dellapa has co-managed each Fund since September 2005.
Mr. Dellapa oversees the research and creation of the processes used to select
investments. Mr. King oversees the day-to-day details of the portfolio
management of all of the Rydex Funds. Mr. Byrum generally oversees all aspects
of the management of all the Rydex Funds and reviews the activities of Messrs.
King and Dellapa, as well as other aspects of the investment management
portfolio department.
Additional information about the portfolio managers' compensation, other
accounts managed by the portfolio managers, and the portfolio managers'
ownership of securities in the Funds is available in the SAI.
[GRAPHIC OMITTED]
PROSPECTUS 75
FINANCIAL HIGHLIGHTS
The information below for the fiscal years ended October 31, 2007 and October
31, 2006 has been audited by Ernst & Young LLP, the Trust's independent
registered public accounting firm, whose report is included in the Trust's
Annual Report along with the Trust's financial statements.
For the fiscal years ended October 31, 2003 through October 31, 2005 for the
Rydex S&P Equal Weight ETF and for the fiscal year ended October 31, 2005 for
the Rydex Russell Top 50(R) ETF the financial highlights were audited by another
independent registered public accounting firm.
RYDEX S&P EQUAL WEIGHT ETF
-----------------------------------------------------------------------
FOR THE PERIOD
APRIL 24, 2003*
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2007(1) 2006(1) 2005(1) 2004(1) 2003(1)
----------- ----------- ----------- ----------- ---------------
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE AT BEGINNING OF PERIOD .. $ 46.06 $ 39.68 $ 35.70 $ 31.61 $ 25.26
----------- ----------- ----------- ----------- ---------------
Net Investment Income** ................. 0.59 0.52 0.43 0.37 0.18
Net Realized and Unrealized Gain on
Investments .......................... 4.56 6.36 3.95 4.08 6.33
----------- ----------- ----------- ----------- ---------------
TOTAL FROM INVESTMENT OPERATIONS ........ 5.15 6.88 4.38 4.45 6.51
----------- ----------- ----------- ----------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net Investment Income ................... (0.58) (0.50) (0.40) (0.36) (0.16)
----------- ----------- ----------- ----------- ---------------
NET ASSET VALUE AT END OF PERIOD ........ $ 50.63 $ 46.06 $ 39.68 $ 35.70 $ 31.61
=========== =========== =========== =========== ===============
TOTAL RETURN*** ......................... 11.23% 17.42% 12.29% 14.11% 25.77%
RATIOS/SUPPLEMENTAL DATA:
Net Assets at End of Period
(000's omitted) ...................... $ 2,177,693 $ 1,759,797 $ 1,071,410 $ 485,636 $ 177,135
RATIO TO AVERAGE NET ASSETS OF:
Expenses ................................ 0.40% 0.40% 0.40% 0.40% 0.40%****
Net Investment Income ................... 1.22% 1.21% 1.11% 1.09% 1.13%****
Portfolio Turnover Rate+ ................ 25% 16% 22% 55% 42%
|
[GRAPHIC OMITTED]
76
FINANCIAL HIGHLIGHTS (CONTINUED)
* THE FUND COMMENCED OPERATIONS ON APRIL 24, 2003.
** BASED ON AVERAGE SHARES OUTSTANDING.
*** TOTAL INVESTMENT RETURN IS CALCULATED ASSUMING AN INITIAL INVESTMENT MADE
AT THE NET ASSET VALUE AT THE BEGINNING OF THE PERIOD, INVESTMENT OF ALL
DIVIDENDS AND DISTRIBUTION AT NET ASSET VALUE DURING THE PERIOD, AND
REDEMPTION ON THE LAST DAY OF THE PERIOD. TRANSACTION FEES ARE NOT
REFLECTED IN THE CALCULATION OF TOTAL INVESTMENT RETURN. TOTAL INVESTMENT
RETURN CALCULATED FOR A PERIOD OF LESS THAN ONE YEAR IS NOT ANNUALIZED.
**** ANNUALIZED.
(1) ALL PER SHARE INFORMATION REPRESENTING DATA PRIOR TO APRIL 26, 2006 HAS
BEEN ADJUSTED FOR THE EFFECT OF A 4 FOR 1 STOCK SPLIT WHICH OCCURRED ON
APRIL 26, 2006.
+ PORTFOLIO TURNOVER IS NOT ANNUALIZED AND DOES NOT INCLUDE SECURITIES
RECEIVED OR DELIVERED FROM PROCESSING CREATIONS OR REDEMPTIONS.
[GRAPHIC OMITTED]
PROSPECTUS 77
RYDEX RUSSELL TOP 50(R) ETF
------------------------------------------
FOR THE PERIOD
MAY 4, 2005*
YEAR ENDED YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, OCTOBER 31,
2007 2006 2005
----------- ----------- --------------
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE AT BEGINNING OF PERIOD .. $ 104.15 $ 91.39 $ 91.51
----------- ----------- --------------
Net Investment Income** ................. 2.15 1.92 0.79
Net Realized and Unrealized Gain/Loss on
Investments .......................... 12.25 12.71 (0.46)
----------- ----------- --------------
TOTAL FROM INVESTMENT OPERATIONS ........ 14.40 14.63 0.33
----------- ----------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net Investment Income ................... (2.08) (1.87) (0.45)
----------- ----------- --------------
NET ASSET VALUE AT END OF PERIOD ........ $ 116.47 $ 104.15 $ 91.39
=========== =========== ==============
TOTAL RETURN*** ......................... 13.96% 16.18% 0.36%
RATIOS/SUPPLEMENTAL DATA:
Net Assets at End of Period
(000's omitted) ...................... $ 681,355 $ 364,541 $ 137,085
RATIO TO AVERAGE NET ASSETS OF:
Expenses ................................ 0.20% 0.20% 0.20%****
Net Investment Income ................... 1.96% 1.98% 1.74%****
Portfolio Turnover Rate+ ................ 8% 7% 1%
|
* THE FUND COMMENCED OPERATIONS ON MAY 4, 2005.
** BASED ON AVERAGE SHARES OUTSTANDING.
*** TOTAL INVESTMENT RETURN IS CALCULATED ASSUMING AN INITIAL INVESTMENT MADE
AT THE NET ASSET VALUE AT THE BEGINNING OF THE PERIOD, REINVESTMENT OF ALL
DIVIDENDS AND DISTRIBUTION AT NET ASSET VALUE DURING THE PERIOD, AND
REDEMPTION ON THE LAST DAY OF THE PERIOD. TRANSACTION FEES ARE NOT
REFLECTED IN THE CALCULATION OF TOTAL INVESTMENT RETURN. TOTAL INVESTMENT
RETURN CALCULATED FOR A PERIOD OF LESS THAN ONE YEAR IS NOT ANNUALIZED.
**** ANNUALIZED.
+ PORTFOLIO TURNOVER IS NOT ANNUALIZED AND DOES NOT INCLUDE SECURITIES
RECEIVED OR DELIVERED FROM PROCESSING CREATIONS OR REDEMPTIONS.
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78
FINANCIAL HIGHLIGHTS (CONTINUED)
RYDEX S&P 500 RYDEX S&P 500
PURE VALUE ETF PURE GROWTH ETF
---------------------------- ----------------------------
FOR THE PERIOD FOR THE PERIOD
MARCH 1, 2006* MARCH 1, 2006*
YEAR ENDED THROUGH YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2007 2006 2007 2006
----------- -------------- ----------- --------------
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE AT BEGINNING OF PERIOD .. $ 32.66 $ 29.87 $ 35.30 $ 34.42
----------- -------------- ----------- --------------
Net Investment Income** ................. 0.75 0.49 0.25 0.11
Net Realized and Unrealized Gain on
Investments .......................... 1.80 2.58 4.26 0.84
----------- -------------- ----------- --------------
TOTAL FROM INVESTMENT OPERATIONS ........ 2.55 3.07 4.51 0.95
----------- -------------- ----------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net Investment Income ................... (0.75) (0.28) (0.22) (0.07)
----------- -------------- ----------- --------------
NET ASSET VALUE AT END OF PERIOD ........ $ 34.46 $ 32.66 $ 39.59 $ 35.30
=========== ============== =========== ==============
TOTAL RETURN*** ......................... 7.79% 10.27% 12.79% 2.77%
RATIOS/SUPPLEMENTAL DATA:
Net Assets at End of Period
(000's omitted) ...................... $ 39,635 $ 21,232 $ 63,340 $ 17,649
RATIO TO AVERAGE NET ASSETS OF:
Expenses ................................ 0.35% 0.35%**** 0.35% 0.35%****
Net Investment Income ................... 2.15% 2.37%**** 0.66% 0.48%****
Portfolio Turnover Rate+ ................ 26% 4% 24% 7%
|
* THE FUND COMMENCED OPERATIONS ON MARCH 1, 2006.
** BASED ON AVERAGE SHARES OUTSTANDING.
*** TOTAL INVESTMENT RETURN IS CALCULATED ASSUMING AN INITIAL INVESTMENT MADE
AT THE NET ASSET VALUE AT THE BEGINNING OF THE PERIOD, REINVESTMENT OF ALL
DIVIDENDS AND DISTRIBUTION AT NET ASSET VALUE DURING THE PERIOD, AND
REDEMPTION ON THE LAST DAY OF THE PERIOD. TRANSACTION FEES ARE NOT
REFLECTED IN THE CALCULATION OF TOTAL INVESTMENT RETURN. TOTAL INVESTMENT
RETURN CALCULATED FOR A PERIOD OF LESS THAN ONE YEAR IS NOT ANNUALIZED.
**** ANNUALIZED.
+ PORTFOLIO TURNOVER IS NOT ANNUALIZED AND DOES NOT INCLUDE SECURITIES
RECEIVED OR DELIVERED FROM PROCESSING CREATIONS OR REDEMPTIONS.
[GRAPHIC OMITTED]
PROSPECTUS 79
RYDEX S&P MIDCAP 400 RYDEX S&P MIDCAP 400
PURE VALUE ETF PURE GROWTH ETF
---------------------------- ----------------------------
FOR THE PERIOD FOR THE PERIOD
MARCH 1, 2006* MARCH 1, 2006*
YEAR ENDED THROUGH YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2007 2006 2007 2006
----------- -------------- ----------- --------------
PER SHARE OPERATING
PERFORMANCE:
NET ASSET VALUE AT
BEGINNING OF PERIOD .......... $ 33.27 $ 31.53 $ 50.10 $ 52.62
----------- -------------- ----------- --------------
Net Investment Income** ......... 0.82 0.44 0.33 0.02
Net Realized and Unrealized
Gain on Investments .......... 2.48 1.60 9.73 (2.53)
----------- -------------- ----------- --------------
TOTAL FROM INVESTMENT
OPERATIONS ................... 3.30 2.04 10.06 (2.51)
----------- -------------- ----------- --------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net Investment Income ........... (0.81) (0.30) (0.27) (0.01)
Net Realized Gain ............... -- -- (0.14) --
----------- -------------- ----------- --------------
Total Distributions ............. (0.81) (0.30) (0.41) (0.01)
----------- -------------- ----------- --------------
NET ASSET VALUE AT END
OF PERIOD .................... $ 35.76 $ 33.27 $ 59.75 $ 50.10
=========== ============== =========== ==============
TOTAL RETURN*** ................. 9.94% 6.48% 20.17% (4.76)%
RATIOS/SUPPLEMENTAL DATA:
Net Assets at End of
Period (000's omitted) ....... $ 21,458 $ 14,973 $ 20,914 $ 22,547
RATIO TO AVERAGE NET
ASSETS OF:
Expenses ........................ 0.35% 0.35%**** 0.35% 0.35%****
Net Investment Income ........... 2.28% 2.07%**** 0.60% 0.07%****
Portfolio Turnover Rate+ ........ 46% 4% 53% 14%
|
* THE FUND COMMENCED OPERATIONS ON MARCH 1, 2006.
** BASED ON AVERAGE SHARES OUTSTANDING.
*** TOTAL INVESTMENT RETURN IS CALCULATED ASSUMING AN INITIAL INVESTMENT MADE
AT THE NET ASSET VALUE AT THE BEGINNING OF THE PERIOD, REINVESTMENT OF ALL
DIVIDENDS AND DISTRIBUTION AT NET ASSET VALUE DURING THE PERIOD, AND
REDEMPTION ON THE LAST DAY OF THE PERIOD. TRANSACTION FEES ARE NOT
REFLECTED IN THE CALCULATION OF TOTAL INVESTMENT RETURN. TOTAL INVESTMENT
RETURN CALCULATED FOR A PERIOD OF LESS THAN ONE YEAR IS NOT ANNUALIZED.
**** ANNUALIZED.
+ PORTFOLIO TURNOVER IS NOT ANNUALIZED AND DOES NOT INCLUDE SECURITIES
RECEIVED OR DELIVERED FROM PROCESSING CREATIONS OR REDEMPTIONS.
[GRAPHIC OMITTED]
80
FINANCIAL HIGHLIGHTS (CONTINUED)
RYDEX S&P SMALLCAP 600 RYDEX S&P SMALLCAP 600
PURE VALUE ETF PURE GROWTH ETF
---------------------------- ----------------------------
FOR THE PERIOD FOR THE PERIOD
MARCH 1, 2006* MARCH 1, 2006*
YEAR ENDED THROUGH YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2007 2006 2007 2006
----------- -------------- ----------- --------------
PER SHARE OPERATING
PERFORMANCE:
NET ASSET VALUE AT
BEGINNING OF PERIOD .......... $ 40.13 $ 38.45 $ 39.10 $ 39.31
----------- -------------- ----------- --------------
Net Investment Income (Loss)** .. 0.74 0.37 -- (0.01)
Net Realized and Unrealized
Gain (Loss) on Investments ... (2.85) 1.62 5.84 (0.20)
----------- -------------- ----------- --------------
TOTAL FROM INVESTMENT
OPERATIONS ................... (2.11) 1.99 5.84 (0.21)
----------- -------------- ----------- --------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net Investment Income ........... (0.62) (0.31) (0.02) --
Capital ......................... (0.02) -- -- --
----------- -------------- ----------- --------------
Total Distributions ............. (0.64) (0.31) (0.02) --
----------- -------------- ----------- --------------
NET ASSET VALUE AT END
OF PERIOD .................... $ 37.38 $ 40.13 $ 44.92 $ 39.10
=========== ============== =========== ==============
TOTAL RETURN*** ................. (5.38)% 5.19% 14.93% (0.55)%
RATIOS/SUPPLEMENTAL DATA:
Net Assets at End of
Period (000's omitted) ....... $ 22,426 $ 6,019 $ 11,229 $ 7,820
RATIO TO AVERAGE NET
ASSETS OF:
Expenses ........................ 0.35% 0.35%**** 0.35% 0.35%****
Net Investment Income ........... 1.78% 1.46%**** 0.00% (0.04)%****
Portfolio Turnover Rate+ ........ 37% 7% 51% 14%
|
* THE FUND COMMENCED OPERATIONS ON MARCH 1, 2006.
** BASED ON AVERAGE SHARES OUTSTANDING.
*** TOTAL INVESTMENT RETURN IS CALCULATED ASSUMING AN INITIAL INVESTMENT MADE
AT THE NET ASSET VALUE AT THE BEGINNING OF THE PERIOD, REINVESTMENT OF ALL
DIVIDENDS AND DISTRIBUTION AT NET ASSET VALUE DURING THE PERIOD, AND
REDEMPTION ON THE LAST DAY OF THE PERIOD. TRANSACTION FEES ARE NOT
REFLECTED IN THE CALCULATION OF TOTAL INVESTMENT RETURN. TOTAL INVESTMENT
RETURN CALCULATED FOR A PERIOD OF LESS THAN ONE YEAR IS NOT ANNUALIZED.
**** ANNUALIZED.
+ PORTFOLIO TURNOVER IS NOT ANNUALIZED AND DOES NOT INCLUDE SECURITIES
RECEIVED OR DELIVERED FROM PROCESSING CREATIONS OR REDEMPTIONS.
[GRAPHIC OMITTED]
PROSPECTUS 81
RYDEX S&P RYDEX S&P
EQUAL WEIGHT EQUAL WEIGHT RYDEX S&P
CONSUMER CONSUMER EQUAL WEIGHT
DISCRETIONARY ETF STAPLES ETF ENERGY ETF
----------------- ----------------- -----------------
FOR THE PERIOD FOR THE PERIOD FOR THE PERIOD
NOVEMBER 1, 2006* NOVEMBER 1, 2006* NOVEMBER 1, 2006*
THROUGH THROUGH THROUGH
OCTOBER 31, 2007 OCTOBER 31, 2007 OCTOBER 31, 2007
----------------- ----------------- -----------------
PER SHARE OPERATING
PERFORMANCE:
NET ASSET VALUE AT
BEGINNING OF PERIOD ............ $ 44.98 $ 48.16 $ 48.35
----------------- ----------------- -----------------
Net Investment Income** ........... 0.32 1.16 0.27
Net Realized and Unrealized
Gain/ (Loss) on Investments** .. (0.49) 4.32 19.14
----------------- ----------------- -----------------
TOTAL FROM INVESTMENT
OPERATIONS ..................... (0.17) 5.48 19.41
----------------- ----------------- -----------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net Investment Income ............. (0.31) (0.96) (0.28)
----------------- ----------------- -----------------
NET ASSET VALUE AT END
OF PERIOD ...................... $ 44.50 $ 52.68 $ 67.48
================= ================= =================
TOTAL RETURN*** ................... (0.40)% 11.45% 40.28%
RATIOS/SUPPLEMENTAL DATA:
Net Assets at End of
Period (000's omitted) ......... $ 28,928 $ 7,902 $ 10,122
RATIO TO AVERAGE NET
ASSETS OF:
Expenses .......................... 0.50% 0.50% 0.50%
Net Investment Income ............. 0.67% 2.29% 0.47%
Portfolio Turnover Rate+ .......... 28% 19% 34%
|
* THE FUND COMMENCED OPERATIONS ON NOVEMBER 1, 2006.
** BASED ON AVERAGE SHARES OUTSTANDING.
*** TOTAL INVESTMENT RETURN IS CALCULATED ASSUMING AN INITIAL INVESTMENT MADE
AT THE NET ASSET VALUE AT THE BEGINNING OF THE PERIOD, REINVESTMENT OF ALL
DIVIDENDS AND DISTRIBUTION AT NET ASSET VALUE DURING THE PERIOD, AND
REDEMPTION ON THE LAST DAY OF THE PERIOD. TRANSACTION FEES ARE NOT
REFLECTED IN THE CALCULATION OF TOTAL INVESTMENT RETURN. TOTAL INVESTMENT
RETURN CALCULATED FOR A PERIOD OF LESS THAN ONE YEAR IS NOT ANNUALIZED.
+ PORTFOLIO TURNOVER IS NOT ANNUALIZED AND DOES NOT INCLUDE SECURITIES
RECEIVED OR DELIVERED FROM PROCESSING CREATIONS OR REDEMPTIONS.
[GRAPHIC OMITTED]
82
FINANCIAL HIGHLIGHTS (CONTINUED)
RYDEX S&P RYDEX S&P RYDEX S&P
EQUAL WEIGHT EQUAL WEIGHT EQUAL WEIGHT
FINANCIALS HEALTH CARE INDUSTRIALS
ETF ETF ETF
----------------- ----------------- -----------------
FOR THE PERIOD FOR THE PERIOD FOR THE PERIOD
NOVEMBER 1, 2006* NOVEMBER 1, 2006* NOVEMBER 1, 2006*
THROUGH THROUGH THROUGH
OCTOBER 31, 2007 OCTOBER 31, 2007 OCTOBER 31, 2007
----------------- ----------------- -----------------
PER SHARE OPERATING
PERFORMANCE:
NET ASSET VALUE AT
BEGINNING OF PERIOD ........................ $ 48.57 $ 49.46 $ 49.15
----------------- ----------------- -----------------
Net Investment Income** ....................... 0.92 0.11 0.56
Net Realized and Unrealized
Gain/ (Loss) on Investments** .............. (1.95) 8.48 10.21
----------------- ----------------- -----------------
TOTAL FROM INVESTMENT
OPERATIONS ................................. (1.03) 8.59 10.77
----------------- ----------------- -----------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net Investment Income ......................... (0.87) (0.11) (0.55)
----------------- ----------------- -----------------
NET ASSET VALUE AT END
OF PERIOD (000'S OMITTED) .................. $ 46.67 $ 57.94 $ 59.37
================= ================= =================
TOTAL RETURN*** ............................... (2.23)% 17.37% 22.00%
RATIOS/SUPPLEMENTAL
DATA:
Net Assets at End of Period
(000's omitted) ............................ $ 7,000 $ 17,383 $ 8,905
RATIO TO AVERAGE NET
ASSETS OF:
Expenses ...................................... 0.50% 0.50% 0.50%
Net Investment Income ......................... 1.84% 0.20% 1.02%
Portfolio Turnover Rate+ ...................... 31% 55% 36%
|
* THE FUND COMMENCED OPERATIONS ON NOVEMBER 1, 2006.
** BASED ON AVERAGE SHARES OUTSTANDING.
*** TOTAL INVESTMENT RETURN IS CALCULATED ASSUMING AN INITIAL INVESTMENT MADE
AT THE NET ASSET VALUE AT THE BEGINNING OF THE PERIOD, REINVESTMENT OF ALL
DIVIDENDS AND DISTRIBUTION AT NET ASSET VALUE DURING THE PERIOD, AND
REDEMPTION ON THE LAST DAY OF THE PERIOD. TRANSACTION FEES ARE NOT
REFLECTED IN THE CALCULATION OF TOTAL INVESTMENT RETURN. TOTAL INVESTMENT
RETURN CALCULATED FOR A PERIOD OF LESS THAN ONE YEAR IS NOT ANNUALIZED.
+ PORTFOLIO TURNOVER IS NOT ANNUALIZED AND DOES NOT INCLUDE SECURITIES
RECEIVED OR DELIVERED FROM PROCESSING CREATIONS OR REDEMPTIONS.
[GRAPHIC OMITTED]
PROSPECTUS 83
RYDEX S&P RYDEX S&P RYDEX S&P
EQUAL WEIGHT EQUAL WEIGHT EQUAL WEIGHT
MATERIALS TECHNOLOGY UTILITIES
ETF ETF ETF
----------------- ----------------- -----------------
FOR THE PERIOD FOR THE PERIOD FOR THE PERIOD
NOVEMBER 1, 2006* NOVEMBER 1, 2006* NOVEMBER 1, 2006*
THROUGH THROUGH THROUGH
OCTOBER 31, 2007 OCTOBER 31, 2007 OCTOBER 31, 2007
----------------- ----------------- -----------------
PER SHARE OPERATING
PERFORMANCE:
NET ASSET VALUE AT
BEGINNING OF PERIOD ........................ $ 48.43 $ 47.80 $ 54.91
----------------- ----------------- -----------------
Net Investment Income** ....................... 0.85 (0.05) 1.55
Net Realized and Unrealized
Gain on Investments** ...................... 10.74 7.43 7.38
----------------- ----------------- -----------------
TOTAL FROM INVESTMENT
OPERATIONS ................................. 11.59 7.38 8.93
----------------- ----------------- -----------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net Investment Income ......................... (0.60) -- (1.56)
----------------- ----------------- -----------------
NET ASSET VALUE AT END
OF PERIOD (000'S OMITTED) .................. $ 59.42 $ 55.18 $ 62.28
================= ================= =================
TOTAL RETURN*** ............................... 24.02% 15.44% 16.41%
RATIOS/SUPPLEMENTAL
DATA:
Net Assets at End of Period
(000's omitted) ............................ $ 8,913 $ 19,312 $ 6,228
RATIO TO AVERAGE NET
ASSETS OF:
Expenses ...................................... 0.50% 0.50% 0.50%
Net Investment Income ......................... 1.53% (0.10)% 2.59%
Portfolio Turnover Rate+ ...................... 31% 60% 20%
|
* THE FUND COMMENCED OPERATIONS ON NOVEMBER 1, 2006.
** BASED ON AVERAGE SHARES OUTSTANDING.
*** TOTAL INVESTMENT RETURN IS CALCULATED ASSUMING AN INITIAL INVESTMENT MADE
AT THE NET ASSET VALUE AT THE BEGINNING OF THE PERIOD, REINVESTMENT OF ALL
DIVIDENDS AND DISTRIBUTION AT NET ASSET VALUE DURING THE PERIOD, AND
REDEMPTION ON THE LAST DAY OF THE PERIOD. TRANSACTION FEES ARE NOT
REFLECTED IN THE CALCULATION OF TOTAL INVESTMENT RETURN. TOTAL INVESTMENT
RETURN CALCULATED FOR A PERIOD OF LESS THAN ONE YEAR IS NOT ANNUALIZED.
+ PORTFOLIO TURNOVER IS NOT ANNUALIZED AND DOES NOT INCLUDE SECURITIES
RECEIVED OR DELIVERED FROM PROCESSING CREATIONS OR REDEMPTIONS.
[GRAPHIC OMITTED]
84
INDEX PUBLISHERS INFORMATION
STANDARD & POOR'S
The Rydex S&P Equal Weight ETF, Rydex S&P Pure Style ETFs, and Rydex S&P Equal
Weight Sector ETFs (the "S&P Funds") are not sponsored, endorsed, sold or
promoted by Standard & Poor's ("S&P") or Citigroup Global Markets Inc.
("Citigroup"). S&P and Citigroup make no representation, condition, warranty,
express or implied, to the owners of the S&P Funds or any member of the public
regarding the advisability of investing in securities generally or in the S&P
Funds particularly or the ability of the S&P Equal Weight Index, S&P
500/Citigroup Pure Value Index, S&P 500/Citigroup Pure Growth Index, S&P MidCap
400/Citigroup Pure Value Index, S&P MidCap 400 Pure Growth Index, S&P SmallCap
600/Citigroup Pure Value Index, S&P SmallCap 600/Citigroup Pure Growth Index,
S&P Equal Weight Index Consumer Discretionary, S&P Equal Weight Index Consumer
Staples, S&P Equal Weight Index Energy, S&P Equal Weight Index Financials, S&P
Equal Weight Index Health Care, S&P Equal Weight Index Industrials, S&P Equal
Weight Index Information Technology, S&P Equal Weight Index Materials and S&P
Equal Weight Index Telecommunication Services & Utilities (the "S&P Indices") to
track general stock market performance. S&P's and Citigroup's only relationship
to Rydex Investments (the "Licensee") is the licensing of certain of their
trademarks and of the S&P Indices which are determined, composed and calculated
by S&P without regard to Licensee or the S&P Funds. S&P and Citigroup have no
obligation to take the needs of Licensee or the owners of the S&P Funds into
consideration in determining, composing or calculating the S&P Indices. Neither
S&P nor Citigroup is responsible for and has not participated in the
determination of the prices and amount of the S&P Funds or the timing of the
issuance or sale of the S&P Funds or in the determination or calculation of the
equation by which the S&P Funds are to be converted into cash. S&P and Citigroup
have no obligation or liability in connection with the administration,
marketing, or trading of the S&P Funds.
S&P and Citigroup do not guarantee the accuracy and/or the completeness of the
S&P Indices or any data included therein and S&P and Citigroup shall have no
liability for any errors, omissions, or interruptions therein. S&P and Citigroup
make no warranty or (condition, express or implied, as to the results to be
obtained by Licensee, owners of the S&P Funds, or any other person or entity
from the use of the S&P Indices or any data included therein. S&P and Citigroup
make no express or implied warranties or conditions, and expressly disclaim all
warranties or conditions of merchantability or fitness for a particular purpose
or use with respect to the S&P Indices or any data included therein. Without
limiting any of the foregoing, in no event shall S&P or Citigroup have
[GRAPHIC OMITTED]
PROSPECTUS 85
any liability for any special, punitive, indirect, or consequential damages
(including lost profits) resulting from the use of the Indexes or any data
included therein, even if notified of the possibility of such damages.
"Standard & Poor's(R)," S&P(R)," "S&P 500(R)," "Standard & Poor's 500," "500,"
"Standard & Poor's MidCap 400," "S&P MidCap 400," Standard & Poor's SmallCap,"
"S&P SmallCap 600," "S&P 500/Citigroup Pure Value," "S&P 500/Citigroup Pure
Growth," "S&P MidCap 400/Citigroup Pure Value," "S&P MidCap 400/Citigroup Pure
Growth," "S&P SmallCap 600/Citigroup Pure Value," and "S&P SmallCap
600/Citigroup Pure Growth" are trademarks of The McGraw-Hill Companies, Inc. and
Citigroup, Inc. and have been licensed for use by Rydex Investments.
FRANK RUSSELL COMPANY ("RUSSELL")
The Rydex Russell Top 50(R) ETF is not sponsored, endorsed, sold or promoted by
Russell. Russell makes no representation or warranty, express or implied, to the
owners of the Rydex Russell Top 50(R) ETF or any member of the public regarding
the advisability of investing in securities generally or in the Rydex Russell
Top 50(R) ETF particularly or the ability of the Russell Top 50(R) Index to
track general stock market performance or a segment of the same. Russell's
publication of the Russell Top 50(R) Index in no way suggests or implies an
opinion by Russell as to the advisability of investment in any or all of the
securities upon which the Russell Top 50(R) Index is based. Russell's only
relationship to Rydex Investments (the "Licensee") is the licensing of certain
trademarks and trade names of Russell and of the Russell Top 50(R) Index which
is determined, composed and calculated by Russell without regard to the Licensee
or the Rydex Russell Top 50(R) ETF. Russell is not responsible for and has not
reviewed the Rydex Russell Top 50(R) ETF nor any associated literature or
publications and Russell makes no representation or warranty express or implied
as to their accuracy or completeness, or otherwise. Russell reserves the right,
at any time and without notice, to alter, amend, terminate or in any way change
the Russell Top 50(R) Index. Russell has no obligation or liability in
connection with the administration, marketing or trading of the Rydex Russell
Top 50(R) ETF.
Russell does not guarantee the accuracy and/or the completeness of the Russell
Top 50(R) Index or any data included therein and Russell shall have no liability
for any errors, omissions, or interruptions therein. Russell makes no warranty,
express or implied, as to results to be obtained by the Licensee, investors,
owners of the Rydex Russell Top 50(R) ETF, or any other person or entity from
the use of the Russell Top 50(R) Index or any data included therein. Russell
makes no express or implied warranties, and expressly disclaims all warranties
of merchantability or fitness for a particular purpose of use with respect to
the Russell
[GRAPHIC OMITTED]
86
Top 50(R) Index or any data included therein. Without limiting any of the
foregoing, in no event shall Russell have any liability for any special,
punitive, indirect, or consequential damages (including lost profits), even if
notified of the possibility of such damages.
"Frank Russell(R)," "Russell(R)," and "Russell 2000(R)" are trademarks of
Russell and have been licensed for use by the Licensee.
MORE INFORMATION ABOUT THE INDEX PUBLISHERS IS LOCATED IN THE SAI.
[GRAPHIC OMITTED]
PROSPECTUS 87
SUPPLEMENTAL INFORMATION
I. PREMIUM/DISCOUNT INFORMATION
The tables that follow present information about the differences between the
daily market price on secondary markets for shares of the Funds and each Fund's
NAV. Net asset value, or "NAV," is the price per share at which a Fund issues
and redeems shares. It is calculated in accordance with the standard formula for
valuing mutual fund shares. The "Market Price" of a Fund generally is determined
using the midpoint between the highest bid and the lowest offer on the Exchange
on which the Fund is listed for trading, as of the time the Fund's NAV is
calculated. A Fund's Market Price may be at, above or below its NAV. The NAV of
a Fund will fluctuate with changes in the market value of its portfolio
holdings. The Market Price of a Fund will fluctuate in accordance with changes
in its NAV, as well as market supply of and demand for shares of the Funds.
Premiums or discounts are the differences (generally expressed as a percentage)
between the NAV and Market Price of a Fund on a given day, generally at the time
NAV is calculated. A premium is the amount that a Fund is trading above the
reported NAV, expressed as a positive percentage of the NAV. A discount is the
amount that a Fund is trading below the reported NAV, expressed as a negative
percentage of the NAV.
The following information shows the frequency distribution of premiums and
discounts for the Funds. The information shown for each Fund is for the year
ended December 31, 2007.
Each line in the table shows the number of trading days in which the Funds
traded within the premium/discount range indicated. The number of trading days
in each premium/discount range is also shown as a percentage of the total number
of trading days in the period covered by the table. All data presented here
represents past performance, which cannot be used to predict future results.
[GRAPHIC OMITTED]
88
PERCENTAGE
NUMBER OF DAYS OF TOTAL DAYS
-----------------------------------------------------------------------------
PREMIUM/ RYDEX S&P RYDEX S&P
DISCOUNT EQUAL WEIGHT RYDEX RUSSELL EQUAL WEIGHT RYDEX RUSSELL
RANGE ETF TOP 50(R) ETF ETF TOP 50(R) ETF
-----------------------------------------------------------------------------
BETWEEN 3.01%
AND 8% 0 0 0.00% 0.00%
BETWEEN 1.01%
AND 3% 0 0 0.00% 0.00%
BETWEEN 0.51%
AND 1% 0 2 0.00% 0.79%
BETWEEN 0.26%
AND 0.5% 9 2 3.57% 0.79%
BETWEEN 0.25%
AND 0% 119 127 47.22% 50.40%
BETWEEN -0.01%
AND -0.25% 117 119 46.43% 47.22%
BETWEEN -0.26%
AND -0.5% 6 1 2.38% 0.40%
BETWEEN -0.51%
AND -1% 1 1 0.40% 0.40%
BETWEEN -1.01%
AND -3% 0 0 0.00% 0.00%
BETWEEN -3.01%
AND -8% 0 0 0.00% 0.00%
-----------------------------------------------------------------------------
TOTAL 252 252 100% 100%
|
[GRAPHIC OMITTED]
PROSPECTUS 89
PERCENTAGE
NUMBER OF DAYS OF TOTAL DAYS
-----------------------------------------------------------------------------
RYDEX RYDEX RYDEX RYDEX
PREMIUM/ S&P 500 S&P 500 S&P 500 S&P 500
DISCOUNT PURE VALUE PURE GROWTH PURE VALUE PURE GROWTH
RANGE ETF ETF ETF ETF
-----------------------------------------------------------------------------
BETWEEN 3.01%
AND 8% 0 0 0.00% 0.00%
BETWEEN 1.01%
AND 3% 3 0 1.19% 0.00%
BETWEEN 0.51%
AND 1% 5 3 1.98% 1.19%
BETWEEN 0.26%
AND 0.5% 13 9 5.16% 3.57%
BETWEEN 0.25%
AND 0% 92 116 36.51% 46.04%
BETWEEN -0.01%
AND -0.25% 123 104 48.81% 41.27%
BETWEEN -0.26%
AND -0.5% 14 16 5.56% 6.35%
BETWEEN -0.51%
AND -1% 2 2 0.79% 0.79%
BETWEEN -1.01%
AND -3% 0 2 0.00% 0.79%
BETWEEN -3.01%
AND -8% 0 0 0.00% 0.00%
-----------------------------------------------------------------------------
TOTAL 252 252 100% 100%
|
90
PERCENTAGE
NUMBER OF DAYS OF TOTAL DAYS
-----------------------------------------------------------------------------
RYDEX S&P RYDEX S&P RYDEX S&P RYDEX S&P
PREMIUM/ MIDCAP 400 MIDCAP 400 MIDCAP 400 MIDCAP 400
DISCOUNT PURE VALUE PURE GROWTH PURE VALUE PURE GROWTH
RANGE ETF ETF ETF ETF
-----------------------------------------------------------------------------
BETWEEN 3.01%
AND 8% 0 0 0.00% 0.00%
BETWEEN 1.01%
AND 3% 1 4 0.40% 1.59%
BETWEEN 0.51%
AND 1% 3 13 1.19% 5.16%
BETWEEN 0.26%
AND 0.5% 22 24 8.73% 9.52%
BETWEEN 0.25%
AND 0% 118 115 46.83% 45.63%
BETWEEN -0.01%
AND -0.25% 95 70 37.68% 27.78%
BETWEEN -0.26%
AND -0.5% 11 9 4.37% 3.57%
BETWEEN -0.51%
AND -1% 1 11 0.40% 4.37%
BETWEEN -1.01%
AND -3% 1 6 0.40% 2.38%
BETWEEN -3.01%
AND -8% 0 0 0.00% 0.00%
-----------------------------------------------------------------------------
TOTAL 252 252 100% 100%
|
[GRAPHIC OMITTED]
PROSPECTUS 91
|
PERCENTAGE
NUMBER OF DAYS OF TOTAL DAYS
-----------------------------------------------------------------------------------------
RYDEX S&P RYDEX S&P RYDEX S&P RYDEX S&P
PREMIUM/ SMALLCAP 600 SMALLCAP 600 SMALLCAP 600 SMALLCAP 600
DISCOUNT PURE VALUE PURE GROWTH PURE VALUE PURE GROWTH
RANGE ETF ETF ETF ETF
-----------------------------------------------------------------------------------------
BETWEEN 3.01%
AND 8% 0 0 0.00% 0.00%
BETWEEN 1.01%
AND 3% 3 9 1.19% 3.57%
BETWEEN 0.51%
AND 1% 13 19 5.16% 7.54%
BETWEEN 0.26%
AND 0.5% 18 33 7.14% 13.10%
BETWEEN 0.25%
AND 0% 100 89 39.68% 35.32%
BETWEEN -0.01%
AND -0.25% 89 53 35.32% 21.02%
BETWEEN -0.26%
AND -0.5% 21 13 8.33% 5.16%
BETWEEN -0.51%
AND -1% 7 20 2.78% 7.94%
BETWEEN -1.01%
AND -3% 0 14 0.00% 5.56%
BETWEEN -3.01%
AND -8% 1 2 0.40% 0.79%
-----------------------------------------------------------------------------------------
TOTAL 252 252 100% 100%
|
[GRAPHIC OMITTED]
92
PERCENTAGE
NUMBER OF DAYS OF TOTAL DAYS
------------------------------------------------------------------------------------------
RYDEX S&P RYDEX S&P RYDEX S&P RYDEX S&P
EQUAL WEIGHT EQUAL WEIGHT EQUAL WEIGHT EQUAL WEIGHT
PREMIUM/ CONSUMER CONSUMER CONSUMER CONSUMER
DISCOUNT DISCRETIONARY STAPLES DISCRETIONARY STAPLES
RANGE ETF ETF ETF ETF
------------------------------------------------------------------------------------------
BETWEEN 3.01%
AND 8% 0 0 0.00% 0.00%
BETWEEN 1.01%
AND 3% 1 10 0.40% 3.97%
BETWEEN 0.51%
AND 1% 2 24 0.79% 9.52%
BETWEEN 0.26%
AND 0.5% 13 27 5.16% 10.71%
BETWEEN 0.25%
AND 0% 120 72 47.62% 28.57%
BETWEEN -0.01%
AND -0.25% 101 75 40.07% 29.77%
BETWEEN -0.26%
AND -0.5% 6 27 2.38% 10.71%
BETWEEN -0.51%
AND -1% 7 11 2.78% 4.37%
BETWEEN -1.01%
AND -3% 1 6 0.40% 2.38%
BETWEEN -3.01%
AND -8% 1 0 0.40% 0.00%
------------------------------------------------------------------------------------------
TOTAL 252 252 100% 100%
|
[GRAPHIC OMITTED]
PROSPECTUS 93
PERCENTAGE
NUMBER OF DAYS OF TOTAL DAYS
------------------------------------------------------------------------------------------
RYDEX S&P RYDEX S&P RYDEX S&P RYDEX S&P
PREMIUM/ EQUAL WEIGHT EQUAL WEIGHT EQUAL WEIGHT EQUAL WEIGHT
DISCOUNT ENERGY FINANCIALS ENERGY FINANCIALS
RANGE ETF ETF ETF ETF
------------------------------------------------------------------------------------------
BETWEEN 3.01%
AND 8% 0 0 0.00% 0.00%
BETWEEN 1.01%
AND 3% 11 18 4.37% 7.14%
BETWEEN 0.51%
AND 1% 15 31 5.95% 12.30%
BETWEEN 0.26%
AND 0.5% 22 21 8.73% 8.33%
BETWEEN 0.25%
AND 0% 97 69 38.49% 27.38%
BETWEEN -0.01%
AND -0.25% 70 58 27.78% 23.02%
BETWEEN -0.26%
AND -0.5% 23 10 9.13% 3.97%
BETWEEN -0.51%
AND -1% 9 23 3.57% 9.13%
BETWEEN -1.01%
AND -3% 5 16 1.98% 6.35%
BETWEEN -3.01%
AND -8% 0 6 0.00% 2.38%
------------------------------------------------------------------------------------------
TOTAL 252 252 100% 100%
|
[GRAPHIC OMITTED]
94
PERCENTAGE
NUMBER OF DAYS OF TOTAL DAYS
-------------------------------------------------------------------------------------------
RYDEX S&P RYDEX S&P RYDEX S&P RYDEX S&P
PREMIUM/ EQUAL WEIGHT EQUAL WEIGHT EQUAL WEIGHT EQUAL WEIGHT
DISCOUNT HEALTH CARE INDUSTRIALS HEALTH CARE INDUSTRIALS
RANGE ETF ETF ETF ETF
-------------------------------------------------------------------------------------------
BETWEEN 3.01%
AND 8% 0 0 0.00% 0.00%
BETWEEN 1.01%
AND 3% 6 6 2.38% 2.38%
BETWEEN 0.51%
AND 1% 10 14 3.97% 5.56%
BETWEEN 0.26%
AND 0.5% 18 29 7.14% 11.51%
BETWEEN 0.25%
AND 0% 104 90 41.27% 35.71%
BETWEEN -0.01%
AND -0.25% 85 66 33.73% 26.19%
BETWEEN -0.26%
AND -0.5% 17 18 6.75% 7.14%
BETWEEN -0.51%
AND -1% 9 15 3.57% 5.95%
BETWEEN -1.01%
AND -3% 3 14 1.19% 5.56%
BETWEEN -3.01%
AND -8% 0 0 0.00% 0.00%
-------------------------------------------------------------------------------------------
TOTAL 252 252 100% 100%
|
[GRAPHIC OMITTED]
PROSPECTUS 95
PERCENTAGE
NUMBER OF DAYS OF TOTAL DAYS
-------------------------------------------------------------------------------------
RYDEX S&P RYDEX S&P RYDEX S&P RYDEX S&P
PREMIUM/ EQUAL WEIGHT EQUAL WEIGHT EQUAL WEIGHT EQUAL WEIGHT
DISCOUNT MATERIALS TECHNOLOGY MATERIALS TECHNOLOGY
RANGE ETF ETF ETF ETF
-------------------------------------------------------------------------------------
BETWEEN 3.01%
AND 8% 2 0 0.79% 0.00%
BETWEEN 1.01%
AND 3% 13 5 5.16% 1.98%
BETWEEN 0.51%
AND 1% 20 26 7.94% 10.32%
BETWEEN 0.26%
AND 0.5% 18 28 7.14% 11.11%
BETWEEN 0.25%
AND 0% 98 72 38.89% 28.57%
BETWEEN -0.01%
AND -0.25% 69 79 27.38% 31.35%
BETWEEN -0.26%
AND -0.5% 15 21 5.95% 8.33%
BETWEEN -0.51%
AND -1% 5 14 1.98% 5.56%
BETWEEN -1.01%
AND -3% 11 7 4.37% 2.78%
BETWEEN -3.01%
AND -8% 1 0 0.40% 0.00%
-------------------------------------------------------------------------------------
TOTAL 252 252 100% 100%
|
[GRAPHIC OMITTED]
96
PERCENTAGE
NUMBER OF DAYS OF TOTAL DAYS
--------------------------------------------------------------------------
PREMIUM/ RYDEX S&P EQUAL WEIGHT RYDEX S&P EQUAL WEIGHT
DISCOUNT RANGE UTILITIES ETF UTILITIES ETF
--------------------------------------------------------------------------
BETWEEN 3.01% AND 8% 0 0.00%
BETWEEN 1.01% AND 3% 9 3.57%
BETWEEN 0.51% AND 1% 27 10.71%
BETWEEN 0.26% AND 0.5% 27 10.71%
BETWEEN 0.25% AND 0% 71 28.19%
BETWEEN -0.01% AND -0.25% 69 27.38%
BETWEEN -0.26% AND -0.5% 27 10.71%
BETWEEN -0.51% AND -1% 16 6.35%
BETWEEN -1.01% AND -3% 6 2.38%
BETWEEN -3.01% AND -8% 0 0.00%
--------------------------------------------------------------------------
TOTAL 252 100%
|
II. TOTAL RETURN INFORMATION
The following tables present information about the total return of each Fund's
Underlying Index and the total return of each Fund. The information presented
for the Funds is for the period ended October 31, 2007.
"Average Annual Total Returns" represent the average annual change in value of
an investment over the period indicated. "Cumulative Total Returns" represent
the total change in value of an investment over the periods indicated.
Each Fund's per share net asset value or "NAV" is the value of one share of a
Fund as calculated in accordance with the standard formula for valuing mutual
fund shares. The NAV return is based on the NAV of each Fund, and the market
return is based on the Market Price per share of each Fund. The price used to
calculate Market Price is determined by using the midpoint between the highest
bid and the lowest offer on the stock exchange on which the shares of the Fund
are listed for trading, as of the time that the Fund's NAV is calculated. Since
a Fund's shares typically do not trade in the secondary market until several
days after a Fund's inception, for the period from inception to the first day of
secondary market trading in Fund shares, the NAV of the Fund is used as a proxy
for secondary market trading price to calculate market returns. Market and NAV
returns assume that dividends and capital gain distributions have been
reinvested in each Fund at Market Price and NAV, respectively.
An index is a statistical composite that tracks a specified financial market or
sector. Unlike each Fund, the Underlying Index does not actually hold a
portfolio of securities and therefore does not incur the expenses incurred by
the Fund. These expenses negatively impact the performance of each Fund. Also,
[GRAPHIC OMITTED]
PROSPECTUS 97
market returns do not include brokerage commissions that may be payable on
secondary market transactions. If brokerage commissions were included, market
returns would be lower. The returns shown in the table below do not reflect the
deduction of taxes that a shareholder would pay on Fund distributions or the
redemption or sale of Fund shares. The investment return and principal value of
shares of each Fund will vary with changes in market conditions. Shares of each
Fund may be worth more or less than their original cost when they are redeemed
or sold in the market. Each Fund's past performance is no guarantee of future
results.
RYDEX S&P EQUAL WEIGHT ETF 1
CUMULATIVE
AVERAGE ANNUAL TOTAL RETURNS TOTAL RETURNS
----------------------------------------------------------------------------------
YEAR ENDED INCEPTION INCEPTION
10/31/07 TO 10/31/07 TO 10/31/07
----------------------------------------------------------------------------------
S&P S&P S&P
Equal Equal Equal
Weight Weight Weight
NAV Market Index NAV Market Index NAV Market Index
----------------------------------------------------------------------------------
11.23% 10.98% 11.69% 17.89% 17.84% 18.37% 110.43% 110.10% 114.37%
----------------------------------------------------------------------------------
|
RYDEX RUSSELL TOP 50(R) ETF 2
CUMULATIVE
AVERAGE ANNUAL TOTAL RETURNS TOTAL RETURNS
----------------------------------------------------------------------------------------
YEAR ENDED INCEPTION INCEPTION
10/31/07 TO 10/31/07 TO 10/31/07
----------------------------------------------------------------------------------------
Russell Russell Russell
NAV Market Top 50(R) NAV Market Top 50(R) NAV Market Top 50(R)
----------------------------------------------------------------------------------------
13.96% 13.92% 14.29% 12.08% 12.01% 12.37% 32.87% 32.73% 33.74%
----------------------------------------------------------------------------------------
|
1 TOTAL RETURNS FOR THE PERIOD SINCE INCEPTION ARE CALCULATED FROM THE
INCEPTION DATE OF THE RYDEX S&P EQUAL WEIGHT ETF (APRIL 24, 2003).
2 TOTAL RETURNS FOR THE PERIOD SINCE INCEPTION ARE CALCULATED FROM THE
INCEPTION DATE OF THE RYDEX RUSSELL TOP 50(R) ETF (MAY 4, 2005).
[GRAPHIC OMITTED]
98
RYDEX S&P 500 PURE VALUE ETF 3
CUMULATIVE
AVERAGE ANNUAL TOTAL RETURNS TOTAL RETURNS
---------------------------------------------------------------------------------------
YEAR ENDED INCEPTION INCEPTION
10/31/07 TO 10/31/07 TO 10/31/07
---------------------------------------------------------------------------------------
S&P S&P S&P
500/ 500/ 500/
Citigroup Citigroup Citigroup
Pure Pure Pure
Value Value Value
NAV Market Index NAV Market Index NAV Market Index
--------------------------------------------------------------------------------------
7.79% 7.43% 8.19% 10.92% 10.72% 11.32% 18.88% 18.55% 19.59%
--------------------------------------------------------------------------------------
|
RYDEX S&P 500 PURE GROWTH ETF 4
CUMULATIVE
AVERAGE ANNUAL TOTAL RETURNS TOTAL RETURNS
----------------------------------------------------------------------------------------
YEAR ENDED INCEPTION INCEPTION
10/31/07 TO 10/31/07 TO 10/31/07
----------------------------------------------------------------------------------------
S&P S&P S&P
500/ 500/ 500/
Citigroup Citigroup Citigroup
Pure Pure Pure
Growth Growth Growth
NAV Market Index NAV Market Index NAV Market Index
----------------------------------------------------------------------------------------
12.79% 12.86% 13.21% 9.26% 9.10% 9.68% 15.93% 15.66% 16.68%
----------------------------------------------------------------------------------------
|
RYDEX S&P MIDCAP 400 PURE VALUE ETF 5
CUMULATIVE
AVERAGE ANNUAL TOTAL RETURNS TOTAL RETURNS
---------------------------------------------------------------------------------------
YEAR ENDED INCEPTION INCEPTION
10/31/07 TO 10/31/07 TO 10/31/07
---------------------------------------------------------------------------------------
S&P S&P S&P
MidCap MidCap MidCap
400/ 400/ 400/
Citigroup Citigroup Citigroup
Pure Pure Pure
Value Value Value
NAV Market Index NAV Market Index NAV Market Index
---------------------------------------------------------------------------------------
9.94% 9.75% 10.32% 9.90% 9.71% 10.31% 17.06% 16.74% 17.78%
---------------------------------------------------------------------------------------
|
3 TOTAL RETURNS FOR THE PERIOD SINCE INCEPTION ARE CALCULATED FROM THE
INCEPTION DATE OF THE RYDEX S&P 500 PURE VALUE ETF (MARCH 1, 2006).
4 TOTAL RETURNS FOR THE PERIOD SINCE INCEPTION ARE CALCULATED FROM THE
INCEPTION DATE OF THE RYDEX S&P 500 PURE GROWTH ETF (MARCH 1, 2006).
5 TOTAL RETURNS FOR THE PERIOD SINCE INCEPTION ARE CALCULATED FROM THE
INCEPTION DATE OF THE RYDEX S&P MIDCAP 400 PURE VALUE ETF (MARCH 1, 2006).
[GRAPHIC OMITTED]
PROSPECTUS 99
RYDEX S&P MIDCAP 400 PURE GROWTH ETF 6
--------------------------------------------------------------------------------
CUMULATIVE
AVERAGE ANNUAL TOTAL RETURNS TOTAL RETURNS
--------------------------------------------------------------------------------
YEAR ENDED INCEPTION INCEPTION
10/31/07 TO 10/31/07 TO 10/31/07
--------------------------------------------------------------------------------
S&P S&P S&P
MidCap MidCap MidCap
400/ 400/ 400/
Citigroup Citigroup Citigroup
Pure Pure Pure
Growth Growth Growth
|
NAV Market Index NAV Market Index NAV Market Index
20.17% 20.19% 20.69% 8.42% 8.31% 8.83% 14.45% 14.27% 15.16%
RYDEX S&P SMALLCAP 600 PURE VALUE ETF 7
--------------------------------------------------------------------------------
CUMULATIVE
AVERAGE ANNUAL TOTAL RETURNS TOTAL RETURNS
--------------------------------------------------------------------------------
YEAR ENDED INCEPTION INCEPTION
10/31/07 TO 10/31/07 TO 10/31/07
--------------------------------------------------------------------------------
S&P S&P S&P
SmallCap SmallCap SmallCap
600/ 600/ 600/
Citigroup Citigroup Citigroup
Pure Pure Pure
Value Value Value
NAV Market Index NAV Market Index NAV Market Index
--------------------------------------------------------------------------------
|
-5.38% -5.83% -5.24% -0.28% -0.50% -0.06% -0.47% -0.83% -0.11%
RYDEX S&P SMALLCAP 600 PURE GROWTH ETF 8
--------------------------------------------------------------------------------
CUMULATIVE
AVERAGE ANNUAL TOTAL RETURNS TOTAL RETURNS
--------------------------------------------------------------------------------
YEAR ENDED INCEPTION INCEPTION
10/31/07 TO 10/31/07 TO 10/31/07
--------------------------------------------------------------------------------
S&P S&P S&P
SmallCap SmallCap SmallCap
600/ 600/ 600/
Citigroup Citigroup Citigroup
Pure Pure Pure
Growth Growth Growth
NAV Market Index NAV Market Index NAV Market Index
--------------------------------------------------------------------------------
|
14.93% 13.26% 15.31% 8.35% 7.71% 8.73% 14.32% 13.22% 14.99%
6 TOTAL RETURNS FOR THE PERIOD SINCE INCEPTION ARE CALCULATED FROM THE
INCEPTION DATE OF THE RYDEX S&P MIDCAP 400 PURE GROWTH ETF (MARCH 1,
2006).
7 TOTAL RETURNS FOR THE PERIOD SINCE INCEPTION ARE CALCULATED FROM THE
INCEPTION DATE OF THE RYDEX S&P SMALLCAP 600 PURE VALUE ETF (MARCH 1,
2006).
8 TOTAL RETURNS FOR THE PERIOD SINCE INCEPTION ARE CALCULATED FROM THE
INCEPTION DATE OF THE RYDEX S&P SMALLCAP 600 PURE GROWTH ETF (MARCH 1,
2006).
[GRAPHIC OMITTED]
100
RYDEX S&P EQUAL WEIGHT CONSUMER DISCRETIONARY ETF 9
--------------------------------------------------------------------------------------------------
CUMULATIVE
AVERAGE ANNUAL TOTAL RETURNS TOTAL RETURNS
--------------------------------------------------------------------------------------------------
YEAR ENDED INCEPTION INCEPTION
10/31/07 TO 10/31/07 TO 10/31/07
--------------------------------------------------------------------------------------------------
S&P S&P S&P
Equal Equal Equal
Weight Weight Weight
Index Index Index
Consumer Consumer Consumer
NAV Market Discretionary NAV Market Discretionary NAV Market Discretionary
--------------------------------------------------------------------------------------------------
-0.40% -0.57% 0.27% -0.40% -0.57% 0.27% -0.40% -0.57% 0.27%
--------------------------------------------------------------------------------------------------
|
RYDEX S&P EQUAL WEIGHT CONSUMER STAPLES ETF 10
--------------------------------------------------------------------------------
CUMULATIVE
AVERAGE ANNUAL TOTAL RETURNS TOTAL RETURNS
--------------------------------------------------------------------------------
YEAR ENDED INCEPTION INCEPTION
10/31/07 TO 10/31/07 TO 10/31/07
--------------------------------------------------------------------------------
S&P S&P S&P
Equal Equal Equal
Weight Weight Weight
Index Index Index
Consumer Consumer Consumer
NAV Market Staples NAV Market Staples NAV Market Staples
--------------------------------------------------------------------------------
11.45% 11.39% 12.51% 11.45% 1.39% 12.51% 11.45% 11.39% 12.51%
--------------------------------------------------------------------------------
RYDEX S&P EQUAL WEIGHT ENERGY ETF 11
--------------------------------------------------------------------------------
CUMULATIVE
AVERAGE ANNUAL TOTAL RETURNS TOTAL RETURNS
--------------------------------------------------------------------------------
YEAR ENDED INCEPTION INCEPTION
10/31/07 TO 10/31/07 TO 10/31/07
--------------------------------------------------------------------------------
S&P S&P S&P
Equal Equal Equal
Weight Weight Weight
Index Index Index
|
NAV Market Energy NAV Market Energy NAV Market Energy
40.28% 39.93% 41.12% 40.28% 39.93% 41.12% 40.28% 39.93% 41.12%
9 TOTAL RETURNS FOR THE PERIOD SINCE INCEPTION ARE CALCULATED FROM THE
INCEPTION DATE OF THE RYDEX S&P EQUAL WEIGHT CONSUMER DISCRETIONARY ETF
(NOVEMBER 1, 2006).
10 TOTAL RETURNS FOR THE PERIOD SINCE INCEPTION ARE CALCULATED FROM THE
INCEPTION DATE OF THE RYDEX S&P EQUAL WEIGHT CONSUMER STAPLES ETF
(NOVEMBER 1, 2006).
11 TOTAL RETURNS FOR THE PERIOD SINCE INCEPTION ARE CALCULATED FROM THE
INCEPTION DATE OF THE RYDEX S&P EQUAL WEIGHT ENERGY ETF (NOVEMBER 1,
2006).
[GRAPHIC OMITTED]
PROSPECTUS 101
RYDEX S&P EQUAL WEIGHT FINANCIALS ETF 12
---------------------------------------------------------------------------------------------
CUMULATIVE
AVERAGE ANNUAL TOTAL RETURNS TOTAL RETURNS
---------------------------------------------------------------------------------------------
YEAR ENDED INCEPTION INCEPTION
10/31/07 TO 10/31/07 TO 10/31/07
---------------------------------------------------------------------------------------------
S&P S&P S&P
Equal Equal Equal
Weight Weight Weight
Index Index Index
NAV Market Financials NAV Market Financials NAV Market Financials
---------------------------------------------------------------------------------------------
-2.23% -2.75% -1.71% -2.23% -2.75% -1.71% -2.23% -2.75% -1.71%
---------------------------------------------------------------------------------------------
|
RYDEX S&P EQUAL WEIGHT HEALTH CARE ETF 13
---------------------------------------------------------------------------------------------
CUMULATIVE
AVERAGE ANNUAL TOTAL RETURNS TOTAL RETURNS
---------------------------------------------------------------------------------------------
YEAR ENDED INCEPTION INCEPTION
10/31/07 TO 10/31/07 TO 10/31/07
---------------------------------------------------------------------------------------------
S&P S&P S&P
Equal Equal Equal
Weight Weight Weight
Index Index Index
NAV Market Health Care NAV Market Health Care NAV Market Health Care
---------------------------------------------------------------------------------------------
17.37% 15.76% 18.22% 17.37% 15.76% 18.22% 17.37% 15.76% 18.22%
---------------------------------------------------------------------------------------------
|
RYDEX S&P EQUAL WEIGHT INDUSTRIALS ETF 14
---------------------------------------------------------------------------------------------
CUMULATIVE
AVERAGE ANNUAL TOTAL RETURNS TOTAL RETURNS
---------------------------------------------------------------------------------------------
YEAR ENDED INCEPTION INCEPTION
10/31/07 TO 10/31/07 TO 10/31/07
---------------------------------------------------------------------------------------------
S&P S&P S&P
Equal Equal Equal
Weight Weight Weight
Index Index Index
NAV Market Industrials NAV Market Industrials NAV Market Industrials
---------------------------------------------------------------------------------------------
22.00% 22.04% 22.52% 22.00% 22.04% 22.52% 22.00% 22.04% 22.52%
---------------------------------------------------------------------------------------------
|
12 TOTAL RETURNS FOR THE PERIOD SINCE INCEPTION ARE CALCULATED FROM THE
INCEPTION DATE OF THE RYDEX S&P EQUAL WEIGHT FINANCIALS ETF (NOVEMBER 1,
2006).
13 TOTAL RETURNS FOR THE PERIOD SINCE INCEPTION ARE CALCULATED FROM THE
INCEPTION DATE OF THE RYDEX S&P EQUAL WEIGHT HEALTH CARE ETF (NOVEMBER 1,
2006).
14 TOTAL RETURNS FOR THE PERIOD SINCE INCEPTION ARE CALCULATED FROM THE
INCEPTION DATE OF THE RYDEX S&P EQUAL WEIGHT INDUSTRIALS ETF (NOVEMBER 1,
2006).
[GRAPHIC OMITTED]
102
RYDEX S&P EQUAL WEIGHT MATERIALS ETF 15
------------------------------------------------------------------------------------------
CUMULATIVE
AVERAGE ANNUAL TOTAL RETURNS TOTAL RETURNS
------------------------------------------------------------------------------------------
YEAR ENDED INCEPTION INCEPTION
10/31/07 TO 10/31/07 TO 10/31/07
------------------------------------------------------------------------------------------
S&P S&P S&P
Equal Equal Equal
Weight Weight Weight
Index Index Index
NAV Market Materials NAV Market Materials NAV Market Materials
------------------------------------------------------------------------------------------
24.02% 22.93% 25.24% 24.02% 22.93% 25.24% 24.02% 22.93% 25.24%
------------------------------------------------------------------------------------------
|
RYDEX S&P EQUAL WEIGHT TECHNOLOGY ETF 16
------------------------------------------------------------------------------------------
CUMULATIVE
AVERAGE ANNUAL TOTAL RETURNS TOTAL RETURNS
------------------------------------------------------------------------------------------
YEAR ENDED INCEPTION INCEPTION
10/31/07 TO 10/31/07 TO 10/31/07
------------------------------------------------------------------------------------------
S&P S&P S&P
Equal Equal Equal
Weight Weight Weight
Index Index Index
NAV Market Technology NAV Market Technology NAV Market Technology
------------------------------------------------------------------------------------------
15.44% 15.51% 16.01% 15.44% 15.51% 16.01% 15.44% 15.51% 16.01%
------------------------------------------------------------------------------------------
|
RYDEX S&P EQUAL WEIGHT UTILITIES ETF 17
------------------------------------------------------------------------------------------
CUMULATIVE
AVERAGE ANNUAL TOTAL RETURNS TOTAL RETURNS
------------------------------------------------------------------------------------------
YEAR ENDED INCEPTION INCEPTION
10/31/07 TO 10/31/07 TO 10/31/07
------------------------------------------------------------------------------------------
S&P S&P S&P
Equal Equal Equal
Weight Weight Weight
Index Index Index
NAV Market Utilities NAV Market Utilities NAV Market Utilities
------------------------------------------------------------------------------------------
16.41% 16.46% 17.01% 16.41% 16.46% 17.01% 16.41% 16.46% 17.01%
------------------------------------------------------------------------------------------
|
15 TOTAL RETURNS FOR THE PERIOD SINCE INCEPTION ARE CALCULATED FROM THE
INCEPTION DATE OF THE RYDEX S&P EQUAL WEIGHT MATERIALS ETF (NOVEMBER 1,
2006).
16 TOTAL RETURNS FOR THE PERIOD SINCE INCEPTION ARE CALCULATED FROM THE
INCEPTION DATE OF THE RYDEX S&P EQUAL WEIGHT TECHNOLOGY ETF (NOVEMBER 1,
2006).
17 TOTAL RETURNS FOR THE PERIOD SINCE INCEPTION ARE CALCULATED FROM THE
INCEPTION DATE OF THE RYDEX S&P EQUAL WEIGHT UTILITIES ETF (NOVEMBER 1,
2006).
[GRAPHIC OMITTED]
PROSPECTUS 103
ADDITIONAL INFORMATION
ADDITIONAL AND MORE DETAILED INFORMATION ABOUT THE FUNDS IS INCLUDED IN THE SAI
DATED MARCH 1, 2008. THE SAI HAS BEEN FILED WITH THE SEC AND IS INCORPORATED BY
REFERENCE INTO THIS PROSPECTUS AND, THEREFORE, LEGALLY FORMS A PART OF THIS
PROSPECTUS. THE SEC MAINTAINS THE EDGAR DATABASE ON ITS WEB SITE
("HTTP://WWW.SEC.GOV") THAT CONTAINS THE SAI, MATERIAL INCORPORATED BY
REFERENCE, AND OTHER INFORMATION REGARDING REGISTRANTS THAT FILE ELECTRONICALLY
WITH THE SEC. YOU MAY ALSO REVIEW AND COPY DOCUMENTS AT THE SEC PUBLIC REFERENCE
ROOM IN WASHINGTON, D.C. (FOR INFORMATION ON THE OPERATION OF THE PUBLIC
REFERENCE ROOM, CALL 202.551.8090). YOU MAY REQUEST DOCUMENTS FROM THE SEC BY
MAIL, UPON PAYMENT OF A DUPLICATION FEE, BY WRITING TO: U.S. SECURITIES AND
EXCHANGE COMMISSION, PUBLIC REFERENCE SECTION, WASHINGTON, D.C. 20549-0102 OR BY
EMAILING THE SEC AT THE FOLLOWING ADDRESS: PUBLICINFO@SEC.GOV.
YOU MAY OBTAIN A COPY OF THE SAI OR THE ANNUAL OR SEMI-ANNUAL REPORTS, WITHOUT
CHARGE BY CALLING 800.820.0888 OR 301.296.5100, VISITING THE RYDEX WEB SITE AT
WWW.RYDEXINVESTMENTS.COM, OR WRITING TO RYDEX ETF TRUST, AT 9601 BLACKWELL ROAD,
SUITE 500, ROCKVILLE, MARYLAND 20850. ADDITIONAL INFORMATION ABOUT THE FUNDS'
INVESTMENTS IS AVAILABLE IN THE ANNUAL AND SEMI-ANNUAL REPORTS. ALSO, IN THE
FUNDS' ANNUAL REPORT, YOU WILL FIND A DISCUSSION OF THE MARKET CONDITIONS AND
INVESTMENT STRATEGIES THAT SIGNIFICANTLY AFFECTED THE FUNDS' PERFORMANCE DURING
THEIR LAST FISCAL YEAR.
NO ONE HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS OR IN THE FUNDS' SAI IN
CONNECTION WITH THE OFFERING OF FUND SHARES. DO NOT RELY ON ANY SUCH INFORMATION
OR REPRESENTATIONS AS HAVING BEEN AUTHORIZED BY THE FUNDS OR RYDEX INVESTMENTS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUNDS IN ANY JURISDICTION
WHERE SUCH AN OFFERING IS NOT LAWFUL.
THE TRUST'S SEC REGISTRATION NUMBER IS 811-21261.
[GRAPHIC OMITTED]
[LOGO] RYDEXINVESTMENTS
ESSENTIAL FOR MODERN MARKETS(R)
9601 Blackwell Road o Suite 500 o Rockville, MD 20850
800.820.0888 o www.rydexinvestments.com
ETF-PRO-0307x0308
[GRAPHIC OMITTED]
RYDEX ETF TRUST
MARCH 1, 2008
RYDEX 2X S&P 500 ETF
RYDEX INVERSE 2X S&P 500 ETF
RYDEX 2X S&P MIDCAP 400 ETF
RYDEX INVERSE 2X S&P MIDCAP 400 ETF
RYDEX 2X RUSSELL 2000(R) ETF
RYDEX INVERSE 2X RUSSELL 2000(R) ETF
[LOGO] RYDEXINVESTMENTS
ESSENTIAL FOR MODERN MARKETS(R)
The U.S. Securities and Exchange Commission has not approved or disapproved the
Trust's shares or passed upon the accuracy or adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
[GRAPHIC OMITTED]
ii
TABLE OF CONTENTS
RYDEX ETF TRUST OVERVIEW ................................................. 1
RYDEX 2X S&P 500 ETF .................................................. 2
RYDEX INVERSE 2X S&P 500 ETF .......................................... 3
RYDEX 2X S&P MIDCAP 400 ETF ........................................... 4
RYDEX INVERSE 2X S&P MIDCAP 400 ETF ................................... 5
RYDEX 2X RUSSELL 2000(R) ETF .......................................... 6
RYDEX INVERSE 2X RUSSELL 2000(R) ETF .................................. 7
PRINCIPAL RISKS OF INVESTING IN THE FUNDS ................................ 8
DESCRIPTIONS OF PRINCIPAL RISKS .......................................... 10
FUND PERFORMANCE ......................................................... 15
FUND FEES AND EXPENSES ................................................... 16
MORE INFORMATION ABOUT THE FUNDS ......................................... 21
BENCHMARKS AND INVESTMENT METHODOLOGY .................................... 21
SHAREHOLDER INFORMATION .................................................. 27
DISTRIBUTION PLAN ........................................................ 31
DIVIDENDS AND DISTRIBUTIONS .............................................. 31
TAX INFORMATION .......................................................... 31
MANAGEMENT OF THE FUNDS .................................................. 33
INDEX PUBLISHERS INFORMATION ............................................. 36
SUPPLEMENTAL INFORMATION ................................................. 38
ADDITIONAL INFORMATION ................................................... 42
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PROSPECTUS 1
RYDEX ETF TRUST
9601 BLACKWELL ROAD, SUITE 500, ROCKVILLE, MARYLAND 20850
800.820.0888 o 301.296.5100 o WWW.RYDEXINVESTMENTS.COM
Rydex ETF Trust (the "Trust") is an investment company offering a number of
professionally managed investment portfolios. This Prospectus describes the
Rydex 2x S&P 500 ETF, Rydex 2x S&P MidCap 400 ETF, and Rydex 2 Russell 2000(R)
ETF (each a "Leveraged Fund," and collectively, the "Leveraged Funds") and the
Rydex Inverse 2x S&P 500 ETF, Rydex Inverse 2x S&P MidCap 400 ETF, and Rydex
Inverse 2x Russell 2000(R) ETF (each an "Inverse Fund" and collectively, the
"Inverse Funds" and together with thE Leveraged Funds, the "Funds").
The shares of the Funds are listed for trading on the American Stock Exchange
(the "Exchange"). Market prices for a Fund's shares may be different from its
net asset value per share ("NAV"). The Funds issue and redeem shares on a
continuous basis at NAV only in blocks of 50,000 shares, or multiples thereof,
called a "Creation Unit." Creation Units of a Leveraged Fund are issued and
redeemed principally in-kind for securities included in the Fund's underlying
index. Creation Units of an Inverse Fund are issued and redeemed for cash. As a
practical matter, only institutions or large investors purchase or redeem
Creation Units. Once created, shares of a Fund generally trade in the secondary
market in amounts less than a Creation Unit. For a more detailed discussion, see
the "Creations and Redemptions" section herein. EXCEPT WHEN AGGREGATED IN
CREATION UNITS, SHARES OF EACH FUND ARE NOT REDEEMABLE SECURITIES.
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2
RYDEX 2X S&P 500 ETF (RSU)
FUND OBJECTIVE
The Rydex 2x S&P 500 ETF seeks to provide investment results that match the
performance of a specific benchmark, before fees and expenses, on a daily basis.
The Fund's current benchmark is 200% of the performance of the S&P 500 Index
(the "Underlying Index"). The Fund's investment objective is non-fundamental and
may be changed without shareholder approval.
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase on a daily basis by 200% of the value of any increase in the Underlying
Index. When the value of the Underlying Index declines, the value of the Fund's
shares should also decrease on a daily basis by 200% of the value of any
decrease in the Underlying Index (E.G., if the value of the Underlying Index
goes down by 5%, the value of the Fund's shares should go down by 10% on that
day). For more information about the effects of leverage, please see
"Understanding Compounding and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Rydex 2x S&P 500 ETF employs as its investment strategy a program of
investing in equity securities contained in the Underlying Index and leveraged
derivative instruments, such as equity index swaps, futures contracts, and
options on securities, futures contracts, and stock indices. Equity index swaps
and futures and options contracts enable the Fund to create the additional
needed exposure to pursue its objective. On a day-to-day basis, the Fund holds
U.S. Government securities or cash equivalents to collateralize its derivative
positions. The Fund will purchase equity securities that are generally within
the capitalization range of the S&P 500 Index at the time of purchase, but may
purchase equity securities of any capitalization range.
PRINCIPAL RISKS
The Rydex 2x S&P 500 ETF is subject to a number of risks that may affect the
value of its shares, including:
o Derivatives Risk
o Early Closing Risk
o Large-Capitalization Securities Risk
o Leveraging Risk
o Liquidity Risk
o Market Risk
o Non-Diversification Risk
o Swap Counterparty Credit Risk
o Tracking Error Risk
o Trading Risk
Please see "Descriptions of Principal Risks" on page 10 for a discussion of each
of the principal risks that apply to the Fund.
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PROSPECTUS 3
RYDEX INVERSE 2X S&P 500 ETF (RSW)
FUND OBJECTIVE
The Rydex Inverse 2x S&P 500 ETF seeks to provide investment results that match
the performance of a specific benchmark, before fees and expenses, on a daily
basis. The Fund's current benchmark is 200% of the inverse (opposite) of the
performance of the S&P 500 Index (the "Underlying Index"). The Fund's investment
objective is non-fundamental and may be changed without shareholder approval.
If the Rydex Inverse 2x S&P 500 ETF meets its objectives, the value of the
Fund's shares will tend to increase during times when the Underlying Index is
decreasing. When the value of the Underlying Index is increasing, however, the
value of the Fund's shares should decrease on a daily basis by an inversely
proportionate amount (E.G., if the value of the Underlying Index goes up by 5%,
the value of the Fund's shares should go down by 10% on that day). For more
information about the effects of leverage, please see "Understanding Compounding
and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its investment strategy a program of engaging in short sales
of securities and investing in leveraged derivative instruments, such as equity
index swaps, futures contracts, and options on securities, futures contracts,
and stock indices. Equity index swaps, short sales, and futures and options
contracts enable the Fund to pursue its objective without selling short each of
the securities included in the Underlying Index. On a day-to-day basis, the Fund
holds U.S. Government securities or cash equivalents to collateralize its short
sales and derivative positions.
PRINCIPAL RISKS
The Rydex Inverse 2x S&P 500 ETF is subject to a number of risks that may affect
the value of its shares, including:
o Derivatives Risk
o Early Closing Risk
o Large-Capitalization Securities Risk
o Leveraging Risk
o Liquidity Risk
o Market Risk
o Non-Diversification Risk
o Short Sales Risk
o Swap Counterparty Credit Risk
o Tracking Error Risk
o Trading Risk
Please see "Descriptions of Principal Risks" on page 10 for a discussion of each
of the principal risks that apply to the Fund.
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4
RYDEX 2X S&P MIDCAP 400 ETF (RMM)
FUND OBJECTIVE
The Rydex 2x S&P MidCap 400 ETF seeks to provide investment results that match
the performance of a specific benchmark, before fees and expenses, on a daily
basis. The Fund's current benchmark is 200% of the performance of the S&P MidCap
400 Index (the "Underlying Index"). The Fund's investment objective is
non-fundamental and may be changed without shareholder approval.
If the Fund meets its objective, the value of the Fund's shares will tend to
increase on a daily basis by 200% of the value of any increase in the Underlying
Index. When the value of the Underlying Index declines, the value of the Fund's
shares should also decrease on a daily basis by 200% of the value of any
decrease in the Underlying Index (E.G., if the value of the Underlying Index
goes down by 5%, the value of the Fund's shares should go down by 10% on that
day). For more information about the effects of leverage, please see
"Understanding Compounding and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Rydex 2x S&P MidCap 400 ETF employs as its investment strategy a program of
investing in equity securities contained in the Underlying Index and leveraged
derivative instruments, such as equity index swaps, futures contracts, and
options on securities, futures contracts, and stock indices. Equity index swaps
and futures and options contracts enable the Fund to create the additional
needed exposure to pursue its investment objective. On a day-to-day basis, the
Fund holds U.S. Government securities or cash equivalents to collateralize its
derivative positions. The Fund will purchase equity securities that are
generally within the capitalization range of the S&P MidCap 400 Index at the
time of purchase, but may purchase equity securities of any capitalization
range.
PRINCIPAL RISKS
The Rydex 2x S&P MidCap 400 ETF is subject to a number of risks that may affect
the value of its shares, including:
o Derivatives Risk
o Early Closing Risk
o Leveraging Risk
o Liquidity Risk
o Market Risk
o Mid-Capitalization Securities Risk
o Non-Diversification Risk
o Swap Counterparty Credit Risk
o Tracking Error Risk
o Trading Risk
Please see "Descriptions of Principal Risks" on page 10 for a discussion of each
of the principal risks that apply to the Fund.
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PROSPECTUS 5
RYDEX INVERSE 2X S&P MIDCAP 400
ETF (RMS)
FUND OBJECTIVE
The Rydex Inverse 2x S&P MidCap 400 ETF seeks to provide investment results that
match the performance of a specific benchmark, before fees and expenses, on a
daily basis. The Fund's current benchmark is 200% of the inverse (opposite) of
the performance of the S&P MidCap 400 Index (the "Underlying Index"). The Fund's
investment objective is non-fundamental and may be changed without shareholder
approval.
If the Rydex Inverse 2x S&P MidCap 400 ETF meets its objectives, the value of
the Fund's shares will tend to increase during times when the Underlying Index
is decreasing. When the value of the Underlying Index is increasing, however,
the value of the Fund's shares should decrease on a daily basis by an inversely
proportionate amount (E.G., if the value of the Underlying Index goes up by 5%,
the value of the Fund's shares should go down by 10% on that day). For more
information about the effects of leverage, please see "Understanding Compounding
and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its investment strategy a program of engaging in short sales
of securities and investing in leveraged derivative instruments, such as equity
index swaps, futures contracts, and options on securities, futures contracts,
and stock indices. Equity index swaps, short sales, and futures and options
contracts enable the Fund to pursue its objective without selling short each of
the securities included in the Underlying Index. On a day-to-day basis, the Fund
holds U.S. Government securities or cash equivalents to collateralize its short
sales and derivative positions.
PRINCIPAL RISKS
The Rydex Inverse 2x S&P MidCap 400 ETF is subject to a number of risks that may
affect the value of its shares, including:
o Derivatives Risk
o Early Closing Risk
o Leveraging Risk
o Liquidity Risk
o Market Risk
o Mid-Capitalization Securities Risk
o Non-Diversification Risk
o Short Sales Risk
o Swap Counterparty Credit Risk
o Tracking Error Risk
o Trading Risk
Please see "Descriptions of Principal Risks" on page 10 for a discussion of each
of the principal risks that apply to the Fund.
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6
RYDEX 2X RUSSELL 2000(R) ETF (RRY)
FUND OBJECTIVE
The Rydex 2x Russell 2000(R) ETF seeks to provide investment results that match
the performance of a specific benchmark, before fees and expenses, on a daily
basis. The Fund's current benchmark is 200% of the performance of the Russell
2000(R) Index (the "Underlying Index"). The Fund's investment objective is
non-fundamental and may be changed without shareholder approval.
If the Fund meets its objective, the value of the Fund's shares will tend to
increase on a daily basis by 200% of the value of any increase in the Underlying
Index. When the value of the Underlying Index declines, the value of the Fund's
shares should also decrease on a daily basis by 200% of the value of any
decrease in the Underlying Index (E.G., if the value of the Underlying Index
goes down by 5%, the value of the Fund's shares should go down by 10% on that
day). For more information about the effects of leverage, please see
"Understanding Compounding and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Rydex 2x Russell 2000(R) ETF employs as its investment strategy a program of
investing in equity securities contained in the Underlying Index and leveraged
derivative instruments, such as equity index swaps, futures contracts, and
options on securities, futures contracts, and stock indices. Equity index swaps
and futures and options contracts enable the Fund to create the additional
needed exposure to pursue its investment objective. On a day-to-day basis, the
Fund holds U.S. Government securities or cash equivalents to collateralize its
derivative positions. The Fund will purchase equity securities that are
generally within the capitalization range of the Russell 2000(R) Index at the
time of purchase, but may purchase equity securities of any capitalization
range.
PRINCIPAL RISKS
The Rydex 2x Russell 2000(R) ETF is subject to a number of risks that may affect
the value of its shares, including:
o Derivatives Risk
o Early Closing Risk
o Leveraging Risk
o Liquidity Risk
o Market Risk
o Non-Diversification Risk
o Small-Capitalization Securities Risk
o Swap Counterparty Credit Risk
o Tracking Error Risk
o Trading Risk
Please see "Descriptions of Principal Risks" on page 10 for a discussion of each
of the principal risks that apply to the Fund.
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PROSPECTUS 7
RYDEX INVERSE 2X RUSSELL 2000(R) ETF
(RRZ)
FUND OBJECTIVE
The Rydex Inverse 2x Russell 2000(R) ETF seeks to provide investment results
that match the performance of a specific benchmark, before fees and expenses, on
a daily basis. The Fund's current benchmark is 200% of the inverse (opposite) of
the performance of the Russell 2000(R) Index (the "Underlying Index"). The
Fund's investment objective is non-fundamental and may be changed without
shareholder approval.
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the value of the Underlying Index goes up by 5%, the value of the Fund's shares
should go down by 10% on that day). For more information about the effects of
leverage, please see "Understanding Compounding and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Rydex Inverse 2x Russell 2000(R) ETF employs as its investment strategy a
program of engaging in short sales of securities and investing in leveraged
derivative instruments, such as equity index swaps, futures contracts, and
options on securities, futures contracts, and stock indices. Equity index swaps,
short sales, and futures and options contracts enable the Fund to pursue its
objective without selling short each of the securities included in the
Underlying Index. On a day-to-day basis, the Fund holds U.S. Government
securities or cash equivalents to collateralize its short sales and derivative
positions.
PRINCIPAL RISKS
The Rydex Inverse 2x Russell 2000(R) ETF is subject to a number of risks that
may affect the value of its shares, including:
o Derivatives Risk
o Early Closing Risk
o Leveraging Risk
o Liquidity Risk
o Market Risk
o Non-Diversification Risk
o Short Sales Risk
o Small-Capitalization Securities Risk
o Swap Counterparty Credit Risk
o Tracking Error Risk
o Trading Risk
Please see "Descriptions of Principal Risks" on page 10 for a discussion of each
of the principal risks that apply to the Fund.
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8
PRINCIPAL RISKS OF INVESTING IN
THE FUNDS
As indicated below, the Funds are subject to a number of risks that may affect
the value of the Funds' shares. Please see "Descriptions of Principal Risks"
immediately following the table for more detailed information about the
principal risks of the Funds.
--------------------------------------------------------------------------------
RYDEX RYDEX
RYDEX 2X INVERSE 2X 2X S&P
S&P 500 S&P 500 MIDCAP 400
ETF ETF ETF
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Derivatives Risk X X X
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Early Closing Risk X X X
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Large-Capitalization Securities Risk X X
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Leveraging Risk X X X
--------------------------------------------------------------------------------
Liquidity Risk X X X
--------------------------------------------------------------------------------
Market Risk X X X
--------------------------------------------------------------------------------
Mid-Capitalization Securities Risk X
--------------------------------------------------------------------------------
Non-Diversification Risk X X X
--------------------------------------------------------------------------------
Short Sales Risk X
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Small-Capitalization Securities Risk
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Swap Counterparty Credit Risk X X X
--------------------------------------------------------------------------------
Tracking Error Risk X X X
--------------------------------------------------------------------------------
Trading Risk X X X
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PROSPECTUS 9
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RYDEX INVERSE RYDEX
2X S&P RYDEX 2X INVERSE 2X
MIDCAP 400 RUSSELL 2000(R) RUSSELL 2000(R)
ETF ETF ETF
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Derivatives Risk X X X
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Early Closing Risk X X X
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Large-Capitalization Securities Risk
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Leveraging Risk X X X
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Liquidity Risk X X X
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Market Risk X X X
---------------------------------------------------------------------------------------
Mid-Capitalization Securities Risk X
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Non-Diversification Risk X X X
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Short Sales Risk X X
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Small-Capitalization Securities Risk X X
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Swap Counterparty Credit Risk X X X
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Tracking Error Risk X X X
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Trading Risk X X X
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10
DESCRIPTIONS OF PRINCIPAL RISKS
DERIVATIVES RISK - The Fund may invest a percentage of its assets in
derivatives, such as futures and options contracts, to pursue its investment
objective. The use of such derivatives may expose the Fund to additional risks
that it would not be subject to if it invested directly in the securities
underlying those derivatives. The Fund may use futures contracts and related
options for bona fide hedging purposes to offset changes in the value of
securities held or expected to be acquired. They may also be used to gain
exposure to a particular market or instrument, to create a synthetic money
market position, and for certain other tax-related purposes. The Fund will only
enter into futures contracts traded on a national futures exchange or board of
trade. Futures and options contracts are described in more detail below:
FUTURES CONTRACTS - Futures contracts and options on futures contracts
provide for the future sale by one party and purchase by another party of
a specified amount of a specific security at a specified future time and
at a specified price. An option on a futures contract gives the purchaser
the right, in exchange for a premium, to assume a position in a futures
contract at a specified exercise price during the term of the option.
Index futures are futures contracts for various indices that are traded on
registered securities exchanges.
OPTIONS - The buyer of an option acquires the right to buy (a call option)
or sell (a put option) a certain quantity of a security (the underlying
security) or instrument at a certain price up to a specified point in
time. The seller or writer of an option is obligated to sell (a call
option) or buy (a put option) the underlying security. When writing
(selling) call options on securities, the Fund may cover its positions by
owning the underlying security on which the option is written or by owning
a call option on the underlying security. Alternatively, the Fund may
cover its positions by maintaining, in a segregated account, cash or
liquid securities equal in value to the exercise price of the call options
written by the Fund.
The risks associated with the Fund's use of futures and options contracts
include:
o The Fund experiencing losses that exceed losses experienced by
funds that do not use futures contracts and options.
o There may be an imperfect correlation between the changes in
market value of the securities held by the Fund and the prices
of futures and options on futures.
o Although the Fund will only purchase exchange-traded futures,
due to market conditions there may not always be a liquid
secondary market for a futures contract. As a result, the Fund
may be unable to close out its futures contracts at a time
which is advantageous.
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PROSPECTUS 11
o Trading restrictions or limitations may be imposed by an
exchange, and government regulations may restrict trading in
futures contracts and options.
o Because option premiums paid or received by the Fund are small
in relation to the market value of the investments underlying
the options, buying and selling put and call options can be
more speculative than investing directly in securities.
EARLY CLOSING RISK - The Fund is subject to the risk that unanticipated
early closings of securities exchanges and other financial markets may
result in the Fund's inability to buy or sell securities or other
financial instruments on that day. If an exchange or market closes early
on a day when the Fund needs to execute a high volume of trades late in a
trading day, the Fund might incur substantial trading losses.
LARGE-CAPITALIZATION SECURITIES RISK - The Rydex 2x S&P 500 ETF is subject
to the risk that large-capitalization stocks may underperform other
segments of the equity market or the equity market as a whole. Conversely,
the Rydex Inverse 2x S&P 500 ETF is subject to the risk that
large-capitalization stocks may outperform other segments of the equity
market or the equity market as a whole.
LEVERAGING RISK - The more the Fund invests in leveraged derivative
instruments, the more this leverage will magnify any losses on those
investments. Because the Fund's investment strategy involves consistently
applied leverage, the value of the Fund's shares will tend to increase or
decrease more than the value of any increase or decrease in its Underlying
Index. Leverage will also have the effect of magnifying tracking error
risk.
LIQUIDITY RISK - Trading in shares may be halted because of market
conditions or for reasons that, in the view of the Exchange, make trading
in shares inadvisable. In addition, trading in shares is subject to
trading halts caused by extraordinary market volatility pursuant to
"circuit breaker" rules. There can be no assurance that the requirements
necessary to maintain the listing of the shares of the Fund will continue
to be met or will remain unchanged.
MARKET RISK - The Fund may invest in public and privately issued
securities, which may include common and preferred stocks, bonds,
warrants, and rights, as well as derivatives and financial instruments
that attempt to track the price movement of securities indices.
Investments in securities and derivatives, in general, are subject to
market risks that may cause their prices to fluctuate over time. The
Fund's investments may decline in value due to factors affecting
securities markets generally, or particular segments, economic sectors,
industries or companies within those markets. The value of a security may
decline due to general economic and market conditions which are not
specifically related to
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12
a particular issuer, such as real or perceived adverse economic conditions
or changes in interest or currency rates. The value of securities
convertible into equity securities, such as warrants or convertible debt,
is also affected by prevailing interest rates, the credit quality of the
issuer and any call provision. Fluctuations in the value of securities and
financial instruments in which the Fund invests will cause the net asset
value of the Fund to fluctuate. Historically, the markets have moved in
cycles, and the value of the Fund's securities and derivatives may
fluctuate drastically from day to day.
MID-CAPITALIZATION SECURITIES RISK - In comparison to securities of
companies with large capitalizations, securities of medium-capitalization
companies may have more price volatility, greater spreads between their
bid and ask prices, significantly lower trading volumes, and cyclical or
static growth prospects. Medium-capitalization companies often have
limited product lines, markets or financial resources, and may therefore
be more vulnerable to adverse developments than large-capitalization
companies. These securities may or may not pay dividends. The Rydex 2x S&P
MidCap 400 ETF is subject to the risk that medium-capitalization stocks
may underperform other segments of the equity market of the equity market
as a whole. Conversely, the Rydex Inverse 2x S&P MidCap 400 ETF is subject
to the risk that medium-capitalization stocks may outperform other
segments of the equity market or the equity markets as a whole.
NON-DIVERSIFICATION RISK - Because the Fund is non-diversified, it may
invest in the securities of a limited number of issuers. To the extent
that the Fund invests a significant percentage of its assets in a limited
number of issuers, the Fund is subject to the risks of investing in those
few issuers, and may be more susceptible to a single adverse economic or
regulatory occurrence. As a result, changes in the market value of a
single security could cause greater fluctuations in the value of Fund
shares than would occur in a diversified fund.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. To complete the transaction, the Fund must
borrow the security to make delivery to the buyer. The Fund is then
obligated to replace the security borrowed by purchasing the security at
the market price at the time of replacement. The price at such time may be
higher or lower than the price at which the security was sold by the Fund.
If the underlying security goes down in price between the time the Fund
sells the security and buys it back, the Fund will realize a gain on the
transaction. Conversely, if the underlying security goes up in price
during the period, the Fund will realize a loss on the transaction. Any
such loss is increased by the amount of premium or interest the Fund must
pay to the lender of the security. Likewise, any gain will be decreased by
the amount of premium or interest the Fund must pay to the lender of the
security.
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PROSPECTUS 13
The Fund is also required to segregate other assets on its books to cover
its obligation to return the security to the lender which means that those
other assets may not be available to meet the Fund's needs for immediate
cash or other liquidity. The Fund's investment performance may also suffer
if the Fund is required to close out a short position earlier than it had
intended. This would occur if the securities lender required the Fund to
deliver the securities the Fund borrowed at the commencement of the short
sale and the Fund was unable to borrow the securities from another
securities lender or otherwise obtain the security by other means. In
addition, the Fund may be subject to expenses related to short sales that
are not typically associated with investing in securities directly, such
as costs of borrowing and margin account maintenance costs associated with
the Fund's open short positions. These expenses negatively impact the
performance of the Fund. For example, when the Fund short sells an
interest-bearing security, such as a bond, it is obligated to pay the
interest on the security it has sold. This cost is partially offset by the
interest earned by the Fund on the investment of the cash generated by the
short sale. Similarly, when the Fund sells short an equity security that
pays a dividend, it is obligated to pay the dividend on the security it
has sold. However, a dividend paid on a security sold short generally
reduces the market value of the shorted security and thus, increases the
Fund's unrealized gain or reduces the Fund's unrealized loss on its short
sale transaction. To the extent that the interest rate and/or dividend
that the Fund is obligated to pay is greater than the interest earned by
the Fund on investments, the performance of the Fund will be negatively
impacted. These types of short sales expenses are sometimes referred to as
the "negative cost of carry," and will tend to cause the Fund to lose
money on a short sale even in instances where the price of the underlying
security sold short does not change over the duration of the short sale.
SMALL-CAPITALIZATION SECURITIES RISK - In comparison to companies with
larger capitalizations, securities of small-capitalization companies may
have more price volatility, greater spreads between their bid and ask
prices, significantly lower trading volumes, and cyclical or static growth
prospects. Small-capitalization companies often have limited product
lines, markets or financial resources, and may therefore be more
vulnerable to adverse developments than larger capitalization companies.
These securities may or may not pay dividends. The Rydex 2x Russell
2000(R) ETF is subject to the risk that small-capitalization stocks may
underperform other segments of the equity market or the equity market as a
whole. Conversely, the Rydex Inverse 2x Russell 2000(R) ETF is subject to
the risk that small-capitalization stocks may outperform other segments of
the equity market or the equity market as a whole.
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14
SWAP COUNTERPARTY CREDIT RISK - The Fund may enter into swap agreements,
including but not limited to equity index or interest rate swap
agreements, for purposes of attempting to gain exposure to a particular
group of stocks or to an index of stocks without actually purchasing those
stocks, or to hedge a position. The Fund will use short-term swap
agreements to exchange the returns (or differentials in rates of return)
earned or realized in particular predetermined investments or instruments.
The Fund will not enter into any swap agreement unless the Fund's
investment adviser, Rydex Investments, (the "Advisor") believes that the
other party to the transaction is creditworthy. The use of swap agreements
involves risks that are different from those associated with ordinary
portfolio securities transactions. The Fund bears the risk of loss of the
amount expected to be received under a swap agreement in the event of the
default or bankruptcy of a swap agreement counterparty. If swap
counter-party defaults on its payment obligations to the Fund, this
default will cause the value of your investment in the Fund to decrease.
In addition, the Fund may enter into swap agreements with a limited number
of counterparties, which may increase the Fund's exposure to counterparty
credit risk. Swap agreements also may be considered to be illiquid.
TRACKING ERROR RISK - Tracking error risk refers to the risk that the
Advisor may not be able to cause the Fund's performance to match or
correlate to that of the Fund's benchmark, either on a daily or aggregate
basis. Factors such as Fund expenses, imperfect correlation between the
Fund's investments and those of its Underlying Index, rounding of share
prices, changes to the composition of the Underlying Index, regulatory
policies, high portfolio turnover rate and leverage all contribute to
tracking error. Because the Fund seeks to track its benchmark on a daily
basis, the Fund is subject to the effects of mathematical compounding
which may prevent the Fund from correlating with the monthly, quarterly,
annual or other performance of its benchmark. Tracking error risk may
cause the Fund's performance to be less than you expect.
TRADING RISK - Shares may trade below their NAV. The NAV of shares will
fluctuate with changes in the market value of the Fund's holdings. The
trading prices of shares will fluctuate in accordance with changes in NAV
as well as market supply and demand. However, given that shares can be
created and redeemed only in Creation Units at NAV (unlike shares of many
closed-end funds, which frequently trade at appreciable discounts from,
and sometimes premiums to, their NAVs), the Advisor does not believe that
large discounts or premiums to NAV will exist for extended periods of
time. In addition, although the Fund's shares are listed on the Exchange,
there can be no assurance that an active trading market for shares will
develop or be maintained.
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PROSPECTUS 15
FUND PERFORMANCE
The Funds commenced operations on November 5, 2007, and therefore do not
have performance history for a full calendar year.
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16
FUND FEES AND EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Funds described in this Prospectus.
RYDEX
RYDEX INVERSE
2X S&P 2X S&P
500 500
--------------------------------------------------------------------------------
|
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)(a)
A. CREATION TRANSACTION FEES(b)
Through NSCC $2,000 $50
Outside NSCC up to $8,000 N/A
B. REDEMPTION TRANSACTION FEES(c)
Through NSCC $2,000 $50
Outside NSCC up to $8,000 N/A
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)(d)
Management Fees 0.70% 0.70%
Distribution (12b-1) Fees(e) NONE NONE
Other Expenses(f),(g) 0.00% 0.00%
-----------------------
Total Annual Fund Operating Expenses 0.70% 0.70%
=======================
|
(a) MOST INVESTORS WILL INCUR CUSTOMARY BROKERAGE COMMISSIONS WHEN BUYING OR
SELLING SHARES OF THE FUND.
(b) THE CREATION TRANSACTION FEE IS THE SAME REGARDLESS OF THE NUMBER OF
CREATION UNITS PURCHASED PURSUANT TO ANY ONE CREATION ORDER. ONE CREATION
UNIT CONSISTS OF 50,000 SHARES.
(c) THE REDEMPTION TRANSACTION FEE IS THE SAME REGARDLESS OF THE NUMBER OF
CREATION UNITS REDEEMED PURSUANT TO ANY ONE REDEMPTION ORDER.
(d) EXPRESSED AS A PERCENTAGE OF AVERAGE NET ASSETS.
(e) THE FUND HAS ADOPTED A DISTRIBUTION (12b-1) PLAN PURSUANT TO WHICH THE
FUND MAY BE SUBJECT TO AN ANNUAL 12b-1 FEE OF UP TO 0.25%. HOWEVER, NO
SUCH FEE IS CURRENTLY CHARGED TO THE FUND AND NO SUCH FEES WILL BE CHARGED
PRIOR TO MARCH 1, 2009.
(f) BECAUSE THE FUNDS COMMENCED OPERATIONS ON NOVEMBER 1, 2007, "OTHER
EXPENSES" ARE BASED ON ESTIMATED AMOUNTS FOR THE CURRENT FISCAL YEAR.
(g) THE ADVISOR HAS CONTRACTUALLY AGREED TO PAY ALL OPERATING EXPENSES OF THE
FUND, EXCLUDING THE MANAGEMENT FEES, INTEREST EXPENSE AND TAXES (EXPECTED
TO BE DE MINIMIS), BROKERAGE COMMISSIONS AND OTHER EXPENSES CONNECTED WITH
THE EXECUTION OF PORTFOLIO TRANSACTIONS, ANY FUTURE DISTRIBUTION FEES OR
EXPENSES, EXPENSES OF THE INDEPENDENT TRUSTEES (INCLUDING ANY TRUSTEES'
COUNSEL FEES) AND EXTRAORDINARY EXPENSES. OTHER EXPENSES ARE THEREFORE
ESTIMATED TO BE LESS THAN 0.01% FOR THE FISCAL YEAR ENDING OCTOBER 31,
2008.
[GRAPHIC OMITTED]
PROSPECTUS 17
RYDEX
RYDEX INVERSE 2X RYDEX
2X S&P S&P RYDEX 2X INVERSE 2X
MIDCAP MIDCAP RUSSELL RUSSELL
400 400 2000(R) 2000(R)
----------------------------------------------------------------------------------------------------------------
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)(a)
A. CREATION TRANSACTION FEES(b)
Through NSCC $2,000 $50 $ 3,000 $50
Outside NSCC up to $8,000 N/A up to $12,000 N/A
B. REDEMPTION TRANSACTION FEES(c)
Through NSCC $2,000 $50 $ 3,000 $50
Outside NSCC up to $8,000 N/A up to $12,000 N/A
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)(d)
Management Fees 0.70% 0.70% 0.70% 0.70%
Distribution(12b-1) Fees(e) NONE NONE NONE NONE
Other Expenses(f),(g) 0.00% 0.00% 0.00% 0.00%
-------------------------------------------------------
Total Annual Fund Operating Expenses 0.70% 0.70% 0.70% 0.70%
=======================================================
|
[GRAPHIC OMITTED]
18
FUND FEES AND EXPENSES (CONTINUED)
EXAMPLE
The Examples that follow are intended to help you compare the cost of investing
in shares of the Funds with the cost of investing in other funds. The Examples
do not take into account creation or redemption transaction fees, or the
brokerage commissions that you pay when purchasing or selling shares of the
Funds. If the commissions were included, your costs would be higher.
The Examples assume that you invest $10,000 in the Funds for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Funds' operating expenses remain the same. Although your actual costs may be
higher or lower, the Examples reflect your cost based on these assumptions.
FUND 1 YEAR 3 YEARS
--------------------------------------------------------------------------------
RYDEX 2X S&P 500 $70 $219
RYDEX INVERSE 2X S&P 500 $70 $219
RYDEX 2X S&P MIDCAP 400 $70 $219
RYDEX INVERSE 2X S&P MIDCAP 400 $70 $219
RYDEX 2X RUSSELL 2000(R) $70 $219
RYDEX INVERSE 2X RUSSELL 2000(R) $70 $219
|
CREATION TRANSACTION FEES AND REDEMPTION TRANSACTION FEES
The Funds issue and redeem shares at NAV only in large blocks of 50,000 shares
or multiples thereof. As a practical matter, only institutions or large
investors purchase or redeem these Creation Units. A standard creation
transaction fee ("Creation Transaction Fee") or redemption transaction fee
("Redemption Transaction Fee"), as applicable, will be assessed per transaction,
which is intended to approximate the issuance or redemption transaction costs
incurred by the Funds. The Creation Transaction Fee and Redemption Transaction
Fee for each Fund are listed below. From time to time, the Advisor may waive the
Creation Transaction Fees and Redemption Transaction Fees for authorized
participants. The fees would instead be subsidized by the Advisor and State
Street Bank and Trust Company, the Funds' administrator (the "Administrator").
Also, for the Rydex 2x S&P 500, Rydex 2x S&P MidCap 400, and Rydex 2x Russell
2000(R) ETFs, an additional charge of up to four (4) times the standard
transaction fee may be imposed for creations and redemptions effected outside
the National Securities Clearing Corporation's ("NSCC") usual clearing process
or for cash. Shareholders who hold Creation Units will also pay the annual Fund
operating expenses described in the table above.
RYDEX 2X S&P 500 ETF
The Creation Transaction Fee per transaction is $2,000 and the Redemption
Transaction Fee per transaction is $2,000. Assuming an investment in a
[GRAPHIC OMITTED]
PROSPECTUS 19
Creation Unit of $3,544,406 and a 5% return each year, and assuming that
creations and redemptions are effected through the NSCC and the Fund's operating
expenses remain the same, the total costs would be $27,443 if the Creation Unit
is redeemed after one year, and $79,718 if the Creation Unit is redeemed after
three years. If creations and redemptions are effected outside of the NSCC, the
total costs would increase to $35,443 if the Creation Unit is redeemed after one
year, and $87,718 if the Creation Unit is redeemed after three years.
RYDEX INVERSE 2X S&P 500 ETF
The Creation Transaction Fee per transaction is $50 and the Redemption
Transaction Fee per transaction is $50. Assuming an investment in a Creation
Unit of $3,885,784 and a 5% return each year, and assuming that the Fund's
operating expenses remain the same, the total costs would be $27,943 if the
Creation Unit is redeemed after one year, and $87,396 if the Creation Unit is
redeemed after three years.
RYDEX 2X S&P MIDCAP 400 ETF
The Creation Transaction Fee per transaction is $2,000 and the Redemption
Transaction Fee per transaction is $2,000. Assuming an investment in a Creation
Unit of $3,525,062 and a 5% return each year, and assuming that creations and
redemptions are effected through the NSCC and the Fund's operating expenses
remain the same, the total costs would be $27,304 if the Creation Unit is
redeemed after one year, and $79,283 if the Creation Unit is redeemed after
three years. If creations and redemptions are effected outside of the NSCC, the
total costs would increase to $35,304 if the Creation Unit is redeemed after one
year, and $87,283 if the Creation Unit is redeemed after three years.
RYDEX INVERSE 2X S&P MIDCAP 400 ETF
The Creation Transaction Fee per transaction is $50 and the Redemption
Transaction Fee per transaction is $50. Assuming an investment in a Creation
Unit of $3,904,000 and a 5% return each year, and assuming that the Fund's
operating expenses remain the same, the total costs would be $28,074 if the
Creation Unit is redeemed after one year, and $87,806 if the Creation Unit is
redeemed after three years.
RYDEX 2X RUSSELL 2000(R) ETF
The Creation Transaction Fee per transaction is $3,000 and the Redemption
Transaction Fee per transaction is $3,000. Assuming an investment in a Creation
Unit of $3,467,848 and a 5% return each year, and assuming that creations and
redemptions are effected through the NSCC and the Fund's
[GRAPHIC OMITTED]
20
operating expenses remain the same, the total costs would be $27,893 if the
Creation Unit is redeemed after one year, and $77,996 if the Creation Unit is
redeemed after three years. If creations and redemptions are effected outside of
the NSCC, the total costs would increase to $39,893 if the Creation Unit is
redeemed after one year, and $89,996 if the Creation Unit is redeemed after
three years.
RYDEX INVERSE 2X RUSSELL 2000(R) ETF
The Creation Transaction Fee per transaction is $50 and the Redemption
Transaction Fee per transaction is $50. Assuming an investment in a Creation
Unit of $3,885,954 and a 5% return each year, and assuming that the Fund's
operating expenses remain the same, the total costs would be $27,945 if the
Creation Unit is redeemed after one year, and $87,400 if the Creation Unit is
redeemed after three years.
For more information, see "Creations and Redemptions" and "Transaction Fees."
[GRAPHIC OMITTED]
PROSPECTUS 21
MORE INFORMATION ABOUT THE FUNDS:
BENCHMARKS AND INVESTMENT METHODOLOGY
Each Fund seeks to provide investment results that match, before fees and
expenses, the performance of a specific benchmark on a daily basis. The current
benchmark used by each Fund is set forth below:
FUND BENCHMARK
--------------------------------------------------------------------------------
RYDEX 2x S&P 500 ETF 200% OF THE PERFORMANCE OF THE S&P 500
INDEX
RYDEX INVERSE 2x S&P 500 ETF 200% OF THE INVERSE (OPPOSITE) OF THE
PERFORMANCE OF THE S&P 500 INDEX
RYDEX 2x S&P MIDCAP 400 ETF 200% OF THE PERFORMANCE OF THE S&P
MIDCAP 400 INDEX
RYDEX INVERSE 2x S&P 200% OF THE INVERSE (OPPOSITE) OF THE
PERFORMANCE OF THE S&P MIDCAP 400 INDEX
RYDEX 2x RUSSELL 2000(R) ETF 200% OF THE PERFORMANCE OF THE RUSSELL
2000(R) INDEX
RYDEX INVERSE 2x 200% OF THE INVERSE (OPPOSITE) OF THE
PERFORMANCE OF THE RUSSELL 2000(R)
|
INDEX
A BRIEF GUIDE TO THE UNDERLYING INDICES
S&P 500 INDEX. The S&P 500 Index is a capitalization-weighted index composed of
500 common stocks, which are chosen by the Standard & Poor's Corporation ("S&P")
on a statistical basis. As of December 31, 2007, the S&P 500 Index included
companies with a capitalization range of $710 million to $512 billion.
S&P MIDCAP 400 INDEX. The S&P MidCap 400 Index is a modified
capitalization-weighted index composed of 400 mid cap stocks chosen by S&P for
market size, liquidity, and industry group representation. It covers
approximately 7% of the U.S. equities market. As of December 31, 2007, the S&P
MidCap 400 Index included companies with a capitalization range of $260 million
to $12.4 billion.
RUSSELL 2000(R) INDEX. The Russell 2000(R) Index is composed of the 2,000
smallest companies in the Russell 3000(R) Index, representing approximately 11%
of the Russell 3000(R) total market capitalization. The Russell 3000(R) Index
[GRAPHIC OMITTED]
22
is composed of the 3,000 largest U.S. companies ranked by total market
capitalization, representing approximately 98% of the U.S. investable equity
market. As of December 31, 2007, the Russell 2000(R) Index included companies
with a capitalization range of $7.7 million to $8.4 billion.
UNDERSTANDING COMPOUNDING & THE EFFECT OF LEVERAGE
It is important to understand the effects of compounding when investing in any
mutual fund, especially funds that use leverage as part of their investment
strategy. The impact of leverage on a fund will generally cause the fund's
performance to not match the performance of the index underlying the fund's
benchmark over a period of time greater than one day. As a result, the use of
leverage could cause the performance of a fund to be less than or greater than
the performance of the index underlying the fund's benchmark multiplied by the
amount of leverage employed, before accounting for fees and expenses. The
following simple examples provide an illustration:
EXAMPLE A: Assume you invest $100 in Fund A, a typical index fund that seeks to
match the performance of its underlying index. If the index increases 10% on day
one, the value of your shares in Fund A would be expected to increase $10 (10%
of $100) to $110. The next day, if the index decreases 10%, the value of your
shares in Fund A would be expected to decrease $11 (10% of $110) to $99.
EXAMPLE B: Assume you invested $100 in Fund B, a fund that seeks to return 200%
of the performance of its underlying index. If the index increases 10% on day
one, the value of your shares in Fund B would be expected to increase $20 (20%
of $100) to $120. The next day, if the index decreases 10%, the value of your
shares in Fund B would be expected to decrease $24 (20% of $120) to $96.
Because of the effect of compounding, in each case the value of your investment
declined even though the index went up 10% on day one and down 10% on day two.
However, the effect of compounding was more pronounced when combined with
leverage (Example B).
The examples demonstrate that over time, the cumulative percentage increase or
decrease in the net asset value of a fund may diverge significantly from the
cumulative percentage increase or decrease in the multiple of the return of the
index underlying a fund's benchmark due to the compounding effect of losses and
gains on the returns of the fund. It is also
[GRAPHIC OMITTED]
PROSPECTUS 23
expected that a fund's use of consistently applied leverage will cause the fund
to underperform the compounded return of twice its benchmark in a trendless or
flat market.
The following graphs further illustrate the impact of leverage on fund
performance in comparison to the performance of the fund's underlying index in
three different markets. Each of the three graphs shows a simulated hypothetical
of the one-year performance of an index compared with the performance of a fund
that perfectly achieves its investment objective of exactly twice (200%) the
daily index returns.
In order to isolate the impact of leverage, the hypothetical graphs assume: (i)
no tracking error (see "Tracking Error Risk" under "Descriptions of Principal
Risks"); (ii) no dividends paid by the companies included in the underlying
index; (iii) no expenses; and (iv) borrowing and/or lending rates (required to
obtain leverage) of zero percent. If tracking error, fund expenses, and
borrowing and lending rates of greater than zero percent were included in the
graphs, the fund's performance would be lower than that shown below. Each of the
graphs also assumes an index volatility of 20%. An index's volatility is a
statistical measure of the magnitude of the fluctuations in the returns of an
index. The S&P 500 Index's index volatility may be more or less significant at
any given time. The average of the most recent five-year historical volatility
of the S&P 500 Index is 11%. The indices underlying the Funds' benchmarks have
different historical volatilities, which may be more or less significant than
the index volatilities assumed in the graphs below. The average five-year
historical volatility for the period ended in 2000 of the S&P MidCap 400 Index
and Russell 2000(R) Index is 19% and 21%, respectively. The hypothetical graphs
are meant to demonstrate the effects of leverage only and are in no way
indicative of the actual performance of any of the Funds.
[GRAPHIC OMITTED]
24
UPWARD MARKET
ONE YEAR SIMULATION
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
1x Index Performance (15.7%) 2x Fund Performance (28.9%)
0 0
-0.66366 -1.32732
-0.348088315 -0.70039326
-1.01242775 -2.024374777
-0.662813543 -1.332294555
1.978164896 3.914064678
4.522010219 9.098337365
5.354057682 10.83529199
7.215979943 14.75287623
4.917805413 9.833420421
4.391904913 8.732340382
3.670525533 7.229594198
4.533727797 9.015267185
3.026665043 5.871920971
1.561213759 2.860076563
1.075537879 1.876302218
-0.763329381 -1.830568914
-0.990988228 -2.280989898
1.218100843 2.079623209
1.101801245 1.845044235
-1.736530723 -3.873351309
-1.54515279 -3.498918787
0.82258783 1.142590217
0.566972323 0.629736599
0.704638452 0.905240692
-0.148551386 -0.804538068
0.730400976 0.941817878
-0.694128355 -1.913220499
0.878578734 1.193580155
0.927403966 1.291535541
1.210353943 1.859477181
1.196096441 1.830779292
0.612346758 0.655957591
2.228482884 3.889630885
2.441455483 4.322497421
2.046287568 3.517649353
2.496117809 4.430281653
1.139581689 1.666012098
0.788526201 0.960246642
-0.202436667 -1.02505584
0.070549588 -0.483583716
0.532665379 0.435530002
-0.133645021 -0.89580321
0.48769348 0.337389953
-0.515907261 -1.666809277
-1.135225584 -2.891116501
-1.462586625 -3.534210371
-1.296886111 -3.209776627
-1.455482274 -3.520821689
-0.921410406 -2.47506458
-2.80865938 -6.19037452
-3.662028508 -7.837727829
-1.564654531 -3.824798174
-1.524436802 -3.746209569
-1.276997254 -3.262495771
-0.644478976 -2.022901392
1.746213571 2.692148502
2.395914018 4.00362993
3.122904528 5.480439874
2.098677528 3.38515532
1.462919273 2.097617273
2.567850464 4.321303377
1.973849272 3.112991448
2.560066339 4.298522756
2.310958194 3.791861392
2.93021573 5.048303391
5.990742765 11.2953159
3.784227482 6.661424125
5.454219487 10.09400208
6.560645157 12.40421462
8.769647331 17.06449335
8.729004465 16.97700872
11.42722344 22.78281161
10.54098702 20.82970543
10.15996329 19.99672961
11.04928467 21.9341968
11.40183284 22.70840579
11.12414149 22.0966553
12.45296397 25.01671891
13.85693923 28.13838638
12.99868562 26.20657207
10.73306197 21.14568853
10.34920581 20.30578547
10.90537685 21.51849185
9.691628402 18.8586951
10.72480288 21.09773143
9.346943434 18.08385109
9.799978755 19.06231749
9.603865013 18.63700308
11.17810533 22.04496963
10.77799756 21.16653876
11.06431437 21.79287283
10.05266285 19.57412335
10.33156932 20.18019675
9.441226652 18.24056049
7.581273005 14.22156384
8.159382492 15.44914867
5.646840036 10.08538122
4.862021356 8.44979868
4.707150636 8.129459665
5.368847475 9.496107906
7.891588421 14.73921954
8.662570923 16.37904951
9.004390772 17.11123667
8.560252382 16.1568972
5.323311337 9.229996791
6.618472096 11.91639933
5.799759511 10.19760965
5.132173608 8.80693786
6.232802334 11.08513753
6.290865996 11.20656913
5.622222046 9.807434804
4.646811387 7.779313444
5.93124635 10.42508003
7.100939173 12.8637075
7.849456926 14.44129383
8.016806929 14.79645094
8.830454329 16.52588243
8.470356121 15.75476075
7.860947966 14.45409396
4.969735256 8.318209982
7.151741143 12.82143124
8.034125016 14.67957765
7.739321496 14.05370239
5.944599878 10.25388924
8.634639214 15.85280224
9.606517287 17.92571009
9.041287438 16.7094479
10.64288587 20.13790465
10.22453405 19.22939778
11.99573209 23.06119217
11.30591678 21.54525057
9.552403364 17.71560281
6.891156381 11.99650797
6.168422517 10.48200159
8.525573833 15.38784439
9.676596069 17.83545134
9.828454284 18.16176127
11.19702665 21.10658869
11.05200349 20.79069426
9.893397939 18.27027564
9.587685495 17.61224348
8.504959162 15.28822554
6.81076273 11.68800484
8.221839716 14.6390253
7.986835991 14.14114801
9.279222444 16.87323053
10.45102355 19.37969384
10.3719616 19.20878748
9.560396566 17.45570305
8.845843659 15.92361086
8.147488727 14.43607908
6.655702267 11.27901653
8.259804029 14.62628935
8.416640007 14.95840756
7.92584872 13.91759713
9.32089824 16.86259485
9.978911659 18.26941014
9.199557099 16.59320145
8.878117283 15.90679395
7.634838062 13.25971459
6.790528865 11.48285088
6.509808602 10.89674094
7.816790463 13.61836876
8.065329728 14.14219489
6.289059904 10.38988437
4.467584284 6.606381476
2.919479153 3.446781542
5.605986317 8.847324219
5.101411475 7.807200958
6.630637012 10.94439051
7.4792676 12.71031456
6.471337776 10.59634244
4.82018027 7.166086284
2.188250363 1.784419763
2.780840027 2.964915463
3.838146529 5.083315634
5.220959126 7.882104663
6.635865363 10.78348599
7.361629063 12.2914708
5.712017632 8.840753899
3.728331621 4.755960405
1.579184319 0.415082918
1.387067607 0.035252825
0.271505702 -2.166122948
0.605510088 -1.51435366
2.118214538 1.447306697
1.255621979 -0.266544102
0.990311999 -0.789187304
-0.106846751 -2.944839843
1.245506758 -0.316974326
1.790379702 0.755953952
1.986489047 1.144186794
1.854508332 0.88240541
2.090861718 1.350600653
1.915091882 1.001609995
0.715245505 -1.376573914
-0.887839058 -4.51615206
-2.615859584 -7.845673838
-3.855170155 -10.19118575
-3.468187215 -9.468224792
-1.135978618 -5.093729414
0.827856303 -1.323293096
1.721957401 0.426758036
0.463046457 -2.059005079
-0.4744546 -3.886936632
-1.314997594 -5.510382385
-0.77012809 -4.466971334
-0.221466282 -3.41052889
1.691787102 0.293677328
1.580037997 0.073251883
1.810451997 0.527244198
0.934841386 -1.201904824
-0.789933184 -4.578428525
-0.67231965 -4.352183979
-0.697373071 -4.400434476
-0.094526683 -3.239702791
2.01577663 0.848032725
1.10048088 -0.961604544
-0.419969252 -3.940481403
1.249290804 -0.719989982
3.874887413 4.429068457
1.500930736 -0.344175404
2.578667619 1.772115687
3.292358699 3.188274677
4.975197806 6.550561419
6.041745816 8.715668827
5.87019148 8.363908409
7.912109863 12.54393781
8.896214349 14.59662669
8.575569446 13.92176716
6.894819631 10.39474925
5.583647773 7.68654526
7.441497639 11.47625016
6.404117747 9.323576884
6.43607516 9.38924537
7.551205919 11.68138762
9.848069473 16.45152305
11.5734531 20.10973119
12.21073835 21.48181672
14.13279609 25.64354079
16.2407147 30.2845619
12.9289005 22.860687
12.15495357 21.17666013
11.30968655 19.3501401
12.93803595 22.8420865
13.39367316 23.83327472
14.35987797 25.94359186
15.26962224 27.94737959
15.88450498 29.31239901
16.41800248 30.50302999
17.19490638 32.24482783
15.70782021 28.88871859
FLAT MARKET
ONE YEAR SIMULATION
|
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
1x Index Performance (-0.2%) 2x Fund Performance (-3.9%)
0 0
-0.84442 -1.68884
0.258090894 0.497403576
-1.460834074 -2.948652393
1.929110312 3.728868528
0.888312166 1.610517575
1.021676426 1.879155462
0.996567489 1.828511333
-0.436371811 -1.060974504
1.264473649 2.319376241
2.378990446 4.571630351
1.03997563 1.836245644
2.322375001 4.421256903
2.914647604 5.630100026
2.107138113 3.972467992
2.779534039 5.341826985
2.544970587 4.86100475
3.16543944 6.129969713
2.888182322 5.559521125
1.930097857 3.593601716
1.812246278 3.354051871
1.369902611 2.455967173
0.959090944 1.625541068
3.009771999 5.753977048
2.240206594 4.173843425
2.052984328 3.79231714
1.861961552 3.403760222
0.581862281 0.804810113
0.560612351 0.762216048
2.916747499 5.483933492
0.756113302 1.054874093
-0.133099701 -0.728825279
-1.55330689 -3.55229603
-2.803087659 -6.001103234
-3.289830357 -6.942558585
-2.837497551 -6.072062055
-3.363331298 -7.088719269
-4.186443787 -8.671481519
-4.987627163 -10.1988414
-3.812989198 -7.978417949
-3.644152138 -7.655366983
-2.559281647 -5.575950536
-3.284659586 -6.981792439
-2.732734153 -5.920138429
-3.265379428 -6.950519889
-3.186586177 -6.798936703
-2.461773192 -5.403399902
-2.523575363 -5.523276497
-2.036622136 -4.579340657
-1.966433335 -4.442606669
-3.535166469 -7.500825485
-3.103032954 -6.672088381
-3.400651989 -7.245401742
-3.862493471 -8.132321211
-4.759177608 -9.846039265
-5.453530824 -11.16057417
-6.833720181 -13.75433004
-6.350932519 -12.86047992
-5.557228578 -11.38341277
-5.972918436 -12.16350459
-4.584702604 -9.569868551
-5.227849416 -10.78895715
-6.062640427 -12.36057025
-6.686074501 -13.52384346
-7.087399032 -14.26767677
-4.091989689 -8.73982803
-2.690006395 -6.071745643
-3.839723969 -8.291270293
-4.303803077 -9.176461294
-3.50205077 -7.654603915
-1.092689974 -3.043244216
0.955680417 0.972704609
-1.406985372 -3.753423803
0.15571391 -0.702407338
-1.270503456 -3.530402777
-0.092759292 -1.228831126
2.153754923 3.21310588
-0.429304924 -2.00658731
0.320890564 -0.529963772
3.616833102 6.006013369
3.011596819 4.767629919
4.037942562 6.855313527
3.763386432 6.291331183
2.308001174 3.30964676
0.608972198 -0.121679847
1.504593269 1.656553765
5.796511986 10.25324189
7.101723554 12.97363038
8.222328888 15.33771657
7.700740552 14.22595325
8.70260515 16.35108142
7.350018635 13.45556841
9.100145988 17.15490067
9.143715132 17.24847229
10.63560057 20.45381103
11.01391901 21.27759464
12.11338976 23.67983698
11.7005322 22.76893498
11.87481855 23.15204772
11.90408724 23.2164858
12.13168896 23.71770582
12.88244426 25.37436013
13.88102493 27.59253346
14.46841187 28.90875252
13.27977188 26.23157554
12.62762024 24.77814518
11.56369468 22.42073664
10.71641305 20.56126359
9.82013047 18.60930439
9.735989581 18.42755461
8.937682204 16.70448106
8.190249873 15.10303883
9.692471492 18.29945022
9.360629827 17.58369123
9.704208118 18.32251659
10.52413737 20.09120157
10.16217082 19.3046042
11.03798211 21.20159513
10.83504909 20.75857906
11.84101017 22.95063709
10.75039256 20.55273082
10.7533198 20.55910347
11.2269896 21.59031782
12.659482 24.72224123
11.40332877 21.94093525
10.5996763 20.18159582
9.420241351 17.61836275
9.010593852 16.73768349
9.722171404 18.2617173
10.94491528 20.89753446
11.32814121 21.73274298
12.05855401 23.33009569
13.10611099 25.63594916
12.16820119 23.55232719
13.0076007 25.40151016
10.31338649 19.42211536
12.28325264 23.68715678
9.106647137 16.68869008
9.255512246 17.00711018
8.830289793 16.09632683
8.373561716 15.12188392
7.552209329 13.37688943
7.216259248 12.66860133
4.751786313 7.489000386
3.287984851 4.484897803
2.512292084 2.915534638
2.632159708 3.156212907
0.602608749 -0.923615313
0.038308596 -2.035093827
0.309912604 -1.503144386
0.030860458 -2.051161192
-0.261739812 -2.624181489
0.369074763 -1.39243581
1.184864565 0.210509032
2.838528807 3.48598973
4.285878261 6.398913369
6.253127069 10.41313157
6.285748904 10.48092965
8.330048998 14.73091005
7.061395795 12.04368268
6.736239629 11.36310694
5.67343487 9.145355212
6.514658816 10.88308024
8.128568927 14.2432811
6.448467223 10.6930569
3.239684627 4.019593887
4.866122618 7.297043251
6.139407079 9.902644649
5.335528438 8.237883349
4.742858087 7.019882448
3.592257791 4.668655631
3.056312886 3.585628117
2.775463822 3.02104501
4.176704496 5.830222865
3.701606635 4.864945402
4.881730918 7.251671559
6.052211036 9.645528869
7.722215203 13.09870515
9.88753945 17.6454993
9.258433287 16.29845833
8.739739801 15.19422773
9.443220674 16.6847028
9.265594326 16.30594426
9.356017069 16.49844223
9.059454486 15.86657798
8.703571674 15.11038634
11.15711999 20.3066994
12.85126566 23.97388821
11.36501449 20.708416
12.16527235 22.44321321
10.63870299 19.11030895
8.799998384 15.1513205
9.71611613 17.0905148
8.646285253 14.80703899
7.44226712 12.26245578
4.890620718 6.930213657
6.339999316 9.885337042
6.492437705 10.2003783
7.140337696 11.54129651
6.521045116 10.2518345
6.415286761 10.03290964
6.914236116 11.06473225
5.307849719 7.727237043
1.722959898 0.392735836
0.803547098 -1.422043571
1.547658722 0.033321946
3.800696626 4.472200574
2.55571107 1.966121427
1.99561331 0.852365876
2.041617411 0.943342778
3.727957181 4.279722143
1.55931678 -0.080630158
1.117543908 -0.949908692
0.170901685 -2.804482982
-2.084446166 -7.181197113
-2.684923092 -8.319638294
-2.767314901 -8.474880651
-2.698570421 -8.345462301
-2.047312492 -7.118537998
-3.785874743 -10.41564414
-5.035215159 -12.74214986
-5.470115888 -13.54136196
-6.693427118 -15.77908443
-4.729323759 -12.23338388
-3.416493841 -9.814535943
-3.250766202 -9.505037467
-4.167049171 -11.21913875
-4.438457671 -11.72201131
-4.035962011 -10.97837518
-3.593308693 -10.15711509
-2.299338082 -7.745372684
-1.834966836 -6.868400196
-1.614429272 -6.449941292
-1.798853025 -6.800660462
-2.040103782 -7.258586097
-2.666645483 -8.444915715
-3.181791995 -9.414044594
-4.110820792 -11.15249778
-4.139737132 -11.20608349
-5.661998107 -14.02617828
-3.934480616 -10.87747303
-4.080538632 -11.14847681
-5.137187418 -13.10605357
-6.907896678 -16.34997838
-6.704536978 -15.98451143
-5.761972915 -14.28689447
-3.8730659 -10.85082749
-2.869212328 -8.988857877
-3.304173708 -9.803971868
-2.857477669 -8.970632725
-1.77686425 -6.945411362
-1.897275992 -7.173562603
-0.189503773 -3.941717358
|
[GRAPHIC OMITTED]
PROSPECTUS 25
--------------------------------------------------------------------------------
DOWNWARD MARKET
ONE YEAR SIMULATION
|
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
1x Index Performance (-15.8%) 2x Fund Performance (-31.9%)
0 0
1.0876 2.1752
0.833779145 1.662096581
-1.693014526 -3.433004376
-2.544215391 -5.105274352
-4.12027034 -8.174549359
-5.432767959 -10.68854655
-5.262915753 -10.36772194
-5.788536044 -11.36231755
-5.385442875 -10.60382718
-5.092440514 -10.05014304
-3.785088882 -7.572024482
-4.448856311 -8.847308717
-3.609210191 -7.245318398
-3.446782071 -6.93271657
-2.204142156 -4.537164695
-3.708144654 -7.473410583
-4.859217493 -9.685536283
-3.545894131 -7.192134569
-3.052155209 -6.241986204
-2.894886415 -5.937797704
-2.698840901 -5.557993344
-2.072669022 -4.342449164
-1.737169986 -3.687003626
-1.666384391 -3.54824164
-1.752535455 -3.71724634
-0.51894029 -1.29939383
-0.771005399 -1.799569022
-0.806391451 -1.869607533
-1.164480378 -2.578108967
-0.223892388 -0.723839146
-0.487241447 -1.247898144
0.553562495 0.817798323
-0.661627308 -1.618967863
-1.32821759 -2.939300342
-3.057045889 -6.34050138
-2.702816335 -5.656037764
-3.051947819 -6.333106643
-2.444471324 -5.159273136
-3.657769434 -7.518341376
-3.25165803 -6.738665505
-2.183556335 -4.679455239
-3.170132985 -6.602261268
-3.54246319 -7.320527238
-1.435637671 -3.27191715
0.798225037 1.11257339
1.416974941 2.353932453
1.250002034 2.016901425
1.020529029 1.554479214
0.29883837 0.103468815
3.155549884 5.805762812
3.585553794 6.687865457
6.005105159 11.67189578
7.058594495 13.89150871
6.994352915 13.75482524
9.037731067 18.09980454
5.772160059 11.02586245
4.870674516 9.133337803
5.625260967 10.70385384
4.31508523 7.957512635
4.235268543 7.792305253
5.092134568 9.564518544
6.542616209 12.58893751
5.239813098 9.835462458
1.377406718 1.773319843
2.384084366 3.794537975
2.860221551 4.759930972
4.58714181 8.277559935
5.685934322 10.55268802
5.982277682 11.1726675
4.619875502 8.314418217
5.141468354 9.394442944
5.974420094 11.12773226
6.208867304 11.61942802
6.794619828 12.85061263
8.680719609 16.83672197
9.008120277 17.54066322
10.83836662 21.4876787
9.21558209 17.93027649
9.513500355 18.5736569
9.385971884 18.29749886
9.676872938 18.92669959
10.3996874 20.49424864
9.760418011 19.09880474
11.60252711 23.09647522
8.968930672 17.28681398
9.141820777 17.6589885
9.580920151 18.60571978
8.246443705 15.71695887
8.270135604 15.76761281
8.023669468 15.24054602
8.750755182 16.79186816
9.046546361 17.42719256
7.278138519 13.618559
4.007979022 6.691689931
6.609322586 12.02862165
4.638862476 7.887371617
5.091467412 8.820683692
5.807497616 10.30356138
3.421009507 5.32776773
2.948540967 4.365408982
3.935055656 6.365592918
3.332419416 5.132134956
4.622111343 7.756443309
5.813757191 10.21113509
5.450064727 9.453521703
7.39488027 13.4908243
7.860028976 14.47392722
9.423783676 17.79321321
9.248399235 17.41561529
8.808390383 16.46980903
8.359338155 15.50846722
6.451455289 11.44095206
5.339463387 9.112727687
6.138463216 10.76796777
7.119214458 12.81502627
5.735127088 9.899660363
6.676000543 11.85552264
5.327722572 9.028038737
2.69537213 3.578381249
3.41322305 5.026427734
0.341540086 -1.212772232
-0.742549913 -3.347366649
0.137992704 -1.632497637
-0.815220849 -3.505218147
-1.229297465 -4.310910978
-1.792408994 -5.401996246
-0.243871699 -2.4187536
0.602509172 -0.76289743
-0.17056075 -2.288052612
2.801860804 3.530693855
5.05126832 8.06140408
2.595589872 3.009317316
3.143809406 4.11017789
2.080499875 1.963634243
0.349929161 -1.49354474
0.349465404 -1.494455215
0.319620469 -1.553048284
0.609423789 -0.984261175
-0.792065485 -3.742839659
0.627203226 -0.988729787
1.635689057 0.995852113
1.517212334 0.760390383
0.150892174 -1.951877805
1.180643647 0.06438378
0.919142273 -0.45284902
0.926982278 -0.43738218
2.106818701 1.890391825
3.547443806 4.765534901
3.965589093 5.611663267
4.435149677 6.565653421
3.18861173 4.021718143
4.732210173 7.133839906
4.494583261 6.647687968
2.264459865 2.095538054
1.931599275 1.430916521
2.770628848 3.100733127
3.277986888 4.118708526
3.694744549 4.959008975
4.471874442 6.532218568
6.082099443 9.816180738
5.836816413 9.308346792
3.534759819 4.55321509
4.354506633 6.208836161
4.600418028 6.709398406
4.876416691 7.272525243
6.611911635 10.82281674
8.647666087 15.05514011
8.316670973 14.35410914
7.605247078 12.85195356
6.729232761 11.01449806
6.112167029 9.730815212
7.75160001 13.1214974
7.831815688 13.289924
7.389586629 12.36069738
7.504074667 12.60027286
5.917529533 9.27676321
6.860862827 11.22326648
7.614370829 12.79180372
8.862374687 15.40789682
9.287710871 16.3097172
9.88231252 17.57532976
8.993968964 15.67425425
6.289065637 9.932878317
5.872083003 9.070322967
6.044442754 9.425455939
7.869891792 13.19275554
7.105892496 11.58935752
5.271704087 7.76742202
5.662441071 8.567422701
4.44087759 6.057126753
4.648652272 6.479106849
2.829021506 2.776189429
2.09201506 1.302933864
3.542232134 4.180950216
3.672892077 4.443882098
5.314863342 7.752246507
7.351652799 11.9201034
8.319556771 13.93829147
7.407917717 12.02043658
6.680540558 10.50320938
7.538998867 12.28164803
5.853755216 8.762516619
3.592083882 4.114876759
0.101859392 -2.900800097
2.513913796 1.778604545
4.225076045 5.176381479
5.623880791 7.999525911
3.426059079 3.505017641
3.368751734 3.39031545
3.307658734 3.268103962
3.142397473 2.93770799
3.346433763 3.344970738
0.282832081 -2.782145887
0.407563868 -2.540306753
-0.192752875 -3.705690781
-0.706939851 -4.697868826
0.129991424 -3.091284559
1.511585045 -0.416991648
-0.839524776 -5.02987576
-0.237769432 -3.877223363
2.080704806 0.590563296
0.829501608 -1.875313773
-0.488743296 -4.441078069
-3.683850727 -10.5774898
-3.640704944 -10.49737438
-4.601079495 -12.28144812
-3.392947565 -10.05971264
-3.333047329 -9.948179487
-3.644256916 -10.52800515
-3.260741787 -9.815772281
-4.050453374 -11.28817409
-3.386146688 -10.05978144
-4.310229211 -11.78028386
-4.834245533 -12.74650148
-5.988130306 -14.86239882
-7.497396862 -17.59599691
-8.280116889 -18.99053634
-8.35777428 -19.12771452
-10.16596704 -22.31909665
-11.09485094 -23.92553774
-12.21221085 -25.83774542
-12.43714072 -26.21778248
-14.21396626 -29.21215999
-12.62572363 -26.59102785
-13.51204829 -28.08034908
-13.80646193 -28.56999245
-12.19834909 -25.90465314
-12.84604431 -26.99782625
-13.27799674 -27.721453
-13.78505163 -28.56666387
-15.5676319 -31.52057519
-15.81726464 -31.92550772
|
ADVISOR'S INVESTMENT METHODOLOGY
The Advisor develops and implements structured investment strategies designed to
achieve each Fund's objective.
The Advisor uses quantitative methods to construct portfolios that correlate
highly with the Funds' respective benchmarks. Statistical techniques are then
used to determine the optimal mix of assets for each Fund. The Advisor places
particular emphasis on controlling risk relative to each Fund's benchmark or
market sector in order to maintain consistency and predictability.
The Advisor's primary objective for the Funds is to correlate with the
performance of the index underlying each Fund's benchmark. The Leveraged Funds
are invested to achieve returns that magnify the returns of the indices
underlying their benchmarks. These leveraged returns are achieved not by
borrowing, but by the use of futures and other instruments that stimulate
leveraged returns without requiring a commitment of cash in excess of the Funds'
assets. For the Inverse Funds, the Advisor uses short selling techniques and
invests in futures contracts and other instruments to produce magnified or
leveraged returns that move inversely to the performance of the Funds'
respective Underlying Indices.
[GRAPHIC OMITTED]
26
OTHER INVESTMENT PRACTICES AND STRATEGIES
Please see the Statement of Additional Information (the "SAI") for a more
complete list of portfolio investment strategies, permitted investments and
related risks.
PORTFOLIO HOLDINGS
A description of the Funds' policies and procedures with respect to the
disclosure of Fund portfolio securities is available in the SAI.
[GRAPHIC OMITTED]
PROSPECTUS 27
INVESTING WITH RYDEX:
For more information on how to buy and sell shares of the Funds, call Rydex
Client Services at 800.820.0888 or 301.296.5100 or visit
www.rydexinvestments.com.
SHAREHOLDER INFORMATION
BUYING AND SELLING SHARES
Most investors will buy and sell shares of the Funds in secondary market
transactions through brokers. Shares can be bought and sold throughout the
trading day like other publicly traded securities. Most investors will incur
customary brokerage commissions and charges when buying or selling shares
through a broker.
Shares may be acquired and redeemed from the Funds only in Creation Units of
50,000 shares, or multiples thereof, as discussed in the "Creations and
Redemptions" section.
BOOK ENTRY
Shares are held in book-entry form, which means that no stock certificates are
issued. Depository Trust Company ("DTC"), or its nominee, is the record owner of
all outstanding shares of the Funds and is recognized as the owner of all
shares.
Investors owning shares of the Funds are beneficial owners as shown on the
records of DTC or its participants. DTC serves as the securities depository for
all shares. Participants in DTC include securities brokers and dealers, banks,
trust companies, clearing corporations and other institutions that directly or
indirectly maintain a custodial relationship with DTC. As a beneficial owner of
shares, you are not entitled to receive physical delivery of stock certificates
or to have shares registered in your name, and you are not considered a
registered owner of shares. Therefore, to exercise any right as an owner of
shares, you must rely upon the procedures of DTC and its participants (E.G.,
broker-dealers, banks, trust companies, or clearing companies). These procedures
are the same as those that apply to any stocks that you hold in book entry or
"street name" through your brokerage account.
[GRAPHIC OMITTED]
28
CALCULATING NAV
Each Fund calculates its NAV by:
o Taking the current market value of its total assets
o Subtracting any liabilities
o Dividing that amount by the total number of shares owned by shareholders
The Funds calculate NAV once each Business Day as of the regularly scheduled
close of normal trading on the New York Stock Exchange ("NYSE") (normally, 4:00
p.m., Eastern Time).
In calculating NAV, each Fund generally values its investment portfolio at
market price. If market prices are unavailable or a Fund thinks that they are
unreliable, or when the value of a security has been materially affected by
events occurring after the relevant market closes, the Fund will price those
securities at fair value as determined in good faith using methods approved by
the Board of Trustees. Because the Funds invest substantially all of their
assets in the component securities included in their respective Underlying
Indices, and these securities are selected for their market size, liquidity and
industry group representation, it is expected that there would be limited
circumstances in which the Funds would use fair value pricing - for example, if
the exchange on which a portfolio security is primarily traded closed early or
if trading in a particular security was halted during the day and did not resume
prior to the time a Fund calculated its NAV.
If a Fund uses fair value pricing to value its securities, it may value those
securities higher or lower than another fund that uses market quotations or its
own fair value procedures to price the same securities.
SHARE TRADING PRICES
The trading prices of a Fund's shares listed on the Exchange may differ from the
Fund's daily NAV and can be affected by market forces of supply and demand,
economic conditions and other factors. The Exchange intends to disseminate the
approximate value of the portfolio underlying a share of a Fund every fifteen
seconds. This approximate value should not be viewed as a "real-time" update of
the NAV of a Fund because the approximate value may not be calculated in the
same manner as the NAV, which is computed once a day. The Funds are not involved
in, or responsible for, the calculation or dissemination of such values and make
no warranty as to their accuracy.
CREATIONS AND REDEMPTIONS
The shares of each Fund that trade on the Exchange are "created" at their NAV by
market makers, large investors and institutions only in block-size Creation
Units of 50,000 shares or more. A "creator" enters into an authorized partici-
[GRAPHIC OMITTED]
PROSPECTUS 29
pant agreement (a "Participant Agreement") with Rydex Distributors, Inc., the
Funds' distributor (the "Distributor"), and deposits into a Fund a portfolio of
securities closely approximating the holdings of the Fund and a specified amount
of cash, together totaling the NAV of the Creation Unit(s), in exchange for
50,000 shares of the Fund (or multiples thereof).
Similarly, shares can only be redeemed in Creation Units, generally 50,000
shares, principally in-kind for a portfolio of securities held by a Fund and a
specified amount of cash together totaling the NAV of the Creation Unit(s).
Shares are not redeemable from a Fund except when aggregated in Creation Units.
The prices at which creations and redemptions occur are based on the next
calculation of NAV after an order is received in a form prescribed in the
Participant Agreement.
Creations and redemptions must be made through an authorized firm that is either
a member of the Continuous Net Settlement System of the NSCC or a DTC
Participant, and in each case, must have executed a Participant Agreement with
the Distributor with respect to creations and redemptions of Creation Units.
Information about the procedures for the creation and redemption of Creation
Units can be found in the SAI.
Because new shares may be created and issued on an ongoing basis, at any point
during the life of a Fund, a "distribution," as such term is used in the
Securities Act of 1933 (the "Securities Act"), may be occurring. Broker-dealers
and other persons are cautioned that some activities on their part may,
depending on the circumstances, result in their being deemed participants in a
distribution in a manner that could render them statutory underwriters and
subject to the prospectus-delivery and liability provisions of the Securities
Act. Nonetheless, any determination of whether one is an underwriter must take
into account all the relevant facts and circumstances of each particular case.
Broker-dealers should also note that dealers who are not "underwriters," but are
participating in a distribution (in contrast to ordinary secondary
transactions), and thus dealing with shares that are part of an "unsold
allotment" within the meaning of Section 4(3)(C) of the Securities Act, would be
unable to take advantage of the prospectus delivery exemption provided by
Section 4(3) of the Securities Act.
TRANSACTION FEES
Each Fund will impose a Creation Transaction Fee and a Redemption
Transaction Fee to offset the Fund's transfer and other transaction costs
associated with the issuance and redemption of Creation Units of shares. The
Creation and Redemption Transaction Fees for creations and redemptions are as
follows:
[GRAPHIC OMITTED]
30
CREATION AND REDEMPTION
FUND TRANSACTION FEES
--------------------------------------------------------------------------------
Rydex 2x S&P 500 ETF $2,000
Rydex Inverse 2x S&P 500 ETF $ 50
Rydex 2x S&P MidCap 400 ETF $2,000
Rydex Inverse 2x S&P MidCap 400 ETF $ 50
Rydex 2x Russell 2000(R) ETF $3,000
Rydex Inverse 2x Russell 2000(R) ETF $ 50
|
An additional charge of up to four (4) times the fixed transaction fee may be
imposed on purchases or redemptions outside the NSCC's usual clearing process or
for cash. Investors who use the services of a broker or other such intermediary
may pay additional fees for these services. From time to time, the Advisor may
waive the Creation Transaction Fees and Redemption Transaction Fees for
authorized participants. The fees would instead be subsidized by the Adivsor and
the Administrator.
The chart below shows the approximate value of one Creation Unit for the Funds
as of December 31, 2007.
APPROXIMATE VALUE
FUND OF ONE CREATION UNIT
--------------------------------------------------------------------------------
Rydex 2x S&P 500 ETF $3,544,406
Rydex Inverse 2x S&P 500 ETF $3,885,784
Rydex 2x S&P MidCap 400 ETF $3,525,062
Rydex Inverse 2x S&P MidCap 400 ETF $3,904,000
Rydex 2x Russell 2000(R) ETF $3,467,848
Rydex Inverse 2x Russell 2000(R) ETF $3,885,954
|
More information on the creation and redemption process is included in the SAI.
ACTIVE INVESTORS AND MARKET TIMING
Shares of the Funds are listed for trading on the Exchange, which allows retail
investors to purchase and sell individual shares at market prices throughout the
trading day similar to other publicly traded securities. The Trust's Board of
Trustees has determined not to adopt policies and procedures designed to prevent
or monitor for frequent purchases and redemptions of the Funds' shares because
the Funds sell and redeem their shares at NAV only in Creation Units pursuant to
the terms of a Participant Agreement between the authorized participant and the
Distributor, principally in exchange for a basket of securities that mirrors the
composition of each Fund's portfolio and a specified amount of cash. The Funds
also impose a transaction fee on such Creation Unit transactions that is
designed to offset the Funds' transfer and other transaction costs associated
with the issuance and redemption of the Creation Unit shares.
[GRAPHIC OMITTED]
PROSPECTUS 31
DISTRIBUTION PLAN
The Funds have adopted a Distribution Plan (the "Plan") that allows the Funds to
pay distribution fees to the Distributor and other firms that provide
distribution services ("Service Providers"). If a Service Provider provides
distribution services, the Funds will pay distribution fees to the Distributor
at an annual rate not to exceed 0.25% of average daily net assets, pursuant to
Rule 12b-1 under the Investment Company Act of 1940. The Distributor will, in
turn, pay the Service Provider out of its fees.
No distribution fees are currently charged to the Funds; there are no plans to
impose these fees, and no such fees will be charged prior to March 1, 2009.
However, in the event that 12b-1 fees are charged in the future, because the
Funds pay these fees out of assets on an ongoing basis, over time these fees may
cost you more than other types of sales charges and will increase the cost of
your investment.
DIVIDENDS AND DISTRIBUTIONS
The Funds pay out dividends to shareholders at least annually. Each Fund
distributes its net capital gains, if any, to shareholders annually.
TAX INFORMATION
The following is a summary of some important tax issues that affect the Funds
and their shareholders. The summary is based on current tax laws, which may be
changed by legislative, judicial or administrative action. You should not
consider this summary to be a detailed explanation of the tax treatment of the
Funds, or the tax consequences of an investment in the Funds. MORE INFORMATION
ABOUT TAXES IS LOCATED IN THE SAI. YOU ARE URGED TO CONSULT YOUR TAX ADVISER
REGARDING SPECIFIC QUESTIONS AS TO FEDERAL, STATE AND LOCAL INCOME TAXES.
TAX STATUS OF EACH FUND
Each Fund is treated as a separate entity for federal tax purposes, and intends
to qualify for the special tax treatment afforded to regulated investment
companies. As long as a Fund qualifies as a regulated investment company, it
pays no federal income tax on the earnings it distributes to shareholders.
TAX STATUS OF DISTRIBUTIONS
o Each Fund will, at least annually, distribute substantially all of
its net investment income and net capital gains income.
o The income dividends and short-term capital gains distributions you
receive from the Funds will be taxed as either ordinary income or
qualified dividend income.
[GRAPHIC OMITTED]
32
o Dividends that are designated as qualified dividend income are
eligible for the reduced maximum rate to individuals of 15% (5% for
individuals in lower tax brackets) to the extent that a Fund
receives qualified dividend income and subject to certain
limitations.
o Long-term capital gains distributions will result from gains on the
sale or exchange of capital assets held by a Fund for more than one
year. Any long-term capital gains distributions you receive from a
Fund are taxable as long-term capital gains regardless of how long
you have owned your shares. Long-term capital gains are currently
taxed at a maximum rate of 15%.
o Absent further legislation, the maximum 15% tax rate on qualified
dividend income and long-term capital gains will cease to apply to
taxable years beginning after December 31, 2010.
o Dividends and distributions are generally taxable to you whether you
receive them in cash or in additional shares.
o Corporate shareholders may be entitled to a dividends-received
deduction for the portion of dividends they receive that is
attributable to dividends received by a Fund from U.S. corporations,
subject to certain limitations.
o Distributions paid in January, but declared by a Fund in October,
November or December of the previous year may be taxable to you in
the previous year.
o The Funds will inform you of the amount of your ordinary income
dividends, qualified dividend income, and capital gains
distributions shortly after the close of each calendar year.
o If you hold your shares in a tax-qualified retirement account, you
generally will not be subject to federal taxation on Fund
distributions until you begin receiving distributions from your
retirement account. You should consult your tax adviser regarding
the tax rules that apply to your retirement account.
TAX STATUS OF SHARE TRANSACTIONS
Currently, any capital gain or loss upon a sale of Fund shares is generally
treated as a long-term gain or loss if the shares have been held for more than
one year and as short-term gain or loss if held for one year or less. Any
capital loss on the sale of Fund shares held for six months or less is treated
as long-term capital loss to the extent that any capital gain distributions were
paid with respect to such shares. An exchange of a Fund's shares for shares of
another Fund will be treated as a sale of the Fund's shares and any gain on the
transaction may be subject to federal income tax.
[GRAPHIC OMITTED]
PROSPECTUS 33
STATE TAX CONSIDERATIONS
A Fund is not liable for any income or franchise tax in Delaware as long as it
qualifies as a regulated investment company for federal income tax purposes. In
addition to federal taxes, distributions by the Funds and ownership of Fund
shares may be subject to state and local taxes. You should consult your tax
adviser regarding how state and local tax laws affect your investment in Fund
shares.
TAXES ON CREATIONS AND REDEMPTIONS OF CREATION UNITS
A person who purchases a Creation Unit by exchanging securities in-kind
generally will recognize a gain or loss equal to the difference between the
market value of the Creation Units at the time, and the purchaser's aggregate
basis in the securities surrendered and any net cash paid. A person who redeems
Creation Units and receives securities in-kind from a Fund will generally
recognize a gain or loss equal to the difference between the redeemer's basis in
the Creation Units, and the aggregate market value of the securities received
and any net cash received. The Internal Revenue Service, however, may assert
that a loss realized upon an in-kind exchange of securities for Creation Units
or an exchange of Creation Units for securities cannot be deducted currently
under the rules governing "wash sales," or on the basis that there has been no
significant change in economic position. Persons effecting in-kind creations or
redemptions should consult their own tax adviser with respect to these matters.
MANAGEMENT OF THE FUNDS
INVESTMENT ADVISOR
PADCO Advisors II, Inc., which operates under the name Rydex Investments, is
located at 9601 Blackwell Road, Suite 500, Rockville, Maryland 20850, and serves
as investment adviser of the Funds. The Advisor has served as the investment
adviser of the Rydex Funds since each Rydex Fund's inception.
The Advisor makes investment decisions for the assets of the Funds and
continuously reviews, supervises, and administers each Fund's investment
program. The Board of Trustees of the Trust supervises the Advisor and
establishes policies that the Advisor must follow in its day-to-day management
activities. Pursuant to an investment advisory agreement between the Trust and
the Advisor, the Funds will pay the Advisor a fee at an annualized rate of 0.70%
based on the average daily net assets of each Fund.
The Advisor bears all of its own costs associated with providing these advisory
services and the expenses of the members of the Board of Trustees who are
affiliated
[GRAPHIC OMITTED]
34
with the Advisor. The Advisor may make payments from its own resources to
broker-dealers and other financial institutions in connection with the sale of
Fund shares.
As part of its agreement with the Trust, the Advisor has contractually agreed to
pay all expenses of the Fund, including the cost of transfer agency, custody,
fund administration, legal, audit and other services, except interest expense,
taxes (expected to be de minimis), brokerage commissions and other expenses
connected with execution of portfolio transactions, short dividend expenses,
expenses of the Independent Trustees (including any Trustees' counsel fees), and
extraordinary expenses.
A discussion regarding the basis for the Board's August 2007 approval of the
Funds' investment advisory agreement is available in the Funds' October 31, 2007
Annual Report to Shareholders, which covers the period November 1, 2006 to
October 31, 2007.
PORTFOLIO MANAGEMENT
Mike Byrum, President and Chief Investment Officer ("CIO") of Rydex Investments,
leads the Portfolio Department. Mr. Byrum's senior management team, called the
Investment Leadership Team ("ILT"), consists of five investment professionals
that are responsible for overseeing different functions within the Portfolio
Department. Those members include Michael Dellapa as the Director of Research,
Douglas Holmes as the Strategic Advisor, James King as the Director of Portfolio
Management, David Reilly as the head of Portfolio Strategies, and Stephen Sachs
as the Director of Trading. The role of the ILT is to set the overall policies
of the Portfolio Department with respect to investment strategies and business
development. The remainder of the Portfolio Department reports to the members of
the ILT, and consists of a team of approximately 16 investment professionals
that focus on research, trading, and implementing the portfolios.
On a day-to-day basis the following three individuals are jointly and primarily
responsible for the management of the Funds.
MICHAEL P. BYRUM, CFA, President and CIO of Rydex Investments - As the CIO, Mr.
Byrum has ultimate responsibility of the management of the Funds. He has been
associated with Rydex Investments since the Advisor was founded in 1993. Mr.
Byrum was named the President of Rydex Investments in 2004 and has served as
Chief Investment Officer of Rydex Investments since 2000. During this time, he
has played a key role in the development of the firm's investment strategies and
product offerings. As Senior Portfolio Manager, Mr. Byrum was instrumental in
the launch of the OTC, Precious Metals, Government Long Bond 1.2x Strategy,
Inverse Government Long Bond Strategy, Inverse S&P 500 Strategy and Inverse OTC
Strategy Funds, and
[GRAPHIC OMITTED]
PROSPECTUS 35
helped to create the Sector Funds, all of which are offered in a separate
prospectus. He was named Vice President of Portfolio for Rydex Investments in
1998, and Executive Vice President in 2000. Prior to joining Rydex Investments,
Mr. Byrum worked for Money Management Associates, the investment adviser for
Rushmore Funds, Inc. He holds a degree in finance from Miami University of Ohio
and is a member of the CFA Institute and the Washington Society of Investment
Analysts. Mr. Byrum has co-managed each Fund since its inception.
JAMES R. KING, CFA, Director of Portfolio Management - Mr. King is responsible
for a team of portfolio managers who manage all of the Rydex Funds. He joined
Rydex Investments in 1996 and was promoted to assistant portfolio manager in
1997. In 1998, he became a portfolio manager and was promoted in 2001 to senior
portfolio manager and currently serves as director of portfolio management.
Prior to joining Rydex Investments, Mr. King worked as a registered
representative at DMG Securities. He holds a degree in finance from the
University of Maryland. Mr. King has co-managed each Fund since its inception.
MICHAEL J. DELLAPA, CFA, Director of Investment Research - Mr. Dellapa joined
Rydex Investments in 2000 as a Research Analyst and was promoted to portfolio
manager in 2003. During his tenure as a portfolio manager, he had direct
oversight for the Russell 2000(R) 1.5x Strategy, Healthcare, Biotechnology, and
Consumer Products Funds, all of which are offered in a separate prospectus. In
2005, Mr. Dellapa became Director of Investment Research. Since joining Rydex
Investments, Mr. Dellapa has played a key role in developing research processes
and systems to enhance current funds and develop new investment products. Prior
to joining Rydex Investments, he worked as an equity analyst for Invista Capital
and systems analyst for Accenture. He holds an engineering degree from the
University of Maryland and MBA from the University of Chicago. Previously, he
was owner/consultant of Dellapa Consulting Inc. as well as a senior consultant
and an analyst at Andersen Consulting. Mr. Dellapa has co-managed each Fund
since its inception.
Mr. Dellapa oversees the research and creation of the processes used to select
investments. Mr. King oversees the day-to-day details of the portfolio
management of all of the Rydex Funds. Mr. Byrum generally oversees all aspects
of the management of all the Rydex Funds and reviews the activities of Messrs.
King and Dellapa, as well as other aspects of the investment management
portfolio department.
Additional information about the portfolio managers' compensation, other
accounts managed by the portfolio managers, and the portfolio managers'
ownership of securities in the Funds is available in the SAI.
[GRAPHIC OMITTED]
36
INDEX PUBLISHERS INFORMATION
STANDARD & POOR'S
The Rydex 2x S&P 500 ETF, Rydex Inverse 2x S&P 500 ETF, Rydex 2x S&P MidCap 400
ETF, and Rydex Inverse 2x S&P 400 ETF (the "S&P Funds") are not sponsored,
endorsed, sold or promoted by Standard & Poor's ("S&P").
S&P makes no representation, condition, warranty, express or implied, to the
owners of the S&P Funds or any member of the public regarding the advisability
of investing in securities generally or in the S&P Funds particularly or the
ability of the S&P 500 Index or the S&P MidCap 400 Index (the "S&P Indices") to
track general stock market performance. S&P's only relationship to Rydex
Investments (the "Licensee") is the licensing of certain of their trademarks and
of the S&P Indices which are determined, composed and calculated by S&P without
regard to Licensee or the S&P Funds. S&P has no obligation to take the needs of
Licensee or the owners of the S&P Funds into consideration in determining,
composing or calculating the S&P Indices. S&P is not responsible for and has not
participated in the determination of the prices and amount of the S&P Funds or
the timing of the issuance or sale of the S&P Funds or in the determination or
calculation of the equation by which the S&P Funds are to be converted into
cash. S&P has no obligation or liability in connection with the administration,
marketing, or trading of the S&P Funds.
S&P does not guarantee the accuracy and/or the completeness of the S&P Indices
or any data included therein and S&P shall have no liability for any errors,
omissions, or interruptions therein. S&P makes no warranty or condition, express
or implied, as to the results to be obtained by Licensee, owners of the S&P
Funds, or any other person or entity from the use of the S&P Indices or any data
included therein. S&P makes no express or implied warranties or conditions, and
expressly disclaims all warranties or conditions of merchantability or fitness
for a particular purpose or use with respect to the S&P Indices or any data
included therein. Without limiting any of the foregoing, in no event shall S&P
have any liability for any special, punitive, indirect, or consequential damages
(including lost profits) resulting from the use of the S&P Indices or any data
included therein, even if notified of the possibility of such damages.
"Standard & Poor's(R)," S&P(R)," "S&P 500(R)," "Standard & Poor's 500," "500,"
"Standard & Poor's MidCap 400," and "S&P MidCap 400" are trademarks of The
McGraw-Hill Companies, Inc. and Citigroup, Inc. and have been licensed for use
by Rydex Investments.
FRANK RUSSELL COMPANY ("RUSSELL")
The Rydex2x Russell 2000(R) ETF and the Rydex Inverse 2x Russell 2000(R) ETF
(the "Russell Funds") are not sponsored, endorsed, sold or promoted by Russell.
Russell makes no representation or warranty, express or implied, to the
[GRAPHIC OMITTED]
PROSPECTUS 37
owners of the Russell Funds or any member of the public regarding the
advisability of investing in securities generally or in the Russell Funds
particularly or the ability of the Russell 2000(R) Index to track general stock
market performance or a segment of the same. Russell's publication of the
Russell 2000(R) Index in no way suggests or implies an opinion by Russell as to
the advisability of investment in any or all of the securities upon which the
Russell 2000(R) Index is based. Russell's only relationship to Rydex Investments
(the "Licensee") is the licensing of certain trademarks and trade names of
Russell and of the Russell 2000(R) Index which is determined, composed and
calculated by Russell without regard to the Licensee or the Russell Funds.
Russell is not responsible for and has not reviewed the Russell Funds nor any
associated literature or publications and Russell makes no representation or
warranty express or implied as to their accuracy or completeness, or otherwise.
Russell reserves the right, at any time and without notice, to alter, amend,
terminate or in any way change the Russell 2000(R) Index. Russell has no
obligation or liability in connection with the administration, marketing or
trading of the Russell Funds.
Russell does not guarantee the accuracy and/or the completeness of the Russell
2000(R) Index or any data included therein and Russell shall have no liability
for any errors, omissions, or interruptions therein. Russell makes no warranty,
express or implied, as to results to be obtained by the Licensee, investors,
owners of the Russell Funds, or any other person or entity from the use of the
Russell 2000(R) Index or any data included therein. Russell makes no express or
implied warranties, and expressly disclaims all warranties of merchantability or
fitness for a particular purpose of use with respect to the Russell 2000(R)
Index or any data included therein. Without limiting any of the foregoing, in no
event shall Russell have any liability for any special, punitive, indirect, or
consequential damages (including lost profits), even if notified of the
possibility of such damages.
"Frank Russell(R)," "Russell(R)," and "Russell 2000(R)" are trademarks of
Russell and have been licensed for use by the Licensee.
MORE INFORMATION ABOUT THE INDEX PUBLISHERS IS LOCATED IN THE SAI.
[GRAPHIC OMITTED]
38
SUPPLEMENTAL INFORMATION
I. PREMIUM/DISCOUNT INFORMATION
The tables that follow present information about the differences between the
daily market price on secondary markets for shares of the Funds and each Fund's
NAV. Net asset value, or NAV, is the price per share at which a Fund issues and
redeems shares. It is calculated in accordance with the standard formula for
valuing mutual fund shares. The "Market Price" of a Fund generally is determined
using the midpoint between the highest bid and the lowest offer on the Exchange
on which the Fund is listed for trading, as of the time the Fund's NAV is
calculated. A Fund's Market Price may be at, above or below its NAV. The NAV of
a Fund will fluctuate with changes in the market value of its portfolio
holdings. The Market Price of a Fund will fluctuate in accordance with changes
in its NAV, as well as market supply of and demand for shares of the Funds.
Premiums or discounts are the differences (generally expressed as a percentage)
between the NAV and Market Price of a Fund on a given day, generally at the time
NAV is calculated. A premium is the amount that a Fund is trading above the
reported NAV, expressed as a positive percentage of the NAV. A discount is the
amount that a Fund is trading below the reported NAV, expressed as a negative
percentage of the NAV.
The following information shows the frequency distribution of premiums and
discounts for the Funds. The information shown for each Fund is for the period
ended December 31, 2007.
Each line in the table shows the number of trading days in which the Funds
traded within the premium/discount range indicated. The number of trading days
in each premium/discount range is also shown as a percentage of the total number
of trading days in the period covered by the table. All data presented here
represents past performance, which cannot be used to predict future results.
[GRAPHIC OMITTED]
PROSPECTUS 39
PERCENTAGE
NUMBER OF DAYS OF TOTAL DAYS
--------------------------------------------------------------------------------
PREMIUM/ RYDEX 2X RYDEX INVERSE RYDEX 2X RYDEX INVERSE
DISCOUNT S&P 500 2X S&P 500 S&P 500 2X S&P 500
RANGE ETF ETF ETF ETF
--------------------------------------------------------------------------------
BETWEEN 3.01%
AND 8% 0 1 0.00% 2.70%
BETWEEN 1.01%
AND 3% 3 2 8.11% 5.41%
BETWEEN 0.51%
AND 1% 4 3 10.81% 8.11%
BETWEEN 0.26%
AND 0.5% 4 2 10.81% 5.41%
BETWEEN 0.25%
AND 0% 5 8 13.51% 21.62%
BETWEEN -0.01%
AND -0.25% 4 9 10.81% 24.32%
BETWEEN -0.26%
AND -0.5% 5 5 13.51% 13.51%
BETWEEN -0.51%
AND -1% 6 6 16.22% 16.22%
BETWEEN -1.01%
AND -3% 6 1 16.22% 2.70%
BETWEEN -3.01%
AND -8% 0 0 0.00% 0.00%
--------------------------------------------------------------------------------
TOTAL 37 37 100% 100%
|
[GRAPHIC OMITTED]
40
PERCENTAGE
NUMBER OF DAYS OF TOTAL DAYS
--------------------------------------------------------------------------------
RYDEX RYDEX
RYDEX 2X INVERSE 2X RYDEX 2X INVERSE 2X
PREMIUM/ S&P S&P S&P S&P
DISCOUNT MIDCAP 400 MIDCAP 400 MIDCAP 400 MIDCAP 400
RANGE ETF ETF ETF ETF
--------------------------------------------------------------------------------
BETWEEN 3.01%
AND 8% 2 0 5.41% 0.00%
BETWEEN 1.01%
AND 3% 3 5 8.11% 13.51%
BETWEEN 0.51%
AND 1% 3 5 8.11% 13.51%
BETWEEN 0.26%
AND 0.5% 3 1 8.11% 2.70%
BETWEEN 0.25%
AND 0% 5 5 13.51% 13.51%
BETWEEN -0.01%
AND -0.25% 1 4 2.70% 10.81%
BETWEEN -0.26%
AND -0.5% 6 6 16.22% 16.22%
BETWEEN -0.51%
AND -1% 3 5 8.11% 13.51%
BETWEEN -1.01%
AND -3% 5 6 13.51% 16.22%
BETWEEN -3.01%
AND -8% 6 0 16.22% 0.00%
--------------------------------------------------------------------------------
TOTAL 37 37 100% 100%
|
[GRAPHIC OMITTED]
PROSPECTUS 41
|
PERCENTAGE
NUMBER OF DAYS OF TOTAL DAYS
-------------------------------------------------------------------------------------------
RYDEX RYDEX
PREMIUM/ RYDEX 2X INVERSE 2X RYDEX 2X INVERSE 2X
DISCOUNT RUSSELL 2000(R) RUSSELL 2000(R) RUSSELL 2000(R) RUSSELL 2000(R)
RANGE ETF ETF ETF ETF
-------------------------------------------------------------------------------------------
BETWEEN 3.01%
AND 8% 1 0 2.70% 0.00%
BETWEEN 1.01%
AND 3% 6 4 16.22% 10.81%
BETWEEN 0.51%
AND 1% 5 2 13.51% 5.41%
BETWEEN 0.26%
AND 0.5% 3 4 8.11% 10.81%
BETWEEN 0.25%
AND 0% 3 8 8.11% 21.62%
BETWEEN -0.01%
AND -0.25% 4 2 10.81% 5.41%
BETWEEN -0.26%
AND -0.5% 6 10 16.22% 27.02%
BETWEEN -0.51%
AND -1% 5 4 13.51% 10.81%
BETWEEN -1.01%
AND -3% 3 2 8.11% 5.41%
BETWEEN -3.01%
AND -8% 1 1 2.70% 2.70%
-------------------------------------------------------------------------------------------
TOTAL 37 37 100% 100%
|
[GRAPHIC OMITTED]
42
ADDITIONAL INFORMATION
ADDITIONAL AND MORE DETAILED INFORMATION ABOUT THE FUNDS IS INCLUDED IN THE SAI
DATED MARCH 1, 2008. THE SAI HAS BEEN FILED WITH THE SEC AND IS INCORPORATED BY
REFERENCE INTO THIS PROSPECTUS AND, THEREFORE, LEGALLY FORMS A PART OF THIS
PROSPECTUS. THE SEC MAINTAINS THE EDGAR DATABASE ON ITS WEB SITE
("HTTP://WWW.SEC.GOV") THAT CONTAINS THE SAI, MATERIAL INCORPORATED BY
REFERENCE, AND OTHER INFORMATION REGARDING REGISTRANTS THAT FILE ELECTRONICALLY
WITH THE SEC. YOU MAY ALSO REVIEW AND COPY DOCUMENTS AT THE SEC PUBLIC REFERENCE
ROOM IN WASHINGTON, D.C. (FOR INFORMATION ON THE OPERATION OF THE PUBLIC
REFERENCE ROOM, CALL 202.551.8090). YOU MAY REQUEST DOCUMENTS FROM THE SEC BY
MAIL, UPON PAYMENT OF A DUPLICATION FEE, BY WRITING TO: U.S. SECURITIES AND
EXCHANGE COMMISSION, PUBLIC REFERENCE SECTION, WASHINGTON, D.C. 20549-0102 OR BY
EMAILING THE SEC AT THE FOLLOWING ADDRESS: PUBLICINFO@SEC.GOV.
YOU MAY OBTAIN A COPY OF THE SAI OR THE ANNUAL OR SEMI-ANNUAL REPORTS, WITHOUT
CHARGE BY CALLING 800.820.0888 OR 301.296.5100, VISITING THE RYDEX WEB SITE AT
WWW.RYDEXINVESTMENTS.COM, OR WRITING TO RYDEX ETF TRUST, AT 9601 BLACKWELL ROAD,
SUITE 500, ROCKVILLE, MARYLAND 20850. ADDITIONAL INFORMATION ABOUT THE FUNDS'
INVESTMENTS IS AVAILABLE IN THE ANNUAL AND SEMI-ANNUAL REPORTS. ALSO, IN THE
FUNDS' ANNUAL REPORT, YOU WILL FIND A DISCUSSION OF THE MARKET CONDITIONS AND
INVESTMENT STRATEGIES THAT SIGNIFICANTLY AFFECTED THE FUNDS' PERFORMANCE DURING
THEIR LAST FISCAL YEAR.
NO ONE HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS OR IN THE FUNDS' SAI IN
CONNECTION WITH THE OFFERING OF FUND SHARES. DO NOT RELY ON ANY SUCH INFORMATION
OR REPRESENTATIONS AS HAVING BEEN AUTHORIZED BY THE FUNDS OR RYDEX INVESTMENTS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUNDS IN ANY JURISDICTION
WHERE SUCH AN OFFERING IS NOT LAWFUL.
THE TRUST'S SEC REGISTRATION NUMBER IS 811-21261.
[LOGO] RYDEXINVESTMENTS
ESSENTIAL FOR MODERN MARKETS(R)
9601 Blackwell Road o Suite 500 o Rockville, MD 20850
800.820.0888 o www.rydexinvestments.com
PRO-ILETF-0308x0309
RYDEX ETF TRUST
MARCH 1, 2008
BROAD MARKET ETFS
Rydex Inverse S&P 500 ETF
Rydex 2x S&P 500 Growth ETF
Rydex Inverse S&P 500 Growth ETF
Rydex Inverse 2x S&P 500 Growth ETF
Rydex 2x S&P 500 Value ETF
Rydex Inverse S&P 500 Value ETF
Rydex Inverse 2x S&P 500 Value ETF
Rydex Inverse S&P MidCap 400 ETF
Rydex 2x S&P MidCap 400 Growth ETF
Rydex Inverse S&P MidCap 400 Growth ETF
Rydex Inverse 2x S&P MidCap 400 Growth ETF
Rydex 2x S&P MidCap 400 Value ETF
Rydex Inverse S&P MidCap 400 Value ETF
Rydex Inverse 2x S&P MidCap 400 Value ETF
Rydex 2x S&P SmallCap 600 ETF
Rydex Inverse S&P SmallCap 600 ETF
Rydex Inverse 2x S&P SmallCap 600 ETF
Rydex 2x S&P SmallCap 600 Growth ETF
Rydex Inverse S&P SmallCap 600 Growth ETF
Rydex Inverse 2x S&P SmallCap 600 Growth ETF
Rydex 2x S&P SmallCap 600 Value ETF
Rydex Inverse S&P SmallCap 600 Value ETF
Rydex Inverse 2x S&P SmallCap 600 Value ETF
Rydex 2x NASDAQ 100 ETF
Rydex Inverse NASDAQ 100 ETF
Rydex Inverse 2x NASDAQ 100 ETF
Rydex 2x Russell 1000(R) ETF
Rydex Inverse Russell 1000(R) ETF
Rydex Inverse 2x Russell 1000(R) ETF
Rydex 2x Russell 1000(R) Growth ETF
Rydex Inverse Russell 1000(R) Growth ETF
Rydex Inverse 2x Russell 1000(R) Growth ETF
Rydex 2x Russell 1000(R) Value ETF
Rydex Inverse Russell 1000(R) Value ETF
Rydex Inverse 2x Russell 1000(R) Value ETF
Rydex 2x Russell MidCap(R) ETF
Rydex Inverse Russell MidCap(R) ETF
Rydex Inverse 2x Russell MidCap(R) ETF
Rydex 2x Russell MidCap(R) Growth ETF
Rydex Inverse Russell MidCap(R) Growth ETF
Rydex Inverse 2x Russell MidCap(R) Growth ETF
Rydex 2x Russell MidCap(R) Value ETF
Rydex Inverse Russell MidCap(R) Value ETF
Rydex Inverse 2x Russell MidCap(R) Value ETF
Rydex Inverse Russell 2000(R) ETF
Rydex 2x Russell 2000(R) Growth ETF
Rydex Inverse Russell 2000(R) Growth ETF
Rydex Inverse 2x Russell 2000(R) Growth ETF
Rydex 2x Russell 2000(R) Value ETF
Rydex Inverse Russell 2000(R) Value ETF
Rydex Inverse 2x Russell 2000(R) Value ETF
Rydex 2x Russell 3000(R) ETF
Rydex Inverse Russell 3000(R) ETF
Rydex Inverse 2x Russell 3000(R) ETF
Rydex 2x Russell 3000(R) Growth ETF
Rydex Inverse Russell 3000(R) Growth ETF
Rydex Inverse 2x Russell 3000(R) Growth ETF
Rydex 2x Russell 3000(R) Value ETF
Rydex Inverse Russell 3000(R) Value ETF
Rydex Inverse 2x Russell 3000 Value ETF
SECTOR ETFS
Rydex 2x NASDAQ Biotech ETF
Rydex Inverse NASDAQ Biotech ETF
Rydex Inverse 2x NASDAQ Biotech ETF
Rydex 2x Consumer Discretionary ETF
Rydex Inverse Consumer Discretionary ETF
Rydex Inverse 2x Consumer Discretionary ETF
Rydex 2x Consumer Staples ETF
Rydex Inverse Consumer Staples ETF
Rydex Inverse 2x Consumer Staples ETF
Rydex 2x Energy ETF
Rydex Inverse Energy ETF
Rydex Inverse 2x Energy ETF
Rydex 2x Financials ETF
Rydex Inverse Financials ETF
Rydex Inverse 2x Financials ETF
Rydex 2x Health Care ETF
Rydex Inverse Health Care ETF
Rydex Inverse 2x Health Care ETF
Rydex 2x Industrials ETF
Rydex Inverse Industrials ETF
Rydex Inverse 2x Industrials ETF
Rydex 2x Materials ETF
Rydex Inverse Materials ETF
Rydex Inverse 2x Materials ETF
Rydex 2x Technology ETF
Rydex Inverse Technology ETF
Rydex Inverse 2x Technology ETF
Rydex 2x Utilities ETF
Rydex Inverse Utilities ETF
Rydex Inverse 2x Utilities ETF
THE U.S. SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE
TRUST'S SHARES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
PAGE
RYDEX ETF TRUST OVERVIEW ................................................ 1
COMMON RISK/RETURN INFORMATION .......................................... 3
BROAD MARKET ETFS
RYDEX INVERSE S&P 500 ETF ............................................ 5
RYDEX 2X S&P 500 GROWTH ETF .......................................... 7
RYDEX INVERSE S&P 500 GROWTH ETF ..................................... 8
RYDEX INVERSE 2X S&P 500 GROWTH ETF .................................. 9
RYDEX 2X S&P 500 VALUE ETF ........................................... 11
RYDEX INVERSE S&P 500 VALUE ETF ...................................... 12
RYDEX INVERSE 2X S&P 500 VALUE ETF ................................... 13
RYDEX INVERSE S&P MIDCAP 400 ETF ..................................... 15
RYDEX 2X S&P MIDCAP 400 GROWTH ETF ................................... 17
RYDEX INVERSE S&P MIDCAP 400 GROWTH ETF .............................. 19
RYDEX INVERSE 2X S&P MIDCAP 400 GROWTH ETF ........................... 21
RYDEX 2X S&P MIDCAP 400 VALUE ETF .................................... 23
RYDEX INVERSE S&P MIDCAP 400 VALUE ETF ............................... 25
RYDEX INVERSE 2X S&P MIDCAP 400 VALUE ETF ............................ 27
RYDEX 2X S&P SMALLCAP 600 ETF ........................................ 29
RYDEX INVERSE S&P SMALLCAP 600 ETF ................................... 31
RYDEX INVERSE 2X S&P SMALLCAP 600 ETF ................................ 33
RYDEX 2X SMALLCAP 600 GROWTH ETF ..................................... 35
RYDEX INVERSE S&P SMALLCAP 600 GROWTH ETF ............................ 37
RYDEX INVERSE 2X S&P SMALLCAP 600 GROWTH ETF ......................... 39
RYDEX 2X S&P SMALLCAP 600 VALUE ETF .................................. 41
RYDEX INVERSE S&P SMALLCAP 600 VALUE ETF ............................. 43
RYDEX INVERS 2X S&P SMALLCAP 600 VALUE ETF ........................... 45
RYDEX 2X NASDAQ 100 ETF .............................................. 47
RYDEX INVERSE NASDAQ 100 ETF ......................................... 49
RYDEX INVERSE 2X NASDAQ 100 .......................................... 51
RYDEX 2X RUSSELL 1000(R) ETF ......................................... 53
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(continued)
PAGE
RYDEX INVERSE RUSSELL 1000(R) ETF .................................... 54
RYDEX INVERSE 2X RUSSELL 1000(R) ETF ................................. 55
RYDEX 2X RUSSELL 1000(R) GROWTH ETF .................................. 57
RYDEX INVERSE RUSSELL 1000(R)GROWTH ETF .............................. 58
RYDEX INVERSE 2X RUSSELL 1000(R) GROWTH ETF .......................... 59
RYDEX 2X RUSSELL 1000(R) VALUE ETF ................................... 61
RYDEX INVERSE RUSSELL 1000(R) VALUE ETF .............................. 62
RYDEX INVERSE 2X RUSSELL 1000(R) VALUE ETF ........................... 63
RYDEX 2X RUSSELL MIDCAP(R) ETF ....................................... 65
RYDEX INVERSE RUSSELL MIDCAP(R) ETF .................................. 67
RYDEX INVERSE 2X RUSSELL MIDCAP(R) ETF ............................... 69
RYDEX 2X RUSSELL MIDCAP(R) GROWTH ETF ................................ 71
RYDEX INVERSE RUSSELL MIDCAP(R) GROWTH ETF ........................... 73
RYDEX INVERSE 2X RUSSELL MIDCAP(R) GROWTH ETF ........................ 75
RYDEX 2X RUSSELL MIDCAP(R) VALUE ETF ................................. 77
RYDEX INVERSE RUSSELL MIDCAP(R) VALUE ETF ............................ 79
RYDEX INVERSE 2X RUSSELL MIDCAP(R) VALUE ETF ......................... 81
RYDEX INVERSE RUSSELL 2000(R) ETF .................................... 83
RYDEX 2X RUSSELL 2000(R) GROWTH ETF .................................. 85
RYDEX INVERSE RUSSELL 2000(R) GROWTH ETF ............................. 87
RYDEX INVERSE 2X RUSSELL 2000(R) GROWTH ETF .......................... 89
RYDEX 2X RUSSELL 2000(R) VALUE ETF ................................... 91
RYDEX INVERSE RUSSELL 2000(R) VALUE ETF .............................. 93
RYDEX INVERSE 2X RUSSELL 2000(R) VALUE ETF ........................... 95
RYDEX 2X RUSSELL 3000(R) ETF ......................................... 97
RYDEX INVERSE RUSSELL 3000(R) ETF .................................... 98
RYDEX INVERSE 2X RUSSELL 3000(R) ETF ................................. 99
RYDEX 2X RUSSELL 3000(R) GROWTH ETF .................................. 101
RYDEX INVERSE RUSSELL 3000(R) GROWTH ETF ............................. 102
RYDEX INVERSE 2X RUSSELL 3000(R) GROWTH ETF .......................... 103
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TABLE OF CONTENTS
(continued)
PAGE
RYDEX 2X RUSSELL 3000(R) VALUE ETF ................................... 105
RYDEX INVERSE RUSSELL 3000(R) VALUE ETF .............................. 106
RYDEX INVERSE 2X RUSSELL 3000(R) VALUE ETF ........................... 107
SECTOR ETFS
RYDEX 2X NASDAQ BIOTECH ETF .......................................... 109
RYDEX INVERSE NASDAQ BIOTECH ETF ..................................... 111
RYDEX INVERSE 2X NASDAQ BIOTECH ETF .................................. 113
RYDEX 2X CONSUMER DISCRETIONARY ETF .................................. 115
RYDEX INVERSE CONSUMER DISCRETIONARY ETF ............................. 117
RYDEX INVERSE 2X CONSUMER DISCRETIONARY ETF .......................... 118
RYDEX 2X CONSUMER STAPLES ETF ........................................ 120
RYDEX INVERSE CONSUMER STAPLES ETF ................................... 122
RYDEX INVERSE 2X CONSUMER STAPLES ETF ................................ 123
RYDEX 2X ENERGY ETF .................................................. 125
RYDEX INVERSE ENERGY ETF ............................................. 127
RYDEX INVERSE 2X ENERGY ETF .......................................... 128
RYDEX 2X FINANCIALS ETF .............................................. 130
RYDEX INVERSE FINANCIALS ETF ......................................... 132
RYDEX INVERSE 2X FINANCIALS ETF ...................................... 134
RYDEX 2X HEALTH CARE ETF ............................................. 136
RYDEX INVERSE HEALTH CARE ETF ........................................ 138
RYDEX INVERSE 2X HEALTH CARE ETF ..................................... 139
RYDEX 2X INDUSTRIALS ETF ............................................. 141
RYDEX INVERSE INDUSTRIALS ETF ........................................ 143
RYDEX INVERS 2X INDUSTRIALS ETF ...................................... 145
RYDEX 2X MATERIALS ETF ............................................... 147
RYDEX INVERSE MATERIALS ETF .......................................... 149
RYDEX INVERSE 2X MATERIALS ETF ....................................... 150
RYDEX 2X TECHNOLOGY ETF .............................................. 152
RYDEX INVERSE TECHNOLOGY ETF ......................................... 154
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(continued)
PAGE
RYDEX INVERSE 2X TECHNOLOGY ETF ...................................... 156
RYDEX 2X UTILITIES ETF ............................................... 158
RYDEX INVERSE UTILITIES ETF .......................................... 160
RYDEX INVERSE 2X UTILITIES ETF ....................................... 162
FEES AND EXPENSES OF THE FUNDS .......................................... 164
MORE INFORMATION ABOUT THE FUNDS ........................................ 166
BENCHMARKS AND INVESTMENT METHODOLOGY ................................... 166
SHAREHOLDER INFORMATION ................................................. 181
DISTRIBUTION PLAN ....................................................... 185
DIVIDENDS AND DISTRIBUTIONS ............................................. 185
TAX INFORMATION ......................................................... 186
MANAGEMENT OF THE FUNDS ................................................. 188
INDEX PUBLISHERS INFORMATION ............................................ 190
ADDITIONAL INFORMATION .................................................. 192
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RYDEX ETF TRUST
9601 BLACKWELL ROAD, SUITE 500, ROCKVILLE, MARYLAND 20850
800.820.0888 o 301.296.5100 o
WWW.RYDEXINVESTMENTS.COM
Rydex ETF Trust (the "Trust") is an investment company offering a number of
professionally managed investment portfolios. This Prospectus describes the
Rydex Leveraged and Inverse ETF Series (each a "Fund" and collectively, the
"Funds"), which are grouped into the following categories.
BROAD MARKET ETFS
Rydex Inverse S&P 500 ETF, Rydex 2x S&P 500 Growth ETF, Rydex Inverse S&P 500
Growth ETF, Rydex Inverse 2x S&P 500 Growth ETF, Rydex 2x S&P 500 Value ETF,
Rydex Inverse S&P 500 Value ETF, Rydex Inverse 2x S&P 500 Value ETF, Rydex
Inverse S&P MidCap 400 ETF, Rydex 2x S&P MidCap 400 Growth ETF, Rydex Inverse
S&P MidCap 400 Growth ETF, Rydex Inverse 2x S&P MidCap 400 Growth ETF, Rydex 2x
S&P MidCap 400 Value ETF, Rydex Inverse S&P MidCap 400 Value ETF, Rydex Inverse
2x S&P MidCap 400 Value ETF, Rydex 2x S&P SmallCap 600 ETF, Rydex Inverse S&P
SmallCap 600 ETF, Rydex Inverse 2x S&P SmallCap 600 ETF, Rydex 2x S&P SmallCap
600 Growth ETF, Rydex Inverse S&P SmallCap 600 Growth ETF, Rydex Inverse 2x S&P
SmallCap 600 Growth ETF, Rydex 2x S&P SmallCap 600 Value ETF, Rydex Inverse S&P
SmallCap 600 Value ETF, Rydex Inverse 2x S&P SmallCap 600 Value ETF, Rydex 2x
NASDAQ 100 ETF, Rydex Inverse NASDAQ 100 ETF, Rydex Inverse 2x NASDAQ 100 ETF,
Rydex 2x Russell 1000(R) ETF, Rydex Inverse Russell 1000(R) ETF, Rydex Inverse
2x Russell 1000(R) ETF, Rydex 2x Russell 1000(R) Growth ETF, Rydex Inverse
Russell 1000(R) Growth ETF, Rydex Inverse 2x Russell 1000(R) Growth ETF, Rydex
2x Russell 1000(R) Value ETF, Rydex Inverse Russell 1000(R) Value ETF, Rydex
Inverse 2x Russell 1000(R) Value ETF, Rydex 2x Russell MidCap(R) ETF, Rydex
Inverse MidCap(R) ETF, Rydex Inverse 2x Russell MidCap(R) ETF, Rydex 2x Russell
MidCap(R) Growth ETF, Rydex Inverse Russell MidCap(R) Growth ETF, Rydex Inverse
2x Russell MidCap(R) Growth ETF, Rydex 2x Russell MidCap(R) Value ETF, Rydex
Inverse Russell MidCap(R) Value ETF, Rydex Inverse 2x Russell MidCap(R) Value
ETF, Rydex Inverse Russell 2000(R) ETF, Rydex 2x Russell 2000(R) Growth ETF,
Rydex Inverse Russell 2000(R) Growth ETF, Rydex Inverse 2x Russell 2000(R)
Growth ETF, Rydex 2x Russell 2000(R) Value ETF, Rydex Inverse Russell 2000(R)
Value ETF, Rydex Inverse 2x Russell 2000(R) Value ETF, Rydex 2x Russell 3000(R)
ETF, Rydex Inverse Russell 3000(R) ETF, Rydex Inverse 2x Russell 3000(R) ETF,
Rydex 2x Russell 3000(R) Growth ETF, Rydex Inverse Russell 3000(R) Growth ETF,
Rydex Inverse 2x Russell 3000(R) Growth ETF, Rydex 2x Russell 3000(R) Value ETF,
Rydex Inverse Russell 3000(R) Value ETF, and Rydex Inverse 2x Russell 3000(R)
Value ETF.
SECTOR ETFS - Rydex 2x NASDAQ Biotech ETF, Rydex Inverse NASDAQ Biotech ETF,
Rydex Inverse 2x NASDAQ Biotech ETF, Rydex 2x Consumer Discretionary ETF, Rydex
Inverse Consumer Discretionary ETF, Rydex Inverse 2x Consumer Discretionary ETF,
Rydex 2x Consumer Staples ETF, Rydex Inverse Consumer Staples ETF, Rydex Inverse
2x Consumer Staples ETF, Rydex 2x Energy ETF, Rydex Inverse Energy ETF, Rydex
Inverse 2x Energy ETF, Rydex 2x Financials ETF, Rydex Inverse Financials ETF,
Rydex Inverse 2x Financials ETF, Rydex 2x Health Care ETF, Rydex Inverse Health
Care ETF, Rydex Inverse 2x Health Care ETF, Rydex 2x Industrials ETF, Rydex
Inverse Industrials ETF, Rydex Inverse 2x Industrials ETF, Rydex 2x Materials
ETF, Rydex Inverse Materials ETF, Rydex Inverse 2x Materials ETF, Rydex 2x
Technology ETF, Rydex Inverse Technology ETF, Rydex Inverse 2x Technology ETF,
Rydex 2x Utilities ETF, Rydex Inverse Utilities ETF, and Rydex Inverse 2x
Utilities ETF.
The shares of the Funds are listed for trading on the [American Stock Exchange]
(the "Exchange"). Market prices for a Fund's shares may be different from its
net asset value per share ("NAV"). The
1
Funds issue and redeem shares on a continuous basis at NAV only in blocks of
50,000 shares, or multiples thereof, called a "Creation Unit." Creation Units of
a Leveraged Fund are issued and redeemed principally in-kind for securities
included in the Fund's underlying index. Creation Units of an Inverse Fund are
issued and redeemed for cash. As a practical matter, only institutions or large
investors purchase or redeem Creation Units. Once created, shares of a Fund
generally trade in the secondary market in amounts less than a Creation Unit.
For a more detailed discussion, see the "Creations and Redemptions" section
herein. EXCEPT WHEN AGGREGATED IN CREATION UNITS, SHARES OF EACH FUND ARE NOT
REDEEMABLE SECURITIES.
2
COMMON RISK / RETURN INFORMATION
INVESTMENT OBJECTIVES
Each Fund seeks to provide investment results that match, before fees and
expenses, the performance of a specific benchmark on a daily basis. Each
benchmark is a multiple, inverse, or inverse multiple of the performance of a
particular index (each an "Underlying Index"). The investment objective of each
Fund is non-fundamental and may be changed without shareholder approval.
PRINCIPAL RISKS
DERIVATIVES RISK - The Funds may invest a percentage of their assets in
derivatives, such as futures and options contracts, to pursue their respective
investment objectives. The use of such derivatives may expose the Funds to
additional risks that they would not be subject to if they invested directly in
the securities underlying those derivatives. These risks may cause the Funds to
experience higher losses than funds that do not use derivatives.
EARLY CLOSING RISK - The Funds are subject to the risk that unanticipated early
closings of securities exchanges and other financial markets may result in the
Funds' inability to buy or sell securities or other financial instruments on
that day. If an exchange closes early on a day when a Fund needs to execute a
high volume of trades late in a trading day, the Fund might incur substantial
trading losses.
LIQUIDITY RISK - Trading in shares may be halted because of market conditions or
for reasons that, in the view of the Exchange, make trading in shares
inadvisable. In addition, trading in shares is subject to trading halts caused
by extraordinary market volatility pursuant to "circuit breaker" rules. There
can be no assurance that the requirements necessary to maintain the listing of
the shares of the Funds will continue to be met or will remain unchanged.
MARKET RISK - Due to market conditions, the value of the Funds' investments in
securities and derivatives, such as futures and options contracts, may fluctuate
significantly from day to day. This volatility may cause the value of your
investment in the Funds to decrease.
NON-DIVERSIFICATION RISK - Each Fund is considered non-diversified and can
invest a greater portion of its assets in securities of individual issuers than
a diversified fund. As a result, changes in the market value of a single
security could cause greater fluctuations in the value of Fund shares than would
occur in a diversified fund.
SWAP COUNTERPARTY CREDIT RISK - The Funds are subject to credit risk on the
amount they expect to receive from counterparties to financial instruments
entered into by the Funds. If a counterparty defaults on its payment obligations
to a Fund, this default will cause the value of your investment in the Fund to
decrease.
TRACKING ERROR RISK - Tracking error risk refers to the risk that the Funds'
investment adviser, Rydex Investments (the "Advisor") may not be able to cause
the Funds' performance to match that of the Funds' benchmarks, either on a daily
or aggregate basis. In addition, because the Funds are tracking the performance
of their respective benchmarks on a daily basis, mathematical compounding may
prevent the Funds from correlating with the monthly, quarterly, annual or other
period performance of their benchmarks. Tracking error may cause the Funds'
performance to be less than you expect.
TRADING RISK
o ABSENCE OF PRIOR ACTIVE MARKET - Although the Funds' shares are listed on
the Exchange, there can be no assurance that an active trading market for
the shares will develop or be maintained.
3
o SHARES MAY TRADE AT PRICES OTHER THAN NAV - Shares may trade below their
NAV. The NAV of shares will fluctuate with changes in the market value of
the Funds' holdings. The trading prices of shares will fluctuate in
accordance with changes in NAV as well as market supply and demand.
However, given that shares can be created and redeemed only in Creation
Units at NAV (unlike shares of many closed-end funds, which frequently
trade at appreciable discounts from, and sometimes premiums to, their
NAVs), the Advisor does not believe that large discounts or premiums to
NAV will exist for extended periods of time.
4
RYDEX INVERSE S&P 500 ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse S&P 500 ETF seeks to provide investment results that will
match, before fees and expenses, the performance of a specific benchmark on a
daily basis. The Fund's current benchmark is the inverse (opposite) of the
performance of the S&P 500 Index (the "Index" or "Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the Underlying Index goes up by 5%, the value of the Fund's shares should go
down by 5% on that day.)
PRINCIPAL INVESTMENT STRATEGY
The Fund's objective is to perform exactly the opposite of the Underlying Index.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. For example, the Fund engages in short sales of securities included in
the Underlying Index or futures contracts and may invest to a significant extent
in derivatives and other instruments whose performance is expected to be the
opposite of the Underlying Index, such as options on securities, futures
contracts, and securities indices and swap agreements. This is a non-fundamental
investment policy that can be changed by the Fund upon 60 days' prior notice to
shareholders. On a day-to-day basis, the Fund may hold U.S. Government
securities or cash equivalents to collateralize its short sales and derivative
positions.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse S&P 500 ETF is subject to a number of other risks that may affect the
value of its shares, including:
LARGE-CAPITALIZATION SECURITIES RISK - The Fund is subject to the risk that
large-capitalization stocks may underperform other segments of the equity market
or the equity market as a whole.
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
5
PERFORMANCE
The Rydex Inverse S&P 500 ETF has not yet commenced operations and therefore
does not have a performance history for a full calendar year.
6
RYDEX 2X S&P 500 GROWTH ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex 2x S&P 500 Growth ETF seeks to provide investment results that will
match, before fees and expenses, the performance of a specific benchmark on a
daily basis. The Fund's current benchmark is 200% of the performance of the S&P
500/Citigroup Growth Index (the "Index" or "Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase on a daily basis by 200% of the value of any increase in the Underlying
Index. When the value of the Underlying Index declines, the value of the Fund's
shares should also decrease on a daily basis by 200% of the value of any
decrease in the Underlying Index (E.G., if the Underlying Index goes down by 5%,
the value of the Fund's shares should go down by 10% on that day). For more
information about the effects of leverage, please see "Understanding Compounding
and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of investing in
equity securities, leveraged instruments, such as equity index swaps, futures
contracts and options on securities, futures contracts, and stock indices.
Equity index swaps, futures and option contracts enable the Fund to pursue its
investment objective without investing directly in the securities included in
the benchmark, or in the same proportion that those securities are represented
in that benchmark. On a day-to-day basis, the Fund holds U.S. Government
securities or cash equivalents to collateralize these futures and options
contracts. The Fund also will purchase equity securities that are generally
within the capitalization range of the S&P 500/Citigroup Growth Index, but may
purchase equity securities of any capitalization range.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in component securities included in,
and financial instruments with economic characteristics that should perform
similarly to those of, the Underlying Index. This is a non-fundamental policy
that can be changed by the Fund upon 60 days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex 2x
S&P 500 Growth ETF is subject to a number of other risks that may affect the
value of its shares, including:
LARGE-CAPITALIZATION SECURITIES RISK - The Fund is subject to the risk that
large-capitalization stocks may underperform other segments of the equity market
or the equity market as a whole.
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
PERFORMANCE
The Rydex 2x S&P 500 Growth ETF has not yet commenced operations and therefore
does not have a performance history for a full calendar year.
7
RYDEX INVERSE S&P 500 GROWTH ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse S&P 500 Growth ETF seeks to provide investment results that
will match, before fees and expenses, the performance of a specific benchmark on
a daily basis. The Fund's current benchmark is the inverse (opposite) of the
performance of the S&P 500/Citigroup Growth Index (the "Index" or "Underlying
Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the Underlying Index goes up by 5%, the value of the Fund's shares should go
down by 5% on that day.
PRINCIPAL INVESTMENT STRATEGY
The Fund's objective is to perform exactly the opposite of the Underlying Index.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. For example, the Fund engages in short sales of securities included in
the Underlying Index or futures contracts and may invest to a significant extent
in derivatives and other instruments whose performance is expected to be the
opposite of the Underlying Index, such as options on securities, futures
contracts, and securities indices and swap agreements. This is a non-fundamental
investment policy that can be changed by the Fund upon 60 days' prior notice to
shareholders. On a day-to-day basis, the Fund may hold U.S. Government
securities or cash equivalents to collateralize its short sales and derivative
positions.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse S&P 500 Growth ETF is subject to a number of other risks that may affect
the value of its shares, including:
LARGE-CAPITALIZATION SECURITIES RISK - The Fund is subject to the risk that
large-capitalization stocks may underperform other segments of the equity market
or the equity market as a whole.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
PERFORMANCE
The Rydex Inverse S&P 500 Growth ETF has not yet commenced operations and
therefore does not have a performance history for a full calendar year.
8
RYDEX INVERSE 2X S&P 500 GROWTH ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse 2x S&P 500 Growth ETF seeks to provide investment results that
will match, before fees and expenses, the performance of a specific benchmark on
a daily basis. The Fund's current benchmark is 200% of the inverse (opposite) of
the performance of the S&P 500/Citigroup Growth Index (the "Index" or
"Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the Underlying Index goes up by 5%, the value of the Fund's shares should go
down by 10% on that day). For more information about the effects of leverage,
please see "Understanding Compounding and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of engaging in
short sales of securities and investing in leveraged instruments, such as equity
index swaps, futures contracts and options on securities, futures contracts, and
stock indices. Equity index swaps, short sales, futures and options contracts
enable the Fund to pursue its objective without selling short each of the
securities included in the benchmark. On a day-to-day basis, the Fund holds U.S.
Government securities or cash equivalents to collateralize these futures and
options contracts.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. This is a non-fundamental policy that can be changed by the Fund upon 60
days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse 2x S&P 500 Growth ETF is subject to a number of other risks that may
affect the value of its shares, including:
LARGE-CAPITALIZATION SECURITIES RISK - The Fund is subject to the risk that
large-capitalization stocks may underperform other segments of the equity market
or the equity market as a whole.
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
9
PERFORMANCE
The Rydex Inverse 2x S&P 500 Growth ETF has not yet commenced operations and
therefore does not have a performance history for a full calendar year.
10
RYDEX 2X S&P 500 VALUE ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex 2x S&P 500 Value ETF seeks to provide investment results that will
match, before fees and expenses, the performance of a specific benchmark on a
daily basis. The Fund's current benchmark is 200% of the performance of the S&P
500/Citigroup Value Index (the "Index" or "Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase on a daily basis by 200% of the value of any increase in the Underlying
Index. When the value of the Underlying Index declines, the value of the Fund's
shares should also decrease on a daily basis by 200% of the value of any
decrease in the Underlying Index (E.G., if the Underlying Index goes down by 5%,
the value of the Fund's shares should go down by 10% on that day). For more
information about the effects of leverage, please see "Understanding Compounding
and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of investing in
equity securities, leveraged instruments, such as equity index swaps, futures
contracts and options on securities, futures contracts, and stock indices.
Equity index swaps, futures and option contracts enable the Fund to pursue its
investment objective without investing directly in the securities included in
the benchmark, or in the same proportion that those securities are represented
in that benchmark. On a day-to-day basis, the Fund holds U.S. Government
securities or cash equivalents to collateralize these futures and options
contracts. The Fund also will purchase equity securities that are generally
within the capitalization range of the S&P 500/Citigroup Value Index, but may
purchase equity securities of any capitalization range.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in component securities included in,
and financial instruments with economic characteristics that should perform
similarly to those of, the Underlying Index. This is a non-fundamental policy
that can be changed by the Fund upon 60 days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex 2x
S&P 500 Value ETF is subject to a number of other risks that may affect the
value of its shares, including:
LARGE-CAPITALIZATION SECURITIES RISK - The Fund is subject to the risk that
large-capitalization stocks may underperform other segments of the equity market
or the equity market as a whole.
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
PERFORMANCE
The Rydex 2x S&P 500 Value ETF has not yet commenced operations and therefore
does not have a performance history for a full calendar year.
11
RYDEX INVERSE S&P 500 VALUE ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse S&P 500 Value ETF seeks to provide investment results that
will match, before fees and expenses, the performance of a specific benchmark on
a daily basis. The Fund's current benchmark is the inverse (opposite) of the
performance of the S&P 500/Citigroup Value Index (the "Index" or "Underlying
Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the Underlying Index goes up by 5%, the value of the Fund's shares should go
down by 5% on that day.
PRINCIPAL INVESTMENT STRATEGY
The Fund's objective is to perform exactly the opposite of the Underlying Index.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. For example, the Fund engages in short sales of securities included in
the Underlying Index or futures contracts and may invest to a significant extent
in derivatives and other instruments whose performance is expected to be the
opposite of the Underlying Index, such as options on securities, futures
contracts, and securities indices and swap agreements. This is a non-fundamental
investment policy that can be changed by the Fund upon 60 days' prior notice to
shareholders. On a day-to-day basis, the Fund may hold U.S. Government
securities or cash equivalents to collateralize its short sales and derivative
positions.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse S&P 500 Value ETF is subject to a number of other risks that may affect
the value of its shares, including:
LARGE-CAPITALIZATION SECURITIES RISK - The Fund is subject to the risk that
large-capitalization stocks may underperform other segments of the equity market
or the equity market as a whole.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
PERFORMANCE
The Rydex Inverse S&P 500 Value ETF has not yet commenced operations and
therefore does not have a performance history for a full calendar year.
12
RYDEX INVERSE 2X S&P 500 VALUE ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse 2x S&P 500 Value ETF seeks to provide investment results that
will match, before fees and expenses, the performance of a specific benchmark on
a daily basis. The Fund's current benchmark is 200% of the inverse (opposite) of
the performance of the S&P 500/Citigroup Value Index (the "Index" or "Underlying
Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the Underlying Index goes up by 5%, the value of the Fund's shares should go
down by 10% on that day). For more information about the effects of leverage,
please see "Understanding Compounding and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of engaging in
short sales of securities and investing in leveraged instruments, such as equity
index swaps, futures contracts and options on securities, futures contracts, and
stock indices. Equity index swaps, short sales, futures and options contracts
enable the Fund to pursue its objective without selling short each of the
securities included in the benchmark. On a day-to-day basis, the Fund holds U.S.
Government securities or cash equivalents to collateralize these futures and
options contracts.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. This is a non-fundamental policy that can be changed by the Fund upon 60
days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse 2x S&P 500 Value ETF is subject to a number of other risks that may
affect the value of its shares, including:
LARGE-CAPITALIZATION SECURITIES RISK - The Fund is subject to the risk that
large-capitalization stocks may underperform other segments of the equity market
or the equity market as a whole.
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
13
PERFORMANCE
The Rydex Inverse 2x S&P 500 Value ETF has not yet commenced operations and
therefore does not have a performance history for a full calendar year.
14
RYDEX INVERSE S&P MIDCAP 400 ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse S&P MidCap 400 ETF seeks to provide investment results that
will match, before fees and expenses, the performance of a specific benchmark on
a daily basis. The Fund's current benchmark is the inverse (opposite) of the
performance of the S&P MidCap 400 Index (the "Index" or "Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the Underlying Index goes up by 5%, the value of the Fund's shares should go
down by 5% on that day).
PRINCIPAL INVESTMENT STRATEGY
The Fund's objective is to perform exactly the opposite of the Underlying Index.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. For example, the Fund engages in short sales of securities included in
the Underlying Index or futures contracts and may invest to a significant extent
in derivatives and other instruments whose performance is expected to be the
opposite of the Underlying Index, such as options on securities, futures
contracts, and securities indices and swap agreements. This is a non-fundamental
investment policy that can be changed by the Fund upon 60 days' prior notice to
shareholders. On a day-to-day basis, the Fund may hold U.S. Government
securities or cash equivalents to collateralize its short sales and derivative
positions.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse S&P MidCap 400 ETF is subject to a number of other risks that may affect
the value of its shares, including:
MID-CAPITALIZATION SECURITIES RISK - In comparison to securities of companies
with large capitalizations, securities of medium-capitalization companies may
have more price volatility, greater spreads between their bid and ask prices,
significantly lower trading volumes, and cyclical or static growth prospects.
Medium-capitalization companies often have limited product lines, markets or
financial resources, and may therefore be more vulnerable to adverse
developments than large-capitalization companies. These securities may or may
not pay dividends. The Fund is subject to the risk that medium-capitalization
stocks may underperform other segments of the equity market or the equity market
as a whole.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
15
PERFORMANCE
The Rydex Inverse S&P MidCap 400 ETF has not yet commenced operations and
therefore does not have a performance history for a full calendar year.
16
RYDEX 2X S&P MIDCAP 400 GROWTH ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex 2x S&P MidCap 400 Growth ETF seeks to provide investment results that
will match, before fees and expenses, the performance of a specific benchmark on
a daily basis. The Fund's current benchmark is 200% of the performance of the
S&P MidCap 400/Citigroup Growth Index (the "Index" or "Underlying Index").
If the Fund meets its objective, the value of the Fund's shares will tend to
increase on a daily basis by 200% of the value of any increase in the Underlying
Index. When the value of the Underlying Index declines, the value of the Fund's
shares should also decrease on a daily basis by 200% of the value of any
decrease in the Underlying Index (E.G., if the Underlying Index goes down by 5%,
the value of the Fund's shares should go down by 10% on that day). For more
information about the effects of leverage, please see "Understanding Compounding
and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of investing in
equity securities, leveraged instruments, such as equity index swaps, futures
contracts and options on securities, futures contracts, and stock indices.
Equity index swaps, futures and option contracts enable the Fund to pursue its
investment objective without investing directly in the securities included in
the benchmark, or in the same proportion that those securities are represented
in that benchmark. On a day-to-day basis, the Fund holds U.S. Government
securities or cash equivalents to collateralize these futures and options
contracts. The Fund also will purchase equity securities that are generally
within the capitalization range of the S&P MidCap 400/Citigroup Growth Index,
but may purchase equity securities of any capitalization range.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in component securities included in,
and financial instruments with economic characteristics that should perform
similarly to those of, the Underlying Index. This is a non-fundamental policy
that can be changed by the Fund upon 60 days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex 2x
S&P MidCap 400 Growth ETF is subject to a number of other risks that may affect
the value of its shares, including:
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
MID-CAPITALIZATION SECURITIES RISK - In comparison to securities of companies
with large capitalizations, securities of medium-capitalization companies may
have more price volatility, greater spreads between their bid and ask prices,
significantly lower trading volumes, and cyclical or static growth prospects.
Medium-capitalization companies often have limited product lines, markets or
financial resources, and may therefore be more vulnerable to adverse
developments than large-capitalization companies. These securities may or may
not pay dividends. The Fund is subject to the risk that medium-capitalization
stocks may underperform other segments of the equity market or the equity market
as a whole.
17
PERFORMANCE
The Rydex 2x S&P MidCap 400 Growth ETF has not yet commenced operations and
therefore does not have a performance history for a full calendar year.
18
RYDEX INVERSE S&P MIDCAP 400 GROWTH ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse S&P MidCap 400 Growth ETF seeks to provide investment results
that will match, before fees and expenses, the performance of a specific
benchmark on a daily basis. The Fund's current benchmark is the inverse
(opposite) of the performance of the S&P Midcap 400/Citigroup Growth Index (the
"Index" or "Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the Underlying Index goes up by 5%, the value of the Fund's shares should go
down by 5% on that day).
PRINCIPAL INVESTMENT STRATEGY
The Fund's objective is to perform exactly the opposite of the Underlying Index
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. For example, the Fund engages in short sales of securities included in
the Underlying Index or futures contracts and may invest to a significant extent
in derivatives and other instruments whose performance is expected to be the
opposite of the Underlying Index, such as options on securities, futures
contracts, and securities indices and swap agreements. This is a non-fundamental
investment policy that can be changed by the Fund upon 60 days' prior notice to
shareholders. On a day-to-day basis, the Fund may hold U.S. Government
securities or cash equivalents to collateralize its short sales and derivative
positions.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse S&P MidCap 400 Growth ETF is subject to a number of other risks that may
affect the value of its shares, including:
MID-CAPITALIZATION SECURITIES RISK - In comparison to securities of companies
with large capitalizations, securities of medium-capitalization companies may
have more price volatility, greater spreads between their bid and ask prices,
significantly lower trading volumes, and cyclical or static growth prospects.
Medium-capitalization companies often have limited product lines, markets or
financial resources, and may therefore be more vulnerable to adverse
developments than large-capitalization companies. These securities may or may
not pay dividends. The Fund is subject to the risk that medium-capitalization
stocks may underperform other segments of the equity market or the equity market
as a whole.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
19
PERFORMANCE
The Rydex Inverse S&P MidCap 400 Growth ETF has not yet commenced operations and
therefore does not have a performance history for a full calendar year.
20
RYDEX INVERSE 2X S&P MIDCAP 400 GROWTH ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse 2x S&P MidCap 400 Growth ETF seeks to provide investment
results that will match, before fees and expenses, the performance of a specific
benchmark on a daily basis. The Fund's current benchmark is 200% of the inverse
(opposite) of the performance of the S&P MidCap 400/Citigroup Growth Index (the
"Index" or "Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the Underlying Index goes up by 5%, the value of the Fund's shares should go
down by 10% on that day). For more information about the effects of leverage,
please see "Understanding Compounding and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of engaging in
short sales of securities and investing in leveraged instruments, such as equity
index swaps, futures contracts and options on securities, futures contracts, and
stock indices. Equity index swaps, short sales, futures and options contracts
enable the Fund to pursue its objective without selling short each of the
securities included in the benchmark. On a day-to-day basis, the Fund holds U.S.
Government securities or cash equivalents to collateralize these futures and
options contracts.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. This is a non-fundamental policy that can be changed by the Fund upon 60
days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse 2x S&P MidCap 400 Growth ETF is subject to a number of other risks that
may affect the value of its shares, including:
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
MID-CAPITALIZATION SECURITIES RISK - In comparison to securities of companies
with large capitalizations, securities of medium-capitalization companies may
have more price volatility, greater spreads between their bid and ask prices,
significantly lower trading volumes, and cyclical or static growth prospects.
Medium-capitalization companies often have limited product lines, markets or
financial resources, and may therefore be more vulnerable to adverse
developments than large-capitalization companies. These securities may or may
not pay dividends. The Fund is subject to the risk that medium-capitalization
stocks may underperform other segments of the equity market or the equity market
as a whole.
21
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
PERFORMANCE
The Rydex Inverse 2x S&P MidCap 400 Growth ETF has not yet commenced operations
and therefore does not have a performance history for a full calendar year.
22
RYDEX 2X S&P MIDCAP 400 VALUE ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex 2x S&P MidCap 400 Value ETF seeks to provide investment results that
will match, before fees and expenses, the performance of a specific benchmark on
a daily basis. The Fund's current benchmark is 200% of the performance of the
S&P MidCap 400/Citigroup Value Index (the "Index" or "Underlying Index").
If the Fund meets its objective, the value of the Fund's shares will tend to
increase on a daily basis by 200% of the value of any increase in the Underlying
Index. When the value of the Underlying Index declines, the value of the Fund's
shares should also decrease on a daily basis by 200% of the value of any
decrease in the Underlying Index (E.G., if the Underlying Index goes down by 5%,
the value of the Fund's shares should go down by 10% on that day). For more
information about the effects of leverage, please see "Understanding Compounding
and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of investing in
equity securities, leveraged instruments, such as equity index swaps, futures
contracts and options on securities, futures contracts, and stock indices.
Equity index swaps, futures and option contracts enable the Fund to pursue its
investment objective without investing directly in the securities included in
the benchmark, or in the same proportion that those securities are represented
in that benchmark. On a day-to-day basis, the Fund holds U.S. Government
securities or cash equivalents to collateralize these futures and options
contracts. The Fund also will purchase equity securities that are generally
within the capitalization range of the S&P MidCap 400/Citigroup Value Index, but
may purchase equity securities of any capitalization range.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in component securities included in,
and financial instruments with economic characteristics that should perform
similarly to those of, the Underlying Index. This is a non-fundamental policy
that can be changed by the Fund upon 60 days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex 2x
S&P MidCap 400 Value ETF is subject to a number of other risks that may affect
the value of its shares, including:
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
MID-CAPITALIZATION SECURITIES RISK - In comparison to securities of companies
with large capitalizations, securities of medium-capitalization companies may
have more price volatility, greater spreads between their bid and ask prices,
significantly lower trading volumes, and cyclical or static growth prospects.
Medium-capitalization companies often have limited product lines, markets or
financial resources, and may therefore be more vulnerable to adverse
developments than large-capitalization companies. These securities may or may
not pay dividends. The Fund is subject to the risk that medium-capitalization
stocks may underperform other segments of the equity market or the equity market
as a whole.
23
PERFORMANCE
The Rydex 2x S&P MidCap 400 Value ETF has not yet commenced operations and
therefore does not have a performance history for a full calendar year.
24
RYDEX INVERSE S&P MIDCAP 400 VALUE ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse S&P MidCap 400 Value ETF seeks to provide investment results
that will match, before fees and expenses, the performance of a specific
benchmark on a daily basis. The Fund's current benchmark is the inverse
(opposite) of the performance of the S&P MidCap 400/Citigroup Value Index (the
"Index" or "Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the Underlying Index goes up by 5%, the value of the Fund's shares should go
down by 5% on that day).
PRINCIPAL INVESTMENT STRATEGY
The Fund's objective is to perform exactly the opposite of the Underlying Index.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. For example, the Fund engages in short sales of securities included in
the Underlying Index or futures contracts and may invest to a significant extent
in derivatives and other instruments whose performance is expected to be the
opposite of the Underlying Index, such as options on securities, futures
contracts, and securities indices and swap agreements. This is a non-fundamental
investment policy that can be changed by the Fund upon 60 days' prior notice to
shareholders. On a day-to-day basis, the Fund may hold U.S. Government
securities or cash equivalents to collateralize its short sales and derivative
positions.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse S&P MidCap 400 Value ETF is subject to a number of other risks that may
affect the value of its shares, including:
MID-CAPITALIZATION SECURITIES RISK - In comparison to securities of companies
with large capitalizations, securities of medium-capitalization companies may
have more price volatility, greater spreads between their bid and ask prices,
significantly lower trading volumes, and cyclical or static growth prospects.
Medium-capitalization companies often have limited product lines, markets or
financial resources, and may therefore be more vulnerable to adverse
developments than large-capitalization companies. These securities may or may
not pay dividends. The Fund is subject to the risk that medium-capitalization
stocks may underperform other segments of the equity market or the equity market
as a whole.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
25
PERFORMANCE
The Rydex Inverse S&P MidCap 400 Value ETF has not yet commenced operations and
therefore does not have a performance history for a full calendar year.
26
RYDEX INVERSE 2X S&P MIDCAP 400 VALUE ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse 2x S&P MidCap 400 Value ETF seeks to provide investment
results that will match, before fees and expenses, the performance of a specific
benchmark on a daily basis. The Fund's current benchmark is 200% of the inverse
(opposite) of the performance of the S&P MidCap 400/Citigroup Value Index (the
"Index" or "Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the Underlying Index goes up by 5%, the value of the Fund's shares should go
down by 10% on that day). For more information about the effects of leverage,
please see "Understanding Compounding and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of engaging in
short sales of securities and investing in leveraged instruments, such as equity
index swaps, futures contracts and options on securities, futures contracts, and
stock indices. Equity index swaps, short sales, futures and options contracts
enable the Fund to pursue its objective without selling short each of the
securities included in the benchmark. On a day-to-day basis, the Fund holds U.S.
Government securities or cash equivalents to collateralize these futures and
options contracts.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. This is a non-fundamental policy that can be changed by the Fund upon 60
days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse 2x S&P MidCap 400 Value ETF is subject to a number of other risks that
may affect the value of its shares, including:
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
MID-CAPITALIZATION SECURITIES RISK - In comparison to securities of companies
with large capitalizations, securities of medium-capitalization companies may
have more price volatility, greater spreads between their bid and ask prices,
significantly lower trading volumes, and cyclical or static growth prospects.
Medium-capitalization companies often have limited product lines, markets or
financial resources, and may therefore be more vulnerable to adverse
developments than large-capitalization companies. These securities may or may
not pay dividends. The Fund is subject to the risk that medium-capitalization
stocks may underperform other segments of the equity market or the equity market
as a whole.
27
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
PERFORMANCE
The Rydex Inverse 2x S&P MidCap 400 Value ETF has not yet commenced operations
and therefore does not have a performance history for a full calendar year.
28
RYDEX 2X S&P SMALLCAP 600 ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex 2x S&P SmallCap 600 ETF seeks to provide investment results that will
match, before fees and expenses, the performance of a specific benchmark on a
daily basis. The Fund's current benchmark is 200% of the performance of the S&P
SmallCap 600 Index (the "Index" or "Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase on a daily basis by 200% of the value of any increase in the Underlying
Index. When the value of the Underlying Index declines, the value of the Fund's
shares should also decrease on a daily basis by 200% of the value of any
decrease in the Underlying Index (E.G., if the Underlying Index goes down by 5%,
the value of the Fund's shares should go down by 10% on that day). For more
information about the effects of leverage, please see "Understanding Compounding
and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of investing in
equity securities, leveraged instruments, such as equity index swaps, futures
contracts and options on securities, futures contracts, and stock indices.
Equity index swaps, futures and option contracts enable the Fund to pursue its
investment objective without investing directly in the securities included in
the benchmark, or in the same proportion that those securities are represented
in that benchmark. On a day-to-day basis, the Fund holds U.S. Government
securities or cash equivalents to collateralize these futures and options
contracts. The Fund also will purchase equity securities that are generally
within the capitalization range of the S&P SmallCap 600 Index, but may purchase
equity securities of any capitalization range.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in component securities included in,
and financial instruments with economic characteristics that should perform
similarly to those of, the Underlying Index. This is a non-fundamental policy
that can be changed by the Fund upon 60 days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex 2x
S&P SmallCap 600 ETF is subject to a number of other risks that may affect the
value of its shares, including:
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
SMALL-CAPITALIZATION SECURITIES RISK - In comparison to securities of companies
with medium and large capitalizations, securities of small-capitalization
companies may have more price volatility, greater spreads between their bid and
ask prices, significantly lower trading volumes, and cyclical or static growth
prospects. Small-capitalization companies often have limited product lines,
markets or financial resources, and may therefore be more vulnerable to adverse
developments than medium and large-capitalization companies. These securities
may or may not pay dividends. The Fund is subject to the risk that
small-capitalization stocks may underperform other segments of the equity market
or the equity market as a whole.
29
PERFORMANCE
The Rydex 2x S&P SmallCap 600 ETF has not yet commenced operations and therefore
does not have a performance history for a full calendar year.
30
RYDEX INVERSE S&P SMALLCAP 600 ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse S&P SmallCap 600 ETF seeks to provide investment results that
will match, before fees and expenses, the performance of a specific benchmark on
a daily basis. The Fund's current benchmark is the inverse (opposite) of the
performance of the S&P SmallCap 600 Index (the "Index" or "Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the Underlying Index goes up by 5%, the value of the Fund's shares should go
down by 5% on that day.
PRINCIPAL INVESTMENT STRATEGY
The Fund's objective is to perform exactly the opposite of the Underlying Index.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. For example, the Fund engages in short sales of securities included in
the Underlying Index or futures contracts and may invest to a significant extent
in derivatives and other instruments whose performance is expected to be the
opposite of the Underlying Index, such as options on securities, futures
contracts, and securities indices and swap agreements. This is a non-fundamental
investment policy that can be changed by the Fund upon 60 days' prior notice to
shareholders. On a day-to-day basis, the Fund may hold U.S. Government
securities or cash equivalents to collateralize its short sales and derivative
positions.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse S&P SmallCap 600 ETF is subject to a number of other risks that may
affect the value of its shares, including:
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
SMALL-CAPITALIZATION SECURITIES RISK - In comparison to securities of companies
with medium and large capitalizations, securities of small-capitalization
companies may have more price volatility, greater spreads between their bid and
ask prices, significantly lower trading volumes, and cyclical or static growth
prospects. Small-capitalization companies often have limited product lines,
markets or financial resources, and may therefore be more vulnerable to adverse
developments than medium and large-capitalization companies. These securities
may or may not pay dividends. The Fund is subject to the risk that
small-capitalization stocks may underperform other segments of the equity market
or the equity market as a whole.
31
PERFORMANCE
The Rydex Inverse S&P SmallCap 600 ETF has not yet commenced operations and
therefore does not have a performance history for a full calendar year.
32
RYDEX INVERSE 2X S&P SMALLCAP 600 ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse 2x S&P SmallCap 600 ETF seeks to provide investment results
that will match, before fees and expenses, the performance of a specific
benchmark on a daily basis. The Fund's current benchmark is 200% of the inverse
(opposite) of the performance of the S&P SmallCap 600 Index (the "Index" or
"Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the Underlying Index goes up by 5%, the value of the Fund's shares should go
down by 10% on that day). For more information about the effects of leverage,
please see "Understanding Compounding and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of engaging in
short sales of securities and investing in leveraged instruments, such as equity
index swaps, futures contracts and options on securities, futures contracts, and
stock indices. Equity index swaps, short sales, futures and options contracts
enable the Fund to pursue its objective without selling short each of the
securities included in the benchmark. On a day-to-day basis, the Fund holds U.S.
Government securities or cash equivalents to collateralize these futures and
options contracts.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. This is a non-fundamental policy that can be changed by the Fund upon 60
days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse 2x S&P SmallCap 600 ETF is subject to a number of other risks that may
affect the value of its shares, including:
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
SMALL-CAPITALIZATION SECURITIES RISK - In comparison to securities of companies
with medium and large capitalizations, securities of small-capitalization
companies may have more price volatility, greater spreads between their bid and
ask prices, significantly lower trading volumes, and
33
cyclical or static growth prospects. Small-capitalization companies often have
limited product lines, markets or financial resources, and may therefore be more
vulnerable to adverse developments than medium and large-capitalization
companies. These securities may or may not pay dividends. The Fund is subject to
the risk that small-capitalization stocks may underperform other segments of the
equity market or the equity market as a whole.
PERFORMANCE
The Rydex Inverse 2x S&P SmallCap 600 ETF has not yet commenced operations and
therefore does not have a performance history for a full calendar year.
34
RYDEX 2X S&P SMALLCAP 600 GROWTH ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex 2x S&P SmallCap 600 Growth ETF seeks to provide investment results
that will match, before fees and expenses, the performance of a specific
benchmark on a daily basis. The Fund's current benchmark is 200% of the
performance of the S&P SmallCap 600/Citigroup Growth Index (the "Index" or
"Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase on a daily basis by 200% of the value of any increase in the Underlying
Index. When the value of the Underlying Index declines, the value of the Fund's
shares should also decrease on a daily basis by 200% of the value of any
decrease in the Underlying Index (E.G., if the Underlying Index goes down by 5%,
the value of the Fund's shares should go down by 10% on that day). For more
information about the effects of leverage, please see "Understanding Compounding
and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of investing in
equity securities, leveraged instruments, such as equity index swaps, futures
contracts and options on securities, futures contracts, and stock indices.
Equity index swaps, futures and option contracts enable the Fund to pursue its
investment objective without investing directly in the securities included in
the benchmark, or in the same proportion that those securities are represented
in that benchmark. On a day-to-day basis, the Fund holds U.S. Government
securities or cash equivalents to collateralize these futures and options
contracts. The Fund also will purchase equity securities that are generally
within the capitalization range of the S&P SmallCap 600/Citigroup Growth Index,
but may purchase equity securities of any capitalization range.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in component securities included in,
and financial instruments with economic characteristics that should perform
similarly to those of, the Underlying Index. This is a non-fundamental policy
that can be changed by the Fund upon 60 days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex 2x
S&P SmallCap 600 Growth ETF is subject to a number of other risks that may
affect the value of its shares, including:
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
SMALL-CAPITALIZATION SECURITIES RISK - In comparison to securities of companies
with medium and large capitalizations, securities of small-capitalization
companies may have more price volatility, greater spreads between their bid and
ask prices, significantly lower trading volumes, and cyclical or static growth
prospects. Small-capitalization companies often have limited product lines,
markets or financial resources, and may therefore be more vulnerable to adverse
developments than medium and large-capitalization companies. These securities
may or may not pay dividends. The Fund is subject to the risk that
small-capitalization stocks may underperform other segments of the equity market
or the equity market as a whole.
35
PERFORMANCE
The Rydex 2x S&P SmallCap 600 Growth ETF has not yet commenced operations and
therefore does not have a performance history for a full calendar year.
36
RYDEX INVERSE S&P SMALLCAP 600 GROWTH ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse S&P SmallCap 600 Growth ETF seeks to provide investment
results that will match, before fees and expenses, the performance of a specific
benchmark on a daily basis. The Fund's current benchmark is the inverse
(opposite) of the performance of the S&P SmallCap 600/Citigroup Growth Index
(the "Index" or "Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the Underlying Index goes up by 5%, the value of the Fund's shares should go
down by 5% on that day.
PRINCIPAL INVESTMENT STRATEGY
The Fund's objective is to perform exactly the opposite of the Underlying Index.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. For example, the Fund engages in short sales of securities included in
the Underlying Index or futures contracts and may invest to a significant extent
in derivatives and other instruments whose performance is expected to be the
opposite of the Underlying Index, such as options on securities, futures
contracts, and securities indices and swap agreements. This is a non-fundamental
investment policy that can be changed by the Fund upon 60 days' prior notice to
shareholders. On a day-to-day basis, the Fund may hold U.S. Government
securities or cash equivalents to collateralize its short sales and derivative
positions.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse S&P SmallCap 600 Growth ETF is subject to a number of other risks that
may affect the value of its shares, including:
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
SMALL-CAPITALIZATION SECURITIES RISK - In comparison to securities of companies
with medium and large capitalizations, securities of small-capitalization
companies may have more price volatility, greater spreads between their bid and
ask prices, significantly lower trading volumes, and cyclical or static growth
prospects. Small-capitalization companies often have limited product lines,
markets or financial resources, and may therefore be more vulnerable to adverse
developments than medium and large-capitalization companies. These securities
may or may not pay dividends. The Fund is subject to the risk that
small-capitalization stocks may underperform other segments of the equity market
or the equity market as a whole.
37
PERFORMANCE
The Rydex Inverse S&P SmallCap 600 Growth ETF has not yet commenced operations
and therefore does not have a performance history for a full calendar year.
38
RYDEX INVERSE 2X S&P SMALLCAP 600 GROWTH ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse 2x S&P SmallCap 600 Growth ETF seeks to provide investment
results that will match, before fees and expenses, the performance of a specific
benchmark on a daily basis. The Fund's current benchmark is 200% of the inverse
(opposite) of the performance of the S&P SmallCap 600/Citigroup Growth Index
(the "Index" or "Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the Underlying Index goes up by 5%, the value of the Fund's shares should go
down by 10% on that day). For more information about the effects of leverage,
please see "Understanding Compounding and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of engaging in
short sales of securities and investing in leveraged instruments, such as equity
index swaps, futures contracts and options on securities, futures contracts, and
stock indices. Equity index swaps, short sales, futures and options contracts
enable the Fund to pursue its objective without selling short each of the
securities included in the benchmark. On a day-to-day basis, the Fund holds U.S.
Government securities or cash equivalents to collateralize these futures and
options contracts.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. This is a non-fundamental policy that can be changed by the Fund upon 60
days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse 2x S&P SmallCap 600 Growth ETF is subject to a number of other risks
that may affect the value of its shares, including:
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
SMALL-CAPITALIZATION SECURITIES RISK - In comparison to securities of companies
with medium and large capitalizations, securities of small-capitalization
companies may have more price volatility, greater spreads between their bid and
ask prices, significantly lower trading volumes, and
39
cyclical or static growth prospects. Small-capitalization companies often have
limited product lines, markets or financial resources, and may therefore be more
vulnerable to adverse developments than medium and large-capitalization
companies. These securities may or may not pay dividends. The Fund is subject to
the risk that small-capitalization stocks may underperform other segments of the
equity market or the equity market as a whole.
PERFORMANCE
The Rydex Inverse 2x S&P SmallCap 600 Growth ETF has not yet commenced
operations and therefore does not have a performance history for a full calendar
year.
40
RYDEX 2X S&P SMALLCAP 600 VALUE ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex 2x S&P SmallCap 600 Value ETF seeks to provide investment results that
will match, before fees and expenses, the performance of a specific benchmark on
a daily basis. The Fund's current benchmark is 200% of the performance of the
S&P SmallCap 600/Citigroup Value Index (the "Index" or "Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase on a daily basis by 200% of the value of any increase in the Underlying
Index. When the value of the Underlying Index declines, the value of the Fund's
shares should also decrease on a daily basis by 200% of the value of any
decrease in the Underlying Index (E.G., if the Underlying Index goes down by 5%,
the value of the Fund's shares should go down by 10% on that day). For more
information about the effects of leverage, please see "Understanding Compounding
and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of investing in
equity securities, leveraged instruments, such as equity index swaps, futures
contracts and options on securities, futures contracts, and stock indices.
Equity index swaps, futures and option contracts enable the Fund to pursue its
investment objective without investing directly in the securities included in
the benchmark, or in the same proportion that those securities are represented
in that benchmark. On a day-to-day basis, the Fund holds U.S. Government
securities or cash equivalents to collateralize these futures and options
contracts. The Fund also will purchase equity securities that are generally
within the capitalization range of the S&P SmallCap 600/Citigroup Value Index,
but may purchase equity securities of any capitalization range.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in component securities included in,
and financial instruments with economic characteristics that should perform
similarly to those of, the Underlying Index. This is a non-fundamental policy
that can be changed by the Fund upon 60 days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex 2x
S&P SmallCap 600 Value ETF is subject to a number of other risks that may affect
the value of its shares, including:
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
SMALL-CAPITALIZATION SECURITIES RISK - In comparison to securities of companies
with medium and large capitalizations, securities of small-capitalization
companies may have more price volatility, greater spreads between their bid and
ask prices, significantly lower trading volumes, and cyclical or static growth
prospects. Small-capitalization companies often have limited product lines,
markets or financial resources, and may therefore be more vulnerable to adverse
developments than medium and large-capitalization companies. These securities
may or may not pay dividends. The Fund is subject to the risk that
small-capitalization stocks may underperform other segments of the equity market
or the equity market as a whole.
41
PERFORMANCE
The Rydex 2x S&P SmallCap 600 Value ETF has not yet commenced operations and
therefore does not have a performance history for a full calendar year.
42
RYDEX INVERSE S&P SMALLCAP 600 VALUE ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse S&P SmallCap 600 Value ETF seeks to provide investment results
that will match, before fees and expenses, the performance of a specific
benchmark on a daily basis. The Fund's current benchmark is the inverse
(opposite) of the performance of the S&P SmallCap 600/Citigroup Value Index (the
"Index" or "Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the Underlying Index goes up by 5%, the value of the Fund's shares should go
down by 5% on that day.
PRINCIPAL INVESTMENT STRATEGY
The Fund's objective is to perform exactly the opposite of the Underlying Index.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. For example, the Fund engages in short sales of securities included in
the Underlying Index or futures contracts and may invest to a significant extent
in derivatives and other instruments whose performance is expected to be the
opposite of the Underlying Index, such as options on securities, futures
contracts, and securities indices and swap agreements. This is a non-fundamental
investment policy that can be changed by the Fund upon 60 days' prior notice to
shareholders. On a day-to-day basis, the Fund may hold U.S. Government
securities or cash equivalents to collateralize its short sales and derivative
positions.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse S&P SmallCap 600 Value ETF is subject to a number of other risks that
may affect the value of its shares, including:
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
SMALL-CAPITALIZATION SECURITIES RISK - In comparison to securities of companies
with medium and large capitalizations, securities of small-capitalization
companies may have more price volatility, greater spreads between their bid and
ask prices, significantly lower trading volumes, and cyclical or static growth
prospects. Small-capitalization companies often have limited product lines,
markets or financial resources, and may therefore be more vulnerable to adverse
developments than medium and large-capitalization companies. These securities
may or may not pay dividends. The Fund is subject to the risk that
small-capitalization stocks may underperform other segments of the equity market
or the equity market as a whole.
43
PERFORMANCE
The Rydex Inverse S&P SmallCap 600 Value ETF has not yet commenced operations
and therefore does not have a performance history for a full calendar year.
44
RYDEX INVERSE 2X S&P SMALLCAP 600 VALUE ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse 2x S&P SmallCap 600 Value ETF seeks to provide investment
results that will match, before fees and expenses, the performance of a specific
benchmark on a daily basis. The Fund's current benchmark is 200% of the inverse
(opposite) of the performance of the S&P SmallCap 600/Citigroup Value Index (the
"Index" or "Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the Underlying Index goes up by 5%, the value of the Fund's shares should go
down by 10% on that day). For more information about the effects of leverage,
please see "Understanding Compounding and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of engaging in
short sales of securities and investing in leveraged instruments, such as equity
index swaps, futures contracts and options on securities, futures contracts, and
stock indices. Equity index swaps, short sales, futures and options contracts
enable the Fund to pursue its objective without selling short each of the
securities included in the benchmark. On a day-to-day basis, the Fund holds U.S.
Government securities or cash equivalents to collateralize these futures and
options contracts.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. This is a non-fundamental policy that can be changed by the Fund upon 60
days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse 2x S&P SmallCap 600 Value ETF is subject to a number of other risks that
may affect the value of its shares, including:
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
SMALL-CAPITALIZATION SECURITIES RISK - In comparison to securities of companies
with medium and large capitalizations, securities of small-capitalization
companies may have more price volatility, greater spreads between their bid and
ask prices, significantly lower trading volumes, and
45
cyclical or static growth prospects. Small-capitalization companies often have
limited product lines, markets or financial resources, and may therefore be more
vulnerable to adverse developments than medium and large-capitalization
companies. These securities may or may not pay dividends. The Fund is subject to
the risk that small-capitalization stocks may underperform other segments of the
equity market or the equity market as a whole.
PERFORMANCE
The Rydex Inverse 2x S&P SmallCap 600 Value ETF has not yet commenced operations
and therefore does not have a performance history for a full calendar year.
46
RYDEX 2X NASDAQ 100 ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex 2x NASDAQ 100 ETF seeks to provide investment results that will match,
before fees and expenses, the performance of a specific benchmark on a daily
basis. The Fund's current benchmark is 200% of the performance of the NASDAQ-100
Index(R) (the "Index" or "Underlying Index").
If the Fund meets its objective, the value of the Fund's shares will tend to
increase on a daily basis by 200% of the value of any increase in the Underlying
Index. When the value of the Underlying Index declines, the value of the Fund's
shares should also decrease on a daily basis by 200% of the value of any
decrease in the Underlying Index (E.G., if the Underlying Index goes down by 5%,
the value of the Fund's shares should go down by 10% on that day). For more
information about the effects of leverage, please see "Understanding Compounding
and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of investing in
equity securities, leveraged instruments, such as equity index swaps, futures
contracts and options on securities, futures contracts, and stock indices.
Equity index swaps, futures and option contracts enable the Fund to pursue its
investment objective without investing directly in the securities included in
the benchmark, or in the same proportion that those securities are represented
in that benchmark. On a day-to-day basis, the Fund holds U.S. Government
securities or cash equivalents to collateralize these futures and options
contracts. The Fund also will purchase equity securities that are generally
within the capitalization range of the NASDAQ-100 Index(R), but may purchase
equity securities of any capitalization range.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in component securities included in,
and financial instruments with economic characteristics that should perform
similarly to those of, the Underlying Index. This is a non-fundamental policy
that can be changed by the Fund upon 60 days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex 2x
NASDAQ 100 ETF is subject to a number of other risks that may affect the value
of its shares, including:
CONCENTRATION RISK - To the extent that the Underlying Index is currently
concentrated in issuers conducting business in the technology sector, the Fund's
investments in those issuers are subject to legislative or regulatory changes,
adverse market conditions and/or increased competition affecting that economic
sector. The prices of the securities of technology companies may fluctuate
widely due to competitive pressures, increased sensitivity to short product
cycles and aggressive pricing, problems relating to bringing their products to
market, very high price/earnings ratios, and high personnel turnover due to
severe labor shortages for skilled technology professionals.
DEPOSITARY RECEIPT RISK - The Fund may hold the securities of non-U.S. companies
in the form of American Depositary Receipts ("ADRs"). The underlying securities
of the ADRs in the Fund's portfolio are subject to fluctuations in foreign
currency exchange rates that may affect the value of the Fund's portfolio. In
addition, the value of the securities underlying the ADRs may change materially
at times when the U.S. markets are not open for trading. Investments in the
underlying foreign securities also involve political and economic risks distinct
from those associated with investing in the securities of U.S. issuers.
47
LARGE-CAPITALIZATION SECURITIES RISK - The Fund is subject to the risk that
large-capitalization stocks may outperform other segments of the equity market
or the equity market as a whole.
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
PERFORMANCE
The Rydex 2x NASDAQ 100 ETF has not yet commenced operations and therefore does
not have a performance history for a full calendar year.
48
RYDEX INVERSE NASDAQ 100 ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse NASDAQ 100 ETF seeks to provide investment results that will
match, before fees and expenses, the performance of a specific benchmark on a
daily basis. The Fund's current benchmark is the inverse (opposite) of the
performance of the NASDAQ-100 Index(R) (the "Index" or "Underlying Index").
If the Fund meets its objective, the value of the Fund's shares will tend to
increase during times when the value of the Underlying Index is decreasing. When
the value of the Underlying Index is increasing, however, the value of the
Fund's shares should decrease on a daily basis by an inversely proportionate
amount (E.G., if the Underlying Index goes up by 5%, the value of the Fund's
shares should go down by 5% on that day).
PRINCIPAL INVESTMENT STRATEGY
The Fund's objective is to perform exactly the opposite of the Underlying Index.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. For example, the Fund engages in short sales of securities included in
the Underlying Index or futures contracts and may invest to a significant extent
in derivatives and other instruments whose performance is expected to be the
opposite of the Underlying Index, such as options on securities, futures
contracts, and securities indices and swap agreements. This is a non-fundamental
investment policy that can be changed by the Fund upon 60 days' prior notice to
shareholders. On a day-to-day basis, the Fund may hold U.S. Government
securities or cash equivalents to collateralize its short sales and derivative
positions.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse NASDAQ 100 ETF is subject to a number of other risks that may affect the
value of its shares, including:
CONCENTRATION RISK - To the extent that the Underlying Index is currently
concentrated in issuers conducting business in the technology sector, the Fund's
investments in those issuers are subject to legislative or regulatory changes,
adverse market conditions and/or increased competition affecting that economic
sector. The prices of the securities of technology companies may fluctuate
widely due to competitive pressures, increased sensitivity to short product
cycles and aggressive pricing, problems relating to bringing their products to
market, very high price/earnings ratios, and high personnel turnover due to
severe labor shortages for skilled technology professionals.
DEPOSITARY RECEIPT RISK - The Fund may hold the securities of non-U.S. companies
in the form of American Depositary Receipts ("ADRs"). The underlying securities
of the ADRs in the Fund's portfolio are subject to fluctuations in foreign
currency exchange rates that may affect the value of the Fund's portfolio. In
addition, the value of the securities underlying the ADRs may change materially
at times when the U.S. markets are not open for trading. Investments in the
underlying foreign securities also involve political and economic risks distinct
from those associated with investing in the securities of U.S. issuers.
49
LARGE-CAPITALIZATION SECURITIES RISK - The Fund is subject to the risk that
large-capitalization stocks may outperform other segments of the equity market
or the equity market as a whole.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
PERFORMANCE
The Rydex Inverse NASDAQ 100 ETF has not yet commenced operations and therefore
does not have a performance history for a full calendar year.
50
RYDEX INVERSE 2X NASDAQ 100 ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse 2x NASDAQ 100 ETF seeks to provide investment results that
will match, before fees and expenses, the performance of a specific benchmark on
a daily basis. The Fund's current benchmark is 200% of the inverse (opposite) of
the performance of the NASDAQ-100 Index(R) (the "Index" or "Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the Underlying Index goes up by 5%, the value of the Fund's shares should go
down by 10% on that day). For more information about the effects of leverage,
please see "Understanding Compounding and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of engaging in
short sales of securities and investing in leveraged instruments, such as equity
index swaps, futures contracts and options on securities, futures contracts, and
stock indices. Equity index swaps, short sales, futures and options contracts
enable the Fund to pursue its objective without selling short each of the
securities included in the benchmark. On a day-to-day basis, the Fund holds U.S.
Government securities or cash equivalents to collateralize these futures and
options contracts.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. This is a non-fundamental policy that can be changed by the Fund upon 60
days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse 2x NASDAQ 100 ETF is subject to a number of other risks that may affect
the value of its shares, including:
CONCENTRATION RISK - To the extent that the Underlying Index is currently
concentrated in issuers conducting business in the technology sector, the Fund's
investments in those issuers are subject to legislative or regulatory changes,
adverse market conditions and/or increased competition affecting that economic
sector. The prices of the securities of technology companies may fluctuate
widely due to competitive pressures, increased sensitivity to short product
cycles and aggressive pricing, problems relating to bringing their products to
market, very high price/earnings ratios, and high personnel turnover due to
severe labor shortages for skilled technology professionals.
DEPOSITARY RECEIPT RISK - The Fund may hold the securities of non-U.S. companies
in the form of American Depositary Receipts ("ADRs"). The underlying securities
of the ADRs in the Fund's portfolio are subject to fluctuations in foreign
currency exchange rates that may affect the value of the Fund's portfolio. In
addition, the value of the securities underlying the ADRs may change materially
at times when the U.S. markets are not open for trading. Investments in the
underlying foreign securities also involve political and economic risks distinct
from those associated with investing in the securities of U.S. issuers.
51
LARGE-CAPITALIZATION SECURITIES RISK - The Fund is subject to the risk that
large-capitalization stocks may outperform other segments of the equity market
or the equity market as a whole.
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
PERFORMANCE
The Rydex Inverse 2x NASDAQ 100 ETF has not yet commenced operations and
therefore does not have a performance history for a full calendar year.
52
RYDEX 2X RUSSELL 1000(R) ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex 2x Russell 1000(R) ETF seeks to provide investment results that will
match, before fees and expenses, the performance of a specific benchmark on a
daily basis. The Fund's current benchmark is 200% of the performance of the
Russell 1000(R) Index (the "Index" or "Underlying Index").
If the Fund meets its objective, the value of the Fund's shares will tend to
increase on a daily basis by 200% of the value of any increase in the Underlying
Index. When the value of the Underlying Index declines, the value of the Fund's
shares should also decrease on a daily basis by 200% of the value of any
decrease in the Underlying Index (E.G., if the Underlying Index goes down by 5%,
the value of the Fund's shares should go down by 10% on that day). For more
information about the effects of leverage, please see "Understanding Compounding
and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of investing in
equity securities, leveraged instruments, such as equity index swaps, futures
contracts and options on securities, futures contracts, and stock indices.
Equity index swaps, futures and option contracts enable the Fund to pursue its
investment objective without investing directly in the securities included in
the benchmark, or in the same proportion that those securities are represented
in that benchmark. On a day-to-day basis, the Fund holds U.S. Government
securities or cash equivalents to collateralize these futures and options
contracts. The Fund also will purchase equity securities that are generally
within the capitalization range of the Russell 1000(R) Index, but may purchase
equity securities of any capitalization range.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in component securities included in,
and financial instruments with economic characteristics that should perform
similarly to those of, the Underlying Index. This is a non-fundamental policy
that can be changed by the Fund upon 60 days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex 2x
Russell 1000(R) ETF is subject to a number of other risks that may affect the
value of its shares, including:
LARGE-CAPITALIZATION SECURITIES RISK - The Fund is subject to the risk that
large-capitalization stocks may outperform other segments of the equity market
or the equity market as a whole.
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
PERFORMANCE
The Rydex 2x Russell 1000(R) ETF has not yet commenced operations and therefore
does not have a performance history for a full calendar year.
53
RYDEX INVERSE RUSSELL 1000(R) ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse Russell 1000(R) ETF seeks to provide investment results that
will match, before fees and expenses, the performance of a specific benchmark on
a daily basis. The Fund's current benchmark is the inverse (opposite) of the
performance of the Russell 1000(R) Index (the "Index" or "Underlying Index").
If the Fund meets its objective, the value of the Fund's shares will tend to
increase during times when the value of the Underlying Index is decreasing. When
the value of the Underlying Index is increasing, however, the value of the
Fund's shares should decrease on a daily basis by an inversely proportionate
amount (E.G., if the Underlying Index goes up by 5%, the value of the Fund's
shares should go down by 5% on that day).
PRINCIPAL INVESTMENT STRATEGY
The Fund's objective is to perform exactly the opposite of the Underlying Index.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. For example, the Fund engages in short sales of securities included in
the Underlying Index or futures contracts and may invest to a significant extent
in derivatives and other instruments whose performance is expected to be the
opposite of the Underlying Index, such as options on securities, futures
contracts, and securities indices and swap agreements. This is a non-fundamental
investment policy that can be changed by the Fund upon 60 days' prior notice to
shareholders. On a day-to-day basis, the Fund may hold U.S. Government
securities or cash equivalents to collateralize its short sales and derivative
positions.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse Russell 1000(R) ETF is subject to a number of other risks that may
affect the value of its shares, including:
LARGE-CAPITALIZATION SECURITIES RISK - The Fund is subject to the risk that
large-capitalization stocks may outperform other segments of the equity market
or the equity market as a whole.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
PERFORMANCE
The Rydex Inverse Russell 1000(R) ETF has not yet commenced operations and
therefore does not have a performance history for a full calendar year.
54
RYDEX INVERSE 2X RUSSELL 1000(R) ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse 2x Russell 1000(R) ETF seeks to provide investment results
that will match, before fees and expenses, the performance of a specific
benchmark on a daily basis. The Fund's current benchmark is 200% of the inverse
(opposite) of the performance of the Russell 1000(R) Index (the "Index" or
"Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the Underlying Index goes up by 5%, the value of the Fund's shares should go
down by 10% on that day). For more information about the effects of leverage,
please see "Understanding Compounding and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of engaging in
short sales of securities and investing in leveraged instruments, such as equity
index swaps, futures contracts and options on securities, futures contracts, and
stock indices. Equity index swaps, short sales, futures and options contracts
enable the Fund to pursue its objective without selling short each of the
securities included in the benchmark. On a day-to-day basis, the Fund holds U.S.
Government securities or cash equivalents to collateralize these futures and
options contracts.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. This is a non-fundamental policy that can be changed by the Fund upon 60
days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse 2x Russell 1000(R) ETF is subject to a number of other risks that may
affect the value of its shares, including:
LARGE-CAPITALIZATION SECURITIES RISK - The Fund is subject to the risk that
large-capitalization stocks may outperform other segments of the equity market
or the equity market as a whole.
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
55
PERFORMANCE
The Rydex Inverse 2x Russell 1000(R) ETF has not yet commenced operations and
therefore does not have a performance history for a full calendar year.
56
RYDEX 2X RUSSELL 1000(R) GROWTH ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex 2x Russell 1000(R) Growth ETF seeks to provide investment results
that will match, before fees and expenses, the performance of a specific
benchmark on a daily basis. The Fund's current benchmark is 200% of the
performance of the Russell 1000(R) Growth Index (the "Index" or "Underlying
Index").
If the Fund meets its objective, the value of the Fund's shares will tend to
increase on a daily basis by 200% of the value of any increase in the Underlying
Index. When the value of the Underlying Index declines, the value of the Fund's
shares should also decrease on a daily basis by 200% of the value of any
decrease in the Underlying Index (E.G., if the Underlying Index goes down by 5%,
the value of the Fund's shares should go down by 10% on that day). For more
information about the effects of leverage, please see "Understanding Compounding
and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of investing in
equity securities, leveraged instruments, such as equity index swaps, futures
contracts and options on securities, futures contracts, and stock indices.
Equity index swaps, futures and option contracts enable the Fund to pursue its
investment objective without investing directly in the securities included in
the benchmark, or in the same proportion that those securities are represented
in that benchmark. On a day-to-day basis, the Fund holds U.S. Government
securities or cash equivalents to collateralize these futures and options
contracts. The Fund also will purchase equity securities that are generally
within the capitalization range of the Russell 1000(R) Growth Index, but may
purchase equity securities of any capitalization range.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in component securities included in,
and financial instruments with economic characteristics that should perform
similarly to those of, the Underlying Index. This is a non-fundamental policy
that can be changed by the Fund upon 60 days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex 2x
Russell 1000(R) Growth ETF is subject to a number of other risks that may
affect the value of its shares, including:
LARGE-CAPITALIZATION SECURITIES RISK - The Fund is subject to the risk that
large-capitalization stocks may outperform other segments of the equity market
or the equity market as a whole.
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
PERFORMANCE
The Rydex 2x Russell 1000(R) Growth ETF has not yet commenced operations and
therefore does not have a performance history for a full calendar year.
57
RYDEX INVERSE RUSSELL 1000(R) GROWTH ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse Russell 1000(R) Growth ETF seeks to provide investment
results that will match, before fees and expenses, the performance of a specific
benchmark on a daily basis. The Fund's current benchmark is the inverse
(opposite) of the performance of the Russell 1000(R) Growth Index (the "Index"
or "Underlying Index").
If the Fund meets its objective, the value of the Fund's shares will tend to
increase during times when the value of the Underlying Index is decreasing. When
the value of the Underlying Index is increasing, however, the value of the
Fund's shares should decrease on a daily basis by an inversely proportionate
amount (E.G., if the Underlying Index goes up by 5%, the value of the Fund's
shares should go down by 5% on that day).
PRINCIPAL INVESTMENT STRATEGY
The Fund's objective is to perform exactly the opposite of the Underlying Index.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. For example, the Fund engages in short sales of securities included in
the Underlying Index or futures contracts and may invest to a significant extent
in derivatives and other instruments whose performance is expected to be the
opposite of the Underlying Index, such as options on securities, futures
contracts, and securities indices and swap agreements. This is a non-fundamental
investment policy that can be changed by the Fund upon 60 days' prior notice to
shareholders. On a day-to-day basis, the Fund may hold U.S. Government
securities or cash equivalents to collateralize its short sales and derivative
positions.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse Russell 1000(R) Growth ETF is subject to a number of other risks that
may affect the value of its shares, including:
LARGE-CAPITALIZATION SECURITIES RISK - The Fund is subject to the risk that
large-capitalization stocks may outperform other segments of the equity market
or the equity market as a whole.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
PERFORMANCE
The Rydex Inverse Russell 1000(R) Growth ETF has not yet commenced operations
and therefore does not have a performance history for a full calendar year.
58
RYDEX INVERSE 2X RUSSELL 1000(R) GROWTH ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse 2x Russell 1000(R) Growth ETF seeks to provide investment
results that will match, before fees and expenses, the performance of a specific
benchmark on a daily basis. The Fund's current benchmark is 200% of the inverse
(opposite) of the performance of the Russell 1000(R) Growth Index (the "Index"
or "Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the Underlying Index goes up by 5%, the value of the Fund's shares should go
down by 10% on that day). For more information about the effects of leverage,
please see "Understanding Compounding and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of engaging in
short sales of securities and investing in leveraged instruments, such as equity
index swaps, futures contracts and options on securities, futures contracts, and
stock indices. Equity index swaps, short sales, futures and options contracts
enable the Fund to pursue its objective without selling short each of the
securities included in the benchmark. On a day-to-day basis, the Fund holds U.S.
Government securities or cash equivalents to collateralize these futures and
options contracts.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. This is a non-fundamental policy that can be changed by the Fund upon 60
days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse 2x Russell 1000(R) Growth ETF is subject to a number of other risks
that may affect the value of its shares, including:
LARGE-CAPITALIZATION SECURITIES RISK - The Fund is subject to the risk that
large-capitalization stocks may outperform other segments of the equity market
or the equity market as a whole.
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
59
PERFORMANCE
The Rydex Inverse 2x Russell 1000(R) Growth ETF has not yet commenced operations
and therefore does not have a performance history for a full calendar year.
60
RYDEX 2X RUSSELL 1000(R) VALUE ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex 2x Russell 1000(R) Value ETF seeks to provide investment results that
will match, before fees and expenses, the performance of a specific benchmark on
a daily basis. The Fund's current benchmark is 200% of the performance of the
Russell 1000(R) Value Index (the "Index" or "Underlying Index").
If the Fund meets its objective, the value of the Fund's shares will tend to
increase on a daily basis by 200% of the value of any increase in the Underlying
Index. When the value of the Underlying Index declines, the value of the Fund's
shares should also decrease on a daily basis by 200% of the value of any
decrease in the Underlying Index (E.G., if the Underlying Index goes down by 5%,
the value of the Fund's shares should go down by 10% on that day). For more
information about the effects of leverage, please see "Understanding Compounding
and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of investing in
equity securities, leveraged instruments, such as equity index swaps, futures
contracts and options on securities, futures contracts, and stock indices.
Equity index swaps, futures and option contracts enable the Fund to pursue its
investment objective without investing directly in the securities included in
the benchmark, or in the same proportion that those securities are represented
in that benchmark. On a day-to-day basis, the Fund holds U.S. Government
securities or cash equivalents to collateralize these futures and options
contracts. The Fund also will purchase equity securities that are generally
within the capitalization range of the Russell 1000(R) Value Index, but may
purchase equity securities of any capitalization range.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in component securities included in,
and financial instruments with economic characteristics that should perform
similarly to those of, the Underlying Index. This is a non-fundamental policy
that can be changed by the Fund upon 60 days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex 2x
Russell 1000(R) Value ETF is subject to a number of other risks that may affect
the value of its shares, including:
LARGE-CAPITALIZATION SECURITIES RISK - The Fund is subject to the risk that
large-capitalization stocks may outperform other segments of the equity market
or the equity market as a whole.
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
PERFORMANCE
The Rydex 2x Russell 1000(R) Value ETF has not yet commenced operations and
therefore does not have a performance history for a full calendar year.
61
RYDEX INVERSE RUSSELL 1000(R) VALUE ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse Russell 1000(R) Value ETF seeks to provide investment results
that will match, before fees and expenses, the performance of a specific
benchmark on a daily basis. The Fund's current benchmark is the inverse
(opposite) of the performance of the Russell 1000(R) Value Index (the "Index"
or "Underlying Index").
If the Fund meets its objective, the value of the Fund's shares will tend to
increase during times when the value of the Underlying Index is decreasing. When
the value of the Underlying Index is increasing, however, the value of the
Fund's shares should decrease on a daily basis by an inversely proportionate
amount (E.G., if the Underlying Index goes up by 5%, the value of the Fund's
shares should go down by 5% on that day).
PRINCIPAL INVESTMENT STRATEGY
The Fund's objective is to perform exactly the opposite of the Underlying Index.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. For example, the Fund engages in short sales of securities included in
the Underlying Index or futures contracts and may invest to a significant extent
in derivatives and other instruments whose performance is expected to be the
opposite of the Underlying Index, such as options on securities, futures
contracts, and securities indices and swap agreements. This is a non-fundamental
investment policy that can be changed by the Fund upon 60 days' prior notice to
shareholders. On a day-to-day basis, the Fund may hold U.S. Government
securities or cash equivalents to collateralize its short sales and derivative
positions.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse Russell 1000(R) Value ETF is subject to a number of other risks that
may affect the value of its shares, including:
LARGE-CAPITALIZATION SECURITIES RISK - The Fund is subject to the risk that
large-capitalization stocks may outperform other segments of the equity market
or the equity market as a whole.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
PERFORMANCE
The Rydex Inverse Russell 1000(R) Value ETF has not yet commenced operations
and therefore does not have a performance history for a full calendar year.
62
RYDEX INVERSE 2X RUSSELL 1000(R) VALUE ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse 2x Russell 1000(R) Value ETF seeks to provide investment
results that will match, before fees and expenses, the performance of a specific
benchmark on a daily basis. The Fund's current benchmark is 200% of the inverse
(opposite) of the performance of the Russell 1000(R) Value Index (the "Index"
or "Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the Underlying Index goes up by 5%, the value of the Fund's shares should go
down by 10% on that day). For more information about the effects of leverage,
please see "Understanding Compounding and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of engaging in
short sales of securities and investing in leveraged instruments, such as equity
index swaps, futures contracts and options on securities, futures contracts, and
stock indices. Equity index swaps, short sales, futures and options contracts
enable the Fund to pursue its objective without selling short each of the
securities included in the benchmark. On a day-to-day basis, the Fund holds U.S.
Government securities or cash equivalents to collateralize these futures and
options contracts.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. This is a non-fundamental policy that can be changed by the Fund upon 60
days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse 2x Russell 1000(R) Value ETF is subject to a number of other risks that
may affect the value of its shares, including:
LARGE-CAPITALIZATION SECURITIES RISK - The Fund is subject to the risk that
large-capitalization stocks may outperform other segments of the equity market
or the equity market as a whole.
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
63
PERFORMANCE
The Rydex Inverse 2x Russell 1000(R) Value ETF has not yet commenced operations
and therefore does not have a performance history for a full calendar year.
64
RYDEX 2X RUSSELL MIDCAP(R) ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex 2x Russell MidCap(R) ETF seeks to provide investment results that
will match, before fees and expenses, the performance of a specific benchmark on
a daily basis. The Fund's current benchmark is 200% of the performance of the
Russell MidCap(R) Index (the "Index" or "Underlying Index").
If the Fund meets its objective, the value of the Fund's shares will tend to
increase on a daily basis by 200% of the value of any increase in the Underlying
Index. When the value of the Underlying Index declines, the value of the Fund's
shares should also decrease on a daily basis by 200% of the value of any
decrease in the Underlying Index (E.G., if the Underlying Index goes down by 5%,
the value of the Fund's shares should go down by 10% on that day). For more
information about the effects of leverage, please see "Understanding Compounding
and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of investing in
equity securities, leveraged instruments, such as equity index swaps, futures
contracts and options on securities, futures contracts, and stock indices.
Equity index swaps, futures and option contracts enable the Fund to pursue its
investment objective without investing directly in the securities included in
the benchmark, or in the same proportion that those securities are represented
in that benchmark. On a day-to-day basis, the Fund holds U.S. Government
securities or cash equivalents to collateralize these futures and options
contracts. The Fund also will purchase equity securities that are generally
within the capitalization range of the Russell MidCap(R) Index, but may
purchase equity securities of any capitalization range.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in component securities included in,
and financial instruments with economic characteristics that should perform
similarly to those of, the Underlying Index. This is a non-fundamental policy
that can be changed by the Fund upon 60 days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex 2x
Russell MidCap(R) ETF is subject to a number of other risks that may affect the
value of its shares, including:
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
MID-CAPITALIZATION SECURITIES RISK - In comparison to securities of companies
with large capitalizations, securities of medium-capitalization companies may
have more price volatility, greater spreads between their bid and ask prices,
significantly lower trading volumes, and cyclical or static growth prospects.
Medium-capitalization companies often have limited product lines, markets or
financial resources, and may therefore be more vulnerable to adverse
developments than large-capitalization companies. These securities may or may
not pay dividends. The Fund is subject to the risk that medium-capitalization
stocks may underperform other segments of the equity market or the equity market
as a whole.
65
PERFORMANCE
The Rydex 2x Russell MidCap(R) ETF has not yet commenced operations and
therefore does not have a performance history for a full calendar year.
66
RYDEX INVERSE RUSSELL MIDCAP(R) ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse Russell MidCap(R) ETF seeks to provide investment results
that will match, before fees and expenses, the performance of a specific
benchmark on a daily basis. The Fund's current benchmark is the inverse
(opposite) of the performance of the Russell MidCap(R) Index (the "Index" or
"Underlying Index").
If the Fund meets its objective, the value of the Fund's shares will tend to
increase during times when the value of the Underlying Index is decreasing. When
the value of the Underlying Index is increasing, however, the value of the
Fund's shares should decrease on a daily basis by an inversely proportionate
amount (E.G., if the Underlying Index goes up by 5%, the value of the Fund's
shares should go down by 5% on that day).
PRINCIPAL INVESTMENT STRATEGY
The Fund's objective is to perform exactly the opposite of the Underlying Index.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. For example, the Fund engages in short sales of securities included in
the Underlying Index or futures contracts and may invest to a significant extent
in derivatives and other instruments whose performance is expected to be the
opposite of the Underlying Index, such as options on securities, futures
contracts, and securities indices and swap agreements. This is a non-fundamental
investment policy that can be changed by the Fund upon 60 days' prior notice to
shareholders. On a day-to-day basis, the Fund may hold U.S. Government
securities or cash equivalents to collateralize its short sales and derivative
positions.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse Russell MidCap(R) ETF is subject to a number of other risks that may
affect the value of its shares, including:
MID-CAPITALIZATION SECURITIES RISK - In comparison to securities of companies
with large capitalizations, securities of medium-capitalization companies may
have more price volatility, greater spreads between their bid and ask prices,
significantly lower trading volumes, and cyclical or static growth prospects.
Medium-capitalization companies often have limited product lines, markets or
financial resources, and may therefore be more vulnerable to adverse
developments than large-capitalization companies. These securities may or may
not pay dividends. The Fund is subject to the risk that medium-capitalization
stocks may underperform other segments of the equity market or the equity market
as a whole.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
67
PERFORMANCE
The Rydex Inverse Russell MidCap(R) ETF has not yet commenced operations and
therefore does not have a performance history for a full calendar year.
68
RYDEX INVERSE 2X RUSSELL MIDCAP(R) ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse 2x Russell MidCap(R) ETF seeks to provide investment results
that will match, before fees and expenses, the performance of a specific
benchmark on a daily basis. The Fund's current benchmark is 200% of the inverse
(opposite) of the performance of the Russell MidCap(R) Index (the "Index" or
"Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the Underlying Index goes up by 5%, the value of the Fund's shares should go
down by 10% on that day). For more information about the effects of leverage,
please see "Understanding Compounding and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of engaging in
short sales of securities and investing in leveraged instruments, such as equity
index swaps, futures contracts and options on securities, futures contracts, and
stock indices. Equity index swaps, short sales, futures and options contracts
enable the Fund to pursue its objective without selling short each of the
securities included in the benchmark. On a day-to-day basis, the Fund holds U.S.
Government securities or cash equivalents to collateralize these futures and
options contracts.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. This is a non-fundamental policy that can be changed by the Fund upon 60
days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse 2x Russell MidCap(R) ETF is subject to a number of other risks that may
affect the value of its shares, including:
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
MID-CAPITALIZATION SECURITIES RISK - In comparison to securities of companies
with large capitalizations, securities of medium-capitalization companies may
have more price volatility, greater spreads between their bid and ask prices,
significantly lower trading volumes, and cyclical or static growth prospects.
Medium-capitalization companies often have limited product lines, markets or
financial resources, and may therefore be more vulnerable to adverse
developments than large-capitalization companies. These securities may or may
not pay dividends. The Fund is subject to the risk that medium-capitalization
stocks may underperform other segments of the equity market or the equity market
as a whole.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and
69
closes its short position, the Fund will realize a gain on the transaction.
Conversely, if the security goes up in price during the period, the Fund will
realize a loss on the transaction. The risk of such price increases is the
principal risk of engaging in short sales. The Fund may also be subject to
expenses related to short sales such as borrowing and margin accounting
maintenance costs, which may negatively impact the performance of the Fund.
PERFORMANCE
The Rydex Inverse 2x Russell MidCap(R) ETF has not yet commenced operations and
therefore does not have a performance history for a full calendar year.
70
RYDEX 2X RUSSELL MIDCAP(R) GROWTH ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex 2x Russell MidCap(R) Growth ETF seeks to provide investment results
that will match, before fees and expenses, the performance of a specific
benchmark on a daily basis. The Fund's current benchmark is 200% of the
performance of the Russell MidCap(R) Growth Index (the "Index" or "Underlying
Index").
If the Fund meets its objective, the value of the Fund's shares will tend to
increase on a daily basis by 200% of the value of any increase in the Underlying
Index. When the value of the Underlying Index declines, the value of the Fund's
shares should also decrease on a daily basis by 200% of the value of any
decrease in the Underlying Index (E.G., if the Underlying Index goes down by 5%,
the value of the Fund's shares should go down by 10% on that day). For more
information about the effects of leverage, please see "Understanding Compounding
and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of investing in
equity securities, leveraged instruments, such as equity index swaps, futures
contracts and options on securities, futures contracts, and stock indices.
Equity index swaps, futures and option contracts enable the Fund to pursue its
investment objective without investing directly in the securities included in
the benchmark, or in the same proportion that those securities are represented
in that benchmark. On a day-to-day basis, the Fund holds U.S. Government
securities or cash equivalents to collateralize these futures and options
contracts. The Fund also will purchase equity securities that are generally
within the capitalization range of the Russell MidCap(R) Growth Index, but may
purchase equity securities of any capitalization range.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in component securities included in,
and financial instruments with economic characteristics that should perform
similarly to those of, the Underlying Index. This is a non-fundamental policy
that can be changed by the Fund upon 60 days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex 2x
Russell MidCap(R) Growth ETF is subject to a number of other risks that may
affect the value of its shares, including:
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
MID-CAPITALIZATION SECURITIES RISK - In comparison to securities of companies
with large capitalizations, securities of medium-capitalization companies may
have more price volatility, greater spreads between their bid and ask prices,
significantly lower trading volumes, and cyclical or static growth prospects.
Medium-capitalization companies often have limited product lines, markets or
financial resources, and may therefore be more vulnerable to adverse
developments than large-capitalization companies. These securities may or may
not pay dividends. The Fund is subject to the risk that medium-capitalization
stocks may underperform other segments of the equity market or the equity market
as a whole.
71
PERFORMANCE
The Rydex 2x Russell MidCap(R) Growth ETF has not yet commenced operations and
therefore does not have a performance history for a full calendar year.
72
RYDEX INVERSE RUSSELL MIDCAP(R) GROWTH ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse Russell MidCap(R) Growth ETF seeks to provide investment
results that will match, before fees and expenses, the performance of a specific
benchmark on a daily basis. The Fund's current benchmark is the inverse
(opposite) of the performance of the Russell MidCap(R) Growth Index (the "Index"
or "Underlying Index").
If the Fund meets its objective, the value of the Fund's shares will tend to
increase during times when the value of the Underlying Index is decreasing. When
the value of the Underlying Index is increasing, however, the value of the
Fund's shares should decrease on a daily basis by an inversely proportionate
amount (E.G., if the Underlying Index goes up by 5%, the value of the Fund's
shares should go down by 5% on that day).
PRINCIPAL INVESTMENT STRATEGY
The Fund's objective is to perform exactly the opposite of the Underlying Index.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. For example, the Fund engages in short sales of securities included in
the Underlying Index or futures contracts and may invest to a significant extent
in derivatives and other instruments whose performance is expected to be the
opposite of the Underlying Index, such as options on securities, futures
contracts, and securities indices and swap agreements. This is a non-fundamental
investment policy that can be changed by the Fund upon 60 days' prior notice to
shareholders. On a day-to-day basis, the Fund may hold U.S. Government
securities or cash equivalents to collateralize its short sales and derivative
positions.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse Russell MidCap(R) Growth ETF is subject to a number of other risks that
may affect the value of its shares, including:
MID-CAPITALIZATION SECURITIES RISK - In comparison to securities of companies
with large capitalizations, securities of medium-capitalization companies may
have more price volatility, greater spreads between their bid and ask prices,
significantly lower trading volumes, and cyclical or static growth prospects.
Medium-capitalization companies often have limited product lines, markets or
financial resources, and may therefore be more vulnerable to adverse
developments than large-capitalization companies. These securities may or may
not pay dividends. The Fund is subject to the risk that medium-capitalization
stocks may underperform other segments of the equity market or the equity market
as a whole.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
73
PERFORMANCE
The Rydex Inverse Russell MidCap(R) Growth ETF has not yet commenced operations
and therefore does not have a performance history for a full calendar year.
74
RYDEX INVERSE 2X RUSSELL MIDCAP(R) GROWTH ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse 2x Russell MidCap(R) Growth ETF seeks to provide investment
results that will match, before fees and expenses, the performance of a specific
benchmark on a daily basis. The Fund's current benchmark is 200% of the inverse
(opposite) of the performance of the Russell MidCap(R) Growth Index (the "Index"
or "Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the Underlying Index goes up by 5%, the value of the Fund's shares should go
down by 10% on that day). For more information about the effects of leverage,
please see "Understanding Compounding and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of engaging in
short sales of securities and investing in leveraged instruments, such as equity
index swaps, futures contracts and options on securities, futures contracts, and
stock indices. Equity index swaps, short sales, futures and options contracts
enable the Fund to pursue its objective without selling short each of the
securities included in the benchmark. On a day-to-day basis, the Fund holds U.S.
Government securities or cash equivalents to collateralize these futures and
options contracts.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. This is a non-fundamental policy that can be changed by the Fund upon 60
days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse 2x Russell MidCap(R) Growth ETF is subject to a number of other risks
that may affect the value of its shares, including:
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
MID-CAPITALIZATION SECURITIES RISK - In comparison to securities of companies
with large capitalizations, securities of medium-capitalization companies may
have more price volatility, greater spreads between their bid and ask prices,
significantly lower trading volumes, and cyclical or static growth prospects.
Medium-capitalization companies often have limited product lines, markets or
financial resources, and may therefore be more vulnerable to adverse
developments than large-capitalization companies. These securities may or may
not pay dividends. The Fund is subject to the risk that medium-capitalization
stocks may underperform other segments of the equity market or the equity market
as a whole.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and
75
closes its short position, the Fund will realize a gain on the transaction.
Conversely, if the security goes up in price during the period, the Fund will
realize a loss on the transaction. The risk of such price increases is the
principal risk of engaging in short sales. The Fund may also be subject to
expenses related to short sales such as borrowing and margin accounting
maintenance costs, which may negatively impact the performance of the Fund.
PERFORMANCE
The Rydex Inverse 2x Russell MidCap(R) Growth ETF has not yet commenced
operations and therefore does not have a performance history for a full calendar
year.
76
RYDEX 2X RUSSELL MIDCAP(R) VALUE ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex 2x Russell MidCap(R) Value ETF seeks to provide investment results
that will match, before fees and expenses, the performance of a specific
benchmark on a daily basis. The Fund's current benchmark is 200% of the
performance of the Russell MidCap(R) Value Index (the "Index" or "Underlying
Index").
If the Fund meets its objective, the value of the Fund's shares will tend to
increase on a daily basis by 200% of the value of any increase in the Underlying
Index. When the value of the Underlying Index declines, the value of the Fund's
shares should also decrease on a daily basis by 200% of the value of any
decrease in the Underlying Index (E.G., if the Underlying Index goes down by 5%,
the value of the Fund's shares should go down by 10% on that day). For more
information about the effects of leverage, please see "Understanding Compounding
and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of investing in
equity securities, leveraged instruments, such as equity index swaps, futures
contracts and options on securities, futures contracts, and stock indices.
Equity index swaps, futures and option contracts enable the Fund to pursue its
investment objective without investing directly in the securities included in
the benchmark, or in the same proportion that those securities are represented
in that benchmark. On a day-to-day basis, the Fund holds U.S. Government
securities or cash equivalents to collateralize these futures and options
contracts. The Fund also will purchase equity securities that are generally
within the capitalization range of the Russell MidCap(R) Value Index, but may
purchase equity securities of any capitalization range.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in component securities included in,
and financial instruments with economic characteristics that should perform
similarly to those of, the Underlying Index. This is a non-fundamental policy
that can be changed by the Fund upon 60 days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex 2x
Russell MidCap(R) Value ETF is subject to a number of other risks that may
affect the value of its shares, including:
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
MID-CAPITALIZATION SECURITIES RISK - In comparison to securities of companies
with large capitalizations, securities of medium-capitalization companies may
have more price volatility, greater spreads between their bid and ask prices,
significantly lower trading volumes, and cyclical or static growth prospects.
Medium-capitalization companies often have limited product lines, markets or
financial resources, and may therefore be more vulnerable to adverse
developments than large-capitalization companies. These securities may or may
not pay dividends. The Fund is subject to the risk that medium-capitalization
stocks may underperform other segments of the equity market or the equity market
as a whole.
77
PERFORMANCE
The Rydex 2x Russell MidCap(R) Value ETF has not yet commenced operations and
therefore does not have a performance history for a full calendar year.
78
RYDEX INVERSE RUSSELL MIDCAP(R) VALUE ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse Russell MidCap(R) Value ETF seeks to provide investment
results that will match, before fees and expenses, the performance of a specific
benchmark on a daily basis. The Fund's current benchmark is the inverse
(opposite) of the performance of the Russell MidCap R Value Index (the "Index"
or "Underlying Index").
If the Fund meets its objective, the value of the Fund's shares will tend to
increase during times when the value of the Underlying Index is decreasing. When
the value of the Underlying Index is increasing, however, the value of the
Fund's shares should decrease on a daily basis by an inversely proportionate
amount (E.G., if the Underlying Index goes up by 5%, the value of the Fund's
shares should go down by 5% on that day).
PRINCIPAL INVESTMENT STRATEGY
The Fund's objective is to perform exactly the opposite of the Underlying Index.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. For example, the Fund engages in short sales of securities included in
the Underlying Index or futures contracts and may invest to a significant extent
in derivatives and other instruments whose performance is expected to be the
opposite of the Underlying Index, such as options on securities, futures
contracts, and securities indices and swap agreements. This is a non-fundamental
investment policy that can be changed by the Fund upon 60 days' prior notice to
shareholders. On a day-to-day basis, the Fund may hold U.S. Government
securities or cash equivalents to collateralize its short sales and derivative
positions.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse Russell MidCap(R) Value ETF is subject to a number of other risks that
may affect the value of its shares, including:
MID-CAPITALIZATION SECURITIES RISK - In comparison to securities of companies
with large capitalizations, securities of medium-capitalization companies may
have more price volatility, greater spreads between their bid and ask prices,
significantly lower trading volumes, and cyclical or static growth prospects.
Medium-capitalization companies often have limited product lines, markets or
financial resources, and may therefore be more vulnerable to adverse
developments than large-capitalization companies. These securities may or may
not pay dividends. The Fund is subject to the risk that medium-capitalization
stocks may underperform other segments of the equity market or the equity market
as a whole.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
79
PERFORMANCE
The Rydex Inverse Russell MidCap(R) Value ETF has not yet commenced operations
and therefore does not have a performance history for a full calendar year.
80
RYDEX INVERSE 2X RUSSELL MIDCAP(R) VALUE ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse 2x Russell MidCap(R) Value ETF seeks to provide investment
results that will match, before fees and expenses, the performance of a specific
benchmark on a daily basis. The Fund's current benchmark is 200% of the inverse
(opposite) of the performance of the Russell MidCap(R) Value Index (the "Index"
or "Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the Underlying Index goes up by 5%, the value of the Fund's shares should go
down by 10% on that day). For more information about the effects of leverage,
please see "Understanding Compounding and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of engaging in
short sales of securities and investing in leveraged instruments, such as equity
index swaps, futures contracts and options on securities, futures contracts, and
stock indices. Equity index swaps, short sales, futures and options contracts
enable the Fund to pursue its objective without selling short each of the
securities included in the benchmark. On a day-to-day basis, the Fund holds U.S.
Government securities or cash equivalents to collateralize these futures and
options contracts.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. This is a non-fundamental policy that can be changed by the Fund upon 60
days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse 2x Russell MidCap(R) Value ETF is subject to a number of other risks
that may affect the value of its shares, including:
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
MID-CAPITALIZATION SECURITIES RISK - In comparison to securities of companies
with large capitalizations, securities of medium-capitalization companies may
have more price volatility, greater spreads between their bid and ask prices,
significantly lower trading volumes, and cyclical or static growth prospects.
Medium-capitalization companies often have limited product lines, markets or
financial resources, and may therefore be more vulnerable to adverse
developments than large-capitalization companies. These securities may or may
not pay dividends. The Fund is subject to the risk that medium-capitalization
stocks may underperform other segments of the equity market or the equity market
as a whole.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and
81
closes its short position, the Fund will realize a gain on the transaction.
Conversely, if the security goes up in price during the period, the Fund will
realize a loss on the transaction. The risk of such price increases is the
principal risk of engaging in short sales. The Fund may also be subject to
expenses related to short sales such as borrowing and margin accounting
maintenance costs, which may negatively impact the performance of the Fund.
PERFORMANCE
The Rydex Inverse 2x Russell MidCap(R) Value ETF has not yet commenced
operations and therefore does not have a performance history for a full calendar
year.
82
RYDEX INVERSE RUSSELL 2000(R) ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse Russell 2000(R) ETF seeks to provide investment results that
will match, before fees and expenses, the performance of a specific benchmark on
a daily basis. The Fund's current benchmark is the inverse (opposite) of the
performance of the Russell 2000(R) Index (the "Index" or "Underlying Index").
If the Fund meets its objective, the value of the Fund's shares will tend to
increase during times when the value of the Underlying Index is decreasing. When
the value of the Underlying Index is increasing, however, the value of the
Fund's shares should decrease on a daily basis by an inversely proportionate
amount (E.G., if the Underlying Index goes up by 5%, the value of the Fund's
shares should go down by 5% on that day).
PRINCIPAL INVESTMENT STRATEGY
The Fund's objective is to perform exactly the opposite of the Underlying Index.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. For example, the Fund engages in short sales of securities included in
the Underlying Index or futures contracts and may invest to a significant extent
in derivatives and other instruments whose performance is expected to be the
opposite of the Underlying Index, such as options on securities, futures
contracts, and securities indices and swap agreements. This is a non-fundamental
investment policy that can be changed by the Fund upon 60 days' prior notice to
shareholders. On a day-to-day basis, the Fund may hold U.S. Government
securities or cash equivalents to collateralize its short sales and derivative
positions.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse Russell 2000(R) ETF is subject to a number of other risks that may
affect the value of its shares, including:
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
SMALL-CAPITALIZATION SECURITIES RISK - In comparison to securities of companies
with medium and large capitalizations, securities of small-capitalization
companies may have more price volatility, greater spreads between their bid and
ask prices, significantly lower trading volumes, and cyclical or static growth
prospects. Small-capitalization companies often have limited product lines,
markets or financial resources, and may therefore be more vulnerable to adverse
developments than medium and large-capitalization companies. These securities
may or may not pay dividends. The Fund is subject to the risk that
small-capitalization stocks may underperform other segments of the equity market
or the equity market as a whole.
83
PERFORMANCE
The Rydex Inverse Russell 2000(R) ETF has not yet commenced operations and
therefore does not have a performance history for a full calendar year.
84
RYDEX 2X RUSSELL 2000(R) GROWTH ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex 2x Russell 2000(R) Growth ETF seeks to provide investment results that
will match, before fees and expenses, the performance of a specific benchmark on
a daily basis. The Fund's current benchmark is 200% of the performance of the
Russell 2000(R) Growth Index (the "Index" or "Underlying Index").
If the Fund meets its objective, the value of the Fund's shares will tend to
increase on a daily basis by 200% of the value of any increase in the Underlying
Index. When the value of the Underlying Index declines, the value of the Fund's
shares should also decrease on a daily basis by 200% of the value of any
decrease in the Underlying Index (E.G., if the Underlying Index goes down by 5%,
the value of the Fund's shares should go down by 10% on that day). For more
information about the effects of leverage, please see "Understanding Compounding
and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of investing in
equity securities, leveraged instruments, such as equity index swaps, futures
contracts and options on securities, futures contracts, and stock indices.
Equity index swaps, futures and option contracts enable the Fund to pursue its
investment objective without investing directly in the securities included in
the benchmark, or in the same proportion that those securities are represented
in that benchmark. On a day-to-day basis, the Fund holds U.S. Government
securities or cash equivalents to collateralize these futures and options
contracts. The Fund also will purchase equity securities that are generally
within the capitalization range of the Russell 2000(R) Growth Index, but may
purchase equity securities of any capitalization range.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in component securities included in,
and financial instruments with economic characteristics that should perform
similarly to those of, the Underlying Index. This is a non-fundamental policy
that can be changed by the Fund upon 60 days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex 2x
Russell 2000(R) Growth ETF is subject to a number of other risks that may affect
the value of its shares, including:
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
SMALL-CAPITALIZATION SECURITIES RISK - In comparison to securities of companies
with medium and large capitalizations, securities of small-capitalization
companies may have more price volatility, greater spreads between their bid and
ask prices, significantly lower trading volumes, and cyclical or static growth
prospects. Small-capitalization companies often have limited product lines,
markets or financial resources, and may therefore be more vulnerable to adverse
developments than medium and large-capitalization companies. These securities
may or may not pay dividends. The Fund is subject to the risk that
small-capitalization stocks may underperform other segments of the equity market
or the equity market as a whole.
85
PERFORMANCE
The Rydex 2x Russell 2000(R) Growth ETF has not yet commenced operations and
therefore does not have a performance history for a full calendar year.
86
RYDEX INVERSE RUSSELL 2000(R) GROWTH ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse Russell 2000(R) Growth ETF seeks to provide investment results
that will match, before fees and expenses, the performance of a specific
benchmark on a daily basis. The Fund's current benchmark is the inverse
(opposite) of the of the Russell 2000(R) Growth Index (the "Index" or
"Underlying Index").
If the Fund meets its objective, the value of the Fund's shares will tend to
increase during times when the value of the Underlying Index is decreasing. When
the value of the Underlying Index is increasing, however, the value of the
Fund's shares should decrease on a daily basis by an inversely proportionate
amount (E.G., if the Underlying Index goes up by 5%, the value of the Fund's
shares should go down by 5% on that day).
PRINCIPAL INVESTMENT STRATEGY
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. For example, the Fund engages in short sales of securities included in
the Underlying Index or futures contracts and may invest to a significant extent
in derivatives and other instruments whose performance is expected to be the
opposite of the Underlying Index, such as options on securities, futures
contracts, and securities indices and swap agreements. This is a non-fundamental
investment policy that can be changed by the Fund upon 60 days' prior notice to
shareholders. On a day-to-day basis, the Fund may hold U.S. Government
securities or cash equivalents to collateralize its short sales and derivative
positions.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse Russell 2000(R) Growth ETF is subject to a number of other risks that
may affect the value of its shares, including:
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
SMALL-CAPITALIZATION SECURITIES RISK - In comparison to securities of companies
with medium and large capitalizations, securities of small-capitalization
companies may have more price volatility, greater spreads between their bid and
ask prices, significantly lower trading volumes, and cyclical or static growth
prospects. Small-capitalization companies often have limited product lines,
markets or financial resources, and may therefore be more vulnerable to adverse
developments than medium and large-capitalization companies. These securities
may or may not pay dividends. The Fund is subject to the risk that
small-capitalization stocks may underperform other segments of the equity market
or the equity market as a whole.
87
PERFORMANCE
The Rydex Inverse Russell 2000(R) Growth ETF has not yet commenced operations
and therefore does not have a performance history for a full calendar year.
88
RYDEX INVERSE 2X RUSSELL 2000(R) GROWTH ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse 2x Russell 2000(R) Growth ETF seeks to provide investment
results that will match, before fees and expenses, the performance of a specific
benchmark on a daily basis. The Fund's current benchmark is 200% of the inverse
(opposite) of the performance of the Russell 2000(R) Growth Index (the "Index"
or "Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the Underlying Index goes up by 5%, the value of the Fund's shares should go
down by 10% on that day). For more information about the effects of leverage,
please see "Understanding Compounding and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of engaging in
short sales of securities and investing in leveraged instruments, such as equity
index swaps, futures contracts and options on securities, futures contracts, and
stock indices. Equity index swaps, short sales, futures and options contracts
enable the Fund to pursue its objective without selling short each of the
securities included in the benchmark. On a day-to-day basis, the Fund holds U.S.
Government securities or cash equivalents to collateralize these futures and
options contracts.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. This is a non-fundamental policy that can be changed by the Fund upon 60
days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse 2x Russell 2000(R) Growth ETF is subject to a number of other risks that
may affect the value of its shares, including:
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
SMALL-CAPITALIZATION SECURITIES RISK - In comparison to securities of companies
with medium and large capitalizations, securities of small-capitalization
companies may have more price volatility, greater spreads between their bid and
ask prices, significantly lower trading volumes, and
89
cyclical or static growth prospects. Small-capitalization companies often have
limited product lines, markets or financial resources, and may therefore be more
vulnerable to adverse developments than medium and large-capitalization
companies. These securities may or may not pay dividends. The Fund is subject to
the risk that small-capitalization stocks may underperform other segments of the
equity market or the equity market as a whole.
PERFORMANCE
The Rydex Inverse 2x Russell 2000(R) Growth ETF has not yet commenced operations
and therefore does not have a performance history for a full calendar year.
90
RYDEX 2X RUSSELL 2000(R) VALUE ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex 2x Russell 2000(R) Value ETF seeks to provide investment results that
will match, before fees and expenses, the performance of a specific benchmark on
a daily basis. The Fund's current benchmark is 200% of the performance of the
Russell 2000(R) Value Index (the "Index" or "Underlying Index").
If the Fund meets its objective, the value of the Fund's shares will tend to
increase on a daily basis by 200% of the value of any increase in the Underlying
Index. When the value of the Underlying Index declines, the value of the Fund's
shares should also decrease on a daily basis by 200% of the value of any
decrease in the Underlying Index (E.G., if the Underlying Index goes down by 5%,
the value of the Fund's shares should go down by 10% on that day). For more
information about the effects of leverage, please see "Understanding Compounding
and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of investing in
equity securities, leveraged instruments, such as equity index swaps, futures
contracts and options on securities, futures contracts, and stock indices.
Equity index swaps, futures and option contracts enable the Fund to pursue its
investment objective without investing directly in the securities included in
the benchmark, or in the same proportion that those securities are represented
in that benchmark. On a day-to-day basis, the Fund holds U.S. Government
securities or cash equivalents to collateralize these futures and options
contracts. The Fund also will purchase equity securities that are generally
within the capitalization range of the Russell 2000(R) Value Index, but may
purchase equity securities of any capitalization range.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in component securities included in,
and financial instruments with economic characteristics that should perform
similarly to those of, the Underlying Index. This is a non-fundamental policy
that can be changed by the Fund upon 60 days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex 2x
Russell 2000(R) Value ETF is subject to a number of other risks that may affect
the value of its shares, including:
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
SMALL-CAPITALIZATION SECURITIES RISK - In comparison to securities of companies
with medium and large capitalizations, securities of small-capitalization
companies may have more price volatility, greater spreads between their bid and
ask prices, significantly lower trading volumes, and cyclical or static growth
prospects. Small-capitalization companies often have limited product lines,
markets or financial resources, and may therefore be more vulnerable to adverse
developments than medium and large-capitalization companies. These securities
may or may not pay dividends. The Fund is subject to the risk that
small-capitalization stocks may underperform other segments of the equity market
or the equity market as a whole.
91
PERFORMANCE
The Rydex 2x Russell 2000(R) Value ETF has not yet commenced operations and
therefore does not have a performance history for a full calendar year.
92
RYDEX INVERSE RUSSELL 2000(R) VALUE ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse Russell 2000(R) Value ETF seeks to provide investment results
that will match, before fees and expenses, the performance of a specific
benchmark on a daily basis. The Fund's current benchmark is the inverse
(opposite) of the performance of the Russell 2000(R) Value Index (the "Index" or
"Underlying Index").
If the Fund meets its objective, the value of the Fund's shares will tend to
increase during times when the value of the Underlying Index is decreasing. When
the value of the Underlying Index is increasing, however, the value of the
Fund's shares should decrease on a daily basis by an inversely proportionate
amount (E.G., if the Underlying Index goes up by 5%, the value of the Fund's
shares should go down by 5% on that day).
PRINCIPAL INVESTMENT STRATEGY
The Fund's objective is to perform exactly the opposite of the Underlying Index.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. For example, the Fund engages in short sales of securities included in
the Underlying Index or futures contracts and may invest to a significant extent
in derivatives and other instruments whose performance is expected to be the
opposite of the Underlying Index, such as options on securities, futures
contracts, and securities indices and swap agreements. This is a non-fundamental
investment policy that can be changed by the Fund upon 60 days' prior notice to
shareholders. On a day-to-day basis, the Fund may hold U.S. Government
securities or cash equivalents to collateralize its short sales and derivative
positions.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse Russell 2000(R) Value ETF is subject to a number of other risks that may
affect the value of its shares, including:
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
SMALL-CAPITALIZATION SECURITIES RISK - In comparison to securities of companies
with medium and large capitalizations, securities of small-capitalization
companies may have more price volatility, greater spreads between their bid and
ask prices, significantly lower trading volumes, and cyclical or static growth
prospects. Small-capitalization companies often have limited product lines,
markets or financial resources, and may therefore be more vulnerable to adverse
developments than medium and large-capitalization companies. These securities
may or may not pay dividends. The Fund is subject to the risk that
small-capitalization stocks may underperform other segments of the equity market
or the equity market as a whole.
93
PERFORMANCE
The Rydex Inverse Russell 2000(R) Value ETF has not yet commenced operations and
therefore does not have a performance history for a full calendar year.
94
RYDEX INVERSE 2X RUSSELL 2000(R) VALUE ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse 2x Russell 2000(R) Value ETF seeks to provide investment
results that will match, before fees and expenses, the performance of a specific
benchmark on a daily basis. The Fund's current benchmark is 200% of the inverse
(opposite) of the performance of the Russell 2000(R) Value Index (the "Index" or
"Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the Underlying Index goes up by 5%, the value of the Fund's shares should go
down by 10% on that day). For more information about the effects of leverage,
please see "Understanding Compounding and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of engaging in
short sales of securities and investing in leveraged instruments, such as equity
index swaps, futures contracts and options on securities, futures contracts, and
stock indices. Equity index swaps, short sales, futures and options contracts
enable the Fund to pursue its objective without selling short each of the
securities included in the benchmark. On a day-to-day basis, the Fund holds U.S.
Government securities or cash equivalents to collateralize these futures and
options contracts.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. This is a non-fundamental policy that can be changed by the Fund upon 60
days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse 2x Russell 2000(R) Value ETF is subject to a number of other risks that
may affect the value of its shares, including:
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
SMALL-CAPITALIZATION SECURITIES RISK - In comparison to securities of companies
with medium and large capitalizations, securities of small-capitalization
companies may have more price volatility, greater spreads between their bid and
ask prices, significantly lower trading volumes, and
95
cyclical or static growth prospects. Small-capitalization companies often have
limited product lines, markets or financial resources, and may therefore be more
vulnerable to adverse developments than medium and large-capitalization
companies. These securities may or may not pay dividends. The Fund is subject to
the risk that small-capitalization stocks may underperform other segments of the
equity market or the equity market as a whole.
PERFORMANCE
The Rydex Inverse 2x Russell 2000(R) Value ETF has not yet commenced operations
and therefore does not have a performance history for a full calendar year.
96
RYDEX 2X RUSSELL 3000(R) ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex 2x Russell 3000(R) ETF seeks to provide investment results that will
match, before fees and expenses, the performance of a specific benchmark on a
daily basis. The Fund's current benchmark is 200% of the performance of the
Russell 3000(R) Index (the "Index" or "Underlying Index").
If the Fund meets its objective, the value of the Fund's shares will tend to
increase on a daily basis by 200% of the value of any increase in the Underlying
Index. When the value of the Underlying Index declines, the value of the Fund's
shares should also decrease on a daily basis by 200% of the value of any
decrease in the Underlying Index (E.G., if the Underlying Index goes down by 5%,
the value of the Fund's shares should go down by 10% on that day). For more
information about the effects of leverage, please see "Understanding Compounding
and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of investing in
equity securities, leveraged instruments, such as equity index swaps, futures
contracts and options on securities, futures contracts, and stock indices.
Equity index swaps, futures and option contracts enable the Fund to pursue its
investment objective without investing directly in the securities included in
the benchmark, or in the same proportion that those securities are represented
in that benchmark. On a day-to-day basis, the Fund holds U.S. Government
securities or cash equivalents to collateralize these futures and options
contracts. The Fund also will purchase equity securities that are generally
within the capitalization range of the Russell 3000(R) Index, but may purchase
equity securities of any capitalization range.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in component securities included in,
and financial instruments with economic characteristics that should perform
similarly to those of, the Underlying Index. This is a non-fundamental policy
that can be changed by the Fund upon 60 days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex 2x
Russell 3000(R) ETF is subject to a number of other risks that may affect the
value of its shares, including:
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
PERFORMANCE
The Rydex 2x Russell 3000(R) ETF has not yet commenced operations and therefore
does not have a performance history for a full calendar year.
97
RYDEX INVERSE RUSSELL 3000(R) ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse Russell 3000(R) ETF seeks to provide investment results that
will match, before fees and expenses, the performance of a specific benchmark on
a daily basis. The Fund's current benchmark is the inverse (opposite) of the
performance of the Russell 3000(R) Index (the "Index" or "Underlying Index").
If the Fund meets its objective, the value of the Fund's shares will tend to
increase during times when the value of the Underlying Index is decreasing. When
the value of the Underlying Index is increasing, however, the value of the
Fund's shares should decrease on a daily basis by an inversely proportionate
amount (E.G., if the Underlying Index goes up by 5%, the value of the Fund's
shares should go down by 5% on that day).
PRINCIPAL INVESTMENT STRATEGY
The Fund's objective is to perform exactly the opposite of the Underlying Index.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. For example, the Fund engages in short sales of securities included in
the Underlying Index or futures contracts and may invest to a significant extent
in derivatives and other instruments whose performance is expected to be the
opposite of the Underlying Index, such as options on securities, futures
contracts, and securities indices and swap agreements. This is a non-fundamental
investment policy that can be changed by the Fund upon 60 days' prior notice to
shareholders. On a day-to-day basis, the Fund may hold U.S. Government
securities or cash equivalents to collateralize its short sales and derivative
positions.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse Russell 3000(R) ETF is subject to a number of other risks that may
affect the value of its shares, including:
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
PERFORMANCE
The Rydex Inverse Russell 3000(R) ETF has not yet commenced operations and
therefore does not have a performance history for a full calendar year.
98
RYDEX INVERSE 2X RUSSELL 3000(R) ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse 2x Russell 3000(R) ETF seeks to provide investment results
that will match, before fees and expenses, the performance of a specific
benchmark on a daily basis. The Fund's current benchmark is 200% of the inverse
(opposite) of the performance of the Russell 3000(R) Index (the "Index" or
"Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the Underlying Index goes up by 5%, the value of the Fund's shares should go
down by 10% on that day). For more information about the effects of leverage,
please see "Understanding Compounding and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of engaging in
short sales of securities and investing in leveraged instruments, such as equity
index swaps, futures contracts and options on securities, futures contracts, and
stock indices. Equity index swaps, short sales, futures and options contracts
enable the Fund to pursue its objective without selling short each of the
securities included in the benchmark. On a day-to-day basis, the Fund holds U.S.
Government securities or cash equivalents to collateralize these futures and
options contracts.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. This is a non-fundamental policy that can be changed by the Fund upon 60
days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse 2x Russell 3000(R) ETF is subject to a number of other risks that may
affect the value of its shares, including:
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
99
PERFORMANCE
The Rydex Inverse 2x Russell 3000(R) ETF has not yet commenced operations and
therefore does not have a performance history for a full calendar year.
100
RYDEX 2X RUSSELL 3000(R) GROWTH ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex 2x Russell 3000(R) Growth ETF seeks to provide investment results that
will match, before fees and expenses, the performance of a specific benchmark on
a daily basis. The Fund's current benchmark is 200% of the performance of the
Russell 3000(R) Growth Index (the "Index" or "Underlying Index").
If the Fund meets its objective, the value of the Fund's shares will tend to
increase on a daily basis by 200% of the value of any increase in the Underlying
Index. When the value of the Underlying Index declines, the value of the Fund's
shares should also decrease on a daily basis by 200% of the value of any
decrease in the Underlying Index (E.G., if the Underlying Index goes down by 5%,
the value of the Fund's shares should go down by 10% on that day). For more
information about the effects of leverage, please see "Understanding Compounding
and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of investing in
equity securities, leveraged instruments, such as equity index swaps, futures
contracts and options on securities, futures contracts, and stock indices.
Equity index swaps, futures and option contracts enable the Fund to pursue its
investment objective without investing directly in the securities included in
the benchmark, or in the same proportion that those securities are represented
in that benchmark. On a day-to-day basis, the Fund holds U.S. Government
securities or cash equivalents to collateralize these futures and options
contracts. The Fund also will purchase equity securities that are generally
within the capitalization range of the Russell 3000(R) Growth Index, but may
purchase equity securities of any capitalization range.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in component securities included in,
and financial instruments with economic characteristics that should perform
similarly to those of, the Underlying Index. This is a non-fundamental policy
that can be changed by the Fund upon 60 days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex 2x
Russell 3000(R) Growth ETF is subject to a number of other risks that may affect
the value of its shares, including:
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
MARKET SEGMENT RISK - The Fund is subject to the risk that growth stocks may
underperform other segments of the equity market or the equity market as a
whole.
PERFORMANCE
The Rydex 2x Russell 3000(R) Growth ETF has not yet commenced operations and
therefore does not have a performance history for a full calendar year.
101
RYDEX INVERSE RUSSELL 3000(R) GROWTH ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse Russell 3000(R) Growth ETF seeks to provide investment results
that will match, before fees and expenses, the performance of a specific
benchmark on a daily basis. The Fund's current benchmark is the inverse
(opposite) of the performance of the Russell 3000(R) Growth Index (the "Index"
or "Underlying Index").
If the Fund meets its objective, the value of the Fund's shares will tend to
increase during times when the value of the Underlying Index is decreasing. When
the value of the Underlying Index is increasing, however, the value of the
Fund's shares should decrease on a daily basis by an inversely proportionate
amount (E.G., if the Underlying Index goes up by 5%, the value of the Fund's
shares should go down by 5% on that day).
PRINCIPAL INVESTMENT STRATEGY
The Fund's objective is to perform exactly the opposite of the Underlying Index.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. For example, the Fund engages in short sales of securities included in
the Underlying Index or futures contracts and may invest to a significant extent
in derivatives and other instruments whose performance is expected to be the
opposite of the Underlying Index, such as options on securities, futures
contracts, and securities indices and swap agreements. This is a non-fundamental
investment policy that can be changed by the Fund upon 60 days' prior notice to
shareholders. On a day-to-day basis, the Fund may hold U.S. Government
securities or cash equivalents to collateralize its short sales and derivative
positions.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse Russell 3000(R) Growth ETF is subject to a number of other risks that
may affect the value of its shares, including:
MARKET SEGMENT RISK - The Fund is subject to the risk that growth stocks may
outperform other segments of the equity market or the equity market as a whole.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
PERFORMANCE
The Rydex Inverse Russell 3000(R) Growth ETF has not yet commenced operations
and therefore does not have a performance history for a full calendar year.
102
RYDEX INVERSE 2X RUSSELL 3000(R) GROWTH ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse 2x Russell 3000(R) Growth ETF seeks to provide investment
results that will match, before fees and expenses, the performance of a specific
benchmark on a daily basis. The Fund's current benchmark is 200% of the inverse
(opposite) of the performance of the Russell 3000(R) Growth Index (the "Index"
or "Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the Underlying Index goes up by 5%, the value of the Fund's shares should go
down by 10% on that day). For more information about the effects of leverage,
please see "Understanding Compounding and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of engaging in
short sales of securities and investing in leveraged instruments, such as equity
index swaps, futures contracts and options on securities, futures contracts, and
stock indices. Equity index swaps, short sales, futures and options contracts
enable the Fund to pursue its objective without selling short each of the
securities included in the benchmark. On a day-to-day basis, the Fund holds U.S.
Government securities or cash equivalents to collateralize these futures and
options contracts.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. This is a non-fundamental policy that can be changed by the Fund upon 60
days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse 2x Russell 3000(R) Growth ETF is subject to a number of other risks that
may affect the value of its shares, including:
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
MARKET SEGMENT RISK - The Fund is subject to the risk that growth stocks may
outperform other segments of the equity market or the equity market as a whole.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
103
PERFORMANCE
The Rydex Inverse 2x Russell 3000(R) Growth ETF has not yet commenced operations
and therefore does not have a performance history for a full calendar year.
104
RYDEX 2X RUSSELL 3000(R) VALUE ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex 2x Russell 3000(R) Value ETF seeks to provide investment results that
will match, before fees and expenses, the performance of a specific benchmark on
a daily basis. The Fund's current benchmark is 200% of the performance of the
Russell 3000(R) Value Index (the "Index" or "Underlying Index").
If the Fund meets its objective, the value of the Fund's shares will tend to
increase on a daily basis by 200% of the value of any increase in the Underlying
Index. When the value of the Underlying Index declines, the value of the Fund's
shares should also decrease on a daily basis by 200% of the value of any
decrease in the Underlying Index (E.G., if the Underlying Index goes down by 5%,
the value of the Fund's shares should go down by 10% on that day). For more
information about the effects of leverage, please see "Understanding Compounding
and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of investing in
equity securities, leveraged instruments, such as equity index swaps, futures
contracts and options on securities, futures contracts, and stock indices.
Equity index swaps, futures and option contracts enable the Fund to pursue its
investment objective without investing directly in the securities included in
the benchmark, or in the same proportion that those securities are represented
in that benchmark. On a day-to-day basis, the Fund holds U.S. Government
securities or cash equivalents to collateralize these futures and options
contracts. The Fund also will purchase equity securities that are generally
within the capitalization range of the Russell 3000(R) Value Index, but may
purchase equity securities of any capitalization range.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in component securities included in,
and financial instruments with economic characteristics that should perform
similarly to those of, the Underlying Index. This is a non-fundamental policy
that can be changed by the Fund upon 60 days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex 2x
Russell 3000(R) Value ETF is subject to a number of other risks that may affect
the value of its shares, including:
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
MARKET SEGMENT RISK - The Fund is subject to the risk that value stocks may
underperform other segments of the equity market or the equity market as a
whole.
PERFORMANCE
The Rydex 2x Russell 3000(R) Value ETF has not yet commenced operations and
therefore does not have a performance history for a full calendar year.
105
RYDEX INVERSE RUSSELL 3000(R) VALUE (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse Russell 3000(R) Value ETF seeks to provide investment results
that will match, before fees and expenses, the performance of a specific
benchmark on a daily basis. The Fund's current benchmark is the inverse
(opposite) of the performance of the Russell 3000(R) Value Index (the "Index" or
"Underlying Index").
If the Fund meets its objective, the value of the Fund's shares will tend to
increase during times when the value of the Underlying Index is decreasing. When
the value of the Underlying Index is increasing, however, the value of the
Fund's shares should decrease on a daily basis by an inversely proportionate
amount (E.G., if the Underlying Index goes up by 5%, the value of the Fund's
shares should go down by 5% on that day).
PRINCIPAL INVESTMENT STRATEGY
The Fund's objective is to perform exactly the opposite of the Underlying Index
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. For example, the Fund engages in short sales of securities included in
the Underlying Index or futures contracts and may invest to a significant extent
in derivatives and other instruments whose performance is expected to be the
opposite of the Underlying Index, such as options on securities, futures
contracts, and securities indices and swap agreements. This is a non-fundamental
investment policy that can be changed by the Fund upon 60 days' prior notice to
shareholders. On a day-to-day basis, the Fund may hold U.S. Government
securities or cash equivalents to collateralize its short sales and derivative
positions.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse Russell 3000(R) Value ETF is subject to a number of other risks that may
affect the value of its shares, including:
MARKET SEGMENT RISK - The Fund is subject to the risk that value stocks may
outperform other segments of the equity market or the equity market as a whole.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
PERFORMANCE
The Rydex Inverse Russell 3000(R) Value ETF has not yet commenced operations and
therefore does not have a performance history for a full calendar year.
106
RYDEX INVERSE 2X RUSSELL 3000(R) VALUE ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse 2x Russell 3000(R) Value ETF seeks to provide investment
results that will match, before fees and expenses, the performance of a specific
benchmark on a daily basis. The Fund's current benchmark is 200% of the inverse
(opposite) of the performance of the Russell 3000(R) Value Index (the "Index" or
"Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the Underlying Index goes up by 5%, the value of the Fund's shares should go
down by 10% on that day). For more information about the effects of leverage,
please see "Understanding Compounding and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of engaging in
short sales of securities and investing in leveraged instruments, such as equity
index swaps, futures contracts and options on securities, futures contracts, and
stock indices. Equity index swaps, short sales, futures and options contracts
enable the Fund to pursue its objective without selling short each of the
securities included in the benchmark. On a day-to-day basis, the Fund holds U.S.
Government securities or cash equivalents to collateralize these futures and
options contracts.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. This is a non-fundamental policy that can be changed by the Fund upon 60
days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse 2x Russell 3000(R) Value ETF is subject to a number of other risks that
may affect the value of its shares, including:
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
MARKET SEGMENT RISK - The Fund is subject to the risk that value stocks may
outperform other segments of the equity market or the equity market as a whole.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
107
PERFORMANCE
The Rydex Inverse 2x Russell 3000(R) Value ETF has not yet commenced operations
and therefore does not have a performance history for a full calendar year.
108
RYDEX 2X NASDAQ BIOTECH ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex 2x NASDAQ Biotech ETF seeks to provide investment results that will
match, before fees and expenses, the performance of a specific benchmark on a
daily basis. The Fund's current benchmark is 200% of the performance of the
NASDAQ Biotechnology Index(R) (the "Index" or "Underlying Index").
If the Fund meets its objective, the value of the Fund's shares will tend to
increase on a daily basis by 200% of the value of any increase in the Underlying
Index. When the value of the Underlying Index declines, the value of the Fund's
shares should also decrease on a daily basis by 200% of the value of any
decrease in the Underlying Index (E.G., if the Underlying Index goes down by 5%,
the value of the Fund's shares should go down by 10% on that day). For more
information about the effects of leverage, please see "Understanding Compounding
and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of investing in
equity securities, leveraged instruments, such as equity index swaps, futures
contracts and options on securities, futures contracts, and stock indices.
Equity index swaps, futures and option contracts enable the Fund to pursue its
investment objective without investing directly in the securities included in
the benchmark, or in the same proportion that those securities are represented
in that benchmark. On a day-to-day basis, the Fund holds U.S. Government
securities or cash equivalents to collateralize these futures and options
contracts. The Fund also will purchase equity securities that are generally
within the capitalization range of the NASDAQ Biotechnology Index(R), but may
purchase equity securities of any capitalization range.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in component securities included in,
and financial instruments with economic characteristics that should perform
similarly to those of, the Underlying Index. This is a non-fundamental policy
that can be changed by the Fund upon 60 days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex 2x
NASDAQ Biotech ETF is subject to a number of other risks that may affect the
value of its shares, including:
BIOTECHNOLOGY SECTOR MARKET RISK - To the extent that the Underlying Index is
currently concentrated in issuers conducting business in the technology sector,
the Fund's investments in those issuers are subject to legislative or regulatory
changes, adverse market conditions and/or increased competition affecting that
economic sector. The prices of the securities of technology companies may
fluctuate widely due to competitive pressures, increased sensitivity to short
product cycles and aggressive pricing, problems relating to bringing their
products to market, very high price/earnings ratios, and high personnel turnover
due to severe labor shortages for skilled technology professionals.
DEPOSITARY RECEIPT RISK - The Fund may hold the securities of non-U.S. companies
in the form of American Depositary Receipts ("ADRs"). The underlying securities
of the ADRs in the Fund's portfolio are subject to fluctuations in foreign
currency exchange rates that may affect the value of the Fund's portfolio. In
addition, the value of the securities underlying the ADRs may change materially
at times when the U.S. markets are not open for trading. Investments in the
underlying foreign securities also involve political and economic risks distinct
from those associated with investing in the securities of U.S. issuers.
109
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
PERFORMANCE
The Rydex 2x NASDAQ Biotech ETF has not yet commenced operations and therefore
does not have a performance history for a full calendar year.
110
RYDEX INVERSE NASDAQ BIOTECH ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse NASDAQ Biotech ETF seeks to provide investment results that
will match, before fees and expenses, the performance of a specific benchmark on
a daily basis. The Fund's current benchmark is the inverse (opposite) of the
performance of the NASDAQ Biotechnology Index(R) (the "Index" or "Underlying
Index").
If the Fund meets its objective, the value of the Fund's shares will tend to
increase during times when the value of the Underlying Index is decreasing. When
the value of the Underlying Index is increasing, however, the value of the
Fund's shares should decrease on a daily basis by an inversely proportionate
amount (E.G., if the Underlying Index goes up by 5%, the value of the Fund's
shares should go down by 5% on that day).
PRINCIPAL INVESTMENT STRATEGY
The Fund's objective is to perform exactly the opposite of the Underlying Index.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. For example, the Fund engages in short sales of securities included in
the Underlying Index or futures contracts and may invest to a significant extent
in derivatives and other instruments whose performance is expected to be the
opposite of the Underlying Index, such as options on securities, futures
contracts, and securities indices and swap agreements. This is a non-fundamental
investment policy that can be changed by the Fund upon 60 days' prior notice to
shareholders. On a day-to-day basis, the Fund may hold U.S. Government
securities or cash equivalents to collateralize its short sales and derivative
positions.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse NASDAQ Biotech ETF is subject to a number of other risks that may affect
the value of its shares, including:
BIOTECHNOLOGY SECTOR MARKET RISK - The risk that the securities of issuers in
the biotechnology sector will outperform the market as a whole. Biotechnology
companies are subject to legislative or regulatory changes, adverse market
conditions and/or increased competition affecting that economic sector. The
prices of the securities of biotechnology companies may fluctuate widely due to
patent considerations, intense competition, rapid technological change and
obsolescence, and regulatory requirements of the Food and Drug Administration,
the Environmental Protection Agency, state and local governments, and foreign
regulatory authorities.
DEPOSITARY RECEIPT RISK - The Fund may hold the securities of non-U.S. companies
in the form of American Depositary Receipts ("ADRs"). The underlying securities
of the ADRs in the Fund's portfolio are subject to fluctuations in foreign
currency exchange rates that may affect the value of the Fund's portfolio. In
addition, the value of the securities underlying the ADRs may change materially
at times when the U.S. markets are not open for trading. Investments in the
underlying foreign securities also involve political and economic risks distinct
from those associated with investing in the securities of U.S. issuers.
111
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
PERFORMANCE
The Rydex Inverse NASDAQ Biotech ETF has not yet commenced operations and
therefore does not have a performance history for a full calendar year.
112
RYDEX INVERSE 2X NASDAQ BIOTECH ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse 2x NASDAQ Biotech ETF seeks to provide investment results that
will match, before fees and expenses, the performance of a specific benchmark on
a daily basis. The Fund's current benchmark is 200% of the inverse (opposite) of
the performance of the NASDAQ Biotechnology Index(R) (the "Index" or "Underlying
Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the Underlying Index goes up by 5%, the value of the Fund's shares should go
down by 10% on that day). For more information about the effects of leverage,
please see "Understanding Compounding and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of engaging in
short sales of securities and investing in leveraged instruments, such as equity
index swaps, futures contracts and options on securities, futures contracts, and
stock indices. Equity index swaps, short sales, futures and options contracts
enable the Fund to pursue its objective without selling short each of the
securities included in the benchmark. On a day-to-day basis, the Fund holds U.S.
Government securities or cash equivalents to collateralize these futures and
options contracts.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. This is a non-fundamental policy that can be changed by the Fund upon 60
days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse 2x NASDAQ Biotech ETF is subject to a number of other risks that may
affect the value of its shares, including:
BIOTECHNOLOGY SECTOR MARKET RISK - The risk that the securities of issuers in
the biotechnology sector will outperform the market as a whole. Biotechnology
companies are subject to legislative or regulatory changes, adverse market
conditions and/or increased competition affecting that economic sector. The
prices of the securities of biotechnology companies may fluctuate widely due to
patent considerations, intense competition, rapid technological change and
obsolescence, and regulatory requirements of the Food and Drug Administration,
the Environmental Protection Agency, state and local governments, and foreign
regulatory authorities.
DEPOSITARY RECEIPT RISK - The Fund may hold the securities of non-U.S. companies
in the form of American Depositary Receipts ("ADRs"). The underlying securities
of the ADRs in the Fund's portfolio are subject to fluctuations in foreign
currency exchange rates that may affect the value of the Fund's portfolio. In
addition, the value of the securities underlying the ADRs may change materially
at times when the U.S. markets are not open for trading. Investments in the
underlying foreign securities also involve political and economic risks distinct
from those associated with investing in the securities of U.S. issuers.
113
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
PERFORMANCE
The Rydex Inverse 2x NASDAQ Biotech ETF has not yet commenced operations and
therefore does not have a performance history for a full calendar year.
114
RYDEX 2X CONSUMER DISCRETIONARY ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex 2x Consumer Discretionary ETF seeks to provide investment results that
will match, before fees and expenses, the performance of a specific benchmark on
a daily basis. The Fund's current benchmark is 200% of the performance of the
S&P 500 Consumer Discretionary Sector Index (the "Index" or "Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase on a daily basis by 200% of the value of any increase in the Underlying
Index. When the value of the Underlying Index declines, the value of the Fund's
shares should also decrease on a daily basis by 200% of the value of any
decrease in the Underlying Index (E.G., if the Underlying Index goes down by 5%,
the value of the Fund's shares should go down by 10% on that day). For more
information about the effects of leverage, please see "Understanding Compounding
and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of investing in
equity securities, leveraged instruments, such as equity index swaps, futures
contracts and options on securities, futures contracts, and stock indices.
Equity index swaps, futures and option contracts enable the Fund to pursue its
investment objective without investing directly in the securities included in
the benchmark, or in the same proportion that those securities are represented
in that benchmark. On a day-to-day basis, the Fund holds U.S. Government
securities or cash equivalents to collateralize these futures and options
contracts. The Fund also will purchase equity securities that are included in
the Underlying Index.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in component securities included in,
and financial instruments with economic characteristics that should perform
similarly to those of, the Underlying Index. This is a non-fundamental policy
that can be changed by the Fund upon 60 days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex 2x
Consumer Discretionary ETF is subject to a number of other risks that may affect
the value of its shares, including:
CONSUMER DISCRETIONARY SECTOR CONCENTRATION RISK - The risk that the securities
of issuers in the consumer discretionary sector will underperform the market as
a whole. To the extent that the Fund's investments are concentrated in the same
economic sector, the Fund is subject to legislative or regulatory changes,
adverse market conditions and/or increased competition affecting that economic
sector. The performance of consumer discretionary companies has historically
been closely tied to the performance of the overall economy, and is also
affected by interest rates, competition, consumer confidence and relative levels
of disposable household income and seasonal consumer spending. Changes in
demographics and consumer tastes can also affect the demand for, and success of,
consumer products in the marketplace.
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
115
PERFORMANCE
The Rydex 2x Consumer Discretionary ETF has not yet commenced operations and
therefore does not have a performance history for a full calendar year.
116
RYDEX INVERSE CONSUMER DISCRETIONARY ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse Consumer Discretionary ETF seeks to provide investment results
that will match, before fees and expenses, the performance of a specific
benchmark on a daily basis. The Fund's current benchmark is the inverse
(opposite) of the performance of the S&P 500 Consumer Discretionary Sector Index
(the "Index" or "Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the index goes up by 5%, the value of the Fund's shares should go down by 5% on
that day.
PRINCIPAL INVESTMENT STRATEGY
The Fund's objective is to perform exactly the opposite of the Underlying Index.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. For example, the Fund engages in short sales of securities included in
the Underlying Index or futures contracts and may invest to a significant extent
in derivatives and other instruments whose performance is expected to be the
opposite of the Underlying Index, such as options on securities, futures
contracts, and securities indices and swap agreements. This is a non-fundamental
investment policy that can be changed by the Fund upon 60 days' prior notice to
shareholders. On a day-to-day basis, the Fund may hold U.S. Government
securities or cash equivalents to collateralize its short sales and derivative
positions.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse Consumer Discretionary ETF is subject to a number of other risks that
may affect the value of its shares, including:
CONSUMER DISCRETIONARY SECTOR MARKET RISK - The risk that the securities of
issuers in the consumer discretionary sector will outperform the market as a
whole. The performance of consumer discretionary companies has historically been
closely tied to the performance of the overall economy, and is also affected by
interest rates, competition, consumer confidence and relative levels of
disposable household income and seasonal consumer spending. Changes in
demographics and consumer tastes can also affect the demand for, and success of,
consumer products in the marketplace.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
PERFORMANCE
The Rydex Inverse Consumer Discretionary ETF has not yet commenced operations
and therefore does not have a performance history for a full calendar year.
117
RYDEX INVERSE 2X CONSUMER DISCRETIONARY ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse 2x Consumer Discretionary ETF seeks to provide investment
results that will match, before fees and expenses, the performance of a specific
benchmark on a daily basis. The Fund's current benchmark is 200% of the inverse
(opposite) of the performance of the S&P 500 Consumer Discretionary Sector Index
(the "Index" or "Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the Underlying Index goes up by 5%, the value of the Fund's shares should go
down by 10% on that day). For more information about the effects of leverage,
please see "Understanding Compounding and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund's objective is to perform exactly the opposite of the Underlying Index.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. For example, the Fund engages in short sales of securities included in
the Underlying Index or futures contracts and may invest to a significant extent
in derivatives and other instruments whose performance is expected to be the
opposite of the Underlying Index, such as options on securities, futures
contracts, and securities indices and swap agreements. This is a non-fundamental
investment policy that can be changed by the Fund upon 60 days' prior notice to
shareholders. On a day-to-day basis, the Fund may hold U.S. Government
securities or cash equivalents to collateralize its short sales and derivative
positions.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse 2x Consumer Discretionary ETF is subject to a number of other risks that
may affect the value of its shares, including:
CONSUMER DISCRETIONARY SECTOR MARKET RISK - The risk that the securities of
issuers in the consumer discretionary sector will outperform the market as a
whole. The performance of consumer discretionary companies has historically been
closely tied to the performance of the overall economy, and is also affected by
interest rates, competition, consumer confidence and relative levels of
disposable household income and seasonal consumer spending. Changes in
demographics and consumer tastes can also affect the demand for, and success of,
consumer products in the marketplace.
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short
118
sales such as borrowing and margin accounting maintenance costs, which may
negatively impact the performance of the Fund.
PERFORMANCE
The Rydex Inverse 2x Consumer Discretionary ETF has not yet commenced operations
and therefore does not have a performance history for a full calendar year.
119
RYDEX 2X CONSUMER STAPLES ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex 2x Consumer Staples ETF seeks to provide investment results that will
match, before fees and expenses, the performance of a specific benchmark on a
daily basis. The Fund's current benchmark is 200% of the performance of the S&P
500 Consumer Staples Sector Index (the "Index" or "Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase on a daily basis by 200% of the value of any increase in the Underlying
Index. When the value of the Underlying Index declines, the value of the Fund's
shares should also decrease on a daily basis by 200% of the value of any
decrease in the Underlying Index (E.G., if the Underlying Index goes down by 5%,
the value of the Fund's shares should go down by 10% on that day). For more
information about the effects of leverage, please see "Understanding Compounding
and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of investing in
equity securities, leveraged instruments, such as equity index swaps, futures
contracts and options on securities, futures contracts, and stock indices.
Equity index swaps, futures and option contracts enable the Fund to pursue its
investment objective without investing directly in the securities included in
the benchmark, or in the same proportion that those securities are represented
in that benchmark. On a day-to-day basis, the Fund holds U.S. Government
securities or cash equivalents to collateralize these futures and options
contracts. The Fund also will purchase equity securities that are included in
the Underlying Index.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in component securities included in,
and financial instruments with economic characteristics that should perform
similarly to those of, the Underlying Index. This is a non-fundamental policy
that can be changed by the Fund upon 60 days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex 2x
Consumer Staples ETF is subject to a number of other risks that may affect the
value of its shares, including:
CONSUMER STAPLES SECTOR CONCENTRATION RISK - The risk that the securities of
issuers in the consumer staples sector that the Fund purchases will underperform
the market as a whole. To the extent that the Fund's investments are
concentrated in issuers conducting business in the same economic sector, the
Fund is subject to legislative or regulatory changes, adverse market conditions
and/or increased competition affecting that economic sector. Consumer staples
companies are subject to government regulation affecting the permissibility of
using various food additives and production methods, which regulations could
affect company profitability. Tobacco companies may be adversely affected by the
adoption of proposed legislation and/or by litigation. Also, the success of food
and soft drink may be strongly affected by fads, marketing campaigns and other
factors affecting supply and demand.
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
120
PERFORMANCE
The Rydex 2x Consumer Discretionary ETF has not yet commenced operations and
therefore does not have a performance history for a full calendar year.
121
RYDEX INVERSE CONSUMER STAPLES ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse Consumer Staples ETF seeks to provide investment results that
will match, before fees and expenses, the performance of a specific benchmark on
a daily basis. The Fund's current benchmark is the inverse (opposite) of the
performance of the S&P 500 Consumer Staples Sector Index (the "Index or
"Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the Underlying Index goes up by 5%, the value of the Fund's shares should go
down by 5% on that day.
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its investment strategy a program of engaging in short sales
of securities included in the Underlying Index or futures contracts and other
derivative instruments whose performance is expected to be the opposite of the
Underlying Index, such as options on securities, futures contracts, and
securities indices. The Fund will also enter into swap agreements. On a
day-to-day basis, the Fund holds U.S. Government securities or cash equivalents
to collateralize its short sales and derivative positions.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. This is a non-fundamental policy that may be changed by the Fund upon 60
days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse Consumer Staples ETF is subject to a number of other risks that may
affect the value of its shares, including:
CONSUMER STAPLES SECTOR MARKET RISK - The risk that the securities of issuers in
the consumer staples sector will outperform the market as a whole. Consumer
staples companies are subject to government regulation affecting the
permissibility of using various food additives and production methods, which
regulations could affect company profitability. Also, the success of food and
soft drink may be strongly affected by fads, marketing campaigns and other
factors affecting supply and demand.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
PERFORMANCE
The Rydex Inverse Consumer Staples ETF has not yet commenced operations and
therefore does not have a performance history for a full calendar year.
122
RYDEX INVERSE 2X CONSUMER STAPLES ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse 2x Consumer Staples ETF seeks to provide investment results
that will match, before fees and expenses, the performance of a specific
benchmark on a daily basis. The Fund's current benchmark is the 200% of the
inverse (opposite) of the performance of the S&P 500 Consumer Staples Sector
Index (the "Index" or "Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the Underlying Index goes up by 5%, the value of the Fund's shares should go
down by 10% on that day). For more information about the effects of leverage,
please see "Understanding Compounding and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of engaging in
short sales of securities and investing in leveraged instruments, such as equity
index swaps, futures contracts and options on securities, futures contracts, and
stock indices. Equity index swaps, short sales, futures and options contracts
enable the Fund to pursue its objective without selling short each of the
securities included in the benchmark. On a day-to-day basis, the Fund holds U.S.
Government securities or cash equivalents to collateralize these futures and
options contracts.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. This is a non-fundamental policy that can be changed by the Fund upon 60
days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse 2x Consumer Discretionary ETF is subject to a number of other risks that
may affect the value of its shares, including:
CONSUMER STAPLES SECTOR MARKET RISK - The risk that the securities of issuers in
the consumer staples sector will outperform the market as a whole. Consumer
staples companies are subject to government regulation affecting the
permissibility of using various food additives and production methods, which
regulations could affect company profitability. Also, the success of food and
soft drink may be strongly affected by fads, marketing campaigns and other
factors affecting supply and demand.
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases
123
is the principal risk of engaging in short sales. The Fund may also be subject
to expenses related to short sales such as borrowing and margin accounting
maintenance costs, which may negatively impact the performance of the Fund.
PERFORMANCE
The Rydex Inverse 2x Consumer Discretionary ETF has not yet commenced operations
and therefore does not have a performance history for a full calendar year.
124
RYDEX 2X ENERGY ETF (XXX)
FUND INFORMATION
The Rydex 2x Energy ETF seeks to provide investment results that will match,
before fees and expenses, the performance of a specific benchmark on a daily
basis. The Fund's current benchmark is 200% of the performance of the S&P 500
Energy Sector Index (the "Index" or "Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase on a daily basis by 200% of the value of any increase in the Underlying
Index. When the value of the Underlying Index declines, the value of the Fund's
shares should also decrease on a daily basis by 200% of the value of any
decrease in the Underlying Index (E.G., if the Underlying Index goes down by 5%,
the value of the Fund's shares should go down by 10% on that day). For more
information about the effects of leverage, please see "Understanding Compounding
and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of investing in
equity securities, leveraged instruments, such as equity index swaps, futures
contracts and options on securities, futures contracts, and stock indices.
Equity index swaps, futures and option contracts enable the Fund to pursue its
investment objective without investing directly in the securities included in
the benchmark, or in the same proportion that those securities are represented
in that benchmark. On a day-to-day basis, the Fund holds U.S. Government
securities or cash equivalents to collateralize these futures and options
contracts. The Fund also will purchase equity securities that are included in
the Underlying Index.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in component securities included in,
and financial instruments with economic characteristics that should perform
similarly to those of, the Underlying Index. This is a non-fundamental policy
that can be changed by the Fund upon 60 days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex 2x
Energy ETF is subject to a number of other risks that may affect the value of
its shares, including:
ENERGY SECTOR CONCENTRATION RISK - The risk that the securities of issuers in
the energy sector that the Fund purchases will underperform the market as a
whole. To the extent that the Fund's investments are concentrated in issuers
conducting business in the same economic sector, the Fund is subject to
legislative or regulatory changes, adverse market conditions and/or increased
competition affecting that economic sector. The prices of the securities of
energy and energy services companies may fluctuate widely due to the supply and
demand for both their specific products or services and energy products in
general. The prices of energy product securities may be affected by changes in
value and dividend yield, which depend largely on the price and supply of energy
fuels, international political events relating to oil producing countries,
energy conservation, the success of exploration projects, and tax and other
governmental regulatory policies.
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
125
PERFORMANCE
The Rydex 2x Energy ETF has not yet commenced operations and therefore does not
have a performance history for a full calendar year.
126
RYDEX INVERSE ENERGY ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse Energy ETF seeks to provide investment results that will
match, before fees and expenses, the performance of a specific benchmark on a
daily basis. The Fund's current benchmark is the inverse (opposite) of the
performance of the S&P 500 Energy Sector Index (the "Index" or "Underlying
Index"), before expenses.
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the Underlying Index goes up by 5%, the value of the Fund's shares should go
down by 5% on that day.
PRINCIPAL INVESTMENT STRATEGY
The Fund's objective is to perform exactly the opposite of the Underlying Index.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. For example, the Fund engages in short sales of securities included in
the Underlying Index or futures contracts and may invest to a significant extent
in derivatives and other instruments whose performance is expected to be the
opposite of the Underlying Index, such as options on securities, futures
contracts, and securities indices and swap agreements. This is a non-fundamental
investment policy that can be changed by the Fund upon 60 days' prior notice to
shareholders. On a day-to-day basis, the Fund may hold U.S. Government
securities or cash equivalents to collateralize its short sales and derivative
positions.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse Energy ETF is subject to a number of other risks that may affect the
value of its shares, including:
ENERGY SECTOR MARKET RISK - The risk that the securities of issuers in the
energy sector will outperform the market as a whole. The prices of the
securities of energy and energy services companies may fluctuate widely due to
the supply and demand for both their specific products or services and energy
products in general. The prices of energy product securities may be affected by
changes in value and dividend yield, which depend largely on the price and
supply of energy fuels, international political events relating to oil producing
countries, energy conservation, the success of exploration projects, and tax and
other governmental regulatory policies.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
PERFORMANCE
The Rydex Inverse Energy ETF has not yet commenced operations and therefore does
not have a performance history for a full calendar year.
127
RYDEX INVERSE 2X ENERGY ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse 2x Energy ETF seeks to provide investment results that will
match, before fees and expenses, the performance of a specific benchmark on a
daily basis. The Fund's current benchmark is 200% of the inverse (opposite) of
the performance of the S&P 500 Energy Sector Index (the "Index" or "Underlying
Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the index goes up by 5%, the value of the Fund's shares should go down by 10% on
that day). For more information about the effects of leverage, please see
"Understanding Compounding and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of engaging in
short sales of securities and investing in leveraged instruments, such as equity
index swaps, futures contracts and options on securities, futures contracts, and
stock indices. Equity index swaps, short sales, futures and options contracts
enable the Fund to pursue its objective without selling short each of the
securities included in the benchmark. On a day-to-day basis, the Fund holds U.S.
Government securities or cash equivalents to collateralize these futures and
options contracts.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. This is a non-fundamental policy that can be changed by the Fund upon 60
days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse 2x Energy ETF is subject to a number of other risks that may affect the
value of its shares, including:
ENERGY SECTOR MARKET RISK - The risk that the securities of issuers in the
energy sector will outperform the market as a whole. The prices of the
securities of energy and energy services companies may fluctuate widely due to
the supply and demand for both their specific products or services and energy
products in general. The prices of energy product securities may be affected by
changes in value and dividend yield, which depend largely on the price and
supply of energy fuels, international political events relating to oil producing
countries, energy conservation, the success of exploration projects, and tax and
other governmental regulatory policies.
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and
128
closes its short position, the Fund will realize a gain on the transaction.
Conversely, if the security goes up in price during the period, the Fund will
realize a loss on the transaction. The risk of such price increases is the
principal risk of engaging in short sales. The Fund may also be subject to
expenses related to short sales such as borrowing and margin accounting
maintenance costs, which may negatively impact the performance of the Fund.
PERFORMANCE
The Rydex Inverse 2x Energy ETF has not yet commenced operations and therefore
does not have a performance history for a full calendar year.
129
RYDEX 2X FINANCIALS ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex 2x Financials ETF seeks to provide investment results that will match,
before fees and expenses, the performance of a specific benchmark on a daily
basis. The Fund's current benchmark is 200% of the performance of the S&P 500
Financials Sector Index (the "Index" or "Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase on a daily basis by 200% of the value of any increase in the Underlying
Index. When the value of the Underlying Index declines, the value of the Fund's
shares should also decrease on a daily basis by 200% of the value of any
decrease in the Underlying Index (E.G., if the Underlying Index goes down by 5%,
the value of the Fund's shares should go down by 10% on that day). For more
information about the effects of leverage, please see "Understanding Compounding
and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of investing in
equity securities, leveraged instruments, such as equity index swaps, futures
contracts and options on securities, futures contracts, and stock indices.
Equity index swaps, futures and option contracts enable the Fund to pursue its
investment objective without investing directly in the securities included in
the benchmark, or in the same proportion that those securities are represented
in that benchmark. On a day-to-day basis, the Fund holds U.S. Government
securities or cash equivalents to collateralize these futures and options
contracts. The Fund also will purchase equity securities that are included in
the Underlying Index.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in component securities included in,
and financial instruments with economic characteristics that should perform
similarly to those of, the Underlying Index. This is a non-fundamental policy
that can be changed by the Fund upon 60 days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex 2x
Financials ETF is subject to a number of other risks that may affect the value
of its shares, including:
FINANICAL SECTOR CONCENTRATION RISK - The risk that the securities of issuers in
the financial sector that the Fund purchases will underperform the market as a
whole. To the extent that the Fund's investments are concentrated in issuers
conducting business in the same economic sector, the Fund is subject to
legislative or regulatory changes, adverse market conditions and/or increased
competition affecting that economic sector. Financial companies are subject to
extensive governmental regulation, which may limit both the amounts and types of
loans and other financial commitments they can make, and the rates and fees that
they can charge. Profitability is largely dependent on the availability and cost
of capital, and can fluctuate significantly when interest rates change. Credit
losses resulting from financial difficulties of borrowers also can negatively
impact the sector.
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
130
PERFORMANCE
The Rydex 2x Financials ETF has not yet commenced operations and therefore does
not have a performance history for a full calendar year.
131
RYDEX INVERSE FINANCIALS ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse Financials ETF seeks to provide investment results that will
match, before fees and expenses, the performance of a specific benchmark on a
daily basis. The Fund's current benchmark is the inverse (opposite) of the
performance of the S&P 500 Financials Sector Index (the "Index" or "Underlying
Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the Underlying Index goes up by 5%, the value of the Fund's shares should go
down by 5% on that day.
PRINCIPAL INVESTMENT STRATEGY
The Fund's objective is to perform exactly the opposite of the Underlying Index.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. For example, the Fund engages in short sales of securities included in
the Underlying Index or futures contracts and may invest to a significant extent
in derivatives and other instruments whose performance is expected to be the
opposite of the Underlying Index, such as options on securities, futures
contracts, and securities indices and swap agreements. This is a non-fundamental
investment policy that can be changed by the Fund upon 60 days' prior notice to
shareholders. On a day-to-day basis, the Fund may hold U.S. Government
securities or cash equivalents to collateralize its short sales and derivative
positions.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse Financials ETF is subject to a number of other risks that may affect the
value of its shares, including:
FINANICAL SECTOR MARKET RISK - The risk that the securities of issuers in the
financial sector will outperform the market as a whole. Financial companies are
subject to extensive governmental regulation, which may limit both the amounts
and types of loans and other financial commitments they can make, and the rates
and fees that they can charge. Profitability is largely dependent on the
availability and cost of capital, and can fluctuate significantly when interest
rates change. Credit losses resulting from financial difficulties of borrowers
also can negatively impact the sector.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
132
PERFORMANCE
The Rydex Inverse Financials ETF has not yet commenced operations and therefore
does not have a performance history for a full calendar year.
133
RYDEX INVERSE 2X FINANCIALS ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse 2x Financials ETF seeks to provide investment results that
will match, before fees and expenses, the performance of a specific benchmark on
a daily basis. The Fund's current benchmark is 200% of the inverse (opposite) of
the performance of the S&P 500 Financials Sector Index (the "Index" or
"Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the Underlying Index goes up by 5%, the value of the Fund's shares should go
down by 10% on that day). For more information about the effects of leverage,
please see "Understanding Compounding and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of engaging in
short sales of securities and investing in leveraged instruments, such as equity
index swaps, futures contracts and options on securities, futures contracts, and
stock indices. Equity index swaps, short sales, futures and options contracts
enable the Fund to pursue its objective without selling short each of the
securities included in the benchmark. On a day-to-day basis, the Fund holds U.S.
Government securities or cash equivalents to collateralize these futures and
options contracts.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. This is a non-fundamental policy that can be changed by the Fund upon 60
days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse 2x Financials ETF is subject to a number of other risks that may affect
the value of its shares, including:
FINANCIAL SECTOR MARKET RISK - The risk that the securities of issuers in the
financial sector will outperform the market as a whole. Financial companies are
subject to extensive governmental regulation, which may limit both the amounts
and types of loans and other financial commitments they can make, and the rates
and fees that they can charge. Profitability is largely dependent on the
availability and cost of capital, and can fluctuate significantly when interest
rates change. Credit losses resulting from financial difficulties of borrowers
also can negatively impact the sector.
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
134
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
PERFORMANCE
The Rydex Inverse 2x Financials ETF has not yet commenced operations and
therefore does not have a performance history for a full calendar year.
135
RYDEX 2X HEALTH CARE ETF (XXX)
FUND INFORMATION
The Rydex 2x Health Care ETF seeks to provide investment results that will
match, before fees and expenses, the performance of a specific benchmark on a
daily basis. The Fund's current benchmark is 200% of the performance of the S&P
500 Health Care Sector Index (the "Index" or "Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase on a daily basis by 200% of the value of any increase in the Underlying
Index. When the value of the Underlying Index declines, the value of the Fund's
shares should also decrease on a daily basis by 200% of the value of any
decrease in the Underlying Index (E.G., if the Underlying Index goes down by 5%,
the value of the Fund's shares should go down by 10% on that day). For more
information about the effects of leverage, please see "Understanding Compounding
and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of investing in
equity securities, leveraged instruments, such as equity index swaps, futures
contracts and options on securities, futures contracts, and stock indices.
Equity index swaps, futures and option contracts enable the Fund to pursue its
investment objective without investing directly in the securities included in
the benchmark, or in the same proportion that those securities are represented
in that benchmark. On a day-to-day basis, the Fund holds U.S. Government
securities or cash equivalents to collateralize these futures and options
contracts. The Fund also will purchase equity securities that are included in
the Underlying Index.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in component securities included in,
and financial instruments with economic characteristics that should perform
similarly to those of, the Underlying Index. This is a non-fundamental policy
that can be changed by the Fund upon 60 days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex 2x
Health Care ETF is subject to a number of other risks that may affect the value
of its shares, including:
HEALTH SECTOR CONCENTRATION RISK - The risk that the securities of issuers in
the health care sector that the Fund purchases will underperform the market as a
whole. To the extent that the Fund's investments are concentrated in issuers
conducting business in the same economic sector, the Fund is subject to
legislative or regulatory changes, adverse market conditions and/or increased
competition affecting that economic sector. The prices of the securities of
health care companies may fluctuate widely due to government regulation and
approval of their products and services, which can have a significant effect on
their price and availability. Furthermore, the types of products or services
produced or provided by these companies may quickly become obsolete. Moreover,
liability for products that are later alleged to be harmful or unsafe may be
substantial, and may have a significant impact on a health care company's market
value and/or share price.
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
136
PERFORMANCE
The Rydex 2x Health Care ETF has not yet commenced operations and therefore does
not have a performance history for a full calendar year.
137
RYDEX INVERSE HEALTH CARE ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse Financials ETF seeks to provide investment results that will
match, before fees and expenses, the performance of a specific benchmark on a
daily basis. The Fund's current benchmark is the inverse (opposite) of the
performance of the S&P 500 Health Care Sector Index (the "Index" or "Underlying
Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the index goes up by 5%, the value of the Fund's shares should go down by 5% on
that day.
PRINCIPAL INVESTMENT STRATEGY
The Fund's objective is to perform exactly the opposite of the Underlying Index.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. For example, the Fund engages in short sales of securities included in
the Underlying Index or futures contracts and may invest to a significant extent
in derivatives and other instruments whose performance is expected to be the
opposite of the Underlying Index, such as options on securities, futures
contracts, and securities indices and swap agreements. This is a non-fundamental
investment policy that can be changed by the Fund upon 60 days' prior notice to
shareholders. On a day-to-day basis, the Fund may hold U.S. Government
securities or cash equivalents to collateralize its short sales and derivative
positions.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse Health Care ETF is subject to a number of other risks that may affect
the value of its shares, including:
HEALTH CARE SECTOR MARKET RISK - The risk that the securities of issuers in the
health care sector will outperform the market as a whole. As the population
ages, the need may increase for health care services. In addition, government
regulation and approval of health care products and services may have a positive
effect on their price and availability. Furthermore, a company may produce
innovative types of products or services that could have a significant impact on
a health care company's market value and/or share price.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
PERFORMANCE
The Rydex Inverse Health Care ETF has not yet commenced operations and therefore
does not have a performance history for a full calendar year.
138
RYDEX INVERSE 2X HEALTH CARE ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse 2x Health Care ETF seeks to provide investment results that
will match, before fees and expenses, the performance of a specific benchmark on
a daily basis. The Fund's current benchmark is 200% of the inverse (opposite) of
the performance of the S&P 500 Health Care Sector Index (the "Index" or
"Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the Underlying Index goes up by 5%, the value of the Fund's shares should go
down by 10% on that day). For more information about the effects of leverage,
please see "Understanding Compounding and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of engaging in
short sales of securities and investing in leveraged instruments, such as equity
index swaps, futures contracts and options on securities, futures contracts, and
stock indices. Equity index swaps, short sales, futures and options contracts
enable the Fund to pursue its objective without selling short each of the
securities included in the benchmark. On a day-to-day basis, the Fund holds U.S.
Government securities or cash equivalents to collateralize these futures and
options contracts.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. This is a non-fundamental policy that can be changed by the Fund upon 60
days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse 2x Health Care ETF is subject to a number of other risks that may affect
the value of its shares, including:
HEALTH CARE SECTOR MARKET RISK - The risk that the securities of issuers in the
health care sector will outperform the market as a whole. As the population
ages, the need may increase for health care services. In addition, government
regulation and approval of health care products and services may have a positive
effect on their price and availability. Furthermore, a company may produce
innovative types of products or services that could have a significant impact on
a health care company's market value and/or share price.
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases
139
is the principal risk of engaging in short sales. The Fund may also be subject
to expenses related to short sales such as borrowing and margin accounting
maintenance costs, which may negatively impact the performance of the Fund.
PERFORMANCE
The Rydex Inverse 2x Health Care ETF has not yet commenced operations and
therefore does not have a performance history for a full calendar year.
140
RYDEX 2X INDUSTRIALS ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex 2x Industrials ETF seeks to provide investment results that will
match, before fees and expenses, the performance of a specific benchmark on a
daily basis. The Fund's current benchmark is 200% of the performance of the S&P
500 Industrials Sector Index (the "Index" or "Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase on a daily basis by 200% of the value of any increase in the Underlying
Index. When the value of the Underlying Index declines, the value of the Fund's
shares should also decrease on a daily basis by 200% of the value of any
decrease in the Underlying Index (E.G., if the Underlying Index goes down by 5%,
the value of the Fund's shares should go down by 10% on that day). For more
information about the effects of leverage, please see "Understanding Compounding
and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of investing in
equity securities, leveraged instruments, such as equity index swaps, futures
contracts and options on securities, futures contracts, and stock indices.
Equity index swaps, futures and option contracts enable the Fund to pursue its
investment objective without investing directly in the securities included in
the benchmark, or in the same proportion that those securities are represented
in that benchmark. On a day-to-day basis, the Fund holds U.S. Government
securities or cash equivalents to collateralize these futures and options
contracts. The Fund also will purchase equity securities that are included in
the Underlying Index.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in component securities included in,
and financial instruments with economic characteristics that should perform
similarly to those of, the Underlying Index. This is a non-fundamental policy
that can be changed by the Fund upon 60 days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex 2x
Industrials ETF is subject to a number of other risks that may affect the value
of its shares, including:
INDUSTRIAL SECTOR CONCENTRATION RISK - The risk that the securities of issuers
in the industrial sector that the Fund purchases will underperform the market as
a whole. To the extent that the Fund's investments are concentrated in issuers
conducting business in the same economic sector, the Fund is subject to
legislative or regulatory changes, adverse market conditions and/or increased
compensation affecting that economic sector. The prices of securities of
aerospace and defense, building products, construction and engineering,
electrical equipment, conglomerates, machinery, commercial services and
supplies, air freight and logistics, airlines, and marine, road and rail
transportation infrastructure may fluctuate widely due to the level and
volatility of commodity prices, the exchange value of the dollar, import
controls, worldwide competition, liability for environmental damage, depletion
of resources, and mandated expenditures for safety and pollution control
devices. Further, the prices of securities of industrial companies, specifically
transportation companies, may fluctuate widely due to their cyclical nature,
occasional sharp price movements that may result from changes in the economy,
fuel prices, labor agreement, and insurance costs, the recent trend of
government deregulation, and increased competition from foreign companies, many
of which are partially funded by foreign governments and which may be less
sensitive to short term economic pressures.
141
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
PERFORMANCE
The Rydex 2x Industrials ETF has not yet commenced operations and therefore does
not have a performance history for a full calendar year.
142
RYDEX INVERSE INDUSTRIALS ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse Industrials ETF seeks to provide investment results that will
match, before fees and expenses, the performance of a specific benchmark on a
daily basis. The Fund's current benchmark is the inverse (opposite) of the
performance of the S&P 500 Industrials Sector Index (the "Index" or "Underlying
Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the Underlying Index goes up by 5%, the value of the Fund's shares should go
down by 5% on that day.
PRINCIPAL INVESTMENT STRATEGY
The Fund's objective is to perform exactly the opposite of the Underlying Index.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. For example, the Fund engages in short sales of securities included in
the Underlying Index or futures contracts and may invest to a significant extent
in derivatives and other instruments whose performance is expected to be the
opposite of the Underlying Index, such as options on securities, futures
contracts, and securities indices and swap agreements. This is a non-fundamental
investment policy that can be changed by the Fund upon 60 days' prior notice to
shareholders. On a day-to-day basis, the Fund may hold U.S. Government
securities or cash equivalents to collateralize its short sales and derivative
positions.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse Industrials ETF is subject to a number of other risks that may affect
the value of its shares, including:
INDUSTRIAL SECTOR MARKET RISK - The risk that the securities of issuers in the
industrial sector will outperform the market as a whole. The prices of
securities of aerospace and defense, building products, construction and
engineering, electrical equipment, conglomerates, machinery, commercial services
and supplies, air freight and logistics, airlines, and marine, road and rail
transportation infrastructure may fluctuate widely due to the level and
volatility of commodity prices, the exchange value of the dollar, import
controls, worldwide competition, liability for environmental damage, depletion
of resources, and mandated expenditures for safety and pollution control
devices. Further, the prices of securities of industrial companies, specifically
transportation companies, may fluctuate widely due to their cyclical nature,
occasional sharp price movements that may result from changes in the economy,
fuel prices, labor agreement, and insurance costs, the recent trend of
government deregulation, and increased competition from foreign companies, many
of which are partially funded by foreign governments and which may be less
sensitive to short term economic pressures.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
143
PERFORMANCE
The Rydex Inverse Industrials ETF has not yet commenced operations and therefore
does not have a performance history for a full calendar year.
144
RYDEX INVERSE 2X INDUSTRIALS ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse 2x Industrials ETF seeks to provide investment results that
will match, before fees and expenses, the performance of a specific benchmark on
a daily basis. The Fund's current benchmark is 200% of the inverse (opposite) of
the performance of the S&P 500 Industrials Sector Index (the "Index" or
"Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the Underlying Index goes up by 5%, the value of the Fund's shares should go
down by 10% on that day). For more information about the effects of leverage,
please see "Understanding Compounding and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of engaging in
short sales of securities and investing in leveraged instruments, such as equity
index swaps, futures contracts and options on securities, futures contracts, and
stock indices. Equity index swaps, short sales, futures and options contracts
enable the Fund to pursue its objective without selling short each of the
securities included in the benchmark. On a day-to-day basis, the Fund holds U.S.
Government securities or cash equivalents to collateralize these futures and
options contracts.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. This is a non-fundamental policy that can be changed by the Fund upon 60
days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse 2x Industrials ETF is subject to a number of other risks that may affect
the value of its shares, including:
INDUSTRIAL SECTOR MARKET RISK - The risk that the securities of issuers in the
industrial sector will outperform the market as a whole. The prices of
securities of aerospace and defense, building products, construction and
engineering, electrical equipment, conglomerates, machinery, commercial services
and supplies, air freight and logistics, airlines, and marine, road and rail
transportation infrastructure may fluctuate widely due to the level and
volatility of commodity prices, the exchange value of the dollar, import
controls, worldwide competition, liability for environmental damage, depletion
of resources, and mandated expenditures for safety and pollution control
devices. Further, the prices of securities of industrial companies, specifically
transportation companies, may fluctuate widely due to their cyclical nature,
occasional sharp price movements that may result from changes in the economy,
fuel prices, labor agreement, and insurance costs, the recent trend of
government deregulation, and increased competition from foreign companies, many
of which are partially funded by foreign governments and which may be less
sensitive to short term economic pressures.
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of
145
any increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
PERFORMANCE
The Rydex Inverse 2x Industrials ETF has not yet commenced operations and
therefore does not have a performance history for a full calendar year.
146
RYDEX 2X MATERIALS ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex 2x Materials ETF seeks to provide investment results that will match,
before fees and expenses, the performance of a specific benchmark on a daily
basis. The Fund's current benchmark is 200% of the performance of the S&P 500
Materials Sector Index (the "Index" or "Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase on a daily basis by 200% of the value of any increase in the Underlying
Index. When the value of the Underlying Index declines, the value of the Fund's
shares should also decrease on a daily basis by 200% of the value of any
decrease in the Underlying Index (E.G., if the Underlying Index goes down by 5%,
the value of the Fund's shares should go down by 10% on that day). For more
information about the effects of leverage, please see "Understanding Compounding
and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of investing in
equity securities, leveraged instruments, such as equity index swaps, futures
contracts and options on securities, futures contracts, and stock indices.
Equity index swaps, futures and option contracts enable the Fund to pursue its
investment objective without investing directly in the securities included in
the benchmark, or in the same proportion that those securities are represented
in that benchmark. On a day-to-day basis, the Fund holds U.S. Government
securities or cash equivalents to collateralize these futures and options
contracts. The Fund also will purchase equity securities that are included in
the Underlying Index.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in component securities included in,
and financial instruments with economic characteristics that should perform
similarly to those of, the Underlying Index. This is a non-fundamental policy
that can be changed by the Fund upon 60 days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex 2x
Materials ETF is subject to a number of other risks that may affect the value of
its shares, including:
MATERIALS SECTOR CONCENTRATION RISK - The risk that the securities of issuers in
the materials sector that the Fund purchases will underperform the market as a
whole. To the extent that the Fund's investments are concentrated in issuers
conducting business in the same economic sector, the Fund is subject to
legislative or regulatory changes, adverse market conditions and/or increased
compensation affecting that economic sector. The prices of securities of
materials companies may fluctuate widely due to the level and volatility of
commodity prices, the exchange value of the dollar, import controls, worldwide
competition, liability for environmental damage, depletion of resources, and
mandated expenditures for safety and pollution control devices.
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
147
PERFORMANCE
The Rydex 2x Materials ETF has not yet commenced operations and therefore does
not have a performance history for a full calendar year.
148
RYDEX INVERSE MATERIALS ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse Materials ETF seeks to provide investment results that will
match, before fees and expenses, the performance of a specific benchmark on a
daily basis. The Fund's current benchmark is the inverse (opposite) of the
performance of the S&P 500 Materials Sector Index (the "Index" or "Underlying
Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the index goes up by 5%, the value of the Fund's shares should go down by 5% on
that day.
PRINCIPAL INVESTMENT STRATEGY
The Fund's objective is to perform exactly the opposite of the Underlying Index.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. For example, the Fund engages in short sales of securities included in
the Underlying Index or futures contracts and may invest to a significant extent
in derivatives and other instruments whose performance is expected to be the
opposite of the Underlying Index, such as options on securities, futures
contracts, and securities indices and swap agreements. This is a non-fundamental
investment policy that can be changed by the Fund upon 60 days' prior notice to
shareholders. On a day-to-day basis, the Fund may hold U.S. Government
securities or cash equivalents to collateralize its short sales and derivative
positions.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse Materials ETF is subject to a number of other risks that may affect the
value of its shares, including:
MATERIALS SECTOR MARKET RISK - The risk that the securities of issuers in the
materials sector will outperform the market as a whole. The prices of securities
of materials companies may fluctuate widely due to the level and volatility of
commodity prices, the exchange value of the dollar, import controls, worldwide
competition, liability for environmental damage, depletion of resources, and
mandated expenditures for safety and pollution control devices.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
PERFORMANCE
The Rydex Inverse Materials ETF has not yet commenced operations and therefore
does not have a performance history for a full calendar year.
149
RYDEX INVERSE 2X MATERIALS ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse 2x Materials ETF seeks to provide investment results that will
match, before fees and expenses, the performance of a specific benchmark on a
daily basis. The Fund's current benchmark is 200% of the inverse (opposite) of
the performance of the S&P 500 Materials Sector Index (the "Index" or
"Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the Underlying Index goes up by 5%, the value of the Fund's shares should go
down by 10% on that day). For more information about the effects of leverage,
please see "Understanding Compounding and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of engaging in
short sales of securities and investing in leveraged instruments, such as equity
index swaps, futures contracts and options on securities, futures contracts, and
stock indices. Equity index swaps, short sales, futures and options contracts
enable the Fund to pursue its objective without selling short each of the
securities included in the benchmark. On a day-to-day basis, the Fund holds U.S.
Government securities or cash equivalents to collateralize these futures and
options contracts.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. This is a non-fundamental policy that can be changed by the Fund upon 60
days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse 2x Materials ETF is subject to a number of other risks that may affect
the value of its shares, including:
MATERIALS SECTOR MARKET RISK - The risk that the securities of issuers in the
materials sector will outperform the market as a whole. The prices of securities
of materials companies may fluctuate widely due to the level and volatility of
commodity prices, the exchange value of the dollar, import controls, worldwide
competition, liability for environmental damage, depletion of resources, and
mandated expenditures for safety and pollution control devices.
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short
150
sales such as borrowing and margin accounting maintenance costs, which may
negatively impact the performance of the Fund.
PERFORMANCE
The Rydex Inverse 2x Materials ETF has not yet commenced operations and
therefore does not have a performance history for a full calendar year.
151
RYDEX 2X TECHNOLOGY ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex 2x Technology ETF seeks to provide investment results that will match,
before fees and expenses, the performance of a specific benchmark on a daily
basis. The Fund's current benchmark is 200% of the performance of the S&P 500
Information Technology Sector Index (the "Index" or "Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase on a daily basis by 200% of the value of any increase in the Underlying
Index. When the value of the Underlying Index declines, the value of the Fund's
shares should also decrease on a daily basis by 200% of the value of any
decrease in the Underlying Index (E.G., if the Underlying Index goes down by 5%,
the value of the Fund's shares should go down by 10% on that day). For more
information about the effects of leverage, please see "Understanding Compounding
and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of investing in
equity securities, leveraged instruments, such as equity index swaps, futures
contracts and options on securities, futures contracts, and stock indices.
Equity index swaps, futures and option contracts enable the Fund to pursue its
investment objective without investing directly in the securities included in
the benchmark, or in the same proportion that those securities are represented
in that benchmark. On a day-to-day basis, the Fund holds U.S. Government
securities or cash equivalents to collateralize these futures and options
contracts. The Fund also will purchase equity securities that are included in
the Underlying Index.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in component securities included in,
and financial instruments with economic characteristics that should perform
similarly to those of, the Underlying Index. This is a non-fundamental policy
that can be changed by the Fund upon 60 days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex 2x
Technology ETF is subject to a number of other risks that may affect the value
of its shares, including:
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
TECHNOLOGY SECTOR CONCENTRATION RISK - The risk that the securities of issuers
in the technology sector that the Fund purchases will underperform the market as
a whole. To the extent that the Fund's investments are concentrated in issuers
conducting business in the same economic sector, the Fund is subject to
legislative or regulatory changes, adverse market conditions and/or increased
competition affecting that economic sector. The prices of the securities of
technology companies may fluctuate widely due to competitive pressures,
increased sensitivity to short product cycles and aggressive pricing, problems
relating to bringing their products to market, very high price/earnings ratios,
and high personnel turnover due to severe labor shortages for skilled technology
professionals. Similarly, the prices of the securities of telecommunications
companies may fluctuate widely due to both federal and state regulations
governing rates of return and services that may be offered, fierce competition
for market
152
share, and competitive challenges in the U.S. from foreign competitors engaged
in strategic joint ventures with U.S. companies, and in foreign markets from
both U.S. and foreign competitors. In addition, recent industry consolidation
trends may lead to increased regulation of telecommunications companies in their
primary markets.
PERFORMANCE
The Rydex 2x Technology ETF has not yet commenced operations and therefore does
not have a performance history for a full calendar year.
153
RYDEX INVERSE TECHNOLOGY ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse Technology ETF seeks to provide investment results that will
match, before fees and expenses, the performance of a specific benchmark on a
daily basis. The Fund's current benchmark is the inverse (opposite) of the
performance of the S&P 500 Information Technology Sector Index (the "Index" or
"Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the index goes up by 5%, the value of the Fund's shares should go down by 5% on
that day.
PRINCIPAL INVESTMENT STRATEGY
The Fund's objective is to perform exactly the opposite of the Underlying Index.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. For example, the Fund engages in short sales of securities included in
the Underlying Index or futures contracts and may invest to a significant extent
in derivatives and other instruments whose performance is expected to be the
opposite of the Underlying Index, such as options on securities, futures
contracts, and securities indices and swap agreements. This is a non-fundamental
investment policy that can be changed by the Fund upon 60 days' prior notice to
shareholders. On a day-to-day basis, the Fund may hold U.S. Government
securities or cash equivalents to collateralize its short sales and derivative
positions.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse Technology ETF is subject to a number of other risks that may affect the
value of its shares, including:
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
TECHNOLOGY SECTOR MARKET RISK - The risk that the securities of issuers in the
technology sector will outperform the market as a whole. The prices of the
securities of technology companies may fluctuate widely due to competitive
pressures, increased sensitivity to short product cycles and aggressive pricing,
problems relating to bringing their products to market, very high price/earnings
ratios, and high personnel turnover due to severe labor shortages for skilled
technology professionals. Similarly, the prices of the securities of
telecommunications companies may fluctuate widely due to both federal and state
regulations governing rates of return and services that may be offered, fierce
competition for market share, and competitive challenges in the U.S. from
foreign competitors engaged in strategic joint ventures with U.S. companies, and
in foreign markets from both U.S. and foreign competitors. In addition, recent
industry consolidation trends may lead to increased regulation of
telecommunications companies in their primary markets.
154
PERFORMANCE
The Rydex Inverse Technology ETF has not yet commenced operations and therefore
does not have a performance history for a full calendar year.
155
RYDEX INVERSE 2X TECHNOLOGY ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse 2x Technology ETF seeks to provide investment results that
will match, before fees and expenses, the performance of a specific benchmark on
a daily basis. The Fund's current benchmark is 200% of the inverse (opposite) of
the performance of the S&P 500 Information Technology Sector Index (the "Index"
or "Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the Underlying Index goes up by 5%, the value of the Fund's shares should go
down by 10% on that day). For more information about the effects of leverage,
please see "Understanding Compounding and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of engaging in
short sales of securities and investing in leveraged instruments, such as equity
index swaps, futures contracts and options on securities, futures contracts, and
stock indices. Equity index swaps, short sales, futures and options contracts
enable the Fund to pursue its objective without selling short each of the
securities included in the benchmark. On a day-to-day basis, the Fund holds U.S.
Government securities or cash equivalents to collateralize these futures and
options contracts.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. This is a non-fundamental policy that can be changed by the Fund upon 60
days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse 2x Technology ETF is subject to a number of other risks that may affect
the value of its shares, including:
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
TECHNOLOGY SECTOR MARKET RISK - The risk that the securities of issuers in the
technology sector will outperform the market as a whole. The prices of the
securities of technology companies may fluctuate widely due to competitive
pressures, increased sensitivity to short product cycles and aggressive
156
pricing, problems relating to bringing their products to market, very high
price/earnings ratios, and high personnel turnover due to severe labor shortages
for skilled technology professionals. Similarly, the prices of the securities of
telecommunications companies may fluctuate widely due to both federal and state
regulations governing rates of return and services that may be offered, fierce
competition for market share, and competitive challenges in the U.S. from
foreign competitors engaged in strategic joint ventures with U.S. companies, and
in foreign markets from both U.S. and foreign competitors. In addition, recent
industry consolidation trends may lead to increased regulation of
telecommunications companies in their primary markets.
PERFORMANCE
The Rydex Inverse 2x Technology ETF has not yet commenced operations and
therefore does not have a performance history for a full calendar year.
157
RYDEX 2X UTILITIES ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex 2x Utilities ETF seeks to provide investment results that will match,
before fees and expenses, the performance of a specific benchmark on a daily
basis. The Fund's current benchmark is 200% of the performance of the S&P 500
Utilities Sector Index (the "Index" or "Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase on a daily basis by 200% of the value of any increase in the Underlying
Index. When the value of the Underlying Index declines, the value of the Fund's
shares should also decrease on a daily basis by 200% of the value of any
decrease in the Underlying Index (E.G., if the Underlying Index goes down by 5%,
the value of the Fund's shares should go down by 10% on that day). For more
information about the effects of leverage, please see "Understanding Compounding
and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of investing in
equity securities, leveraged instruments, such as equity index swaps, futures
contracts and options on securities, futures contracts, and stock indices.
Equity index swaps, futures and option contracts enable the Fund to pursue its
investment objective without investing directly in the securities included in
the benchmark, or in the same proportion that those securities are represented
in that benchmark. On a day-to-day basis, the Fund holds U.S. Government
securities or cash equivalents to collateralize these futures and options
contracts. The Fund also will purchase equity securities that are included in
the Underlying Index.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in component securities included in,
and financial instruments with economic characteristics that should perform
similarly to those of, the Underlying Index. This is a non-fundamental policy
that can be changed by the Fund upon 60 days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex 2x
Utilities ETF is subject to a number of other risks that may affect the value of
its shares, including:
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
UTILITIES SECTOR CONCENTRATION RISK - The risk that the securities of issuers in
the utilities sector that the Fund purchases will underperform the market as a
whole. To the extent that the Fund's investments are concentrated in issuers
conducting business in the same economic sector, the Fund is subject to
legislative or regulatory changes, adverse market conditions and/or increased
competition affecting that economic sector. The prices of the securities of
utilities companies may fluctuate widely due to: government regulation; the
effect of interest rates on capital financing; competitive pressures due to
deregulation in the utilities industry; supply and demand for services;
increased sensitivity to the cost of natural resources required for energy
production; and environmental factors such as conservation of natural resources
or pollution control.
158
PERFORMANCE
The Rydex 2x Utilities ETF has not yet commenced operations and therefore does
not have a performance history for a full calendar year.
159
RYDEX INVERSE UTILITIES ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse Utilities ETF seeks to provide investment results that will
match, before fees and expenses, the performance of a specific benchmark on a
daily basis. The Fund's current benchmark is the inverse (opposite) of the
performance of the S&P 500 Utilities Sector Index (the "Index" or "Underlying
Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the Underlying Index goes up by 5%, the value of the Fund's shares should go
down by 5% on that day.
PRINCIPAL INVESTMENT STRATEGY
The Fund's objective is to perform exactly the opposite of the Underlying Index.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. For example, the Fund engages in short sales of securities included in
the Underlying Index or futures contracts and may invest to a significant extent
in derivatives and other instruments whose performance is expected to be the
opposite of the Underlying Index, such as options on securities, futures
contracts, and securities indices and swap agreements. This is a non-fundamental
investment policy that can be changed by the Fund upon 60 days' prior notice to
shareholders. On a day-to-day basis, the Fund may hold U.S. Government
securities or cash equivalents to collateralize its short sales and derivative
positions.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse Utilities ETF is subject to a number of other risks that may affect the
value of its shares, including:
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
UTILITIES SECTOR MARKET RISK - The risk that the securities of issuers in the
utilities sector will outperform the market as a whole. To the extent that the
Fund's investments are concentrated in issuers conducting business in the same
economic sector, the Fund is subject to legislative or regulatory changes,
adverse market conditions and/or increased competition affecting that economic
sector. The prices of the securities of utilities companies may fluctuate widely
due to: government regulation; the effect of interest rates on capital
financing; competitive pressures due to deregulation in the utilities industry;
supply and demand for services; increased sensitivity to the cost of natural
resources required for energy production; and environmental factors such as
conservation of natural resources or pollution control.
160
PERFORMANCE
The Rydex Inverse Utilities ETF has not yet commenced operations and therefore
does not have a performance history for a full calendar year.
161
RYDEX INVERS 2X UTILITIES ETF (XXX)
FUND INFORMATION
FUND OBJECTIVE
The Rydex Inverse 2x Utilities ETF seeks to provide investment results that will
match, before fees and expenses, the performance of a specific benchmark on a
daily basis. The Fund's current benchmark is 200% of the inverse (opposite) of
the performance of the S&P 500 Utilities Sector Index (the "Index" or
"Underlying Index").
If the Fund meets its objectives, the value of the Fund's shares will tend to
increase during times when the Underlying Index is decreasing. When the value of
the Underlying Index is increasing, however, the value of the Fund's shares
should decrease on a daily basis by an inversely proportionate amount (E.G., if
the index goes up by 5%, the value of the Fund's shares should go down by 10% on
that day). For more information about the effects of leverage, please see
"Understanding Compounding and the Effect of Leverage."
PRINCIPAL INVESTMENT STRATEGY
The Fund employs as its portfolio investment strategy a program of engaging in
short sales of securities and investing in leveraged instruments, such as equity
index swaps, futures contracts and options on securities, futures contracts, and
stock indices. Equity index swaps, short sales, futures and options contracts
enable the Fund to pursue its objective without selling short each of the
securities included in the benchmark. On a day-to-day basis, the Fund holds U.S.
Government securities or cash equivalents to collateralize these futures and
options contracts.
Under normal circumstances, the Fund will invest at least 80% of its net assets
plus any borrowings for investment purposes in financial instruments with
economic characteristics that should perform opposite to those of the Underlying
Index. This is a non-fundamental policy that can be changed by the Fund upon 60
days' prior notice to shareholders.
PRINCIPAL RISKS
In addition to the risks common to investing in any of the Funds, the Rydex
Inverse 2x Utilities ETF is subject to a number of other risks that may affect
the value of its shares, including:
LEVERAGING RISK - The more the Fund invests in leveraged instruments, the more
this leverage will magnify any losses on those investments. Because the Fund's
investment strategy involves consistently applied leverage, the value of the
Fund's shares will tend to increase or decrease more than the value of any
increase or decrease in its benchmark. Leverage will also have the effect of
magnifying tracking error risk.
SHORT SALES RISK - Short sales are transactions in which the Fund sells a
security it does not own. If the security the Fund sold short goes down in price
between the time the Fund sells the security and closes its short position, the
Fund will realize a gain on the transaction. Conversely, if the security goes up
in price during the period, the Fund will realize a loss on the transaction. The
risk of such price increases is the principal risk of engaging in short sales.
The Fund may also be subject to expenses related to short sales such as
borrowing and margin accounting maintenance costs, which may negatively impact
the performance of the Fund.
UTILITIES SECTOR MARKET RISK - The risk that the securities of issuers in the
utilities sector will outperform the market as a whole. To the extent that the
Fund's investments are concentrated in issuers conducting business in the same
economic sector, the Fund is subject to legislative or regulatory changes,
162
adverse market conditions and/or increased competition affecting that economic
sector. The prices of the securities of utilities companies may fluctuate widely
due to: government regulation; the effect of interest rates on capital
financing; competitive pressures due to deregulation in the utilities industry;
supply and demand for services; increased sensitivity to the cost of natural
resources required for energy production; and environmental factors such as
conservation of natural resources or pollution control.
PERFORMANCE
The Rydex Inverse 2x Utilities ETF has not yet commenced operations and
therefore does not have a performance history for a full calendar year.
163
FEES AND EXPENSES OF THE FUNDS
This table describes the fees and expenses that you may pay for each Fund if you
buy and hold shares of the Funds described in this Prospectus(a).
--------------------------------------------------------------------------------------------------
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
--------------------------------------------------------------------------------------------------
A. CREATION TRANSACTION FEES(b)
--------------------------------------------------------------------------------------------------
Through NSCC ....................................................................... $XXX
--------------------------------------------------------------------------------------------------
Outside NSCC ....................................................................... up to $XXX
--------------------------------------------------------------------------------------------------
B. REDEMPTION TRANSACTION FEES(c)
--------------------------------------------------------------------------------------------------
Through NSCC ....................................................................... $XXX
--------------------------------------------------------------------------------------------------
Outside NSCC ....................................................................... up to $XXX
--------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)(d)
--------------------------------------------------------------------------------------------------
MANAGEMENT FEES .................................................................... X.XX%
--------------------------------------------------------------------------------------------------
DISTRIBUTION (12b-1) FEES(e) ....................................................... X.XX%
--------------------------------------------------------------------------------------------------
OTHER EXPENSES(f) .................................................................. X.XX%
--------------------------------------------------------------------------------------------------
TOTAL ANNUAL FUND OPERATING EXPENSES ............................................... X.XX%
--------------------------------------------------------------------------------------------------
LESS FEE WAIVERS(g) X.XX%
--------------------------------------------------------------------------------------------------
TOTAL NET OPERATING EXPENSES X.XX%
--------------------------------------------------------------------------------------------------
|
(a) Most investors will incur customary brokerage commissions when buying or
selling shares of the Funds.
(b) The creation transaction fee is the same regardless of the number of
Creation Units being purchased pursuant to any one creation order. One
Creation Unit consists of 50,000 shares.
(c) The redemption transaction fee is the same regardless of the number of
Creation Units being redeemed pursuant to any one redemption order.
(d) Expressed as a percentage of average net assets.
(e) The Funds have adopted a Distribution (12b-1) Plan pursuant to which the
Funds may be subject to an annual 12b-1 fee of up to 0.25%. However, no
such fee is currently charged to the Funds and no such fees will be
charged prior to November 1, 2007.
(f) "Other Expenses" are based on estimated amounts for the current fiscal
year.
(g) The Advisor has contractually agreed to waive its management fee to the
extent necessary to limit the ordinary operating expenses of each Fund
(but excluding interest expenses, brokerage commissions and extraordinary
expenses) to not more than X.XX% per annum of the average monthly net
assets of the Fund through [insert date], 2008 (the "Contractual Fee
Waiver"). The Contractual Fee Waiver may not be modified or eliminated
prior to [insert date], 2008, except with the approval of the Board of
Trustees. There is no guarantee that the Contractual Fee Waiver will
continue beyond [insert date], 2008.
EXAMPLE
This Example is intended to help you compare the cost of investing in shares of
the Rydex Leveraged and Inverse ETF Series with the cost of investing in other
mutual funds. This example does not take into account creation or redemption
transaction fees, or the brokerage commissions that you pay when purchasing or
selling shares of a Fund. If the commissions were included, your costs would be
higher.
The Example assumes that you invest $10,000 in a Fund for the time periods
indicated and then sell all of your shares at the end of those periods. The
Example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
--------------------------------------------------------------------------------
1 YEAR 3 YEARS
--------------------------------------------------------------------------------
RYDEX LEVERAGED AND INVERSE ETF SERIES $XXX $XXX
--------------------------------------------------------------------------------
|
164
CREATION TRANSACTION FEES AND REDEMPTION TRANSACTION FEES
Each Fund issues and redeems shares at NAV only in large blocks of 50,000 shares
or multiples thereof. As a practical matter, only institutions or large
investors purchase or redeem these Creation Units. A standard creation
transaction fee ("Creation Transaction Fee") or redemption transaction fee
("Redemption Transaction Fee"), as applicable, will be assessed per transaction,
which is intended to approximate the issuance or redemption transaction costs
incurred by the Fund. The Creation Transaction Fee per transaction is $X,XXX,
and the Redemption Transaction Fee per transaction is $X,XXX. An additional
charge of up to four (4) times the standard transaction fee may be imposed for
creations and redemptions effected outside the National Securities Clearing
Corporation's ("NSCC") usual clearing process or for cash (rather than in-kind).
Shareholders who hold Creation Units will also pay the annual Fund operating
expenses described in the table above. Assuming an investment in a Creation Unit
of $X,XXX,XXX and a 5% return each year, and assuming that creations and
redemptions are effected through the NSCC and the Fund's operating expenses
remain the same, the total costs would be $XXX if the Creation Unit is redeemed
after one year, and $XXX if the Creation Unit is redeemed after three years. If
creations and redemptions are effected outside of the NSCC, the total costs
would increase to $XXX if the Creation Unit is redeemed after one year, and $XXX
if the Creation Unit is redeemed after three years. For more information, see
"Creations and Redemptions" and "Transaction Fees."
165
MORE INFORMATION ABOUT THE FUNDS:
BENCHMARKS AND INVESTMENT METHODOLOGY
Each Fund seeks to provide investment results that match, before fees and
expenses, the performance of a specific benchmark on a daily basis. The current
benchmark used by each Fund is set forth below:
------------------------------------------------------------------------------------------------------------------------------------
FUND BENCHMARK
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE S&P 500 ETF INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE S&P 500 INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX 2x S&P 500 GROWTH ETF 200% OF THE PERFORMANCE OF THE S&P 500/CITIGROUP GROWTH INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE S&P 500 GROWTH ETF INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE S&P 500/CITIGRIUP GROWTH INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE 2x S&P 500 GROWTH ETF 200% OF THE INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE S&P 500/CITIGRIUP GROWTH
INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX 2x S&P 500 VALUE ETF 200% OF THE PERFORMANCE OF THE S&P 500/CITIGROUP VALUE INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE S&P 500 VALUE ETF INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE S&P 500/CITIGROUP VALUE INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE 2x S&P 500 VALUE ETF 200% OF THE INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE S&P 500/CITIGROUP VALUE
INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE S&P MIDCAP 400 ETF INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE S&P MIDCAP 400 INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX 2x S&P MIDCAP 400 GROWTH ETF 200% OF THE PERFORMANCE OF THE S&P MIDCAP 400/CITIGROUP GROWTH INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE S&P MIDCAP 400 GROWTH ETF INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE S&P MIDCAP 400/CITIGROUP GROWTH INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE 2x S&P MIDCAP 400 GROWTH ETF 200% OF THE INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE S&P MIDCAP 400/CITIGROUP
GROWTH INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX 2x S&P MIDCAP 400 VALUE ETF 200% OF THE PERFORMANCE OF THE S&P MIDCAP 400/CITIGROUP VALUE INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE S&P MIDCAP 400 VALUE ETF INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE S&P MIDCAP 400/CITIGROUP VALUE INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE 2x S&P MIDCAP 400 VALUE ETF 200% OF THE INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE S&P MIDCAP 400/CITIGROUP
VALUE INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX 2x S&P SMALLCAP 600 ETF 200% OF THE PERFORMANCE OF THE S&P SMALLCAP 600 INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE S&P SMALLCAP 600 ETF INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE S&P SMALLCAP 600 INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE 2x S&P SMALLCAP 600 ETF 200% OF THE INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE S&P SMALLCAP 600 INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX 2x S&P SMALLCAP 600 GROWTH ETF 200% OF THE PERFORMANCE OF THE S&P SMALLCAP 600/CITIGROUP GROWTH INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE S&P SMALLCAP 600 GROWTH ETF INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE S&P SMALLCAP 600/CITIGROUP GROWTH
INDEX
------------------------------------------------------------------------------------------------------------------------------------
|
166
------------------------------------------------------------------------------------------------------------------------------------
FUND BENCHMARK
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE 2x S&P SMALLCAP 600 GROWTH ETF 200% OF THE INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE S&P SMALLCAP
600/CITIGROUP GROWTH INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX 2x S&P SMALLCAP 600 VALUE ETF 200% OF THE PERFORMANCE OF THE S&P SMALLCAP 600/CITIGROUP VALUE INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE S&P SMALLCAP 600 VALUE ETF INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE S&P SMALLCAP 600/CITIGROUP VALUE INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE 2x S&P SMALLCAP 600 VALUE ETF 200% OF THE INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE S&P SMALLCAP
600/CITIGROUP VALUE INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX 2x NASDAQ 100 ETF 200% OF THE PERFORMANCE OF THE NASDAQ-100 INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE NASDAQ 100 ETF INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE NASDAQ-100 INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE 2x NASDAQ 100 ETF 200% OF THE INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE NASDAQ-100 INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX 2x RUSSELL 1000(R) ETF 200% OF THE PERFORMANCE OF THE RUSSELL 1000(R) INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE RUSSELL 1000(R) ETF INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE RUSSELL 1000(R) INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE 2x RUSSELL 1000(R) ETF 200% OF THE INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE RUSSELL 1000(R) INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX 2x RUSSELL 1000(R) GROWTH ETF 200% OF THE PERFORMANCE OF THE RUSSELL 1000(R) GROWTH INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE RUSSELL 1000(R) GROWTH ETF INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE RUSSELL 1000(R) GROWTH INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE 2x RUSSELL 1000(R) GROWTH ETF 200% OF THE INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE RUSSELL 1000(R) GROWTH
INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX 2x RUSSELL 1000(R) VALUE ETF 200% OF THE PERFORMANCE OF THE RUSSELL 1000(R) VALUE INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE RUSSELL 1000(R) VALUE ETF INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE RUSSELL 1000(R) VALUE INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE 2x RUSSELL 1000(R) VALUE ETF 200% OF THE INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE RUSSELL 1000(R) VALUE INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX 2x RUSSELL MIDCAP(R) ETF 200% OF THE PERFORMANCE OF THE RUSSELL MIDCAP(R) INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE RUSSELL MIDCAP(R) ETF INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE RUSSELL MIDCAP(R) INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE 2x RUSSELL MIDCAP(R) ETF 200% OF THE INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE RUSSELL MIDCAP(R) INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX 2x RUSSELL MIDCAP(R) GROWTH ETF 200% OF THE PERFORMANCE OF THE RUSSELL MIDCAP(R) GROWTH INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE RUSSELL MIDCAP(R) GROWTH ETF INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE RUSSELL MIDCAP(R) GROWTH INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE 2x RUSSELL 200% OF THE INVERSE (OPPOSITE) OF THE
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|
167
------------------------------------------------------------------------------------------------------------------------------------
FUND BENCHMARK
------------------------------------------------------------------------------------------------------------------------------------
MIDCAP(R) GROWTH ETF PERFORMANCE OF THE RUSSELL MIDCAP(R) GROWTH INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX 2x RUSSELL MIDCAP(R) VALUE ETF 200% OF THE PERFORMANCE OF THE RUSSELL MIDCAP(R) VALUE INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE RUSSELL MIDCAP(R) VALUE ETF INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE RUSSELL MIDCAP(R) VALUE INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE 2x RUSSELL MIDCAP(R) VALUE ETF 200% OF THE INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE RUSSELL MIDCAP(R) VALUE
INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE RUSSELL 2000(R) ETF INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE RUSSELL 2000(R) INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX 2x RUSSELL 2000(R) GROWTH ETF 200% OF THE PERFORMANCE OF THE RUSSELL 2000(R) GROWTH INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE RUSSELL 2000(R) GROWTH ETF INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE RUSSELL 2000(R) GROWTH INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE 2x RUSSELL 2000(R) GROWTH ETF 200% OF THE INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE RUSSELL 2000(R) GROWTH
INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX 2x RUSSELL 2000(R) VALUE ETF 200% OF THE PERFORMANCE OF THE RUSSELL 2000(R) VALUE INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE RUSSELL 2000(R) VALUE ETF INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE RUSSELL 2000(R) VALUE INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE 2x RUSSELL 2000(R) VALUE ETF 200% OF THE INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE RUSSELL 2000(R) VALUE
INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX 2x RUSSELL 3000(R) ETF 200% OF THE PERFORMANCE OF THE RUSSELL 3000(R) INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE RUSSELL 3000(R) ETF INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE RUSSELL 3000(R) INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE 2x RUSSELL 3000(R) ETF 200% OF THE INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE RUSSELL 3000(R) INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX 2x RUSSELL 3000(R) GROWTH ETF 200% OF THE PERFORMANCE OF THE RUSSELL 3000(R) GROWTH INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE RUSSELL 3000(R) GROWTH ETF INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE RUSSELL 3000(R) GROWTH INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE 2x RUSSELL 3000(R) GROWTH ETF 200% OF THE INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE RUSSELL 3000(R) GROWTH
INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX 2x RUSSELL 3000(R) VALUE ETF 200% OF THE PERFORMANCE OF THE RUSSELL 3000(R) VALUE INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE RUSSELL 3000(R) VALUE ETF INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE RUSSELL 3000(R) VALUE INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE 2x RUSSELL 3000(R) VALUE ETF 200% OF THE INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE RUSSELL 3000(R) VALUE
INDEX
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RYDEX 2x NASDAQ BIOTECH ETF 200% OF THE PERFORMANCE OF THE NASDAQ BIOTECHNOLOGY INDEX(R)
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE NASDAQ BIOTECH ETF INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE NASDAQ BIOTECHNOLOGY INDEX(R)
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|
168
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FUND BENCHMARK
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RYDEX INVERSE 2x NASDAQ BIOTECH ETF 200% OF THE INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE NASDAQ BIOTECHNOLOGY
INDEX(R)
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RYDEX 2x CONSUMER DISCRETIONARY ETF 200% OF THE PERFORMANCE OF THE S&P 500 CONSUMER DISCRETIONARY SECTOR INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE CONSUMER DISCRETIONARY ETF INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE S&P 500 CONSUMER DISCRETIONARY SECTOR
INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE 2x CONSUMER DISCRETIONARY ETF 200% OF THE INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE S&P 500 CONSUMER
DISCRETIONARY SECTOR INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX 2x CONSUMER STAPLES ETF 200% OF THE PERFORMANCE OF THE S&P 500 CONSUMER STAPLES SECTOR INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE CONSUMER STAPLES ETF INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE S&P 500 CONSUMER STAPLES SECTOR INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE 2x CONSUMER STAPLES ETF 200% OF THE INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE S&P 500 CONSUMER STAPLES
SECTOR INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX 2x ENERGY ETF 200% OF THE PERFORMANCE OF THE S&P 500 ENERGY SECTOR INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE ENERGY ETF INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE S&P 500 ENERGY SECTOR INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE 2x ENERGY ETF 200% OF THE INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE S&P 500 ENERGY SECTOR
INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX 2x FINANCIALS ETF 200% OF THE PERFORMANCE OF THE S&P 500 FINANCIALS SECTOR INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE FINANCIALS ETF INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE S&P 500 FINANCIALS SECTOR INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE 2x FINANCIALS ETF 200% OF THE INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE S&P 500 FINANCIALS SECTOR
INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX 2x HEALTH CARE ETF 200% OF THE PERFORMANCE OF THE S&P 500 HEALTH CARE SECTOR INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE HEALTH CARE ETF INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE S&P 500 HEALTH CARE SECTOR INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE 2x HEALTH CARE ETF 200% OF THE INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE S&P 500 HEALTH CARE
SECTOR INDEX
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RYDEX 2x INDUSTRIALS ETF 200% OF THE PERFORMANCE OF THE S&P 500 INDUSTRIALS SECTOR INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE INDUSTRIALS ETF INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE S&P 500 INDUSTRIALS SECTOR INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE 2x INDUSTRIALS ETF 200% OF THE INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE S&P 500 INDUSTRIALS
SECTOR INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX 2x MATERIALS ETF 200% OF THE PERFORMANCE OF THE S&P 500 MATERIALS SECTOR INDEX
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|
169
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FUND BENCHMARK
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RYDEX INVERSE MATERIALS ETF INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE S&P 500 MATERIALS SECTOR INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE 2x MATERIALS ETF 200% OF THE INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE S&P 500 MATERIALS SECTOR
INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX 2x TECHNOLOGY ETF 200% OF THE PERFORMANCE OF THE S&P 500 TECHNOLOGY SECTOR INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE TECHNOLOGY ETF INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE S&P 500 TECHNOLOGY SECTOR INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE 2x TECHNOLOGY ETF 200% OF THE INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE S&P 500 TECHNOLOGY SECTOR
INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX 2x UTILITIES ETF 200% OF THE PERFORMANCE OF THE S&P 500 UTILITIES SECTOR INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE UTILITIES ETF INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE S&P 500 UTILITIES SECTOR INDEX
------------------------------------------------------------------------------------------------------------------------------------
RYDEX INVERSE 2x UTILITIES ETF 200% OF THE INVERSE (OPPOSITE) OF THE PERFORMANCE OF THE S&P 500 UTILITIES SECTOR
INDEX
------------------------------------------------------------------------------------------------------------------------------------
|
A BRIEF GUIDE TO THE UNDERLYING INDICES
S&P 500 INDEX. The S&P 500 Index is a capitalization-weighted index composed of
500 common stocks, which are chosen by the Standard & Poor's Corporation (S&P)
on a statistical basis. As of December 31, 200_, the S&P 500 Index included
companies with a capitalization range of $XX.X billion to $XX.X billion.
S&P 500/CITIGROUP GROWTH INDEX. The S&P 500/Citigroup Growth Index includes the
full market capitalization of the S&P 500 Index. The S&P/Citigroup multifactor
methodology is used to score constituents, which are weighted according to
market capitalization and classified as growth. As of December 31, 200_, the S&P
500/Citigroup Growth Index included companies with a capitalization range of
$XX.X billion to $X.XX billion.
S&P 500/CITIGROUP VALUE INDEX. The S&P 500/Citigroup Value Index includes the
full market capitalization of the S&P 500 Index. The S&P/Citigroup multifactor
methodology is used to score constituents, which are weighted according to
market capitalization and classified as value. As of December 31, 200_, the S&P
500/Citigroup Value Index included companies with a capitalization range of
$X.XX billion to $XX.X billion.
S&P MIDCAP 400 INDEX - The S&P MidCap 400 Index is a modified
capitalization-weighted index composed of 400 mid cap stocks chosen by S&P for
market size, liquidity, and industry group representation. It covers
approximately 7% of the U.S. equities market. As of December 31, 200_, the S&P
MidCap 400 Index included companies with a capitalization range of $X.X billion
to $X.X billion.
S&P MIDCAP 400/CITIGROUP GROWTH INDEX - The S&P MidCap 400/Citigroup Growth
Index includes the full market capitalization of the S&P MidCap 400 Index. The
S&P/Citigroup multifactor methodology is used to score constituents, which are
weighted according to market capitalization and classified as growth. As of
December 31, 200_, the S&P 500/Citigroup Growth Index included companies with a
capitalization range of $X.X billion to $XX.X billion.
170
S&P MIDCAP 400/CITIGROUP VALUE INDEX - The S&P MidCap 400/Citigroup Value Index
includes the full market capitalization of the S&P MidCap 400 Index. The
S&P/Citigroup multifactor methodology is used to score constituents, which are
weighted according to market capitalization and classified as value. As of
December 31, 200_, the S&P 500/Citigroup Value Index included companies with a
capitalization range of $X.X billion to $XX.X billion.
S&P SMALLCAP 600 INDEX. The S&P SmallCap 600 Index is a modified
capitalization-weighted index composed of 600 small cap stocks chosen by S&P for
market size, liquidity, and industry group representation. It covers
approximately 3% of the U.S. equities market. As of December 31, 200_, the S&P
SmallCap 600 Index included companies with a capitalization range of $X.X
billion to $XX.X billion.
S&P SMALLCAP 600/CITIGROUP GROWTH INDEX. The S&P 600/Citigroup Growth Index
includes the full market capitalization of the S&P SmallCap 600 Index. The
S&P/Citigroup multifactor methodology is used to score constituents, which are
weighted according to market capitalization and classified as growth. As of
December 31, 200_, the S&P SmallCap 600/Citigroup Growth Index included
companies with a capitalization range of $X.X billion to $X.X billion.
S&P SMALLCAP 600/CITIGROUP VALUE INDEX. The S&P 600/Citigroup Value Index
includes the full market capitalization of the S&P SmallCap 600 Index. The
S&P/Citigroup multifactor methodology is used to score constituents, which are
weighted according to market capitalization and classified as value. As of
December 31, 200_, the S&P SmallCap 600/Citigroup Value Index included companies
with a capitalization range of $X.X billion to $X.X billion.
NASDAQ-100 INDEX(R). The NASDAQ-100 Index(R) is a modified capitalizations
weighted index composed of 100 of the largest non-financial companies listed on
NASDAQ. As of December 31, 200_, the NASDAQ-100 Index(R) included companies with
a capitalization range of $X.X billion to $XX.X billion.
NASDAQ BIOTECHNOLOGY INDEX(R). The NASDAQ Biotechnology Index(R) contains
securities of NASDAQ-listed companies classified according to the Industry
Classification Benchmark as either Biotechnology or Pharmaceuticals which also
meet other eligibility criteria. The NASDAQ Biotechnology Index is calculated
under a modified capitalization-weighted methodology. As of December 31, 200_,
the NASDAQ Biotechnology Index(R) included companies with a capitalization range
of $X.X billion to $XX.X billion.
RUSSELL 1000(R) INDEX. The Russell 1000(R) Index measures the performance of the
1,000 largest companies in the Russell 3000(R) Index, which represents
approximately 92% of the total market capitalization of the Russell 3000(R)
Index. As of December 31, 200_, the Russell 1000(R) Index included companies
with a capitalization range of $X.X billion to $X.X billion.
RUSSELL 1000(R) GROWTH INDEX. The Russell 1000(R) Growth Index measures the
performance of those Russell 1000(R) companies with higher price-to-book ratios
and higher forecasted growth values. As of December 31, 200_, the Russell
1000(R) Growth Index included companies with a capitalization range of $X.X
billion to $X.X billion.
RUSSELL 1000(R) VALUE INDEX. The Russell 1000(R) Growth Index measures the
performance of those Russell 1000(R) companies with lower price-to-book ratios
and lower forecasted growth values. As of December 31, 200_, the Russell 1000(R)
Value Index included companies with a capitalization range of $X.X billion to
$XX.X billion.
171
RUSSELL MIDCAP(R) INDEX. The Russell Midcap(R) Index measures the performance of
800 smallest companies in the Russell 1000(R) Index, which represent
approximately 25% of the total market capitalization of the Russell 1000(R)
Index. As of December 31, 200_, the Russell MidCap(R) Index included companies
with a capitalization range of $X.X billion to $X.X billion.
RUSSELL MIDCAP(R) GROWTH INDEX. The Russell Midcap(R) Growth Index measures the
performance of those Russell Midcap(R) companies with higher price-to-book
ratios and higher forecasted growth values. The stocks are also members of the
Russell 1000(R) Growth Index. As of December 31, 200_, the Russell Midcap(R)
Growth Index included companies with a capitalization range of $X.X billion to
$X.X billion.
RUSSELL MIDCAP(R) VALUE INDEX. The Russell Midcap(R) Value Index measures the
performance of those Russell Midcap(R) companies with lower price-to-book ratios
and lower forecasted growth values. The stocks are also members of the Russell
1000(R) Value Index. As of December 31, 200_, the Russell Midcap(R) Value Index
included companies with a capitalization range of $X.X billion to $X.X billion.
RUSSELL 2000(R) INDEX. The Russell 2000(R) Index is composed of the 2,000
smallest companies in the Russell 3000(R) Index, representing approximately 11%
of the Russell 3000(R) total market capitalization. The Russell 3000(R) Index is
composed of the 3,000 largest U.S. companies ranked by total market
capitalization, representing approximately 98% of the U.S. investable equity
market. As of December 31, 200_, the Russell 2000(R) Index included companies
with a capitalization range of $X.X million to $X.X billion.
RUSSELL 2000(R) GROWTH INDEX. The Russell 2000(R) Growth Index measures the
performance of those Russell 2000(R) companies with higher price-to-book ratios
and higher forecasted growth values. As of December 31, 200_, the Russell
2000(R) Growth Index included companies with a capitalization range of $X.X
million to $X.X million.
RUSSELL 2000(R) VALUE INDEX. The Russell 2000(R) Value Index measures the
performance of those Russell 2000(R) companies with lower price-to-book ratios
and lower forecasted growth values. As of December 31, 200_, the Russell 2000(R)
Value Index included companies with a capitalization range of $X.X million to
$X.X million.
RUSSELL 3000(R) INDEX. The Russell 3000(R) Index measures the performance of the
3,000 largest U.S. companies based on total market capitalization, which
represents approximately 98% of the investable U.S. equity market. As of
December 31, 200_, the Russell 3000(R) Index included companies with a
capitalization range of $X.X billion to $X.X billion.
RUSSELL 3000(R) GROWTH INDEX. The Russell 3000(R) Growth Index measures the
performance of those Russell 3000(R) Index companies with higher price-to-book
ratios and higher forecasted growth values. The stocks in this index are also
members of either the Russell 1000(R) Growth or the Russell 2000(R) Growth
Indices. As of December 31, 200_, the Russell 3000(R) Growth Index included
companies with a capitalization range of $X.X billion to $X.X billion.
RUSSELL 3000(R) VALUE INDEX. The Russell 3000(R) Value Index measures the
performance of those Russell 3000(R) Index companies with lower price-to-book
ratios and lower forecasted growth values. The stocks in this index are also
members of either the Russell 1000(R) Value or the Russell 2000(R) Value
Indices. As of December 31, 200_, the Russell 3000(R) Value Index included
companies with a capitalization range of $X.X billion to $X.X billion.
S&P 500 CONSUMER DISCRETIONARY INDEX. The S&P 500 Consumer Discretionary Index
consists of the common stocks of the following industries: automobiles and
components, consumer durables, apparel,
172
hotels, restaurants, leisure, media and retailing that comprise the Consumer
Discretionary sector of the S&P 500 Index. As of December 31, 200_, the S&P 500
Consumer Discretionary Index included companies with a capitalization range of
$X.X billion to $X.X billion.
S&P 500 CONSUMER STAPLES INDEX. The S&P 500 Consumer Staples Index consists of
the common stocks of the following industries: food and drug retailing,
beverages, food products, tobacco, household products and personal products that
comprise the Consumer Staples sector of the S&P 500 Index. As of December 31,
200_, the S&P 500 Consumer Staples Index included companies with a
capitalization range of $X.X billion to $X.X billion.
S&P 500 ENERGY INDEX. The S&P 500 Energy Index consists of the common stocks of
the following industries: oil and gas exploration, production, marketing,
refining and/or transportation and energy equipment and services industries that
comprise the Energy sector of the S&P 500 Index. As of December 31, 200_, the
S&P 500 Energy Index included companies with a capitalization range of $X.X
billion to $X.X billion.
S&P 500 FINANCIALS INDEX. The S&P 500 Financials Index consists of the common
stocks of the following industries: banks, diversified financials, brokerage,
asset management insurance and real estate, including real estate investment
trusts that comprise the Financials sector of the S&P 500 Index. As of December
31, 200_, the S&P 500 Financials Index included companies with a capitalization
range of $X.X billion to $X.X billion.
S&P 500 HEALTH CARE INDEX. The S&P 500 Health Care Index consists of the common
stocks of the following industries: health care equipment and supplies, health
care providers and services, and biotechnology and pharmaceuticals that comprise
the Health Care sector of the S&P 500 Index. As of December 31, 200_, the S&P
500 Health Care Index included companies with a capitalization range of $X.X
billion to $X.X billion.
S&P 500 INDUSTRIALS INDEX. The S&P 500 Industrials Index consists of the common
stocks of the following industries: aerospace and defense, building products,
construction and engineering, electrical equipment, conglomerates, machinery,
commercial services and supplies, air freight and logistics, airlines, and
marine, road and rail transportation infrastructure that comprise the
Industrials sector of the S&P 500 Index. As of December 31, 200_, the S&P 500
Industrials Index included companies with a capitalization range of $X.X billion
to $X.X billion.
S&P 500 INFORMATION TECHNOLOGY INDEX. The S&P 500 Information Technology Index
consists of the common stocks of the following industries: internet equipment,
computers and peripherals, electronic equipment, office electronics and
instruments, semiconductor equipment and products, diversified telecommunication
services, and wireless telecommunication services that comprise the Information
Technology sector of the S&P 500 Index. As of December 31, 200_, the S&P 500
Information Technology Index included companies with a capitalization range of
$X.X billion to $X.X billion.
S&P 500 MATERIALS INDEX. The S&P 500 Materials Index consists of the common
stocks of the following industries: chemicals, construction materials,
containers and packaging, metals and mining, and paper and forest products that
comprise the Materials sector of the S&P 500 Index. As of December 31, 200_, the
S&P 500 Materials Index included companies with a capitalization range of $X.X
billion to $X.X billion.
S&P 500 UTILITIES INDEX. The S&P 500 Utilities Index consists of the common
stocks of the following industries: electric utilities, gas utilities,
multi-utilities and unregulated power and water utilities, telecommunication
service companies, including fixed-line, cellular, wireless, high bandwidth and
fiber-
173
optic cable networks that comprise the Utilities sector of the S&P 500 Index. As
of December 31, 200_, the S&P 500 Utilities Index included companies with a
capitalization range of $X.X billion to $X.X billion.
UNDERSTANDING COMPOUNDING & THE EFFECT OF LEVERAGE
It is important to understand the effects of compounding when investing in any
mutual fund, especially funds that use leverage as part of their investment
strategy. The impact of leverage on a fund will generally cause the fund's
performance to not match the performance of the index underlying the fund's
benchmark over a period of time greater than one day. As a result, the use of
leverage could cause the performance of a fund to be less than or greater than
the performance of the index underlying the fund's benchmark multiplied by the
amount of leverage employed, before accounting for fees and expenses. The
following simple examples provide an illustration:
EXAMPLE A: Assume you invest $100 in Fund A, a typical index fund that seeks to
match the performance of its underlying index. If the index increases 10% on day
one, the value of your shares in Fund A would be expected to increase $10 (10%
of $100) to $110. The next day, if the index decreases 10%, the value of your
shares in Fund A would be expected to decrease $11 (10% of $110) to $99.
EXAMPLE B: Assume you invested $100 in Fund B, a fund that seeks to return 200%
of the performance of its underlying index. If the index increases 10% on day
one, the value of your shares in Fund B would be expected to increase $20 (20%
of $100) to $120. The next day, if the index decreases 10%, the value of your
shares in Fund B would be expected to decrease $24 (20% of $120) to $96.
Because of the effect of compounding, in each case the value of your investment
declined even though the index went up 10% on day one and down 10% on day two.
However, the effect of compounding was more pronounced when combined with
leverage (Example B).
The examples demonstrate that over time, the cumulative percentage increase or
decrease in the net asset value of a fund may diverge significantly from the
cumulative percentage increase or decrease in the multiple of the return of the
index underlying a fund's benchmark due to the compounding effect of losses and
gains on the returns of the fund. It is also expected that a fund's use of
consistently applied leverage will cause the fund to underperform the compounded
return of twice its benchmark in a trendless or flat market.
The following graphs further illustrate the impact of leverage on fund
performance in comparison to the performance of the fund's underlying index in
three different markets. Each of the three graphs shows a simulated hypothetical
of the one-year performance of an index compared with the performance of a fund
that perfectly achieves its investment objective of exactly twice (200%) the
daily index returns.
In order to isolate the impact of leverage, the hypothetical graphs assume: (i)
no tracking error (see "Tracking Error Risk"); (ii) no dividends paid by the
companies included in the underlying index; (iii) no expenses; and (iv)
borrowing and/or lending rates (required to obtain leverage) of zero percent. If
tracking error, fund expenses, and borrowing and lending rates of greater than
zero percent were included in the graphs, the fund's performance would be lower
than that shown below. Each of the graphs also assumes an index volatility of
20%. An index's volatility is a statistical measure of the magnitude of the
fluctuations in the returns of an index. The S&P 500 Index's index volatility
may be more or less significant at any given time. The average of the most
recent five-year historical volatility of the S&P 500 Index is 11%. The indices
underlying the Funds' benchmarks have different historical volatilities, which
may be more or less significant than the index volatilities assumed in the
graphs below. The average five-year historical volatility for the period ended
in 2000 of the S&P MidCap 400 Index and Russell 2000(R) Index is 19% and 21%,
respectively. The hypothetical graphs are meant to demonstrate the effects of
leverage only and are in no way indicative of the actual performance of any of
the Funds.
174
UPWARD MARKET
ONE YEAR SIMULATION
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
1x Index Performance 2x Fund Performance
0 0
-0.66366 -1.32732
-0.348088315 -0.70039326
-1.01242775 -2.024374777
-0.662813543 -1.332294555
1.978164896 3.914064678
4.522010219 9.098337365
5.354057682 10.83529199
7.215979943 14.75287623
4.917805413 9.833420421
4.391904913 8.732340382
3.670525533 7.229594198
4.533727797 9.015267185
3.026665043 5.871920971
1.561213759 2.860076563
1.075537879 1.876302218
-0.763329381 -1.830568914
-0.990988228 -2.280989898
1.218100843 2.079623209
1.101801245 1.845044235
-1.736530723 -3.873351309
-1.54515279 -3.498918787
0.82258783 1.142590217
0.566972323 0.629736599
0.704638452 0.905240692
-0.148551386 -0.804538068
0.730400976 0.941817878
-0.694128355 -1.913220499
0.878578734 1.193580155
0.927403966 1.291535541
1.210353943 1.859477181
1.196096441 1.830779292
0.612346758 0.655957591
2.228482884 3.889630885
2.441455483 4.322497421
2.046287568 3.517649353
2.496117809 4.430281653
1.139581689 1.666012098
0.788526201 0.960246642
-0.202436667 -1.02505584
0.070549588 -0.483583716
0.532665379 0.435530002
-0.133645021 -0.89580321
0.48769348 0.337389953
-0.515907261 -1.666809277
-1.135225584 -2.891116501
-1.462586625 -3.534210371
-1.296886111 -3.209776627
-1.455482274 -3.520821689
-0.921410406 -2.47506458
-2.80865938 -6.19037452
-3.662028508 -7.837727829
-1.564654531 -3.824798174
-1.524436802 -3.746209569
-1.276997254 -3.262495771
-0.644478976 -2.022901392
1.746213571 2.692148502
2.395914018 4.00362993
3.122904528 5.480439874
2.098677528 3.38515532
1.462919273 2.097617273
2.567850464 4.321303377
1.973849272 3.112991448
2.560066339 4.298522756
2.310958194 3.791861392
2.93021573 5.048303391
5.990742765 11.2953159
3.784227482 6.661424125
5.454219487 10.09400208
6.560645157 12.40421462
8.769647331 17.06449335
8.729004465 16.97700872
11.42722344 22.78281161
10.54098702 20.82970543
10.15996329 19.99672961
11.04928467 21.9341968
11.40183284 22.70840579
11.12414149 22.0966553
12.45296397 25.01671891
13.85693923 28.13838638
12.99868562 26.20657207
10.73306197 21.14568853
10.34920581 20.30578547
10.90537685 21.51849185
9.691628402 18.8586951
10.72480288 21.09773143
9.346943434 18.08385109
9.799978755 19.06231749
9.603865013 18.63700308
11.17810533 22.04496963
10.77799756 21.16653876
11.06431437 21.79287283
10.05266285 19.57412335
10.33156932 20.18019675
9.441226652 18.24056049
7.581273005 14.22156384
8.159382492 15.44914867
5.646840036 10.08538122
4.862021356 8.44979868
4.707150636 8.129459665
5.368847475 9.496107906
7.891588421 14.73921954
8.662570923 16.37904951
9.004390772 17.11123667
8.560252382 16.1568972
5.323311337 9.229996791
6.618472096 11.91639933
5.799759511 10.19760965
5.132173608 8.80693786
6.232802334 11.08513753
6.290865996 11.20656913
5.622222046 9.807434804
4.646811387 7.779313444
5.93124635 10.42508003
7.100939173 12.8637075
7.849456926 14.44129383
8.016806929 14.79645094
8.830454329 16.52588243
8.470356121 15.75476075
7.860947966 14.45409396
4.969735256 8.318209982
7.151741143 12.82143124
8.034125016 14.67957765
7.739321496 14.05370239
5.944599878 10.25388924
8.634639214 15.85280224
9.606517287 17.92571009
9.041287438 16.7094479
10.64288587 20.13790465
10.22453405 19.22939778
11.99573209 23.06119217
11.30591678 21.54525057
9.552403364 17.71560281
6.891156381 11.99650797
6.168422517 10.48200159
8.525573833 15.38784439
9.676596069 17.83545134
9.828454284 18.16176127
11.19702665 21.10658869
11.05200349 20.79069426
9.893397939 18.27027564
9.587685495 17.61224348
8.504959162 15.28822554
6.81076273 11.68800484
8.221839716 14.6390253
7.986835991 14.14114801
9.279222444 16.87323053
10.45102355 19.37969384
10.3719616 19.20878748
9.560396566 17.45570305
8.845843659 15.92361086
8.147488727 14.43607908
6.655702267 11.27901653
8.259804029 14.62628935
8.416640007 14.95840756
7.92584872 13.91759713
9.32089824 16.86259485
9.978911659 18.26941014
9.199557099 16.59320145
8.878117283 15.90679395
7.634838062 13.25971459
6.790528865 11.48285088
6.509808602 10.89674094
7.816790463 13.61836876
8.065329728 14.14219489
6.289059904 10.38988437
4.467584284 6.606381476
2.919479153 3.446781542
5.605986317 8.847324219
5.101411475 7.807200958
6.630637012 10.94439051
7.4792676 12.71031456
6.471337776 10.59634244
4.82018027 7.166086284
2.188250363 1.784419763
2.780840027 2.964915463
3.838146529 5.083315634
5.220959126 7.882104663
6.635865363 10.78348599
7.361629063 12.2914708
5.712017632 8.840753899
3.728331621 4.755960405
1.579184319 0.415082918
1.387067607 0.035252825
0.271505702 -2.166122948
0.605510088 -1.51435366
2.118214538 1.447306697
1.255621979 -0.266544102
0.990311999 -0.789187304
-0.106846751 -2.944839843
1.245506758 -0.316974326
1.790379702 0.755953952
1.986489047 1.144186794
1.854508332 0.88240541
2.090861718 1.350600653
1.915091882 1.001609995
0.715245505 -1.376573914
-0.887839058 -4.51615206
-2.615859584 -7.845673838
-3.855170155 -10.19118575
-3.468187215 -9.468224792
-1.135978618 -5.093729414
0.827856303 -1.323293096
1.721957401 0.426758036
0.463046457 -2.059005079
-0.4744546 -3.886936632
-1.314997594 -5.510382385
-0.77012809 -4.466971334
-0.221466282 -3.41052889
1.691787102 0.293677328
1.580037997 0.073251883
1.810451997 0.527244198
0.934841386 -1.201904824
-0.789933184 -4.578428525
-0.67231965 -4.352183979
-0.697373071 -4.400434476
-0.094526683 -3.239702791
2.01577663 0.848032725
1.10048088 -0.961604544
-0.419969252 -3.940481403
1.249290804 -0.719989982
3.874887413 4.429068457
1.500930736 -0.344175404
2.578667619 1.772115687
3.292358699 3.188274677
4.975197806 6.550561419
6.041745816 8.715668827
5.87019148 8.363908409
7.912109863 12.54393781
8.896214349 14.59662669
8.575569446 13.92176716
6.894819631 10.39474925
5.583647773 7.68654526
7.441497639 11.47625016
6.404117747 9.323576884
6.43607516 9.38924537
7.551205919 11.68138762
9.848069473 16.45152305
11.5734531 20.10973119
12.21073835 21.48181672
14.13279609 25.64354079
16.2407147 30.2845619
12.9289005 22.860687
12.15495357 21.17666013
11.30968655 19.3501401
12.93803595 22.8420865
13.39367316 23.83327472
14.35987797 25.94359186
15.26962224 27.94737959
15.88450498 29.31239901
16.41800248 30.50302999
17.19490638 32.24482783
15.70782021 28.88871859
FLAT MARKET
ONE YEAR SIMULATION
|
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
1x Index Performance 2x Fund Performance
0 0
-0.84442 -1.68884
0.258090894 0.497403576
-1.460834074 -2.948652393
1.929110312 3.728868528
0.888312166 1.610517575
1.021676426 1.879155462
0.996567489 1.828511333
-0.436371811 -1.060974504
1.264473649 2.319376241
2.378990446 4.571630351
1.03997563 1.836245644
2.322375001 4.421256903
2.914647604 5.630100026
2.107138113 3.972467992
2.779534039 5.341826985
2.544970587 4.86100475
3.16543944 6.129969713
2.888182322 5.559521125
1.930097857 3.593601716
1.812246278 3.354051871
1.369902611 2.455967173
0.959090944 1.625541068
3.009771999 5.753977048
2.240206594 4.173843425
2.052984328 3.79231714
1.861961552 3.403760222
0.581862281 0.804810113
0.560612351 0.762216048
2.916747499 5.483933492
0.756113302 1.054874093
-0.133099701 -0.728825279
-1.55330689 -3.55229603
-2.803087659 -6.001103234
-3.289830357 -6.942558585
-2.837497551 -6.072062055
-3.363331298 -7.088719269
-4.186443787 -8.671481519
-4.987627163 -10.1988414
-3.812989198 -7.978417949
-3.644152138 -7.655366983
-2.559281647 -5.575950536
-3.284659586 -6.981792439
-2.732734153 -5.920138429
-3.265379428 -6.950519889
-3.186586177 -6.798936703
-2.461773192 -5.403399902
-2.523575363 -5.523276497
-2.036622136 -4.579340657
-1.966433335 -4.442606669
-3.535166469 -7.500825485
-3.103032954 -6.672088381
-3.400651989 -7.245401742
-3.862493471 -8.132321211
-4.759177608 -9.846039265
-5.453530824 -11.16057417
-6.833720181 -13.75433004
-6.350932519 -12.86047992
-5.557228578 -11.38341277
-5.972918436 -12.16350459
-4.584702604 -9.569868551
-5.227849416 -10.78895715
-6.062640427 -12.36057025
-6.686074501 -13.52384346
-7.087399032 -14.26767677
-4.091989689 -8.73982803
-2.690006395 -6.071745643
-3.839723969 -8.291270293
-4.303803077 -9.176461294
-3.50205077 -7.654603915
-1.092689974 -3.043244216
0.955680417 0.972704609
-1.406985372 -3.753423803
0.15571391 -0.702407338
-1.270503456 -3.530402777
-0.092759292 -1.228831126
2.153754923 3.21310588
-0.429304924 -2.00658731
0.320890564 -0.529963772
3.616833102 6.006013369
3.011596819 4.767629919
4.037942562 6.855313527
3.763386432 6.291331183
2.308001174 3.30964676
0.608972198 -0.121679847
1.504593269 1.656553765
5.796511986 10.25324189
7.101723554 12.97363038
8.222328888 15.33771657
7.700740552 14.22595325
8.70260515 16.35108142
7.350018635 13.45556841
9.100145988 17.15490067
9.143715132 17.24847229
10.63560057 20.45381103
11.01391901 21.27759464
12.11338976 23.67983698
11.7005322 22.76893498
11.87481855 23.15204772
11.90408724 23.2164858
12.13168896 23.71770582
12.88244426 25.37436013
13.88102493 27.59253346
14.46841187 28.90875252
13.27977188 26.23157554
12.62762024 24.77814518
11.56369468 22.42073664
10.71641305 20.56126359
9.82013047 18.60930439
9.735989581 18.42755461
8.937682204 16.70448106
8.190249873 15.10303883
9.692471492 18.29945022
9.360629827 17.58369123
9.704208118 18.32251659
10.52413737 20.09120157
10.16217082 19.3046042
11.03798211 21.20159513
10.83504909 20.75857906
11.84101017 22.95063709
10.75039256 20.55273082
10.7533198 20.55910347
11.2269896 21.59031782
12.659482 24.72224123
11.40332877 21.94093525
10.5996763 20.18159582
9.420241351 17.61836275
9.010593852 16.73768349
9.722171404 18.2617173
10.94491528 20.89753446
11.32814121 21.73274298
12.05855401 23.33009569
13.10611099 25.63594916
12.16820119 23.55232719
13.0076007 25.40151016
10.31338649 19.42211536
12.28325264 23.68715678
9.106647137 16.68869008
9.255512246 17.00711018
8.830289793 16.09632683
8.373561716 15.12188392
7.552209329 13.37688943
7.216259248 12.66860133
4.751786313 7.489000386
3.287984851 4.484897803
2.512292084 2.915534638
2.632159708 3.156212907
0.602608749 -0.923615313
0.038308596 -2.035093827
0.309912604 -1.503144386
0.030860458 -2.051161192
-0.261739812 -2.624181489
0.369074763 -1.39243581
1.184864565 0.210509032
2.838528807 3.48598973
4.285878261 6.398913369
6.253127069 10.41313157
6.285748904 10.48092965
8.330048998 14.73091005
7.061395795 12.04368268
6.736239629 11.36310694
5.67343487 9.145355212
6.514658816 10.88308024
8.128568927 14.2432811
6.448467223 10.6930569
3.239684627 4.019593887
4.866122618 7.297043251
6.139407079 9.902644649
5.335528438 8.237883349
4.742858087 7.019882448
3.592257791 4.668655631
3.056312886 3.585628117
2.775463822 3.02104501
4.176704496 5.830222865
3.701606635 4.864945402
4.881730918 7.251671559
6.052211036 9.645528869
7.722215203 13.09870515
9.88753945 17.6454993
9.258433287 16.29845833
8.739739801 15.19422773
9.443220674 16.6847028
9.265594326 16.30594426
9.356017069 16.49844223
9.059454486 15.86657798
8.703571674 15.11038634
11.15711999 20.3066994
12.85126566 23.97388821
11.36501449 20.708416
12.16527235 22.44321321
10.63870299 19.11030895
8.799998384 15.1513205
9.71611613 17.0905148
8.646285253 14.80703899
7.44226712 12.26245578
4.890620718 6.930213657
6.339999316 9.885337042
6.492437705 10.2003783
7.140337696 11.54129651
6.521045116 10.2518345
6.415286761 10.03290964
6.914236116 11.06473225
5.307849719 7.727237043
1.722959898 0.392735836
0.803547098 -1.422043571
1.547658722 0.033321946
3.800696626 4.472200574
2.55571107 1.966121427
1.99561331 0.852365876
2.041617411 0.943342778
3.727957181 4.279722143
1.55931678 -0.080630158
1.117543908 -0.949908692
0.170901685 -2.804482982
-2.084446166 -7.181197113
-2.684923092 -8.319638294
-2.767314901 -8.474880651
-2.698570421 -8.345462301
-2.047312492 -7.118537998
-3.785874743 -10.41564414
-5.035215159 -12.74214986
-5.470115888 -13.54136196
-6.693427118 -15.77908443
-4.729323759 -12.23338388
-3.416493841 -9.814535943
-3.250766202 -9.505037467
-4.167049171 -11.21913875
-4.438457671 -11.72201131
-4.035962011 -10.97837518
-3.593308693 -10.15711509
-2.299338082 -7.745372684
-1.834966836 -6.868400196
-1.614429272 -6.449941292
-1.798853025 -6.800660462
-2.040103782 -7.258586097
-2.666645483 -8.444915715
-3.181791995 -9.414044594
-4.110820792 -11.15249778
-4.139737132 -11.20608349
-5.661998107 -14.02617828
-3.934480616 -10.87747303
-4.080538632 -11.14847681
-5.137187418 -13.10605357
-6.907896678 -16.34997838
-6.704536978 -15.98451143
-5.761972915 -14.28689447
-3.8730659 -10.85082749
-2.869212328 -8.988857877
-3.304173708 -9.803971868
-2.857477669 -8.970632725
-1.77686425 -6.945411362
-1.897275992 -7.173562603
-0.189503773 -3.941717358
|
175
DOWNWARD MARKET
ONE YEAR SIMULATION
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
1x Index Performance 2x Fund Performance
0 0
1.0876 2.1752
0.833779145 1.662096581
-1.693014526 -3.433004376
-2.544215391 -5.105274352
-4.12027034 -8.174549359
-5.432767959 -10.68854655
-5.262915753 -10.36772194
-5.788536044 -11.36231755
-5.385442875 -10.60382718
-5.092440514 -10.05014304
-3.785088882 -7.572024482
-4.448856311 -8.847308717
-3.609210191 -7.245318398
-3.446782071 -6.93271657
-2.204142156 -4.537164695
-3.708144654 -7.473410583
-4.859217493 -9.685536283
-3.545894131 -7.192134569
-3.052155209 -6.241986204
-2.894886415 -5.937797704
-2.698840901 -5.557993344
-2.072669022 -4.342449164
-1.737169986 -3.687003626
-1.666384391 -3.54824164
-1.752535455 -3.71724634
-0.51894029 -1.29939383
-0.771005399 -1.799569022
-0.806391451 -1.869607533
-1.164480378 -2.578108967
-0.223892388 -0.723839146
-0.487241447 -1.247898144
0.553562495 0.817798323
-0.661627308 -1.618967863
-1.32821759 -2.939300342
-3.057045889 -6.34050138
-2.702816335 -5.656037764
-3.051947819 -6.333106643
-2.444471324 -5.159273136
-3.657769434 -7.518341376
-3.25165803 -6.738665505
-2.183556335 -4.679455239
-3.170132985 -6.602261268
-3.54246319 -7.320527238
-1.435637671 -3.27191715
0.798225037 1.11257339
1.416974941 2.353932453
1.250002034 2.016901425
1.020529029 1.554479214
0.29883837 0.103468815
3.155549884 5.805762812
3.585553794 6.687865457
6.005105159 11.67189578
7.058594495 13.89150871
6.994352915 13.75482524
9.037731067 18.09980454
5.772160059 11.02586245
4.870674516 9.133337803
5.625260967 10.70385384
4.31508523 7.957512635
4.235268543 7.792305253
5.092134568 9.564518544
6.542616209 12.58893751
5.239813098 9.835462458
1.377406718 1.773319843
2.384084366 3.794537975
2.860221551 4.759930972
4.58714181 8.277559935
5.685934322 10.55268802
5.982277682 11.1726675
4.619875502 8.314418217
5.141468354 9.394442944
5.974420094 11.12773226
6.208867304 11.61942802
6.794619828 12.85061263
8.680719609 16.83672197
9.008120277 17.54066322
10.83836662 21.4876787
9.21558209 17.93027649
9.513500355 18.5736569
9.385971884 18.29749886
9.676872938 18.92669959
10.3996874 20.49424864
9.760418011 19.09880474
11.60252711 23.09647522
8.968930672 17.28681398
9.141820777 17.6589885
9.580920151 18.60571978
8.246443705 15.71695887
8.270135604 15.76761281
8.023669468 15.24054602
8.750755182 16.79186816
9.046546361 17.42719256
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|
ADVISOR'S INVESTMENT METHODOLOGY
The Advisor develops and implements structured investment strategies designed to
achieve each Fund's objective.
The Advisor uses quantitative methods to construct portfolios that correlate
highly with the Funds' respective benchmarks. Statistical techniques are then
used to determine the optimal mix of assets for each Fund. The Advisor places
particular emphasis on controlling risk relative to each Fund's benchmark or
market sector in order to maintain consistency and predictability.
The Advisor's primary objective for the Funds is to correlate with the
performance of the index underlying each Fund's benchmark. The Leveraged Funds
are invested to achieve returns that magnify the returns of the indices
underlying their benchmarks. These leveraged returns are achieved not by
borrowing, but by the use of futures and other instruments that stimulate
leveraged returns without requiring a commitment of cash in excess of the Funds'
assets. For the Inverse Funds, the Advisor uses short selling techniques and
invests in futures contacts and other instruments to produce magnified or
leveraged returns that move inversely to the performance of the Funds'
respective Underlying Indices.
176
PRINCIPAL RISKS OF INVESTING IN THE FUNDS
As indicated below, the Funds are subject to a number of additional risks that
may affect the value of Fund shares.
COUNTERPARTY CREDIT RISK (ALL FUNDS) - The Funds may enter into derivative
contracts, such as swap agreements, with counterparties for purposes of
attempting to gain exposure to a particular group of stocks or to an index of
stocks without actually purchasing those stocks, or to hedge a position. A Fund
will not enter into any agreement with a counterparty unless the Advisor
believes that the other party to the transaction is creditworthy. The use of
derivative contracts involves risks that are different from those associated
with ordinary portfolio securities transactions. Derivative contracts may be
considered to be illiquid. A Fund bears the risk of loss of the amount expected
to be received under a derivative contract in the event of the default or
bankruptcy of a derivative contract counterparty.
DEPOSITARY RECEIPT RISK (RYDEX 2X NASDAQ 100 ETF, RYDEX INVERSE NASDAQ 100 ETF,
RYDEX INVERSE 2X NASDAQ 100 ETF, RYDEX 2X NASDAQ BIOTECH ETF, RYDEX INVERSE
NASDAQ BIOTECH ETF AND RYDEX INVERSE 2X NASDAQ BIOTECH ETF) - The Broad Market
ETFs may hold the securities of non-U.S. companies in the form of American
Depositary Receipts ("ADRs"). The underlying securities of the ADRs in a Fund's
portfolio are usually denominated or quoted in currencies other than the U.S.
Dollar. As a result, changes in foreign currency exchange rates may affect the
value of the Fund's portfolio. Generally, when the U.S. Dollar rises in value
against a foreign currency, a security denominated in that currency loses value
because the currency is worth fewer U.S. Dollars. In addition, because the
underlying securities of ADRs trade on foreign exchanges at times when the U.S.
markets are not open for trading, the value of the securities underlying the
ADRs may change materially at times when the U.S. markets are not open for
trading, regardless of whether there is an active U.S. market for shares of the
Fund. Foreign securities markets also generally have less trading volume and
less liquidity than U.S. securities markets. Investments in the underlying
foreign securities also involve political and economic risks.
DERIVATIVES RISK (ALL FUNDS) - The Funds' use of equity derivatives such as
futures, options and swap agreements to pursue their respective investment
objectives may expose the Funds to additional risks that they would not be
subject to if they invested directly in the securities underlying those
derivatives. These risks may cause the Funds to experience higher losses than
funds that do not use derivatives.
EARLY CLOSING RISK (ALL FUNDS) - The normal close of trading of securities
listed on Nasdaq and the New York Stock Exchange ("NYSE") is 4:00 p.m., Eastern
Time. Unanticipated early closings may result in a Fund's inability to buy or
sell securities on that day. If an exchange closes early on a day when one or
more of the Funds need to execute a high volume of securities trades late in a
trading day, a Fund might incur substantial trading losses.
FUTURES AND OPTIONS RISK (ALL FUNDS) - The Funds may invest a percentage of
their assets in futures and options contracts. The Funds may use futures
contracts and related options for bona fide hedging purposes to offset changes
in the value of securities held or expected to be acquired. They may also be
used to gain exposure to a particular market or instrument, to create a
synthetic money market position, and for certain other tax-related purposes. The
Funds will only enter into futures contracts traded on a national futures
exchange or board of trade. Futures and options contracts are described in more
detail below:
FUTURES CONTRACTS - Futures contracts and options on futures contracts provide
for the future sale by one party and purchase by another party of a specified
amount of a specific security at a specified future time and at a specified
price. An option on a futures contract gives the purchaser the right, in
177
exchange for a premium, to assume a position in a futures contract at a
specified exercise price during the term of the option. Index futures are
futures contracts for various indices that are traded on registered securities
exchanges.
OPTIONS - The buyer of an option acquires the right to buy (a call option) or
sell (a put option) a certain quantity of a security (the underlying security)
or instrument at a certain price up to a specified point in time. The seller or
writer of an option is obligated to sell (a call option) or buy (a put option)
the underlying security. When writing (selling) call options on securities, the
Funds may cover their positions by owning the underlying security on which the
option is written or by owning a call option on the underlying security.
Alternatively, the Funds may cover their position by maintaining in a segregated
account cash or liquid securities equal in value to the exercise price of the
call option written by the Funds.
The risks associated with the Funds' use of futures and options contracts
include:
o The Funds experiencing losses over certain ranges in the market that
exceed losses experienced by funds that do not use futures contracts and
options.
o There may be an imperfect correlation between the changes in market value
of the securities held by the Funds and the prices of futures and options
on futures.
o Although the Funds will only purchase exchange-traded futures, due to
market conditions there may not always be a liquid secondary market for a
futures contract. As a result, the Funds may be unable to close out their
futures contracts at a time which is advantageous.
o Trading restrictions or limitations may be imposed by an exchange, and
government regulations may restrict trading in futures contracts and
options.
o Because option premiums paid or received by the Funds are small in
relation to the market value of the investments underlying the options,
buying and selling put and call options can be more speculative than
investing directly in securities.
INDUSTRY CONCENTRATION RISK (SECTOR ETFS) - With the exception of the Sector
ETFs, none of the Funds will invest 25% or more of the value of a Fund's total
assets in the securities of one or more issuers conducting their principal
business activities in the same industry or group of industries; except that, to
the extent the index underlying a Fund's benchmark is concentrated in a
particular industry, a Fund will necessarily be concentrated in that industry.
The Sector ETFs, particularly the Leveraged Sector ETFs, may invest in the
securities of a limited number of issuers conducting business in a specific
market sector and therefore may be concentrated in an industry or group of
industries within a sector. The risk of concentrating Fund investments in a
limited number of issuers conducting business in the same industry or group of
industries is that a Fund will be more susceptible to the risks that are
associated with that industry or group of industries than a fund that does not
concentrate its investments.
MARKET RISK (ALL FUNDS) - The Funds may invest in public and privately issued
equity securities, including common and preferred stocks, warrants, and rights,
as well as instruments that attempt to track the price movement of equity
indices. Investments in equity securities and equity derivatives in general are
subject to market risks that may cause their prices to fluctuate over time. The
value of securities convertible into equity securities, such as warrants or
convertible debt, is also affected by prevailing interest rates, the credit
quality of the issuer and any call provision. Fluctuations in the value of
equity securities in which the Funds invest will cause the NAV of the Funds to
fluctuate. Historically, the equity markets have moved in cycles, and the value
of the Funds' equity securities and equity derivatives may
178
fluctuate drastically from day to day. Because of their link to the equity
markets, an investment in the Funds may be more suitable for long-term investors
who can bear the risk of short-term principal fluctuations, which at times may
be significant.
NON-DIVERSIFICATION RISK (ALL FUNDS) - Since each Fund is non-diversified, each
Fund may invest in the securities of a limited number of issuers. To the extent
that a Fund invests a significant percentage of its assets in a limited number
of issuers, the Fund is subject to the risks of investing in those few issuers,
and may be more susceptible to a single adverse economic or regulatory
occurrence.
SHORT SALES RISK (INVERSE FUNDS AND LEVERAGED INVERSE FUNDS) - Short sales are
transactions in which a Fund sells a security it does not own. To complete the
transaction, the Fund must borrow the security to make delivery to the buyer.
The Fund is then obligated to replace the security borrowed by purchasing the
security at the market price at the time of replacement. The price at such time
may be higher or lower than the price at which the security was sold by the
Fund. If the underlying security goes down in price between the time the Fund
sells the security and buys it back, the Fund will realize a gain on the
transaction. Conversely, if the underlying security goes up in price during the
period, the Fund will realize a loss on the transaction. Any such loss is
increased by the amount of premium or interest the Fund must pay to the lender
of the security. Likewise, any gain will be decreased by the amount of premium
or interest the Fund must pay to the lender of the security. The Fund is also
required to segregate other assets on its books to cover its obligation to
return the security to the lender which means that those other assets may not be
available to meet the Fund's needs for immediate cash or other liquidity. The
Fund's investment performance may also suffer if the Fund is required to close
out a short position earlier than it had intended. This would occur if the
securities lender required the Fund to deliver the securities the Fund borrowed
at the commencement of the short sale and the Fund was unable to borrow the
securities from another securities lender or otherwise obtain the security by
other means. In addition, the Fund may be subject to expenses related to short
sales that are not typically associated with investing in securities directly,
such as costs of borrowing and margin account maintenance costs associated with
the Fund's open short positions. These expenses negatively impact the
performance of the Fund. For example, when a Fund short sells an
interest-bearing security, such as a bond, it is obligated to pay the interest
on the security it has sold. This cost is partially offset by the interest
earned by the Fund on the cash generated by the short sale. To the extent that
the interest rate that the Fund is obligated to pay is greater than the interest
earned by the Fund on investments, the performance of the Fund will be
negatively impacted. This type of short sales expense is sometimes referred to
as the "negative cost of carry," and will tend to cause a Fund to lose money on
a short sale even in instances where the price of the underlying security sold
short does not change over the duration of the short sale.
TRACKING ERROR RISK (ALL FUNDS) - Tracking error risk refers to the risk that
the Funds' returns may not match or correlate to the returns of their respective
underlying indices on either a daily or aggregate basis. Factors such as Fund
expenses, imperfect correlation between the Funds' investments and those of
their underlying indices, rounding of share prices, changes to the underlying
indices, regulatory policies, high portfolio turnover rate and leverage all
contribute to tracking error.
TRADING HALT RISK (ALL FUNDS) - Shares trading on the Exchange may be halted due
to market conditions or for reasons that, in the view of the Exchange, make
trading in shares of the Funds inadvisable. In addition, trading in shares of
the Funds on the Exchange is subject to trading halts caused by extraordinary
market volatility pursuant to Exchange "circuit breaker" rules. There can be no
assurance that the requirements of the Exchange necessary to maintain the
listing of the Funds will continue to be met or will remain unchanged.
179
OTHER INVESTMENT PRACTICES AND STRATEGIES
Please see the Statement of Additional Information (the "SAI") for a more
complete list of portfolio investment strategies, permitted investments and
related risks.
PORTFOLIO HOLDINGS
A description of the Funds' policies and procedures with respect to the
disclosure of Fund portfolio securities is available in the SAI.
180
INVESTING WITH RYDEX:
For more information on how to buy and sell shares of the Funds, call Rydex
Client Services at 800.820.0888 or 301.296.5100 or visit
www.rydexinvestments.com.
SHAREHOLDER INFORMATION
BUYING AND SELLING SHARES
Most investors will buy and sell shares of the Funds in secondary market
transactions through brokers. Shares can be bought and sold throughout the
trading day like other publicly traded securities. Most investors will incur
customary brokerage commissions and charges when buying or selling shares
through a broker.
Shares may be acquired and redeemed from the Funds ONLY in Creation Units of
50,000 shares, or multiples thereof, as discussed in the "Creations and
Redemptions" section.
BOOK ENTRY
Shares are held in book-entry form, which means that no stock certificates are
issued. Depository Trust Company ("DTC"), or its nominee, is the record owner of
all outstanding shares of the Funds and is recognized as the owner of all
shares.
Investors owning shares of the Funds are beneficial owners as shown on the
records of DTC or its participants. DTC serves as the securities depository for
all shares. Participants in DTC include securities brokers and dealers, banks,
trust companies, clearing corporations and other institutions that directly or
indirectly maintain a custodial relationship with DTC. As a beneficial owner of
shares, you are not entitled to receive physical delivery of stock certificates
or to have shares registered in your name, and you are not considered a
registered owner of shares. Therefore, to exercise any right as an owner of
shares, you must rely upon the procedures of DTC and its participants (E.G.,
broker-dealers, banks, trust companies, or clearing companies). These procedures
are the same as those that apply to any stocks that you hold in book entry or
"street name" through your brokerage account.
CALCULATING NAV
Each Fund calculates its NAV by:
o Taking the current market value of its total assets
o Subtracting any liabilities
o Dividing that amount by the total number of shares owned by
shareholders
The Funds calculate NAV once each Business Day as of the regularly scheduled
close of normal trading on the New York Stock Exchange ("NYSE") (normally, 4:00
p.m., Eastern Time).
In calculating NAV, each Fund generally values its investment portfolio at
market price. If market prices are unavailable or a Fund thinks that they are
unreliable, or when the value of a security has been materially affected by
events occurring after the relevant market closes, the Fund will price those
securities at fair value as determined in good faith using methods approved by
the Board of Trustees. Because the Funds invest substantially all of their
assets in the component securities included in their
181
respective Underlying Indices, and these securities are selected for their
market size, liquidity and industry group representation, it is expected that
there would be limited circumstances in which the Funds would use fair value
pricing - for example, if the exchange on which a portfolio security is
primarily traded closed early or if trading in a particular security was halted
during the day and did not resume prior to the time a Fund calculated its NAV.
If a Fund uses fair value pricing to value its securities, it may value those
securities higher or lower than another fund that uses market quotations or its
own fair value procedures to price the same securities.
SHARE TRADING PRICES
The trading prices of a Fund's shares listed on the Exchange may differ from the
Fund's daily NAV and can be affected by market forces of supply and demand,
economic conditions and other factors. The Exchange intends to disseminate the
approximate value of the portfolio underlying a share of a Fund every fifteen
seconds. This approximate value should not be viewed as a "real-time" update of
the NAV of a Fund because the approximate value may not be calculated in the
same manner as the NAV, which is computed once a day. The Funds are not involved
in, or responsible for, the calculation or dissemination of such values and make
no warranty as to their accuracy.
CREATIONS AND REDEMPTIONS
The shares of each Fund that trade on the Exchange are "created" at their NAV by
market makers, large investors and institutions only in block-size Creation
Units of 50,000 shares or more. A "creator" enters into an authorized
participant agreement (a "Participant Agreement") with Rydex Distributors, Inc.,
the Funds' distributor (the "Distributor"), and deposits into a Fund a portfolio
of securities closely approximating the holdings of the Fund and a specified
amount of cash, together totaling the NAV of the Creation Unit(s), in exchange
for 50,000 shares of the Fund (or multiples thereof).
Similarly, shares can only be redeemed in Creation Units, generally 50,000
shares, principally in-kind for a portfolio of securities held by a Fund and a
specified amount of cash together totaling the NAV of the Creation Unit(s).
Shares are not redeemable from a Fund except when aggregated in Creation Units.
The prices at which creations and redemptions occur are based on the next
calculation of NAV after an order is received in a form prescribed in the
Participant Agreement.
Creations and redemptions must be made through an authorized firm that is either
a member of the Continuous Net Settlement System of the NSCC or a DTC
Participant, and in each case, must have executed a Participant Agreement with
the Distributor with respect to creations and redemptions of Creation Units.
Information about the procedures for the creation and redemption of Creation
Units can be found in the SAI.
Because new shares may be created and issued on an ongoing basis, at any point
during the life of a Fund, a "distribution," as such term is used in the
Securities Act of 1933 (the "Securities Act"), may be occurring. Broker-dealers
and other persons are cautioned that some activities on their part may,
depending on the circumstances, result in their being deemed participants in a
distribution in a manner that could render them statutory underwriters and
subject to the prospectus-delivery and liability provisions of the Securities
Act. Nonetheless, any determination of whether one is an underwriter must take
into account all the relevant facts and circumstances of each particular case.
Broker-dealers should also note that dealers who are not "underwriters," but are
participating in a distribution (in contrast to ordinary secondary
transactions), and thus dealing with shares that are part of an "unsold
allotment" within the meaning of Section 4(3)(C) of the Securities Act, would be
unable to take advantage of the prospectus delivery exemption provided by
Section 4(3) of the Securities Act.
182
TRANSACTION FEES
Each Fund will impose a Creation Transaction Fee and a Redemption Transaction
Fee to offset the Fund's transfer and other transaction costs associated with
the issuance and redemption of Creation Units of shares. The Creation and
Redemption Transaction Fees for creations and redemptions are as follows:
--------------------------------------------------------------------------------
ANTICIPATED ANTICIPATED
VALUE OF A VALUE OF A
FUND CREATION UNIT FUND CREATION UNIT
--------------------------------------------------------------------------------
Rydex Inverse S&P 500 $X,XXX,XXX Rydex Inverse 2x $X,XXX,XXX
ETF Russell 2000(R) Growth
ETF
--------------------------------------------------------------------------------
Rydex 2x S&P 500 $X,XXX,XXX Rydex 2x Russell 2000(R) $X,XXX,XXX
Growth ETF Value ETF
--------------------------------------------------------------------------------
Rydex Inverse S&P 500 $X,XXX,XXX Rydex Inverse Russell $X,XXX,XXX
Growth ETF 2000(R) Value ETF
--------------------------------------------------------------------------------
Rydex Inverse 2x S&P $X,XXX,XXX Rydex Inverse 2x $X,XXX,XXX
500 Growth ETF Russell 2000(R) Value
ETF
--------------------------------------------------------------------------------
Rydex 2x S&P 500 $X,XXX,XXX Rydex 2x Russell 3000(R) $X,XXX,XXX
Value ETF ETF
--------------------------------------------------------------------------------
Rydex Inverse S&P 500 $X,XXX,XXX Rydex Inverse Russell $X,XXX,XXX
Value ETF 3000(R) ETF
--------------------------------------------------------------------------------
Rydex Inverse 2x S&P $X,XXX,XXX Rydex Inverse 2x $X,XXX,XXX
500 Value ETF Russell 3000(R) ETF
--------------------------------------------------------------------------------
Rydex Inverse S&P $X,XXX,XXX Rydex 2x Russell 3000(R) $X,XXX,XXX
MidCap 400 ETF Growth ETF
--------------------------------------------------------------------------------
Rydex 2x S&P MidCap $X,XXX,XXX Rydex Inverse Russell $X,XXX,XXX
400 Growth ETF 3000(R) Growth ETF
--------------------------------------------------------------------------------
Rydex Inverse S&P $X,XXX,XXX Rydex Inverse 2x $X,XXX,XXX
MidCap 400 Growth Russell 3000(R) Growth
ETF ETF
--------------------------------------------------------------------------------
Rydex Inverse 2x S&P $X,XXX,XXX Rydex 2x Russell 3000(R) $X,XXX,XXX
MidCap 400 Growth Value ETF
ETF
--------------------------------------------------------------------------------
Rydex 2x S&P MidCap $X,XXX,XXX Rydex Inverse Russell $X,XXX,XXX
400 Value ETF 3000(R) Value ETF
--------------------------------------------------------------------------------
Rydex Inverse S&P $X,XXX,XXX Rydex Inverse 2x $X,XXX,XXX
MidCap 400 Value ETF Russell 3000(R) Value
ETF
--------------------------------------------------------------------------------
Rydex Inverse 2x S&P $X,XXX,XXX Rydex 2x NASDAQ $X,XXX,XXX
MidCap 400 Value ETF Biotech ETF
--------------------------------------------------------------------------------
Rydex 2x S&P $X,XXX,XXX Rydex Inverse $X,XXX,XXX
SmallCap 600 ETF NASDAQ Biotech ETF
--------------------------------------------------------------------------------
Rydex Inverse S&P $X,XXX,XXX Rydex Inverse 2x $X,XXX,XXX
SmallCap 600 ETF NASDAQ Biotech ETF
--------------------------------------------------------------------------------
Rydex Inverse 2x S&P $X,XXX,XXX Rydex 2x Consumer $X,XXX,XXX
SmallCap 600 ETF Discretionary ETF
--------------------------------------------------------------------------------
Rydex 2x S&P $X,XXX,XXX Rydex Inverse $X,XXX,XXX
SmallCap 600 Growth Consumer Discretionary
ETF ETF
--------------------------------------------------------------------------------
Rydex Inverse S&P $X,XXX,XXX Rydex Inverse 2x $X,XXX,XXX
SmallCap 600 Growth Consumer Discretionary
ETF ETF
--------------------------------------------------------------------------------
|
183
--------------------------------------------------------------------------------
ANTICIPATED ANTICIPATED
VALUE OF A VALUE OF A
FUND CREATION UNIT FUND CREATION UNIT
--------------------------------------------------------------------------------
Rydex Inverse 2x S&P $X,XXX,XXX Rydex 2x Consumer $X,XXX,XXX
SmallCap 600 Growth Staples ETF
ETF
--------------------------------------------------------------------------------
Rydex 2x NASDAQ $X,XXX,XXX Rydex Inverse $X,XXX,XXX
100 ETF Consumer Staples ETF
--------------------------------------------------------------------------------
Rydex Inverse $X,XXX,XXX Rydex Inverse 2x $X,XXX,XXX
NASDAQ 100 ETF Consumer Staples ETF
--------------------------------------------------------------------------------
Rydex Inverse 2x $X,XXX,XXX Rydex 2x Energy ETF $X,XXX,XXX
NASDAQ 100 ETF
--------------------------------------------------------------------------------
Rydex 2x Russell 1000(R) $X,XXX,XXX Rydex Inverse Energy $X,XXX,XXX
ETF ETF
--------------------------------------------------------------------------------
Rydex Inverse Russell $X,XXX,XXX Rydex Inverse 2x $X,XXX,XXX
1000(R) ETF Energy ETF
--------------------------------------------------------------------------------
Rydex Inverse 2x $X,XXX,XXX Rydex 2x Financials $X,XXX,XXX
Russell 1000(R) ETF ETF
--------------------------------------------------------------------------------
Rydex 2x Russell 1000(R) $X,XXX,XXX Rydex Inverse $X,XXX,XXX
Growth ETF Financials ETF
--------------------------------------------------------------------------------
Rydex Inverse Russell $X,XXX,XXX Rydex Inverse 2x $X,XXX,XXX
1000(R) Growth ETF Financials ETF
--------------------------------------------------------------------------------
Rydex Inverse 2x $X,XXX,XXX Rydex 2x Health Care $X,XXX,XXX
Russell 1000(R) Growth ETF
ETF
--------------------------------------------------------------------------------
Rydex 2x Russell 1000(R) $X,XXX,XXX Rydex Inverse Health $X,XXX,XXX
Value ETF Care ETF
--------------------------------------------------------------------------------
Rydex Inverse Russell $X,XXX,XXX Rydex Inverse 2x Health $X,XXX,XXX
1000(R) Value ETF Care ETF
--------------------------------------------------------------------------------
Rydex Inverse 2x $X,XXX,XXX Rydex 2x Industrials $X,XXX,XXX
Russell 1000(R) Value ETF
ETF
--------------------------------------------------------------------------------
Rydex 2x Russell $X,XXX,XXX Rydex Inverse $X,XXX,XXX
MidCap ETF Industrials ETF
--------------------------------------------------------------------------------
Rydex Inverse Russell $X,XXX,XXX Rydex Inverse 2x $X,XXX,XXX
MidCap ETF Industrials ETF
--------------------------------------------------------------------------------
Rydex Inverse 2x $X,XXX,XXX Rydex 2x Materials ETF $X,XXX,XXX
Russell MidCap ETF
--------------------------------------------------------------------------------
Rydex 2x Russell $X,XXX,XXX Rydex Inverse Materials $X,XXX,XXX
MidCap(R) Growth ETF ETF
--------------------------------------------------------------------------------
Rydex Inverse Russell $X,XXX,XXX Rydex Inverse 2x $X,XXX,XXX
MidCap(R) Growth ETF Materials ETF
--------------------------------------------------------------------------------
Rydex Inverse 2x $X,XXX,XXX Rydex 2x Technology $X,XXX,XXX
Russell MidCap(R) ETF
Growth ETF
--------------------------------------------------------------------------------
Rydex 2x Russell $X,XXX,XXX Rydex Inverse $X,XXX,XXX
MidCap(R) Value ETF Technology ETF
--------------------------------------------------------------------------------
Rydex Inverse Russell $X,XXX,XXX Rydex Inverse 2x $X,XXX,XXX
MidCap(R) Value ETF Technology ETF
--------------------------------------------------------------------------------
Rydex Inverse 2x $X,XXX,XXX Rydex 2x Utilities ETF $X,XXX,XXX
Russell MidCap(R) Value
ETF
--------------------------------------------------------------------------------
Rydex Inverse Russell $X,XXX,XXX Rydex Inverse Utilities $X,XXX,XXX
|
2000(R) ETF
184
--------------------------------------------------------------------------------
ANTICIPATED ANTICIPATED
VALUE OF A VALUE OF A
FUND CREATION UNIT FUND CREATION UNIT
--------------------------------------------------------------------------------
Rydex 2x Russell 2000(R) $X,XXX,XXX Rydex Inverse 2x $X,XXX,XXX
Growth ETF Utilities
--------------------------------------------------------------------------------
Rydex Inverse Russell $X,XXX,XXX
2000(R) Growth ETF
--------------------------------------------------------------------------------
|
An additional charge of up to four 4 times the fixed transaction fee may be
imposed on purchases or redemptions outside the NSCC's usual clearing process or
for cash. Investors who use the services of a broker or other such intermediary
may pay additional fees for these services. The anticipated approximate value of
one Creation Unit of a Fund, as of the date the Fund was first offered to the
public, is set forth below:
The anticipated approximate value of one Creation Unit for the Funds as of the
date each Fund is first offered to the public is $XXX. More information on the
creation and redemption process is included in the SAI.
ACTIVE INVESTORS AND MARKET TIMING
Shares of the Funds are listed for trading on the Exchange, which allows retail
investors to purchase and sell individual shares at market prices throughout the
trading day similar to other publicly traded securities. The Trust's Board of
Trustees has determined not to adopt policies and procedures designed to prevent
or monitor for frequent purchases and redemptions of the Funds' shares because
the Funds sell and redeem their shares at NAV only in Creation Units pursuant to
the terms of a Participant Agreement between the authorized participant and the
Distributor, principally in exchange for a basket of securities that mirrors the
composition of each Fund's portfolio and a specified amount of cash. The Funds
also impose a transaction fee on such Creation Unit transactions that is
designed to offset the Funds' transfer and other transaction costs associated
with the issuance and redemption of the Creation Unit shares.
DISTRIBUTION PLAN
The Funds have adopted a Distribution Plan (the "Plan") that allows the Funds to
pay distribution fees to the Distributor and other firms that provide
distribution services ("Service Providers"). If a Service Provider provides
distribution services, the Funds will pay distribution fees to the Distributor
at an annual rate not to exceed 0.25% of average daily net assets, pursuant to
Rule 12b-1 under the Investment Company Act of 1940. The Distributor will, in
turn, pay the Service Provider out of its fees.
No distribution fees are currently charged to the Funds; there are no plans to
impose these fees, and no such fees will be charged prior to March 1, 2009.
However, in the event that 12b-1 fees are charged in the future, because the
Funds pay these fees out of assets on an ongoing basis, over time these fees may
cost you more than other types of sales charges and will increase the cost of
your investment.
DIVIDENDS AND DISTRIBUTIONS
The Funds pay out dividends to shareholders at least annually. Each Fund
distributes its net capital gains, if any, to shareholders annually.
185
TAX INFORMATION
The following is a summary of some important tax issues that affect the Funds
and their shareholders. The summary is based on current tax laws, which may be
changed by legislative, judicial or administrative action. You should not
consider this summary to be a detailed explanation of the tax treatment of the
Funds, or the tax consequences of an investment in the Funds. More information
about taxes is located in the SAI. You are urged to consult your tax adviser
regarding specific questions as to federal, state and local income taxes.
TAX STATUS OF EACH FUND
Each Fund is treated as a separate entity for federal tax purposes, and intends
to qualify for the special tax treatment afforded to regulated investment
companies. As long as a Fund qualifies as a regulated investment company, it
pays no federal income tax on the earnings it distributes to shareholders.
TAX STATUS OF DISTRIBUTIONS
o Each Fund will, at least annually, distribute substantially all of its net
investment income and net capital gains income.
o The income dividends and short-term capital gains distributions you
receive from the Funds will be taxed as either ordinary income or
qualified dividend income.
o Dividends that are designated as qualified dividend income are eligible
for the reduced maximum rate to individuals of 15% (5% for individuals in
lower tax brackets) to the extent that a Fund receives qualified dividend
income and subject to certain limitations.
o Long-term capital gains distributions will result from gains on the sale
or exchange of capital assets held by a Fund for more than one year. Any
long-term capital gains distributions you receive from a Fund are taxable
as long-term capital gains regardless of how long you have owned your
shares. Long-term capital gains are currently taxed at a maximum rate of
15%.
o Absent further legislation, the maximum 15% tax rate on qualified dividend
income and long-term capital gains will cease to apply to taxable years
beginning after December 31, 2010.
o Dividends and distributions are generally taxable to you whether you
receive them in cash or in additional shares.
o Corporate shareholders may be entitled to a dividends-received deduction
for the portion of dividends they receive that is attributable to
dividends received by a Fund from U.S. corporations, subject to certain
limitations.
o Distributions paid in January, but declared by a Fund in October, November
or December of the previous year may be taxable to you in the previous
year.
o The Funds will inform you of the amount of your ordinary income dividends,
qualified dividend income, and capital gains distributions shortly after
the close of each calendar year.
o If you hold your shares in a tax-qualified retirement account, you
generally will not be subject to federal taxation on Fund distributions
until you begin receiving distributions from your retirement account. You
should consult your tax adviser regarding the tax rules that apply to your
retirement account.
186
TAX STATUS OF SHARE TRANSACTIONS
Currently, any capital gain or loss upon a sale of Fund shares is generally
treated as a long-term gain or loss if the shares have been held for more than
one year and as short-term gain or loss if held for one year or less. Any
capital loss on the sale of Fund shares held for six months or less is treated
as long-term capital loss to the extent that any capital gain distributions were
paid with respect to such shares. An exchange of a Fund's shares for shares of
another Fund will be treated as a sale of the Fund's shares and any gain on the
transaction may be subject to federal income tax.
STATE TAX CONSIDERATIONS
A Fund is not liable for any income or franchise tax in Delaware as long as it
qualifies as a regulated investment company for federal income tax purposes. In
addition to federal taxes, distributions by the Funds and ownership of Fund
shares may be subject to state and local taxes. You should consult your tax
adviser regarding how state and local tax laws affect your investment in Fund
shares.
TAXES ON CREATIONS AND REDEMPTIONS OF CREATION UNITS
A person who purchases a Creation Unit by exchanging securities in-kind
generally will recognize a gain or loss equal to the difference between the
market value of the Creation Units at the time, and the purchaser's aggregate
basis in the securities surrendered and any net cash paid. A person who redeems
Creation Units and receives securities in-kind from a Fund will generally
recognize a gain or loss equal to the difference between the redeemer's basis in
the Creation Units, and the aggregate market value of the securities received
and any net cash received. The Internal Revenue Service, however, may assert
that a loss realized upon an in-kind exchange of securities for Creation Units
or an exchange of Creation Units for securities cannot be deducted currently
under the rules governing "wash sales," or on the basis that there has been no
significant change in economic position. Persons effecting in-kind creations or
redemptions should consult their own tax adviser with respect to these matters.
187
MANAGEMENT OF THE FUNDS
INVESTMENT ADVISOR
PADCO Advisors II, Inc., which operates under the name Rydex Investments, is
located at 9601 Blackwell Road, Suite 500, Rockville, Maryland 20850, and serves
as investment adviser of the Funds. The Advisor has served as the investment
adviser of the Rydex Funds since each Rydex Fund's inception.
The Advisor makes investment decisions for the assets of the Funds and
continuously reviews, supervises, and administers each Fund's investment
program. The Board of Trustees of the Trust supervises the Advisor and
establishes policies that the Advisor must follow in its day-to-day management
activities. Pursuant to an investment advisory agreement between the Trust and
the Advisor, the Funds will pay the Advisor a fee at an annualized rate of X.XX%
based on the average daily net assets of each Fund.
The Advisor bears all of its own costs associated with providing these advisory
services and the expenses of the members of the Board of Trustees who are
affiliated with the Advisor. The Advisor may make payments from its own
resources to broker-dealers and other financial institutions in connection with
the sale of Fund shares.
As part of its agreement with the Trust, the Advisor will pay all expenses of
the Funds, including the cost of transfer agency, custody, fund administration,
legal, audit and other services, except interest expense, taxes (expected to be
de minimis), brokerage commissions and other expenses connected with execution
of portfolio transactions, short dividend expenses, expenses of the Independent
Trustees (including any Trustees' counsel fees), and extraordinary expenses.
A discussion regarding the basis for the Board's August 2007 approval of the
Trust's investment advisory agreement is available in the Trust's October 31,
2007 Annual Report to Shareholders, which covers the period November 1, 2006 to
October 31, 2007.
PORTFOLIO MANAGEMENT
Mike Byrum, President and Chief Investment Officer ("CIO") of Rydex Investments,
leads the Portfolio Department. Mr. Byrum's senior management team, called the
Investment Leadership Team ("ILT"), consists of five investment professionals
that are responsible for overseeing different functions within the Portfolio
Department. Those members include Michael Dellapa as the Director of Research,
Douglas Holmes as the Strategic Advisor, James King as the Director of Portfolio
Management, David Reilly as the head of Portfolio Strategies, and Stephen Sachs
as the Director of Trading. The role of the ILT is to set the overall policies
of the Portfolio Department with respect to investment strategies and business
development. The remainder of the Portfolio Department reports to the members of
the ILT, and consists of a team of approximately 16 investment professionals
that focus on research, trading, and implementing the portfolios.
On a day-to-day basis the following three individuals are jointly and primarily
responsible for the management of the Funds.
MICHAEL P. BYRUM, CFA, President and CIO of Rydex Investments -- As the CIO, Mr.
Byrum has ultimate responsibility of the management of the Funds. He has been
associated with Rydex Investments since the Advisor was founded in 1993. Mr.
Byrum was named the President of Rydex Investments in 2004 and has served as
Chief Investment Officer of Rydex Investments since 2000. During this time, he
has played a key role in the development of the firm's investment strategies and
product offerings. As
188
Senior Portfolio Manager, Mr. Byrum was instrumental in the launch of the OTC,
Precious Metals, Government Long Bond 1.2x Strategy, Inverse Government Long
Bond Strategy, Inverse S&P 500 Strategy and Inverse OTC Strategy Funds, and
helped to create the Sector Funds, all of which are offered in a separate
prospectus. He was named Vice President of Portfolio for Rydex Investments in
1998, and Executive Vice President in 2000. Prior to joining Rydex Investments,
Mr. Byrum worked for Money Management Associates, the investment adviser for
Rushmore Funds, Inc. He holds a degree in finance from Miami University of Ohio
and is a member of the CFA Institute and the Washington Society of Investment
Analysts. Mr. Byrum has co-managed each Fund since its inception.
JAMES R. KING, CFA, Director of Portfolio Management -- Mr. King is responsible
for a team of portfolio managers who manage all of the Rydex Funds. He joined
Rydex Investments in 1996 and was promoted to assistant portfolio manager in
1997. In 1998, he became a portfolio manager and was promoted in 2001 to senior
portfolio manager and currently serves as director of portfolio management.
Prior to joining Rydex Investments, Mr. King worked as a registered
representative at DMG Securities. He holds a degree in finance from the
University of Maryland. Mr. King has co-managed each Fund since its inception.
MICHAEL J. DELLAPA, CFA, Director of Investment Research -- Mr. Dellapa joined
Rydex Investments in 2000 as a Research Analyst and was promoted to portfolio
manager in 2003. During his tenure as a portfolio manager, he had direct
oversight for the Russell 2000(R) 1.5x Strategy, Healthcare, Biotechnology, and
Consumer Products Funds, all of which are offered in a separate prospectus. In
2005, Mr. Dellapa became Director of Investment Research. Since joining Rydex
Investments, Mr. Dellapa has played a key role in developing research processes
and systems to enhance current funds and develop new investment products. Prior
to joining Rydex Investments, he worked as an equity analyst for Invista Capital
and systems analyst for Accenture. He holds an engineering degree from the
University of Maryland and MBA from the University of Chicago. Previously, he
was owner/consultant of Dellapa Consulting Inc. as well as a senior consultant
and an analyst at Andersen Consulting. Mr. Dellapa has co-managed each Fund
since its inception.
Mr. Dellapa oversees the research and creation of the processes used to select
investments. Mr. King oversees the day-to-day details of the portfolio
management of all of the Rydex Funds. Mr. Byrum generally oversees all aspects
of the management of all the Rydex Funds and reviews the activities of Messrs.
King and Dellapa, as well as other aspects of the investment management
portfolio department.
Additional information about the portfolio managers' compensation, other
accounts managed by the portfolio managers, and the portfolio managers'
ownership of securities in the Funds is available in the SAI.
189
INDEX PUBLISHERS INFORMATION
STANDARD & POOR'S
"STANDARD & POOR'S," S&P," "STANDARD & POOR'S 400," "S&P 400," "S&P 500"
"STANDARD & POOR'S 500," "500," "STANDARD& POOR'S 600," AND "S&P 600," "S&P
CONSUMER DISCRETIONARY INDEX," "S&P CONSUMER STAPLES INDEX," "S&P ENERGY INDEX,"
"S&P FINANCIALS INDEX," "S&P HEALTH CARE INDEX," "S&P INDUSTRIALS INDEX," "S&P
MATERIALS INDEX," "S&P TECHNOLOGY INDEX" AND "S&P UTILITIES INDEX" ARE
TRADEMARKS OF THE MCGRAW-HILL COMPANIES, INC. AND HAVE BEEN LICENSED FOR USE BY
RYDEX INVESTMENTS. THE RYDEX FUNDS ARE NOT SPONSORED, ENDORSED, SOLD OR PROMOTED
BY STANDARD & POOR'S AND STANDARD & POOR'S MAKES NO REPRESENTATION REGARDING THE
ADVISABILITY OF INVESTING IN THE RYDEX FUNDS.
NASDAQ
The Rydex 2x NASDAQ 100 ETF, Rydex Inverse NASDAQ 100 ETF, Rydex Inverse 2x
NASDAQ 100 ETF, Rydex 2x NASDAQ Biotechnology ETF, Rydex Inverse NASDAQ
Biotechnology ETF and the Rydex Inverse 2x NASDAQ Biotechnology ETF are not
sponsored, endorsed, sold or promoted by The Nasdaq Stock Market, Inc. or its
affiliates (Nasdaq, with its affiliates, are referred to as the "Corporations").
The Corporations have not passed on the legality or suitability of, or the
accuracy or adequacy of descriptions and disclosures relating to, the Funds. The
Corporations make no representation or warranty, expressed or implied to the
owners of the Funds or any member of the public regarding the advisability of
investing in securities generally or in the Funds particularly, or the ability
of the NASDAQ-100 Index(R) or the NASDAQ Biotechnology Index(R) to track general
stock market performance. The Corporations' only relationship to Rydex
Investments ("Licensee") is in the licensing of the NASDAQ(R), NASDAQ-100(R),
NASDAQ-100 Index(R) and Nasdaq Biotechnology Index(R) trademarks, and certain
trade names of the Corporations and the use of the NASDAQ-100 Index(R) and the
NASDAQ Biotechnology Index(R) which are determined, composed and calculated by
Nasdaq without regard to Licensee or the Funds. Nasdaq has no obligation to take
the needs of the Licensee or the owners of the Funds into consideration in
determining, composing or calculating the Nasdaq-100 Index(R) or the NASDAQ
Biotechnology Index(R). The Corporations are not responsible for and have not
participated in the determiniation of the timing of, prices at, or quantities of
the Funds to be issued or in the determination or calculation of the equation by
which the Funds are to be converted into cash. The Corporations have no
liability in connection with the administration, marketing or trading of the
Funds.
THE CORPORATIONS DO NOT GUARANTEE THE ACCURACY AND/OR UNINTERRUPTED CALCULATION
OF THE NASDAQ-100 INDEX(R), THE NASDAQ BIOTECHNOLOGY INDEX(R) OR ANY DATA
INCLUDED THEREIN. THE CORPORATIONS MAKE NO WARRANTY, EXPRESS OR IMPLIED, AS TO
RESULTS TO BE OBTAINED BY LICENSSE, OWNERS OF THE FUNDS, OR ANY OTHER PERSON OR
ENTITY FROM THE USE OF THE NASDAQ-100 INDEX(R), NASDAQ BIOTECHNOLOGY INDEX(R) OR
ANY DATA INCLUDED THEREIN. THE CORPORATIONS MAKE NO EXPRESS OR IMPLIED
WARRANTIES, AND EXPRESSLY DISCLAIM ALL WARRANTIES OF MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE NASDAQ-100 INDEX(R), THE
NASDAQ BIOTECHNOLOGY INDEX(R) OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY
OF THE FOREGOING, IN NO EVENT SHALL THE CORPORATIONS HAVE ANY LIABILITY FOR ANY
LOST PROFITS OR SPECIAL, INCIDENTAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL
DAMAGES, EVEN IF NOTIFED OF SUCH DAMAGES.
FRANK RUSSELL
The Frank Russell Company ("Russell") publication of the Russell 1000(R) Index,
Russell 2000(R) Index, Russell 3000(R) Index, Russell MidCap(R) Index, Russell
MidCap(R) Growth Index, Russell MidCap(R) Value Index, Russell 1000(R) Growth
Index, Russell 1000(R) Value Index, Russell 2000(R) Growth Index, Russell
190
2000(R) Value Index, Russell 3000(R) Growth Index, and Russell 3000(R) Value
Index (the "Indices") in no way suggests or implies an opinion by Russell as to
the advisability of investment in any or all of the securities upon which the
Indices are based. Russell's only relationship to the Trust is the licensing of
certain trademarks and trade names of Russell and of the Indices which is
determined, composed and calculated by Russell without regard to the Trust or
the Funds. Russell is not responsible for and has not reviewed the Funds nor any
associated literature or publications and Russell makes no representation or
warranty express or implied as to their accuracy or completeness, or otherwise.
Russell reserves the right, at any time and without notice, to alter, amend,
terminate or in any way change the Indices. Russell has no obligation or
liability in connection with the administration, marketing or trading of the
Funds.
Russell does not guarantee the accuracy and/or the completeness of the Indices
or any data included therein and Russell shall have no liability for any errors,
omissions, or interruptions therein. Russell makes no warranty, express or
implied, as to results to be obtained by the Trust, investors, owners of the
Funds, or any other person or entity from the use of the Indices or any data
included therein. Russell makes no express or implied warranties, and expressly
disclaims all warranties of merchantability or fitness for a particular purpose
or use with respect to the Indices or any data included therein. Without
limiting any of the foregoing, in no event shall Russell have any liability for
any special, punitive, indirect or consequential damages (including lost
profits), even if notified of the possibility of such damages.
MORE INFORMATION ABOUT THE INDEX PUBLISHERS IS LOCATED IN THE SAI.
191
ADDITIONAL AND MORE DETAILED INFORMATION ABOUT THE FUNDS IS INCLUDED IN THE SAI
DATED MARCH 1, 2008. THE SAI HAS BEEN FILED WITH THE SEC AND IS INCORPORATED BY
REFERENCE INTO THIS PROSPECTUS AND, THEREFORE, LEGALLY FORMS A PART OF THIS
PROSPECTUS. THE SEC MAINTAINS THE EDGAR DATABASE ON ITS WEB SITE
("HTTP://WWW.SEC.GOV") THAT CONTAINS THE SAI, MATERIAL INCORPORATED BY
REFERENCE, AND OTHER INFORMATION REGARDING REGISTRANTS THAT FILE ELECTRONICALLY
WITH THE SEC. YOU MAY ALSO REVIEW AND COPY DOCUMENTS AT THE SEC PUBLIC REFERENCE
ROOM IN WASHINGTON, D.C. (FOR INFORMATION ON THE OPERATION OF THE PUBLIC
REFERENCE ROOM, CALL 202.551.8090). YOU MAY REQUEST DOCUMENTS FROM THE SEC BY
MAIL, UPON PAYMENT OF A DUPLICATION FEE, BY WRITING TO: U.S. SECURITIES AND
EXCHANGE COMMISSION, PUBLIC REFERENCE SECTION, WASHINGTON, D.C. 20549-0102 OR BY
EMAILING THE SEC AT THE FOLLOWING ADDRESS: PUBLICINFO@SEC.GOV.
YOU MAY OBTAIN A COPY OF THE SAI OR THE ANNUAL OR SEMI-ANNUAL REPORTS, WITHOUT
CHARGE BY CALLING 800.820.0888 OR 301.296.5100, VISITING THE RYDEX WEB SITE AT
WWW.RYDEXINVESTMENTS.COM, OR WRITING TO RYDEX ETF TRUST, AT 9601 BLACKWELL
ROAD, SUITE 500, ROCKVILLE, MARYLAND 20850. ADDITIONAL INFORMATION ABOUT THE
FUNDS' INVESTMENTS IS AVAILABLE IN THE ANNUAL AND SEMI-ANNUAL REPORTS. ALSO, IN
THE FUNDS' ANNUAL REPORT, YOU WILL FIND A DISCUSSION OF THE MARKET CONDITIONS
AND INVESTMENT STRATEGIES THAT SIGNIFICANTLY AFFECTED THE FUNDS' PERFORMANCE
DURING THEIR LAST FISCAL YEAR.
NO ONE HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS OR IN THE FUNDS' SAI IN
CONNECTION WITH THE OFFERING OF FUND SHARES. DO NOT RELY ON ANY SUCH
INFORMATION OR REPRESENTATIONS AS HAVING BEEN AUTHORIZED BY THE FUNDS OR RYDEX
INVESTMENTS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUNDS IN
ANY JURISDICTION WHERE SUCH AN OFFERING IS NOT LAWFUL.
THE TRUST'S SEC REGISTRATION NUMBER IS 811-21261.
192
[RYDEX INVESTMENTS LOGO]
9601 BLACKWELL ROAD
SUITE 500
ROCKVILLE, MD 20850
800.820.0888
WWW.RYDEXINVESTMENTS.COM
[INSERT PROSPECTUS CODE]
195
STATEMENT OF ADDITIONAL INFORMATION
RYDEX ETF TRUST
9601 BLACKWELL ROAD, SUITE 500
ROCKVILLE, MARYLAND 20850
800.820.0888 OR 301.296.5100
WWW.RYDEXINVESTMENTS.COM
Rydex ETF Trust (the "Trust") is an investment company offering professionally
managed investment portfolios. This Statement of Additional Information ("SAI")
relates to shares of the following portfolios (each a "Fund" and collectively,
the "Funds"):
RYDEX S&P EQUAL WEIGHT ETF
RYDEX RUSSELL TOP 50(R) ETF
RYDEX S&P 500 PURE VALUE ETF
RYDEX S&P 500 PURE GROWTH ETF
RYDEX S&P MIDCAP 400 PURE VALUE ETF
RYDEX S&P MIDCAP 400 PURE GROWTH ETF
RYDEX S&P SMALLCAP 600 PURE VALUE ETF
RYDEX S&P SMALLCAP 600 PURE GROWTH ETF
RYDEX S&P EQUAL WEIGHT CONSUMER DISCRETIONARY ETF
RYDEX S&P EQUAL WEIGHT CONSUMER STAPLES ETF
RYDEX S&P EQUAL WEIGHT ENERGY ETF
RYDEX S&P EQUAL WEIGHT FINANCIALS ETF
RYDEX S&P EQUAL WEIGHT HEALTH CARE ETF
RYDEX S&P EQUAL WEIGHT INDUSTRIALS ETF
RYDEX S&P EQUAL WEIGHT MATERIALS ETF
RYDEX S&P EQUAL WEIGHT TECHNOLOGY ETF
RYDEX S&P EQUAL WEIGHT UTILITIES ETF
This SAI is not a prospectus. It should be read in conjunction with the Funds'
Prospectus, dated March 1, 2008. Capitalized terms not defined herein are
defined in the Prospectus. Copies of the Funds' Prospectus are available,
without charge, upon request to the Trust at the address above or by telephoning
the Trust at the telephone numbers above.
The date of this SAI is March 1, 2008
TABLE OF CONTENTS
PAGE
GENERAL INFORMATION ABOUT THE TRUST ..................................... 1
INVESTMENT POLICIES, TECHNIQUES AND RISK FACTORS ........................ 1
MORE INFORMATION ABOUT THE UNDERLYING INDICES ........................... 12
INVESTMENT RESTRICTIONS ................................................. 19
CONTINUOUS OFFERING ..................................................... 20
EXCHANGE LISTING AND TRADING ............................................ 21
PORTFOLIO TRANSACTIONS AND BROKERAGE .................................... 21
MANAGEMENT OF THE TRUST ................................................. 26
PRINCIPAL HOLDERS OF SECURITIES ......................................... 40
BOOK ENTRY ONLY SYSTEM .................................................. 43
CREATION AND REDEMPTION OF CREATION UNITS ............................... 45
DETERMINATION OF NET ASSET VALUE ........................................ 52
DIVIDENDS, DISTRIBUTIONS, AND TAXES ..................................... 52
OTHER INFORMATION ....................................................... 56
INDEX PUBLISHERS INFORMATION ............................................ 57
COUNSEL ................................................................. 59
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ........................... 59
CUSTODIAN ............................................................... 59
FINANCIAL STATEMENTS .................................................... 59
APPENDIX A - RYDEX INVESTMENTS PROXY VOTING POLICIES AND
PROCEDURES ........................................................... A-1
|
GENERAL INFORMATION ABOUT THE TRUST
The Trust, an open-end management investment company, was organized as a
Delaware statutory trust on November 22, 2002. The Trust currently consists of
twenty-three (23) investment portfolios (I.E., funds), which include the Trust's
six (6) Inverse and Leveraged ETFs (which are described in a separate SAI) as
well as the Funds. All payments received by the Trust for shares of any Fund
belong to that Fund. Each Fund has its own assets and liabilities. Additional
series and/or classes may be created from time to time.
The shares of the Funds are listed and traded on the American Stock Exchange LLC
(the "Exchange"). The shares of each Fund will trade on the Exchange at market
prices that may be below, at, or above net asset value ("NAV") of such Fund.
Each Fund offers and issues shares at NAV only in aggregated lots of 50,000
shares (each a "Creation Unit" or a "Creation Unit Aggregation"), generally in
exchange for: (i) a basket of equity securities included in its Underlying
Index, as defined below, (the "Deposit Securities"); and (ii) an amount of cash
(the "Cash Component"). Shares are redeemable only in Creation Unit
Aggregations, and, generally, in exchange for portfolio securities and a
specified cash payment.
The Trust reserves the right to offer an "all cash" option for creations and
redemptions of Creation Units for any Fund. In addition, Creation Units may be
issued in advance of receipt of Deposit Securities subject to various
conditions, including a requirement to maintain a cash deposit with the Trust at
least equal to 115% of the market value of the missing Deposit Securities. In
each instance, transaction fees may be imposed that will be higher than the
transaction fees associated with traditional in-kind creations or redemptions.
In all cases, such fees will be limited in accordance with U.S. Securities and
Exchange Commission ("SEC") requirements applicable to management investment
companies offering redeemable securities. See the "Creation and Redemption of
Creation Units" section for detailed information.
INVESTMENT POLICIES, TECHNIQUES AND RISK FACTORS
GENERAL
Each Fund's investment objective is to replicate as closely as possible, before
fees and expenses, the performance of its Underlying Index. Each Fund's
investment objective is non-fundamental and may be changed without the consent
of the holders of a majority of that Fund's outstanding shares. Additional
information concerning each Fund's investment objective and principal investment
strategies is contained in the Prospectus. Additional information concerning
each Fund's Underlying Index is included below under the heading "More
Information About the Underlying Indices."
The Funds seek to achieve their respective objectives by using a "replication"
strategy to try to track their Underlying Indices. "Replication" refers to
investing in substantially all of the securities in the Underlying Index in
approximately the same proportions as in the Underlying Index. Each Fund
operates as an index fund and will not be actively managed. Adverse performance
of a security in a Fund's portfolio will ordinarily not result in the
elimination of the security from the Fund's portfolio. The following information
supplements, and should be read in conjunction with, the Funds' Prospectus.
Portfolio management is provided to the Funds by the Trust's investment adviser,
PADCO Advisors II, Inc. (the "Advisor"). The Advisor, a Maryland corporation
with offices at 9601 Blackwell Road, Suite 500, Rockville, Maryland 20850,
operates under the name Rydex Investments. The investment strategies of the
Funds discussed below and in the Prospectus may be used by the Funds if, in the
opinion of the Advisor, these strategies will be advantageous to the Funds. The
Funds are free to modify or eliminate their activity with respect to any of the
following investment strategies. There is no assurance that any of these
strategies or any other strategies and methods of investment available to the
Funds will result in the
1
achievement of the Funds' respective objectives.
BORROWING
While the Funds do not anticipate doing so, each Fund may borrow money for
investment purposes. Borrowing for investment purposes is one form of leverage.
Leveraging investments, by purchasing securities with borrowed money, is a
speculative technique that increases investment risk, but also increases
investment opportunity. Because substantially all of a Fund's assets will
fluctuate in value, whereas the interest obligations on borrowings may be fixed,
the NAV of the Fund will increase more when the Fund's portfolio assets increase
in value and decrease more when the Fund's portfolio assets decrease in value
than would otherwise be the case. Moreover, interest costs on borrowings may
fluctuate with changing market rates of interest and may partially offset or
exceed the returns on the borrowed funds. Under adverse conditions, a Fund might
have to sell portfolio securities to meet interest or principal payments at a
time when investment considerations would not favor such sales. The Funds intend
to use leverage during periods when the Advisor believes that the respective
Fund's investment objective would be furthered.
Each Fund may also borrow money to facilitate management of the Fund's portfolio
by enabling the Fund to meet redemption requests when the liquidation of
portfolio instruments would be inconvenient or disadvantageous. Such borrowing
is not for investment purposes and will be repaid by the borrowing Fund
promptly. As required by the Investment Company Act of 1940 (the "1940 Act"), a
Fund must maintain continuous asset coverage (total assets, including assets
acquired with borrowed funds, less liabilities exclusive of borrowings) of 300%
of all amounts borrowed. If, at any time, the value of a Fund's assets should
fail to meet this 300% coverage test, a Fund, within three days (not including
Sundays and holidays), will reduce the amount of a Fund's borrowings to the
extent necessary to meet this 300% coverage requirement. Maintenance of this
percentage limitation may result in the sale of portfolio securities at a time
when investment considerations otherwise indicate that it would be
disadvantageous to do so.
In addition to the foregoing, the Funds are authorized to borrow money as a
temporary measure for extraordinary or emergency purposes in amounts not in
excess of 5% of the value of a Fund's total assets. Borrowings for extraordinary
or emergency purposes are not subject to the foregoing 300% asset coverage
requirement. The Funds are authorized to pledge portfolio securities as the
Advisor deems appropriate in connection with any borrowings for extraordinary or
emergency purposes.
EQUITY SECURITIES
The Funds may invest in equity securities. Equity securities represent ownership
interests in a company or partnership and consist of common stocks, preferred
stocks, warrants to acquire common stock, securities convertible into common
stock, and investments in master limited partnerships. Investments in equity
securities in general are subject to market risks that may cause their prices to
fluctuate over time. Fluctuations in the value of equity securities in which a
Fund invests will cause the NAV of the Fund to fluctuate. The U.S. stock market
tends to be cyclical, with periods when stock prices generally rise and periods
when stock prices generally decline. The Funds may purchase equity securities
traded in the U.S. on registered exchanges or the over-the-counter market.
Equity securities are described in more detail below.
o COMMON STOCK. Common stock represents an equity or ownership interest in
an issuer. In the event an issuer is liquidated or declares bankruptcy,
the claims of owners of bonds and preferred stock take precedence over the
claims of those who own common stock.
o PREFERRED STOCK. Preferred stock represents an equity or ownership
interest in an issuer that pays dividends at a specified rate and that has
precedence over common stock in the payment of dividends.
2
In the event an issuer is liquidated or declares bankruptcy, the claims of
owners of bonds take precedence over the claims of those who own preferred
and common stock.
o WARRANTS. Warrants are instruments that entitle the holder to buy an
equity security at a specific price for a specific period of time. Changes
in the value of a warrant do not necessarily correspond to changes in the
value of its underlying security. The price of a warrant may be more
volatile than the price of its underlying security, and a warrant may
offer greater potential for capital appreciation as well as capital loss.
Warrants do not entitle a holder to dividends or voting rights with
respect to the underlying security and do not represent any rights in the
assets of the issuing company. A warrant ceases to have value if it is not
exercised prior to its expiration date. These factors can make warrants
more speculative than other types of investments.
o CONVERTIBLE SECURITIES. Convertible securities are bonds, debentures,
notes, preferred stocks or other securities that may be converted or
exchanged (by the holder or by the issuer) into shares of the underlying
common stock (or cash or securities of equivalent value) at a stated
exchange ratio. A convertible security may also be called for redemption
or conversion by the issuer after a particular date and under certain
circumstances (including a specified price) established upon issue. If a
convertible security held by a Fund is called for redemption or
conversion, the Fund could be required to tender it for redemption,
convert it into the underlying common stock, or sell it to a third party.
Convertible securities generally have less potential for gain or loss than
common stocks. Convertible securities generally provide yields higher than
the underlying common stocks, but generally lower than comparable
non-convertible securities. Because of this higher yield, convertible
securities generally sell at a price above their "conversion value," which
is the current market value of the stock to be received upon conversion.
The difference between this conversion value and the price of convertible
securities will vary over time depending on changes in the value of the
underlying common stocks and interest rates. When the underlying common
stocks decline in value, convertible securities will tend not to decline
to the same extent because of the interest or dividend payments and the
repayment of principal at maturity for certain types of convertible
securities. However, securities that are convertible other than at the
option of the holder generally do not limit the potential for loss to the
same extent as securities convertible at the option of the holder. When
the underlying common stocks rise in value, the value of convertible
securities may also be expected to increase. At the same time, however,
the difference between the market value of convertible securities and
their conversion value will narrow, which means that the value of
convertible securities will generally not increase to the same extent as
the value of the underlying common stocks. Because convertible securities
may also be interest-rate sensitive, their value may increase as interest
rates fall and decrease as interest rates rise. Convertible securities are
also subject to credit risk, and are often lower-quality securities.
o SMALL AND MEDIUM CAPITALIZATION ISSUERS. Investing in equity securities of
small and medium capitalization companies often involves greater risk than
is customarily associated with investments in larger capitalization
companies. This increased risk may be due to the greater business risks of
smaller size, limited markets and financial resources, narrow product
lines and frequent lack of depth of management. The securities of smaller
companies are often traded in the over-the-counter market and even if
listed on a national securities exchange may not be traded in volumes
typical for that exchange. Consequently, the securities of smaller
companies are less likely to be liquid, may have limited market stability,
and may be subject to more abrupt or erratic market movements than
securities of larger, more established growth companies or the market
averages in general.
o MASTER LIMITED PARTNERSHIPS ("MLPS"). MLPs are limited partnerships in
which the ownership units are publicly traded. MLP units are registered
with the SEC and are freely traded on a securities exchange or in the
over-the-counter market. MLPs often own several properties or businesses
(or
3
own interests) that are related to real estate development and oil and gas
industries, but they also may finance motion pictures, research and
development and other projects. Generally, a MLP is operated under the
supervision of one or more managing general partners. Limited partners are
not involved in the day-to-day management of the partnership.
The risks of investing in a MLP are generally those involved in investing
in a partnership as opposed to a corporation. For example, state law
governing partnerships is often less restrictive than state law governing
corporations. Accordingly, there may be fewer protections afforded
investors in a MLP than investors in a corporation. Additional risks
involved with investing in a MLP are risks associated with the specific
industry or industries in which the partnership invests, such as the risks
of investing in real estate, or oil and gas industries.
FUTURES AND OPTIONS TRANSACTIONS
FUTURES AND OPTIONS ON FUTURES. Futures contracts provide for the future sale by
one party and purchase by another party of a specified amount of a specific
security at a specified future time and at a specified price. An option on a
futures contract gives the purchaser the right, in exchange for a premium, to
assume a position in a futures contract at a specified exercise price during the
term of the option. A Fund will reduce the risk that it will be unable to close
out a futures contract by only entering into futures contracts that are traded
on a national futures exchange regulated by the Commodities Futures Trading
Commission ("CFTC"). The Funds may use futures contracts and related options for
BONA FIDE hedging; attempting to offset changes in the value of securities held
or expected to be acquired or be disposed of; attempting to gain exposure to a
particular market, index or instrument; or other risk management purposes. To
the extent a Fund uses futures and/or options on futures, it will do so in
accordance with Rule 4.5 under the Commodity Exchange Act ("CEA"). The Trust, on
behalf of all of its series, including the Funds, has filed a notice of
eligibility for exclusion from the definition of the term "commodity pool
operator" in accordance with Rule 4.5 and therefore, the Funds are not subject
to registration or regulation as a commodity pool operator under the CEA.
Each Fund may buy and sell index futures contracts with respect to any stock
index traded on a recognized stock exchange or board of trade. An index futures
contract is a bilateral agreement pursuant to which two parties agree to take or
make delivery of an amount of cash equal to a specified dollar amount times the
difference between the index value at the close of trading of the contract and
the price at which the futures contract is originally struck. No physical
delivery of the securities comprising the index is made. Instead, settlement in
cash must occur upon the termination of the contract, with the settlement being
the difference between the contract price and the actual level of the stock
index at the expiration of the contract. Generally, contracts are closed out
prior to the expiration date of the contract.
When a Fund purchases or sells a futures contract, or sells an option thereon,
the Fund is required to "cover" its position in order to limit leveraging and
related risks. To cover its position, a Fund may maintain with its custodian
bank (and marked-to-market on a daily basis), a segregated account consisting of
cash or liquid securities that, when added to any amounts deposited with a
futures commission merchant as margin, are equal to the market value of the
futures contract or otherwise "cover" its position in a manner consistent with
the 1940 Act or the rules and SEC interpretations thereunder. If a Fund
continues to engage in the described securities trading practices and properly
segregates assets, the segregated account will function as a practical limit on
the amount of leverage which the Fund may undertake and on the potential
increase in the speculative character of the Fund's outstanding portfolio
securities. Additionally, such segregated accounts will generally assure the
availability of adequate funds to meet the obligations of the fund arising from
such investment activities.
Each Fund may also cover its long position in a futures contract by purchasing a
put option on the same futures contract with a strike price (I.E., an exercise
price) as high or higher than the price of the futures
4
contract. In the alternative, if the strike price of the put is less than the
price of the futures contract, a Fund will maintain, in a segregated account,
cash or liquid securities equal in value to the difference between the strike
price of the put and the price of the futures contract. Each Fund may also cover
its long position in a futures contract by taking a short position in the
instruments underlying the futures contract (or, in the case of an index futures
contract, a portfolio with a volatility substantially similar to that of the
index on which the futures contract is based), or by taking positions in
instruments with prices which are expected to move relatively consistently with
the futures contract. Each Fund may cover its short position in a futures
contract by taking a long position in the instruments underlying the futures
contracts, or by taking positions in instruments with prices which are expected
to move relatively consistently with the futures contract.
Each Fund may cover its sale of a call option on a futures contract by taking a
long position in the underlying futures contract at a price less than or equal
to the strike price of the call option. In the alternative, if the long position
in the underlying futures contract is established at a price greater than the
strike price of the written (sold) call, a Fund will maintain, in a segregated
account, cash or liquid securities equal in value to the difference between the
strike price of the call and the price of the futures contract. Each Fund may
also cover its sale of a call option by taking positions in instruments with
prices which are expected to move relatively consistently with the call option.
Each Fund may cover its sale of a put option on a futures contract by taking a
short position in the underlying futures contract at a price greater than or
equal to the strike price of the put option, or, if the short position in the
underlying futures contract is established at a price less than the strike price
of the written put, a Fund will maintain, in a segregated account, cash or
liquid securities equal in value to the difference between the strike price of
the put and the price of the futures contract. Each Fund may also cover its sale
of a put option by taking positions in instruments with prices which are
expected to move relatively consistently with the put option.
There are significant risks associated with the Funds' use of futures contracts
and related options, including the following: (1) the success of a hedging
strategy may depend on the Advisor's ability to predict movements in the prices
of individual securities, fluctuations in markets and movements in interest
rates; (2) there may be an imperfect or no correlation between the changes in
market value of the securities held by a Fund and the prices of futures and
options on futures; (3) there may not be a liquid secondary market for a futures
contract or option; (4) trading restrictions or limitations may be imposed by an
exchange; and (5) government regulations may restrict trading in futures
contracts and options on futures. In addition, some strategies reduce a Fund's
exposure to price fluctuations, while others tend to increase its market
exposure.
OPTIONS. The Funds may purchase and write put and call options on securities and
stock indices and enter into related closing transactions. A put option on a
security gives the purchaser of the option the right to sell, and the writer of
the option the obligation to buy, the underlying security at any time during the
option period. A call option on a security gives the purchaser of the option the
right to buy, and the writer of the option the obligation to sell, the
underlying security at any time during the option period. The premium paid to
the writer is the consideration for undertaking the obligations under the option
contract.
Put and call options on indices are similar to options on securities except that
options on an index give the holder the right to receive, upon exercise of the
option, an amount of cash if the closing level of the Underlying Index is
greater than (or less than, in the case of puts) the exercise price of the
option. This amount of cash is equal to the difference between the closing price
of the index and the exercise price of the option, expressed in dollars
multiplied by a specified number. Thus, unlike options on individual securities,
all settlements are in cash, and gain or loss depends on price movements in the
particular market represented by the index generally, rather than the price
movements in individual securities.
5
All options written on indices or securities must be covered. When a Fund writes
an option on a security, an index or a foreign currency, it will establish a
segregated account containing cash or liquid securities in an amount at least
equal to the market value of the option and will maintain the account while the
option is open or will otherwise cover the transaction.
The Funds may trade put and call options on securities, securities indices and
currencies, as the investment adviser determines is appropriate in seeking a
Fund's investment objective, and except as restricted by a Fund's investment
limitations. See "Investment Restrictions."
The initial purchase (sale) of an option contract is an "opening transaction."
In order to close out an option position, a Fund may enter into a "closing
transaction," which is simply the sale (purchase) of an option contract on the
same security with the same exercise price and expiration date as the option
contract originally opened. If a Fund is unable to effect a closing purchase
transaction with respect to an option it has written, it will not be able to
sell the underlying security until the option expires or the Fund delivers the
security upon exercise.
Each Fund may purchase put and call options on securities to protect against a
decline in the market value of the securities in its portfolio or to anticipate
an increase in the market value of securities that a Fund may seek to purchase
in the future. A Fund purchasing put and call options pays a premium; therefore,
if price movements in the underlying securities are such that exercise of the
options would not be profitable for a Fund, loss of the premium paid may be
offset by an increase in the value of the Fund's securities or by a decrease in
the cost of acquisition of securities by the Fund.
A Fund may write covered call options on securities as a means of increasing the
yield on its assets and as a means of providing limited protection against
decreases in its market value. When a Fund writes an option, if the underlying
securities do not increase or decrease to a price level that would make the
exercise of the option profitable to the holder thereof, the option generally
will expire without being exercised and the Fund will realize as profit the
premium received for such option. When a call option of which a Fund is the
writer is exercised, the Fund will be required to sell the underlying securities
to the option holder at the strike price, and will not participate in any
increase in the price of such securities above the strike price. When a put
option of which a Fund is the writer is exercised, the Fund will be required to
purchase the underlying securities at a price in excess of the market value of
such securities.
The Funds may purchase and write options on an exchange or over-the-counter
("OTC"). OTC options differ from exchange-traded options in several respects.
They are transacted directly with dealers and not with a clearing corporation,
and therefore entail the risk of non-performance by the dealer. OTC options are
available for a greater variety of securities and for a wider range of
expiration dates and exercise prices than are available for exchange-traded
options. Because OTC options are not traded on an exchange, pricing is done
normally by reference to information from a market maker. It is the SEC's
position that OTC options are generally illiquid.
The market value of an option generally reflects the market price of an
underlying security. Other principal factors affecting market value include
supply and demand, interest rates, the pricing volatility of the underlying
security and the time remaining until the expiration date.
6
Risks associated with options transactions include: (1) the success of a hedging
strategy may depend on an ability to predict movements in the prices of
individual securities, fluctuations in markets and movements in interest rates;
(2) there may be an imperfect correlation between the movement in prices of
options and the securities underlying them; (3) there may not be a liquid
secondary market for options; and (4) while a Fund will receive a premium when
it writes covered call options, it may not participate fully in a rise in the
market value of the underlying security.
ILLIQUID SECURITIES
While none of the Funds anticipate doing so, each Fund may purchase or hold
illiquid securities, including securities that are not readily marketable and
securities that are not registered ("restricted securities") under the
Securities Act of 1933, as amended (the "1933 Act"), but which can be offered
and sold to "qualified institutional buyers" under Rule 144A under the 1933 Act.
A Fund will not invest more than 15% of the Fund's net assets in illiquid
securities. If the percentage of a Fund's net assets invested in illiquid
securities exceeds 15% due to market activity, the Fund will take appropriate
measures to reduce its holdings of illiquid securities. The term "illiquid
securities" for this purpose means securities that cannot be disposed of within
seven days in the ordinary course of business at approximately the amount at
which a Fund has valued the securities. Under the current guidelines of the
staff of the SEC, illiquid securities also are considered to include, among
other securities, purchased OTC options, certain cover for OTC options,
repurchase agreements with maturities in excess of seven days, and certain
securities whose disposition is restricted under the federal securities laws. A
Fund may not be able to sell illiquid securities when the Advisor considers it
desirable to do so or may have to sell such securities at a price that is lower
than the price that could be obtained if the securities were more liquid. In
addition, the sale of illiquid securities also may require more time and may
result in higher dealer discounts and other selling expenses than does the sale
of securities that are not illiquid. Illiquid securities also may be more
difficult to value due to the unavailability of reliable market quotations for
such securities, and investment in illiquid securities may have an adverse
impact on NAV.
Institutional markets for restricted securities have developed as a result of
the promulgation of Rule 144A under the 1933 Act, which provides a "safe harbor"
from 1933 Act registration requirements for qualifying sales to institutional
investors. When Rule 144A restricted securities present an attractive investment
opportunity and meet other selection criteria, a Fund may make such investments
whether or not such securities are "illiquid" depending on the market that
exists for the particular security. The board of trustees of the Trust (the
"Board") has delegated the responsibility for determining the liquidity of Rule
144A restricted securities, which may be invested in by a Fund, to the Advisor.
INVESTMENTS IN OTHER INVESTMENT COMPANIES
While none of the Funds anticipate doing so, each Fund may invest in the
securities of other investment companies to the extent that such an investment
would be consistent with the requirements of Section 12(d)(1) of the 1940 Act,
or any rule, regulation or order of the SEC. A Fund, therefore, may invest in
the securities of another investment company (the "acquired company") provided
that the Fund, immediately after such purchase or acquisition, does not own in
the aggregate: (i) more than 3% of the total outstanding voting stock of the
acquired company; (ii) securities issued by the acquired company having an
aggregate value in excess of 5% of the value of the total assets of the Fund; or
(iii) securities issued by the acquired company and all other investment
companies (other than Treasury stock of the Fund) having an aggregate value in
excess of 10% of the value of the total assets of the Fund. A Fund may also
invest in the securities of other investment companies if such securities are
the only investment securities held by the Fund.
If a Fund invests in, and thus, is a shareholder of, another investment company,
the Fund's shareholders will indirectly bear the Fund's proportionate share of
the fees and expenses paid by such other investment company, including advisory
fees, in addition to both the management fees payable directly by the Fund
7
to the Fund's own investment adviser and the other expenses that the Fund bears
directly in connection with the Fund's own operations.
Investment companies may include index-based investments, such as other ETFs
that hold substantially all of their assets in securities representing a
specific index. The main risk of investing in index-based investments is the
same as investing in a portfolio of equity securities comprising the index. The
market prices of ETFs will fluctuate in accordance with both changes in the
market value of their underlying portfolio securities and due to supply and
demand for the instruments on the exchanges on which they are traded (which may
result in their trading at a discount or premium to their NAVs). ETFs may not
replicate exactly the performance of their specific index because of transaction
costs and because of the temporary unavailability of certain component
securities of the index.
LENDING OF PORTFOLIO SECURITIES
Each Fund may lend portfolio securities to brokers, dealers and other financial
organizations that meet capital and other credit requirements or other criteria
established by the Funds' Board. These loans, if and when made, may not exceed
33 1/3% of the total asset value of a Fund (including the loan collateral). No
Fund will lend portfolio securities to the Advisor or its affiliates unless it
has applied for and received specific authority to do so from the SEC. Loans of
portfolio securities will be fully collateralized by cash, letters of credit or
U.S. Government securities, and the collateral will be maintained in an amount
equal to at least 100% of the current market value of the loaned securities by
marking to market daily. Any gain or loss in the market price of the securities
loaned that might occur during the term of the loan would be for the account of
the Funds. The Funds may pay a part of the interest earned from the investment
of collateral, or other fee, to an unaffiliated third party for acting as the
Funds' securities lending agent. By lending its securities, a Fund may increase
its income by receiving payments from the borrower that reflect the amount of
any interest or any dividends payable on the loaned securities as well as by
either investing cash collateral received from the borrower in short-term
instruments or obtaining a fee from the borrower when U.S. Government securities
or letters of credit are used as collateral.
Each Fund will adhere to the following conditions whenever its portfolio
securities are loaned: (i) the Fund must receive at least 100% cash collateral
or equivalent securities of the type discussed in the preceding paragraph from
the borrower; (ii) the borrower must increase such collateral whenever the
market value of the securities rises above the level of such collateral; (iii)
the Fund must be able to terminate the loan on demand; (iv) the Fund must
receive reasonable interest on the loan, as well as any dividends, interest or
other distributions on the loaned securities and any increase in market value;
(v) the Fund may pay only reasonable fees in connection with the loan (which
fees may include fees payable to the lending agent, the borrower, the Fund's
administrator and the custodian); and (vi) voting rights on the loaned
securities may pass to the borrower, provided, however, that if a material event
adversely affecting the investment occurs, the Fund must terminate the loan and
regain the right to vote the securities. The Board has adopted procedures
reasonably designed to ensure that the foregoing criteria will be met. Loan
agreements involve certain risks in the event of default or insolvency of the
borrower, including possible delays or restrictions upon a Fund's ability to
recover the loaned securities or dispose of the collateral for the loan, which
could give rise to loss because of adverse market action, expenses and/or delays
in connection with the disposition of the underlying securities.
PORTFOLIO TURNOVER
Portfolio turnover may vary from year to year, as well as within a year. A
higher portfolio turnover rate would likely involve correspondingly greater
brokerage commissions and transaction and other expenses which would be borne by
the Funds. In addition, a Fund's portfolio turnover level may adversely affect
the ability of the Fund to achieve its investment objective. Because each Fund's
portfolio turnover rate, to a great extent, will depend on the creation and
redemption activity of investors, it is difficult to estimate
8
what the Fund's actual portfolio turnover rate will be in the future. However,
the Trust expects that the portfolio turnover experienced by the Funds will be
substantial.
"Portfolio Turnover Rate" is defined under the rules of the SEC as the lesser of
the value of the securities purchased or of the securities sold, excluding all
securities whose maturities at the time of acquisition were one-year or less,
divided by the average monthly value of such securities owned during the year.
Based on this definition, instruments with a remaining maturity of less than
one-year are excluded from the calculation of the portfolio turnover rate.
Instruments excluded from the calculation of portfolio turnover generally would
include the futures contracts and option contracts in which the Funds invest
since such contracts generally have a remaining maturity of less than one-year.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with financial institutions. Each
Fund follows certain procedures designed to minimize the risks inherent in such
agreements. These procedures include effecting repurchase transactions only with
large, well-capitalized and well-established financial institutions whose
condition will be continually monitored by the Advisor. In addition, the value
of the collateral underlying the repurchase agreement will always be at least
equal to the repurchase price, including any accrued interest earned on the
repurchase agreement. In the event of a default or bankruptcy by a selling
financial institution, a Fund will seek to liquidate such collateral. However,
the exercising of a Fund's right to liquidate such collateral could involve
certain costs or delays and, to the extent that proceeds from any sale upon a
default of the obligation to repurchase were less than the repurchase price, the
Fund could suffer a loss. It is the current policy of each Fund not to invest in
repurchase agreements that do not mature within seven days if any such
investment, together with any other illiquid assets held by the Fund, amounts to
more than 15% of the Fund's net assets. The investments of a Fund in repurchase
agreements, at times, may be substantial when, in the view of the Advisor,
liquidity or other considerations so warrant.
REVERSE REPURCHASE AGREEMENTS
Each Fund may use reverse repurchase agreements as part of the Fund's investment
strategy. Reverse repurchase agreements involve sales by a Fund of portfolio
assets concurrently with an agreement by the Fund to repurchase the same assets
at a later date at a fixed price. Generally, the effect of such a transaction is
that the Fund can recover all or most of the cash invested in the portfolio
securities involved during the term of the reverse repurchase agreement, while
the Fund will be able to keep the interest income associated with those
portfolio securities. Such transactions are advantageous only if the interest
cost to the Fund of the reverse repurchase transaction is less than the cost of
obtaining the cash otherwise. Opportunities to achieve this advantage may not
always be available, and each Fund intends to use the reverse repurchase
technique only when it will be advantageous to the Fund. Each Fund will
establish a segregated account with the Trust's custodian bank in which the Fund
will maintain cash or cash equivalents or other portfolio securities equal in
value to the Fund's obligations in respect of reverse repurchase agreements.
SWAP AGREEMENTS
The Funds may enter into swap agreements, including, but not limited to, equity
index swaps and interest rate swap agreements. A Fund may utilize swap
agreements in an attempt to gain exposure to the stocks making up an index of
securities in a market without actually purchasing those stocks, or to hedge a
position. Swap agreements are two-party contracts entered into primarily by
institutional investors for periods ranging from a day to more than one year. In
a standard "swap" transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on particular predetermined
investments or instruments. The gross returns to be exchanged or "swapped"
between the parties are calculated with respect to a "notional amount," I.E.,
the return on or increase in value of a particular dollar amount invested in a
"basket" of securities representing a particular index. Forms of swap agreements
9
include interest rate caps, under which, in return for a premium, one party
agrees to make payments to the other to the extent that interest rates exceed a
specified rate, or "cap," interest rate floors, under which, in return for a
premium, one party agrees to make payments to the other to the extent that
interest rates fall below a specified level, or "floor;" and interest rate
dollars, under which a party sells a cap and purchases a floor or vice versa in
an attempt to protect itself against interest rate movements exceeding given
minimum or maximum levels.
Most swap agreements entered into by the Funds calculate the obligations of the
parties to the agreement on a "net basis." Consequently, a Fund's current
obligations (or rights) under a swap agreement will generally be equal only to
the net amount to be paid or received under the agreement based on the relative
values of the positions held by each party to the agreement (the "net amount").
A Fund's current obligations under a swap agreement will be accrued daily
(offset against any amounts owing to the Fund) and any accrued but unpaid net
amounts owed to a swap counterparty will be covered by segregating assets
determined to be liquid. Obligations under swap agreements so covered will not
be construed to be "senior securities" for purposes of a Fund's investment
restriction concerning senior securities. Because they are two party contracts
and because they may have terms of greater than seven days, swap agreements may
be considered to be illiquid for a Fund's illiquid investment limitations. No
Fund will enter into any swap agreement unless the Advisor believes that the
other party to the transaction is creditworthy. A Fund bears the risk of loss of
the amount expected to be received under a swap agreement in the event of the
default or bankruptcy of a swap agreement counterparty.
Each Fund may enter into swap agreements to invest in a market without owning or
taking physical custody of securities in circumstances in which direct
investment is restricted for legal reasons or is otherwise impracticable. The
counterparty to any swap agreement will typically be a bank, investment banking
firm or broker/dealer. The counterparty will generally agree to pay a Fund the
amount, if any, by which the notional amount of the swap agreement would have
increased in value had it been invested in the particular stocks, plus the
dividends that would have been received on those stocks. A Fund will agree to
pay to the counterparty a floating rate of interest on the notional amount of
the swap agreement plus the amount, if any, by which the notional amount would
have decreased in value had it been invested in such stocks. Therefore, the
return to a Fund on any swap agreement should be the gain or loss on the
notional amount plus dividends on the stocks less the interest paid by the Fund
on the notional amount.
Swap agreements typically are settled on a net basis, which means that the two
payment streams are netted out, with a Fund receiving or paying, as the case may
be, only the net amount of the two payments. Payments may be made at the
conclusion of a swap agreement or periodically during its term.
Swap agreements do not involve the delivery of securities or other underlying
assets. Accordingly, the risk of loss with respect to swap agreements is limited
to the net amount of payments that a Fund is contractually obligated to make. If
the other party to a swap agreement defaults, a Fund's risk of loss consists of
the net amount of payments that the Fund is contractually entitled to receive,
if any. The net amount of the excess, if any, of a Fund's obligations over its
entitlements with respect to each equity swap will be accrued on a daily basis
and an amount of cash or liquid assets, having an aggregate NAV at least equal
to such accrued excess will be maintained in a segregated account by the Fund's
custodian. Inasmuch as these transactions are entered into for hedging purposes
or are offset by segregated cash of liquid assets, as permitted by applicable
law, the Funds and the Advisor believe that these transactions do not constitute
senior securities under the 1940 Act and, accordingly, will not treat them as
being subject to a Fund's borrowing restrictions.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a
10
result, the swap market has become relatively liquid in comparison with the
markets for other similar instruments which are traded in the OTC market. The
Advisor, under the supervision of the Board, is responsible for determining and
monitoring the liquidity of Fund transactions in swap agreements.
The use of swap agreements is a highly specialized activity that involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions.
TRACKING ERROR
The following factors may affect the ability of the Funds to achieve correlation
with the performance of their respective benchmarks: (1) Fund expenses,
including brokerage (which may be increased by high portfolio turnover); (2) a
Fund holding less than all of the securities in the Underlying Index and/or
securities not included in the Underlying Index being held by a Fund; (3) an
imperfect correlation between the performance of instruments held by a Fund,
such as futures contracts and options, and the performance of the underlying
securities in the market; (4) bid-ask spreads (the effect of which may be
increased by portfolio turnover); (5) a Fund holding instruments traded in a
market that has become illiquid or disrupted; (6) Fund share prices being
rounded to the nearest cent; (7) changes to the Underlying Index that are not
disseminated in advance; (8) the need to conform a Fund's portfolio holdings to
comply with investment restrictions or policies or regulatory or tax law
requirements; or (9) early or unanticipated closings of the markets on which the
holdings of a Fund trade, resulting in the inability of the Fund to execute
intended portfolio transactions. The Funds' performance attempts to correlate
highly with the movement in their respective benchmarks over time.
U.S. GOVERNMENT SECURITIES
The Funds may make short-term investments in U.S. Government securities.
Securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities include U.S. Treasury securities, which are backed by the full
faith and credit of the U.S. Treasury and which differ only in their interest
rates, maturities, and times of issuance. U.S. Treasury bills have initial
maturities of one year or less; U.S. Treasury notes have initial maturities of
one to ten years; and U.S. Treasury bonds generally have initial maturities of
greater than ten years. Certain U.S. Government securities are issued or
guaranteed by agencies or instrumentalities of the U.S. Government including,
but not limited to, obligations of U.S. Government agencies or instrumentalities
such as Fannie Mae, the Government National Mortgage Association, the Small
Business Administration, the Federal Farm Credit Administration, the Federal
Home Loan Banks, Banks for Cooperatives (including the Central Bank for
Cooperatives), the Federal Land Banks, the Federal Intermediate Credit Banks,
the Tennessee Valley Authority, the Export-Import Bank of the United States, the
Commodity Credit Corporation, the Federal Financing Bank, the Student Loan
Marketing Association, and the National Credit Union Administration.
Some obligations issued or guaranteed by U.S. Government agencies and
instrumentalities, including, for example, the Government National Mortgage
Association pass-through certificates, are supported by the full faith and
credit of the U.S. Treasury. Other obligations issued by or guaranteed by
federal agencies, such as those securities issued by Fannie Mae, are supported
by the discretionary authority of the U.S. Government to purchase certain
obligations of the federal agency, while other obligations issued by or
guaranteed by federal agencies, such as those of the Federal Home Loan Banks,
are supported by the right of the issuer to borrow from the U.S. Treasury, while
the U.S. Government provides financial support to such U.S. Government-sponsored
federal agencies, no assurance can be given that the U.S. Government will always
do so, since the U.S. Government is not so obligated by law. U.S. Treasury notes
and bonds typically pay coupon interest semi-annually and repay the principal at
maturity.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES
The Funds, from time to time, in the ordinary course of business, may purchase
securities on a when-issued or delayed-delivery basis (I.E., delivery and
payment can take place between a month and 120 days
11
after the date of the transaction). These securities are subject to market
fluctuation and no interest accrues to the purchaser during this period. At the
time a Fund makes the commitment to purchase securities on a when-issued or
delayed-delivery basis, the Fund will record the transaction and thereafter
reflect the value of the securities, each day, in determining the Fund's NAV. A
Fund will not purchase securities on a when-issued or delayed-delivery basis if,
as a result, more than 15% of the Fund's net assets would be so invested. At the
time of delivery of the securities, the value of the securities may be more or
less than the purchase price. Each Fund will also establish a segregated account
with the Fund's custodian bank in which the Fund will maintain cash or liquid
securities equal to or greater in value than the Fund's purchase commitments for
such when-issued or delayed-delivery securities. The Trust does not believe that
a Fund's NAV or income will be adversely affected by the Fund's purchase of
securities on a when-issued or delayed-delivery basis.
ZERO COUPON BONDS
The Funds may invest in U.S. Treasury zero-coupon bonds. These securities are
U.S. Treasury bonds which have been stripped of their unmatured interest
coupons, the coupons themselves, and receipts or certificates representing
interests in such stripped debt obligations and coupons. Interest is not paid in
cash during the term of these securities, but is accrued and paid at maturity.
Such obligations have greater price volatility than coupon obligations and other
normal interest-paying securities, and the value of zero coupon securities
reacts more quickly to changes in interest rates than do coupon bonds. Since
dividend income is accrued throughout the term of the zero coupon obligation,
but is not actually received until maturity, the Funds may have to sell other
securities to pay said accrued dividends prior to maturity of the zero coupon
obligation. Unlike regular U.S. Treasury bonds which pay semi-annual interest,
U.S. Treasury zero coupon bonds do not generate semi-annual coupon payments.
Instead, zero coupon bonds are purchased at a substantial discount from the
maturity value of such securities, the discount reflecting the current value of
the deferred interest; this discount is amortized as interest income over the
life of the security, and is taxable even though there is no cash return until
maturity. Zero coupon U.S. Treasury issues originally were created by government
bond dealers who bought U.S. Treasury bonds and issued receipts representing an
ownership interest in the interest coupons or in the principal portion of the
bonds. Subsequently, the U.S. Treasury began directly issuing zero coupon bonds
with the introduction of "Separate Trading of Registered Interest and Principal
of Securities" (or "STRIPS"). While zero coupon bonds eliminate the reinvestment
risk of regular coupon issues, that is, the risk of subsequently investing the
periodic interest payments at a lower rate than that of the security held, zero
coupon bonds fluctuate much more sharply than regular coupon-bearing bonds.
Thus, when interest rates rise, the value of zero coupon bonds will decrease to
a greater extent than will the value of regular bonds having the same interest
rate.
MORE INFORMATION ABOUT THE UNDERLYING INDICES
INDEX DESCRIPTIONS
The Funds seek to provide investment results that replicate as closely as
possible, before expenses, the performance of a specific benchmark. The current
benchmark for each Fund is set forth below and a description of each Fund's
Underlying Index (each an "Underlying Index" and collectively, the "Underlying
Indices") is set forth in the Funds' Prospectus under "More Information About
the Funds - Benchmarks and Investment Methodology."
12
--------------------------------------------------------------------------------
FUND BENCHMARK
--------------------------------------------------------------------------------
Rydex S&P Equal Weight ETF S&P Equal Weight Index
--------------------------------------------------------------------------------
Rydex Russell Top 50(R) ETF Russell Top 50(R) Index
--------------------------------------------------------------------------------
Rydex S&P Pure Value ETF S&P 500/Citigroup Pure Value Index
--------------------------------------------------------------------------------
Rydex S&P Pure Growth ETF S&P 500/Citigroup Pure Growth Index
--------------------------------------------------------------------------------
Rydex S&P MidCap 400 Pure Value ETF S&P MidCap 400/Citigroup Pure Value
|
Index
Rydex S&P MidCap 400 Pure Growth ETF S&P MidCap 400/Citigroup Pure Growth
Index
--------------------------------------------------------------------------------
Rydex S&P SmallCap 600 Pure Value ETF S&P SmallCap 600/Citigroup Pure Value
Index
--------------------------------------------------------------------------------
Rydex S&P SmallCap 600 Pure Growth S&P SmallCap 600/Citigroup Pure Growth
ETF Index
--------------------------------------------------------------------------------
Rydex S&P Equal Weight Consumer S&P Equal Weight Index Consumer
Discretionary ETF Discretionary Index
--------------------------------------------------------------------------------
Rydex S&P Equal Weight Consumer S&P Equal Weight Index Consumer
Staples ETF Staples Index
--------------------------------------------------------------------------------
Rydex S&P Equal Weight Energy ETF S&P Equal Weight Index Energy
--------------------------------------------------------------------------------
Rydex S&P Equal Weight Financials ETF S&P Equal Weight Index Financials
--------------------------------------------------------------------------------
Rydex S&P Equal Weight Health Care S&P Equal Weight Index Health Care
ETF
--------------------------------------------------------------------------------
Rydex S&P Equal Weight Industrials ETF S&P Equal Weight Index Industrials
--------------------------------------------------------------------------------
Rydex S&P Equal Weight Materials ETF S&P Equal Weight Index Materials
--------------------------------------------------------------------------------
Rydex S&P Equal Weight Technology S&P Equal Weight Index Technology
ETF
--------------------------------------------------------------------------------
Rydex S&P Equal Weight Utilities ETF S&P Equal Weight Index Utilities
--------------------------------------------------------------------------------
|
The Rydex S&P Equal Weight ETF is composed of the same constituent equity
securities (stocks) as the S&P 500 Index (the "S&P 500"). Each of the Rydex S&P
Equal Weight Consumer Discretionary ETF, Rydex S&P Equal Weight Consumer Staples
ETF, Rydex S&P Equal Weight Energy ETF, Rydex S&P Equal Weight Financials ETF,
Rydex S&P Equal Weight Health Care ETF, Rydex S&P Equal Weight Industrials ETF,
Rydex S&P Equal Weight Materials ETF, Rydex S&P Equal Weight Technology ETF and
Rydex S&P Equal Weight Utilities ETF (the "Rydex S&P Equal Weight Sector ETFs")
are composed of component stocks, each of which is a member of the S&P 500 Equal
Weight Index. The Rydex S&P 500 Pure Growth ETF, Rydex S&P 500 Pure Value ETF,
Rydex S&P MidCap 400 Pure Growth ETF, Rydex S&P MidCap 400 Pure Value ETF, Rydex
S&P SmallCap 600 Pure Growth ETF and Rydex S&P SmallCap 600 Pure Value ETF (the
"Rydex S&P Pure Style ETFs") are composed of the same constituent equity
securities (stocks) as the S&P 500, S&P MidCap 400 Index and S&P SmallCap 600
Index. The Underlying Indices (except for the Russell Top 50(R) Index) are
compiled by Standard & Poor's, a division of The McGraw Hill Company, Inc.
("Standard & Poor's"). Standard & Poor's is not affiliated with the Rydex S&P
Equal Weight ETF, the Rydex S&P Pure Style ETFs, the Rydex S&P Equal Weight
Sector ETFs or with the Advisor or its affiliates. The Rydex S&P Equal Weight
ETF, Rydex S&P Pure Style ETFs and Rydex S&P Equal Weight Sector ETFs are
entitled to use their Underlying Indices pursuant to a sub-licensing agreement
with the Advisor, which in turn has a licensing agreement with the index
provider. the Advisor has provided the sub-license without charge to the Rydex
S&P Equal Weight ETF, Rydex S&P Pure Style ETFs and Rydex S&P Equal Weight
Sector ETFs.
The Russell Top 50(R) Index is composed of the approximately 50 largest
capitalization stocks as represented in the Russell 3000(R) Index. The Russell
Top 50(R) Index is compiled by the Frank Russell Company ("Russell"). Russell is
not affiliated with the Rydex Russell Top 50(R) ETF or with the Advisor or its
affiliates. The Rydex Russell Top 50(R) ETF is entitled to use its Underlying
Index pursuant to a sub-licensing agreement with the Advisor, which in turn has
a licensing agreement with the index provider. The Advisor has provided the
sub-license without charge to the Rydex Russell Top 50(R) ETF.
13
The S&P Equal Weight Index is the equal-weight version of the widely regarded
S&P 500, which is a measure of large-capitalization stocks of 500 major
corporations selected by Standard & Poor's for their market size, liquidity and
industry group representation. Unlike the S&P 500, where each stock's weight in
the index is proportionate to its market value (stock price times number of
shares outstanding), each stock in the S&P Equal Weight Index will have the same
target weighting as every other stock in that Underlying Index, which is fixed
at a weight of .20% and rebalanced quarterly. The S&P 500/Citigroup Pure Value
Index is composed of those S&P 500 companies with the strongest value
characteristics. The S&P 500/Citigroup Pure Growth Index contains only those S&P
500 companies with strong growth characteristics. The S&P MidCap 400 is a
measure of mid-capitalization stocks of 400 mid-sized companies selected by
Standard & Poor's and covers approximately 7% of the U.S. equities market. The
S&P MidCap 400/Citigroup Pure Value Index contains only those S&P MidCap 400
companies with strong value characteristics. The S&P MidCap 400/Citigroup Pure
Growth Index contains only those S&P MidCap 400 companies with strong growth
characteristics. The S&P SmallCap 600 is a measure of small-capitalization
stocks of 600 small companies selected by Standard & Poor's and covers
approximately 3% of the U.S. equities market. The S&P SmallCap 600/Citigroup
Pure Value Index contains only those S&P SmallCap 600 companies with strong
value characteristics. The S&P SmallCap 600/Citigroup Pure Growth Index contains
only those S&P SmallCap 600 companies with strong growth characteristics.
Standard & Poor's will assign the Component Stocks to each Underlying Index of
the Rydex S&P Equal Weight Sector ETFs in accordance with the Global Industry
Classification Standard ("GICS"). GICS was created by Standard & Poor's and
Morgan Stanley Capital International to establish a consistent set of global
sector and industry definitions. The GICS methodology assigns each company to a
sub-industry, and to a corresponding industry, industry group and sector,
according to the definition of the company's principal business activity. For
purposes of the Underlying Indices of the Rydex S&P Equal Weight Sector ETFs,
the information technology and telecommunications sectors will be combined into
a single sector index. Unlike the S&P 500, where each stock's weight in the
index is proportionate to its market value (stock price times number of shares
outstanding), each stock included in the an Underlying Index of the Rydex S&P
Equal Weight Sector ETFs will have the same target weighting as every other
stock included in that Underlying Index.
The S&P Equal Weight Index Consumer Discretionary is an unmanaged equal weighted
version of the S&P 500 Consumer Discretionary Index and consists of the common
stocks of the following industries: automobiles and components, consumer
durables, apparel, hotels, restaurants, leisure, media and retailing that
comprise the Consumer Discretionary sector of the S&P 500 Index.
The S&P Equal Weight Index Consumer Staples is an unmanaged equal weighted
version of the S&P 500 Consumer Staples Index and consists of the common stocks
of the following industries: food and drug retailing, beverages, food products,
tobacco, household products and personal products that comprise the Consumer
Staples sector of the S&P 500 Index.
The S&P Equal Weight Index Energy is an unmanaged equal weighted version of the
S&P 500 Energy Index and consists of the common stocks of the following
industries: oil and gas exploration, production, marketing, refining and/or
transportation and energy equipment and services industries that comprise the
Energy sector of the S&P 500 Index.
The S&P Equal Weight Index Financials is an unmanaged equal weighted version of
the S&P 500 Financials Index and consists of the common stocks of the following
industries: banks, diversified financials, brokerage, asset management insurance
and real estate, including investment trusts that comprise the Financials sector
of the S&P 500 Index.
14
The S&P Equal Weight Index Health Care is an unmanaged equal weighted version of
the S&P 500 Health Care Index and consists of the common stocks of the following
industries: health care equipment and supplies, health care providers and
services, and biotechnology and pharmaceuticals that comprise the Health Care
sector of the S&P 500 Index.
The S&P Equal Weight Index Industrials is an unmanaged equal weighted version of
the S&P 500 Industrials Index and consists of the common stocks of the following
industries: aerospace and defense, building products, construction and
engineering, electrical equipment, conglomerates, machinery, commercial services
and supplies, air freight and logistics, airlines, and marine, road and rail
transportation infrastructure that comprise the Industrials sector of the S&P
500 Index.
The S&P Equal Weight Index Materials is an unmanaged equal weighted version of
the S&P 500 Materials Index and consists of the common stocks of the following
industries: chemicals, construction materials, containers and packaging, metals
and mining, and paper and forest products that comprise the Materials sector of
the S&P 500 Index.
The S&P Equal Weight Index Technology is an unmanaged equal weighted version of
the S&P 500 Information Technology Index and consists of the common stocks of
the following industries: internet equipment, computers and peripherals,
electronic equipment, office electronics and instruments, semiconductor
equipment and products, diversified telecommunication services, and wireless
telecommunication services that comprise the Information Technology sector of
the S&P 500 Index.
The S&P Equal Weight Index Utilities is an unmanaged equal weighted version of
the S&P 500 Utilities Index and consists of the common stocks of the following
industries: electric utilities, gas utilities, multi-utilities and unregulated
power and water utilities, telecommunication service companies, including
fixed-line, cellular, wireless, high bandwidth and fiber-optic cable networks
that comprise the Utilities sector of the S&P 500 Index.
Standard & Poor's has sole control over the compilation of the S&P Underlying
Indices as well as the removal of stocks from the S&P 500 and the selection of
replacement stocks to be added to the S&P 500. Standard & Poor's also attempts
to assure that the S&P Underlying Indices reflect the full range and diversity
of the U.S. economy. The Russell Top 50(R) Index offers investors access to the
largest capitalization segment in the U.S. equity universe representing
approximately 40% of the U.S. stock market.
S&P INDEX CALCULATION
S&P EQUAL WEIGHT INDEX AND S&P EQUAL WEIGHT SECTOR INDICES. The S&P Equal Weight
Index and S&P Equal Weight Sector Indices are calculated using the divisor
method as used to calculate the S&P 500 and specific S&P Sector Indices. For
example, the initial divisor for the S&P Equal Weight Index is set so as to have
a base index value of 1000 on September 30, 1989. The index value is simply the
index market value divided by the index divisor.
(1) INDEX VALUE = IndexMarketValue/Divisor
(2) INDEX MARKET VALUE = n summation i=1(Index Shares) (i) x (Price) (i)
where "n" is the number of stocks in the index.
15
At the beginning of each quarterly rebalancing, Index Shares for each
constituent are set so as to have each stock in the S&P Equal Weight Index have
a weight of 20 basis points. Index Shares for all 500 constituents are
calculated using Equation 3, with Weight = 0.02.
(3) (INDEX SHARES) (i), AFTER REBALANCE = Weight X 500 summation i=1(Price)
i, rebalance date/
(Price) (i), rebalance date
Several key features of this process should be noted:
o "INDEX SHARES" AND "INDEX MARKET VALUE" ARE ARTIFICIAL CONSTRUCTS: Index
Shares shown in the equations here are artificial constructs bearing no
relation to actual shares outstanding. These may be fractions, and might
be less than 1. Therefore, the Index Market Value is also an artificial
construct bearing no relation to the market of the S&P 500. These terms
are used simply to show the resemblance between the calculation
methodology of the equal weighted and capitalization weighted indices.
o ARITHMETIC MEAN, NOT GEOMETRIC MEAN: In between two rebalancing periods,
the index return will be the arithmetic mean of the return of S&P 500
stocks. Therefore, the S&P Equal Weight Index is an arithmetic mean index.
Since the arithmetic mean is always greater than the geometric mean, the
S&P Equal Weight Index will always provide higher returns than a geometric
mean based index.
o NOT ALWAYS EQUALLY WEIGHTED: In between two rebalancing periods, the S&P
Equal Weight Index would usually not be equally weighted. Therefore, any
return computation starting from a non-rebalancing date would not match
the arithmetic average of returns of S&P 500 constituents between those
two dates.
o QUARTERLY REBALANCING: Index rebalancing seeks to strike a balance between
equal weighted representation of the S&P 500 universe, and the
investability of the S&P Equal Weight Index. Based on historical
simulation and market conventions, Standard & Poor's has arrived upon a
quarterly rebalancing procedure for the S&P Equal Weight Index. The S&P
Equal Weight Index will be rebalanced on the third Friday of the
quarter-ending month, which coincides with triple witching of index
futures, index options and stock options. This date will also coincide the
conventional date for quarterly share adjustments of the S&P 500, and with
the dates when the S&P/Citigroup Pure Style indices are rebalanced.
At rebalancing, constituents will be assigned Index Shares as given in Equation
3. Also, in order to maintain index series continuity, it is necessary to adjust
the divisor.
(4) (INDEX VALUE) BEFORE REBALANCE = (Index Value) after rebalance
Therefore,
(5) (DIVISOR) AFTER REBALANCE = (Index Market Value) after rebalance/
(Index Value) before rebalance
S&P/CITIGROUP PURE STYLE INDICES. The S&P/Citigroup Pure Style Indices are
calculated following the divisor-based methodology of the S&P Equal Weight
Index.
16
INDEX VALUE (t) = Index Market Value (t)/Index Divisor (t)
INDEX MARKET VALUE (t) = N summation X -> 1 IWF (x,t) x (Index Shares) (x,t)
x (PWF) (x) x (Price) (x,t)
WHERE,
IWF (x,t) = INVESTABLE WEIGHT FACTOR OF STOCK X ON DATE t
N = NUMBER OF STOCKS IN A S&P/CITIGROUP PURE STYLE INDEX ON DATE t
Essentially, the PWF (pure weight factor) term ensures that a S&P/Citigroup Pure
Style Index weights each stock according to its style score.
Standard & Poor's will announce the constituents and their weights two to five
days before rebalancing.
The PWF is set only once a year at rebalancing. Therefore, only at rebalancing
will the stocks be weighted in exact proportion to their style scores. The
weights of stocks in a pure style index between rebalancings will depend on
their relative price performances.
Since pure style indices are score-weighted, weights of individual stocks should
not be affected by corporate actions such as stock splits, spin-offs and rights
offerings. Between rebalancings, the PWF might be adjusted to ensure there is no
change in a stock's weight after such a corporate action (although in practical
terms most of these PWF adjustments would not necessitate any action on the part
of a portfolio manager).
S&P INDEX MAINTENANCE
Maintaining the S&P Indices includes monitoring and completing the adjustments
for company additions and deletions, share changes, stock splits, stock
dividends and stock price adjustments due to restructuring and spin-offs. Share
changes of less than 5% are only updated on quarterly basis on the Friday near
the end of the calendar year.
A company will be removed from the S&P Indices as a result of
mergers/acquisitions, bankruptcy, restructuring, or if it no longer
representative of its industry group. A company is removed from the relevant
index as close as possible to the actual date on which the event occurred. A
company can be removed from an index because it no longer meets current criteria
for inclusion and/or is no longer representative of its industry group.
When calculating index weights, individual constituents' shares held by
governments, corporations, strategic partners, or other control groups are
excluded from the company's shares outstanding. Shares owned by other companies
are also excluded regardless of whether they are index constituents.
Once a year, the float adjustments will be reviewed. Each company's financial
statements will be used to update the major shareholders' ownership. However,
any Investable Weight Factor ("IWF") changes, equal to or greater than 5% will
be implemented as soon as reasonably possible when it results from a major
corporate action (i.e. privatization, merger, takeover, or share offering.)
Changes in the number of shares outstanding driven by corporate events, such as
stock dividends, splits, and rights issues will be adjusted on the ex-date.
Share changes of 5% or greater are implemented when
17
they occur. All share changes of less than 5% are updated on a quarterly basis
(third Friday of March, June, September, and December or at the close of the
expiration of futures contracts). Implementations of new additions, deletions,
and changes to the float adjustment, due to corporate actions, will be made
available at the close of the third Friday in March, June, September, and
December. Generally, index changes due to rebalancing are announced two days
before the effective date by way of a news release posted on WWW.SPGLOBAL.COM.
RUSSELL INDEX CALCULATION
The securities in the Russell Indices (sometimes referred to as the
"components") are reconstituted annually after the close on the last Friday in
June to reflect changes in the marketplace. The Russell 3000(R) Index, includes
the largest 3000 securities listed on any U.S. exchange ranked by decreasing
total market capitalization. All U.S. incorporated companies listed on a U.S.
exchange are considered for inclusion with the following rules and exceptions.
Stocks must trade at or above $1.00 on May 31 to be eligible for inclusion.
Although only one class of security is allowed into the indices, all common
classes are combined to determine total market capitalization and available
float. Tracking stocks are considered individually for membership. Also excluded
are preferred and convertible preferred stock, participating preferred stock,
redeemable shares, warrants and rights, trust receipts, royalty trusts, limited
liability companies, OTC bulletin boards and pink sheet stocks, closed-end
investment companies, limited partnerships, and foreign stocks including
American Depositary Receipts ("ADRs"). After component selection, stocks are
weighted by their available market capitalization.
RUSSELL INDEX MAINTENANCE
The Russell Top 50(R) Index will be reconstituted annually. Securities that
leave the Russell Top 50(R) Index, between reconstitution dates, for any reason
(I.E., mergers, acquisitions, or other similar corporate activity) are not
replaced. Thus, the number of securities in the Russell Top 50(R) Index over the
year will fluctuate according to corporate activity.
When a stock is acquired, delisted, reincorporated outside of the U.S. or moves
to the pink sheets on OTC bulletin boards, the stock is deleted from the
relevant indices. When acquisitions or mergers take place within the Russell Top
50(R) Index, the stock's capitalization moves to the acquiring stock, hence,
mergers have no effect on index total capitalization if the acquiring stock is
part of the Russell Top 50(R) Index. The only additions between reconstitution
dates are as a result of spin-offs and eligible initial public offerings
("IPOs").
Maintaining the Russell Top 50(R) Index includes monitoring and completing the
adjustments for company additions and deletions, share changes, stock splits,
stock dividends, and stock price adjustments due to restructuring and spin-offs.
In addition, significant changes to outstanding share capital changes are made
at month-end. The divisor is adjusted for all changes in company market value to
leave the value of the investments unaffected. All divisor adjustments will be
made at the open of the ex-date using previous day closing prices.
COMMENCEMENT DATES OF THE UNDERLYING INDICES
The S&P Equal Weight Index and the Russell Top 50(R) Index commenced operations
on January 8, 2003 and April 14, 2005, respectively. The S&P 500/Citigroup Pure
Value Index, S&P 500/Citigroup Pure Growth Index, S&P MidCap 400/Citigroup Pure
Value Index, S&P MidCap 400/Citigroup Pure Growth Index, S&P SmallCap
600/Citigroup Pure Value Index and S&P SmallCap 600/Citigroup Pure Growth Index
commenced operations on September 15, 2005. The S&P Equal Weight Index Consumer
Discretionary, S&P Equal Weight Index Consumer Staples, S&P Equal Weight Index
Energy, S&P Equal Weight Index Financials, S&P Equal Weight Index Health Care,
S&P Equal Weight Index Industrials, S&P Equal Weight Index Materials, S&P Equal
Weight Index Technology, and S&P Equal Weight Index Utilities commenced
operations on November 3, 2006.
18
INDEX AVAILABILITY
Each Underlying Index is calculated continuously and widely disseminated to
major data vendors.
INVESTMENT RESTRICTIONS
FUNDAMENTAL POLICIES
The following investment limitations (and those set forth in the Prospectus) are
fundamental policies of the Funds, which cannot be changed with respect to a
Fund without the consent of the holders of a majority of that Fund's outstanding
shares. The term "majority of the outstanding shares" means the vote of (i) 67%
or more of a Fund's shares present at a meeting, if more than 50% of the
outstanding shares of that Fund are present or represented by proxy, or (ii)
more than 50% of that Fund's outstanding shares, whichever is less.
FUNDAMENTAL POLICIES OF THE FUNDS
Each Fund shall not:
1. Borrow money in an amount exceeding 33 1/3% of the value of its total
assets, provided that, for purposes of this limitation, investment
strategies which either obligate a Fund to purchase securities or require
a Fund to segregate assets are not considered to be borrowing. Asset
coverage of a least 300% is required for all borrowing, except where a
Fund has borrowed money for temporary purposes in amounts not exceeding 5%
of its total assets. A Fund will not purchase securities while its
borrowing exceeds 5% of its total assets.
2. Make loans if, as a result, more than 33 1/3% of its total assets would be
lent to other parties, except that a Fund may: (i) purchase or hold debt
instruments in accordance with its investment objective and policies; (ii)
enter into repurchase agreements; and (iii) lend its securities.
3. Purchase or sell real estate, physical commodities, or commodities
contracts, except that a Fund may purchase: (i) marketable securities
issued by companies which own or invest in real estate (including real
estate investment trusts), commodities, or commodities contracts; and (ii)
commodities contracts relating to financial instruments, such as financial
futures contracts and options on such contracts.
4. Issue senior securities (as defined in the 1940 Act) except as permitted
by rule, regulation or order of the SEC.
5. Act as an underwriter of securities of other issuers except as it may be
deemed an underwriter in selling a portfolio security.
6. Invest in interests in oil, gas, or other mineral exploration or
development programs and oil, gas or mineral leases.
7. Invest 25% or more of the value of a Fund's total assets in the securities
of one or more issuers conducting their principal business activities in
the same industry; except that, to the extent the benchmark or sector
selected for a particular Fund is concentrated in a particular industry,
the Fund will necessarily be concentrated in that industry. This
limitation does not apply to investments or obligations of the U.S.
Government or any of its agencies or instrumentalities, or shares of
investment companies.
19
NON-FUNDAMENTAL POLICIES
The following investment limitations are non-fundamental policies of the Funds
and may be changed with respect to any Fund by the Board.
Each Fund may not:
1. Invest in warrants.
2. Invest in real estate limited partnerships.
3. Invest in mineral leases.
4. Purchase or hold illiquid securities, I.E., securities that cannot be
disposed of for their approximate carrying value in seven days or less
(which term includes repurchase agreements and time deposits maturing in
more than seven days) if, in the aggregate, more than 15% of its net
assets would be invested in illiquid securities.
5. Change its investment strategy to invest at least 90% of its net assets,
plus any borrowings for investment purposes, in the equity securities (and
derivatives thereof) included in its Underlying Index without 60 days'
prior notice to shareholders.
With respect to both the fundamental and non-fundamental policies of the Funds,
the foregoing percentages: (i) are based on total assets (except for the
limitations in 4 and 5 above that are specifically based on net assets); (ii)
will apply at the time of the purchase of a security; and (iii) shall not be
considered violated unless an excess or deficiency occurs or exists immediately
after and as a result of a purchase of such security, except for the fundamental
limitation on borrowing described in paragraph 1 above, under the heading
"Fundamental Policies of the Funds." With respect to borrowings in accordance
with the limitations set forth in paragraph 1, in the event that such asset
coverage shall at any time fall below 300 per centum, a Fund must reduce the
amount of its borrowings to an extent that the asset coverage of such borrowings
shall be at least 300 per centum within three days thereafter.
CONTINUOUS OFFERING
The method by which Creation Units are created and traded may raise certain
issues under applicable securities laws. Because new Creation Unit of shares are
issued and sold by the Funds on an ongoing basis, at any point a "distribution",
as such term is used in the 1933 Act, may occur. Broker-dealers and other
persons are cautioned that some activities on their part may, depending on the
circumstances, result in their being deemed participants in a distribution in a
manner which could render them statutory underwriters and subject them to the
prospectus delivery requirement and liability provisions of the 1933 Act.
For example, a broker-dealer firm or its client may be deemed a statutory
underwriter if it takes Creation Units after placing an order with the
Distributor (as defined below), breaks them down into constituent shares, and
sells such shares directly to customers, or if it chooses to couple the creation
of a supply of new shares with an active selling effort involving solicitation
of secondary market demand for shares. A determination of whether one is an
underwriter for purposes of the 1933 Act must take into account all the facts
and circumstances pertaining to the activities of the broker-dealer or its
client in the particular case, and the examples mentioned above should not be
considered a complete description of all the activities that could lead to a
categorization as an underwriter.
20
Broker-dealer firms should also note that dealers who are not "underwriters,"
but are effecting transactions in shares, whether or not participating in the
distribution of shares, are generally required to deliver a prospectus. This is
because the prospectus delivery exemption in Section 4(3) of the 1933 Act is not
available with respect to such transactions as a result of Section 24(d) of the
1940 Act. Firms that incur a prospectus-delivery obligation with respect to
shares are reminded that, under Rule 153 of the 1933 Act, a prospectus-delivery
obligation under Section 5(b)(2) of the 1933 Act owed to an exchange member in
connection with a sale on an exchange is satisfied by the fact that the
prospectus is available at the exchange upon request. The prospectus delivery
mechanism provided in Rule 153 is only available with respect to transactions on
an exchange.
EXCHANGE LISTING AND TRADING
A discussion of exchange listing and trading matters associated with an
investment in the Funds is contained in the Prospectus. The discussion below
supplements, and should be read in conjunction with, such sections of the
Prospectus.
The shares of the Funds are listed and traded on the Exchange. The shares of
each Fund will trade on the Exchange at prices that may differ to some degree
from a Fund's NAV. There can be no assurance that the requirements of the
Exchange necessary to maintain the listing of shares will continue to be met.
The Exchange may, but is not required to, remove the shares of a Fund from
listing if: (i) following the initial 12-month period beginning at the
commencement of trading of the Fund, there are fewer than 50 beneficial owners
of the shares of the Fund for 30 or more consecutive trading days; (ii) the
value of the Underlying Index is no longer calculated or available; or (iii)
such other event shall occur or condition exist that, in the opinion of the
Exchange, makes further dealings on the Exchange inadvisable. The Exchange will
remove the shares of a Fund from listing and trading upon termination of the
Fund.
As in the case of other stocks traded on the Exchange, broker's commissions on
purchases or sales of shares in market transactions will be based on negotiated
commission rates at customary levels.
The Trust reserves the right to adjust the price levels of shares in the future
to help maintain convenient trading ranges for investors. Any adjustments would
be accomplished through stock splits or reverse stock splits, which would have
no effect on the net assets of a Fund.
PORTFOLIO TRANSACTIONS AND BROKERAGE
BROKERAGE TRANSACTIONS. Generally, equity securities are bought and sold through
brokerage transactions for which commissions are payable. Purchases from
underwriters will include the underwriting commission or concession, and
purchases from dealers serving as market makers will include a dealer's mark-up
or reflect a dealer's mark-down. Money market securities and other debt
securities are usually bought and sold directly from the issuer or an
underwriter or market maker for the securities. Generally, a Fund will not pay
brokerage commissions for such purchases. When a debt security is bought from an
underwriter, the purchase price will usually include an underwriting commission
or concession. The purchase price for securities bought from dealers serving as
market makers will similarly include the dealer's mark up or reflect a dealer's
mark down. When a Fund executes transactions in the over-the-counter market, it
will generally deal with primary market makers unless prices that are more
favorable are otherwise obtainable.
In addition, the Advisor may place a combined order, often referred to as
"bunching," for two or more accounts it manages, including any of the Funds,
engaged in the purchase or sale of the same security or other instrument if, in
its judgment, joint execution is in the best interest of each participant and
will result in best price and execution. Transactions involving commingled
orders are allocated in a manner
21
deemed equitable to each account or Fund. Although it is recognized that, in
some cases, the joint execution of orders could adversely affect the price or
volume of the security that a particular account or a Fund may obtain, it is the
opinion of the Advisor and the Trust's Board that the advantages of combined
orders outweigh the possible disadvantages of separate transactions. In
addition, in some instances a Fund effecting the larger portion of a combined
order may not benefit to the same extent as participants effecting smaller
portions of the combined order. Nonetheless, the Advisor believes that the
ability of a Fund to participate in higher volume transactions will generally be
beneficial to the Fund.
For the fiscal years ended October 31, 2007, October 31, 2006 and October 31,
2005, the Funds paid the following aggregate brokerage commissions:
---------------------------------------------------------------------------------------------------------
AGGREGATE AGGREGATE AGGREGATE
BROKERAGE BROKERAGE BROKERAGE
FUND COMMISSIONS COMMISSIONS COMMISSIONS
INCEPTION DURING THE FISCAL DURING THE FISCAL DURING THE FISCAL
FUND NAME DATE YEAR ENDED 2007 YEAR ENDED 2006 YEAR ENDED 2005
---------------------------------------------------------------------------------------------------------
Rydex S&P Equal
Weight ETF 04/24/03 $ 444,572 $ 321,939 $ 121,495
---------------------------------------------------------------------------------------------------------
Rydex Russell Top 50
ETF 05/04/05 $ 5,279 $ 11,454 $ 1,486*
---------------------------------------------------------------------------------------------------------
Rydex S&P 500 Pure
Value ETF 03/01/06 $ 15,393 $ 969*** **
---------------------------------------------------------------------------------------------------------
Rydex S&P 500 Pure
Growth ETF 03/01/06 $ 5,346 $ 580*** **
---------------------------------------------------------------------------------------------------------
Rydex S&P MidCap
400 Pure Value ETF 03/01/06 $ 11,985 $ 412*** **
---------------------------------------------------------------------------------------------------------
Rydex S&P MidCap
400 Pure Growth ETF 03/01/06 $ 7,598 $ 1,642*** **
---------------------------------------------------------------------------------------------------------
Rydex S&P SmallCap
600 Pure Value ETF 03/01/06 $ 15,804 $ 722*** **
---------------------------------------------------------------------------------------------------------
Rydex S&P SmallCap
600 Pure Growth ETF 03/01/06 $ 5,687 $ 893*** **
---------------------------------------------------------------------------------------------------------
Rydex S&P Consumer
Discretionary ETF 11/01/06 $ 7,927 ** **
---------------------------------------------------------------------------------------------------------
Rydex S&P Equal Weight
Consumer Staples ETF 11/01/06 $ 1,388 ** **
---------------------------------------------------------------------------------------------------------
Rydex S&P Equal Weight
Energy ETF 11/01/06 $ 1,744 ** **
---------------------------------------------------------------------------------------------------------
Rydex S&P Equal Weight
Financials ETF 11/01/06 $ 1,207 ** **
---------------------------------------------------------------------------------------------------------
Rydex S&P Equal Weight
Health Care ETF 11/01/06 $ 10,299 ** **
---------------------------------------------------------------------------------------------------------
Rydex S&P Equal Weight
Industrials ETF 11/01/06 $ 1,482 ** **
---------------------------------------------------------------------------------------------------------
Rydex S&P Equal Weight
Materials ETF 11/01/06 $ 1,598 ** **
---------------------------------------------------------------------------------------------------------
Rydex S&P Equal Weight
Technology ETF 11/01/06 $ 9,597 ** **
---------------------------------------------------------------------------------------------------------
Rydex S&P Equal Weight
Utilities ETF 11/01/06 $ 1,045 ** **
--------------------------------------------------------------------------------------------------------
|
* From commencement of operations on May 4, 2005.
** The Fund was not in operation for the period indicated.
*** From commencement of operations on March 1, 2006.
22
Differences, year to year, in the amount of brokerage commissions paid by the
Funds (as disclosed in the table above) were primarily the result of increases
or decreases in the Funds' assets over those periods.
BROKERAGE SELECTION. The Trust does not expect to use one particular broker or
dealer, and when one or more brokers is believed capable of providing the best
combination of price and execution, the Funds' Advisor may select a broker based
upon brokerage or research services provided to the Advisor. The Advisor may pay
a higher commission than otherwise obtainable from other brokers in return for
such services only if a good faith determination is made that the commission is
reasonable in relation to the services provided.
Section 28(e) of the Securities Exchange Act of 1934, as amended, permits the
Advisor, under certain circumstances, to cause each Fund to pay a broker or
dealer a commission for effecting a transaction in excess of the amount of
commission another broker or dealer would have charged for effecting the
transaction in recognition of the value of brokerage and research services
provided by the broker or dealer. In addition to agency transactions, the
Advisor may receive brokerage and research services in connection with certain
riskless principal transactions, in accordance with applicable SEC guidance.
Brokerage and research services include: (1) furnishing advice as to the value
of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities; (2) furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy, and the performance
of accounts; and (3) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement, and custody). In the case of
research services, the Advisor believes that access to independent investment
research is beneficial to their investment decision-making processes and,
therefore, to each Fund.
To the extent research services may be a factor in selecting brokers, such
services may be in written form or through direct contact with individuals and
may include information as to particular companies and securities as well as
market, economic, or institutional areas and information which assists in the
valuation and pricing of investments. Examples of research-oriented services for
which the Advisor might utilize Fund commissions include research reports and
other information on the economy, industries, sectors, groups of securities,
individual companies, statistical information, political developments, technical
market action, pricing and appraisal services, credit analysis, risk measurement
analysis, performance and other analysis. The Advisor may use research services
furnished by brokers in servicing all client accounts and not all services may
necessarily be used in connection with the account that paid commissions to the
broker providing such services. Information so received by the Advisor will be
in addition to and not in lieu of the services required to be performed by the
Funds' Advisor under the
23
Advisory Agreement. Any advisory or other fees paid to the Advisor are not
reduced as a result of the receipt of research services.
In some cases the Advisor may receive a service from a broker that has both a
"research" and a "non-research" use. When this occurs, the Advisor makes a good
faith allocation, under all the circumstances, between the research and
non-research uses of the service. The percentage of the service that is used for
research purposes may be paid for with client commissions, while the Advisor
will use its own funds to pay for the percentage of the service that is used for
non-research purposes. In making this good faith allocation, the Advisor faces a
potential conflict of interest, but the Advisor believes that its allocation
procedures are reasonably designed to ensure that it appropriately allocates the
anticipated use of such services to their research and non-research uses.
From time to time, a Fund may purchase new issues of securities for clients in a
fixed price offering. In these situations, the seller may be a member of the
selling group that will, in addition to selling securities, provide the Advisor
with research services. The NASD has adopted rules expressly permitting these
types of arrangements under certain circumstances. Generally, the seller will
provide research "credits" in these situations at a rate that is higher than
that which is available for typical secondary market transactions. These
arrangements may not fall within the safe harbor of Section 28(e).
For the Trust's fiscal year ended October 31, 2007, the Funds did not pay any
commissions on brokerage transactions directed to brokers pursuant to an
agreement or understanding whereby the broker provides research or other
brokerage services to the Advisor.
BROKERAGE WITH FUND AFFILIATES. The Funds may execute brokerage or other agency
transactions through registered broker-dealer affiliates of the Funds, the
Advisor or the Distributor for a commission in conformity with the 1940 Act, the
Exchange Act and rules promulgated by the SEC. Under the 1940 Act and the
Exchange Act, affiliated broker-dealers are permitted to receive and retain
compensation for effecting portfolio transactions for the Funds on an exchange
if a written contract is in effect between the affiliate and the Funds expressly
permitting the affiliate to receive and retain such compensation. These rules
further require that commissions paid to the affiliate by the Funds for exchange
transactions not exceed "usual and customary" brokerage commissions. The rules
define "usual and customary" commissions to include amounts which are
"reasonable and fair compared to the commission, fee or other remuneration
received or to be received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time." The Board, including
those who are not "interested persons" of the Funds, has adopted procedures for
evaluating the reasonableness of commissions paid to affiliates and reviews
these procedures periodically.
For the fiscal years ended October 31, 2007, October 31, 2006 and October 31
2005, the Funds did not pay any brokerage commissions to the Distributor.
SECURITIES OF "REGULAR BROKER-DEALERS." Each Fund is required to identify any
securities of its "regular brokers and dealers" (as such term is defined in the
1940 Act) which the Fund may hold at the close of its most recent fiscal year.
"Regular brokers or dealers" of the Trust are the ten brokers or dealers that,
during the most recent fiscal year: (i) received the greatest dollar amounts of
brokerage commissions from the Trust's portfolio transactions; (ii) engaged as
principal in the largest dollar amounts of portfolio transactions of the Trust;
or (iii) sold the largest dollar amounts of the Trust's shares. As of October
31, 2007, the following Funds held the following securities of the Trust's
"regular brokers or dealers:"
24
---------------------------------------------------------------------------------------------------------
MARKET
FUND NAME ISSUER VALUE OF INVESTMENT
---------------------------------------------------------------------------------------------------------
Goldman Sachs Group, Inc. $ 5,437,133
-------------------------------------------------------------
State Street Corp. $ 5,189,836
-------------------------------------------------------------
Rydex S&P Equal Weight ETF Bank of New York Mellon Corp. $ 4,852,515
-------------------------------------------------------------
Lehman Brothers Holdings, Inc. $ 4,388,892
-------------------------------------------------------------
Bear Stearns Cos., Inc. $ 4,214,787
-------------------------------------------------------------
Merrill Lynch & Co., Inc. $ 3,790,142
---------------------------------------------------------------------------------------------------------
Rydex Russell Top 50 ETF Goldman Sachs Group, Inc. $10,707,417
-------------------------------------------------------------
Merrill Lynch & Co., Inc. $ 5,944,705
---------------------------------------------------------------------------------------------------------
Rydex S&P 500 Pure Value ETF Bear Stearns Cos., Inc. $ 84,064
---------------------------------------------------------------------------------------------------------
Rydex S&P SmallCap 600 Pure Value ETF LaBranche & Co., Inc. $ 88,880
---------------------------------------------------------------------------------------------------------
Goldman Sachs Group, Inc. $ 94,209
-------------------------------------------------------------
State Street Corp. $ 93,331
-------------------------------------------------------------
Rydex S&P Equal Weight Financials ETF Bank of New York Mellon Corp. $ 86,953
-------------------------------------------------------------
Lehman Brothers Holdings, Inc. $ 78,542
-------------------------------------------------------------
Bear Stearns Cos., Inc. $ 74,976
-------------------------------------------------------------
Merrill Lynch & Co., Inc. $ 68,001
---------------------------------------------------------------------------------------------------------
|
PORTFOLIO TURNOVER. Portfolio turnover may vary from year to year, as well as
within a year. High turnover rates are likely to result in comparatively greater
brokerage expenses. For the fiscal years ended October 31, 2007 and October 31,
2006, the portfolio turnover rate for each Fund was as follows:
------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE
------------------------------
FUND 2007 2006
------------------------------------------------------------------------------------
Rydex S&P Equal Weight ETF 25% 16%
------------------------------------------------------------------------------------
Rydex Russell Top 50 ETF 8% 7%
------------------------------------------------------------------------------------
Rydex S&P 500 Pure Value ETF 26% 4%*
------------------------------------------------------------------------------------
Rydex S&P 500 Pure Growth ETF 24% 7%*
------------------------------------------------------------------------------------
Rydex S&P MidCap 400 Pure Value ETF 46% 4%*
------------------------------------------------------------------------------------
Rydex S&P MidCap 400 Pure Growth ETF 53% 14%*
------------------------------------------------------------------------------------
Rydex S&P SmallCap 600 Pure Value ETF 37% 7%*
------------------------------------------------------------------------------------
Rydex S&P SmallCap 600 Pure Growth ETF 51% 14%*
------------------------------------------------------------------------------------
Rydex S&P Equal Weight Consumer Discretionary ETF 28% **
------------------------------------------------------------------------------------
Rydex S&P Equal Weight Consumer Staples ETF 19% **
------------------------------------------------------------------------------------
Rydex S&P Equal Weight Energy ETF 34% **
------------------------------------------------------------------------------------
Rydex S&P Equal Weight Financials ETF 31% **
------------------------------------------------------------------------------------
Rydex S&P Equal Weight Health Care ETF 55% **
------------------------------------------------------------------------------------
Rydex S&P Equal Weight Industrials ETF 36% **
------------------------------------------------------------------------------------
Rydex S&P Equal Weight Materials ETF 31% **
------------------------------------------------------------------------------------
Rydex S&P Equal Weight Technology ETF 60% **
------------------------------------------------------------------------------------
Rydex S&P Equal Weight Utilities ETF 20% **
------------------------------------------------------------------------------------
|
* From commencement of operations on March 1, 2006.
** Not in operation for the period indicated.
25
MANAGEMENT OF THE TRUST
BOARD RESPONSIBILITIES. The management and affairs of the Trust are supervised
by the Board under the laws of the State of Delaware and the 1940 Act. The Board
has approved contracts, as described below, under which certain companies
provide essential management services to the Trust.
MEMBERS OF THE BOARD AND OFFICERS OF THE TRUST. Set forth below are the names,
ages, position with the Trust, term of office, and the principal occupations for
a minimum of the last five years of each of the persons currently serving as
members of the Board and as Executive Officers of the Trust. Also included below
is the term of office for each of the Executive Officers of the Trust. The
members of the Board serve as Trustees for the life of the Trust or until
retirement, removal, or their office is terminated pursuant to the Trust's
Declaration of Trust. Unless otherwise noted, the business address of each
Trustee and Officer is 9601 Blackwell Road, Suite 500, Rockville, Maryland
20850.
------------------------------------------------------------------------------------------------------------------------------
NUMBER OF
POSITION(S) HELD PORTFOLIOS IN
WITH FUND COMPLEX
NAME, ADDRESS THE TRUST, TERM OF OVERSEEN
AND AGE OF OFFICE AND LENGTH PRINCIPAL OCCUPATION(S) BY TRUSTEE/ OTHER DIRECTORSHIPS HELD
TRUSTEE/OFFICER OF TIME SERVED DURING PAST 5 YEARS OFFICER BY TRUSTEE
------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
------------------------------------------------------------------------------------------------------------------------------
Michael P. Trustee from 2005 PADCO ADVISORS, INC.: 147 None
Byrum (37) to present. Chief Investment Officer from August 2006
to present; Chief Operating Officer of
PADCO Advisors, Inc. from October 2003 to
May 2004; Executive Vice President from
December 2002 to May 2004; President from
May 2004 to present; and Secretary from
December 2002 to present
PADCO ADVISORS II, INC.:
Chief Investment Officer from August 2006
to present; Chief Operating Officer of
PADCO Advisors II, Inc. from December 2003
to May 2004; Executive Vice President from
December 2002 to May 2004; President from
May 2004 to present; and Secretary from
December 2002 to present
RYDEX ADVISORY SERVICES:
President from August 2004 to present
RYDEX CAPITAL PARTNERS I, LLC:
President and Secretary from October 2003
to April 2007
------------------------------------------------------------------------------------------------------------------------------
|
26
------------------------------------------------------------------------------------------------------------------------------
NUMBER OF
POSITION(S) HELD PORTFOLIOS IN
WITH FUND COMPLEX
NAME, ADDRESS THE TRUST, TERM OF OVERSEEN
AND AGE OF OFFICE AND LENGTH PRINCIPAL OCCUPATION(S) BY TRUSTEE/ OTHER DIRECTORSHIPS HELD
TRUSTEE/OFFICER OF TIME SERVED DURING PAST 5 YEARS OFFICER BY TRUSTEE
------------------------------------------------------------------------------------------------------------------------------
RYDEX CAPITAL PARTNERS II, LLC:
President and Secretary from October 2003
to April 2007
RYDEX DISTRIBUTORS, INC.:
Secretary from December 2001 to May
2004; Executive Vice President from
December 2002 to May 2004; and Chief
Operating Officer from December 2003 to May
2004
RYDEX FUND SERVICES, INC.:
Secretary from December 2002 to present;
Executive Vice President from December 2002
to August 2006; and Chief Operating Officer
from December 2003 to May 2004
RYDEX HOLDINGS, INC.:
Secretary from December 2005 to present
and Executive Vice President from December
2005 to August 2006
ADVISOR RESEARCH CENTER, INC.:
Secretary from May 2006 to present and
Executive Vice President from May 2006 to
August 2006
RYDEX SPECIALIZED PRODUCTS, LLC:
Director and Secretary from September 2005
to present
------------------------------------------------------------------------------------------------------------------------------
Carl G. Trustee from 2004 PADCO ADVISORS, INC.: 147 None
Verboncoeur (55) to present; Chief Executive Officer from October 2003
President from to present; Executive Vice President of
2003 to present; PADCO Advisors, Inc. from December 2002
Vice President to October 2003; President of PADCO
from 1997 to Advisors, Inc. from October 2003 to May
present; and 2004; and Treasurer from December 2002 to
Treasurer from present
1997 to 2003.
------------------------------------------------------------------------------------------------------------------------------
|
27
------------------------------------------------------------------------------------------------------------------------------
NUMBER OF
POSITION(S) HELD PORTFOLIOS IN
WITH FUND COMPLEX
NAME, ADDRESS THE TRUST, TERM OF OVERSEEN
AND AGE OF OFFICE AND LENGTH PRINCIPAL OCCUPATION(S) BY TRUSTEE/ OTHER DIRECTORSHIPS HELD
TRUSTEE/OFFICER OF TIME SERVED DURING PAST 5 YEARS OFFICER BY TRUSTEE
------------------------------------------------------------------------------------------------------------------------------
PADCO ADVISORS II, INC.:
Chief Executive Officer from
December 2003 to present;
Executive Vice President of PADCO Advisors
II, Inc. from December 2002 to December
2003; President of PADCO Advisors II,
Inc. from December 2002 to May 2004 and
Treasurer from December 2003 to present
RYDEX CAPITAL PARTNERS I, LLC:
Treasurer from October 2003 to April 2007,
and Executive Vice President from October
2003 to August 2006
RYDEX CAPITAL PARTNERS II, LLC:
Treasurer from October 2003 to April 2007,
and Executive Vice President from October
2003 to August 2006
RYDEX ADVISORY SERVICES:
Chief Executive Officer from August 2004
to present
RYDEX DISTRIBUTORS, INC.:
President and Chief Executive Officer from
December 2003 to present; Treasurer from
December 2002 to present; Executive Vice
President from December 2002 to December
2003; and Vice President from December
2001 to December 2002
RYDEX FUND SERVICES, INC.:
Chief Executive Officer from December 2003
to present; President and Treasurer from
December 2002 to present; and Executive
Vice President from December 2001 to
December 2002
RYDEX HOLDINGS, INC.:
Chief Executive Officer, President and
Treasurer from December 2005 to present
------------------------------------------------------------------------------------------------------------------------------
|
28
------------------------------------------------------------------------------------------------------------------------------
NUMBER OF
POSITION(S) HELD PORTFOLIOS IN
WITH FUND COMPLEX
NAME, ADDRESS THE TRUST, TERM OF OVERSEEN
AND AGE OF OFFICE AND LENGTH PRINCIPAL OCCUPATION(S) BY TRUSTEE/ OTHER DIRECTORSHIPS HELD
TRUSTEE/OFFICER OF TIME SERVED DURING PAST 5 YEARS OFFICER BY TRUSTEE
------------------------------------------------------------------------------------------------------------------------------
ADVISOR RESEARCH CENTER, INC.:
Chief Executive Officer, President and
Treasurer from May 2006 to present
RYDEX SPECIALIZED PRODUCTS, LLC:
Chief Executive Officer, Director and
Treasurer from September 2005 to present
------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------------------------------
Corey A. Trustee and Member Retired from August 2006 to present. 138 None
Colehour (62) of the Audit and President and Senior Vice President of
Governance and Schield Management Company (registered
Nominating investment adviser) from 2003 to 2006
Committees from
2003 to present.
------------------------------------------------------------------------------------------------------------------------------
J. Kenneth Trustee and Member Retired 147 None
Dalton (67) of the Governance
and Nominating
Committee from
2003 to present;
and Chairman of
the Audit
Committee from
2006 to present.
------------------------------------------------------------------------------------------------------------------------------
John O. Chairman of the Retired 147 None
Demaret (68) Board from 2006 to
present; and
Trustee and Member
of the Audit and
Governance and
Nominating
Committees from
2003 to present.
------------------------------------------------------------------------------------------------------------------------------
Werner E. Trustee and Member Founder and President of Keller Partners, 147 None
Keller (67) of the Audit and LLC (registered investment adviser) from
Governance and 2005 to present; and Retired from 2001 to
Nominating 2005
Committees from
2005 to present.
------------------------------------------------------------------------------------------------------------------------------
|
29
------------------------------------------------------------------------------------------------------------------------------
NUMBER OF
POSITION(S) HELD PORTFOLIOS IN
WITH FUND COMPLEX
NAME, ADDRESS THE TRUST, TERM OF OVERSEEN
AND AGE OF OFFICE AND LENGTH PRINCIPAL OCCUPATION(S) BY TRUSTEE/ OTHER DIRECTORSHIPS HELD
TRUSTEE/OFFICER OF TIME SERVED DURING PAST 5 YEARS OFFICER BY TRUSTEE
------------------------------------------------------------------------------------------------------------------------------
Thomas F. Trustee and Member President of Global Trends Investments 147 None
Lydon (48) of the Audit and (registered investment adviser) from 1996
Governance and to present
Nominating
Committees from
2005 to present.
------------------------------------------------------------------------------------------------------------------------------
Patrick T. Trustee, Chairman Chief Executive Officer of Par Industries, 147 None
McCarville (64) of the Governance Inc., d/b/a Par Leasing from 1977 to
and Nominating present
Committee and
Member of the
Audit Committee
from 2003 to
present.
------------------------------------------------------------------------------------------------------------------------------
Roger Somers Trustee and Member Founder and Chief Executive Officer of 147 None
(63) of the Audit and Arrow Limousine from 1965 to present
Governance and
Nominating
Committees from
2003 to present.
------------------------------------------------------------------------------------------------------------------------------
OFFICERS
------------------------------------------------------------------------------------------------------------------------------
Nick Bonos (44) Vice President and Senior Vice President of Fund Services of 147 Not Applicable
Treasurer from PADCO Advisors, Inc. from August 2006 to
2003 to present. present; Senior Vice President of Rydex
Fund Services, Inc. from December 2003 to
August 2006; Vice President of Accounting,
Rydex Fund Services, Inc. from 2001 to
2003; and Chief Financial Officer and
Manager of Rydex Specialized Products, LLC
from September 2005 to present
------------------------------------------------------------------------------------------------------------------------------
|
30
------------------------------------------------------------------------------------------------------------------------------
NUMBER OF
POSITION(S) HELD PORTFOLIOS IN
WITH FUND COMPLEX
NAME, ADDRESS THE TRUST, TERM OF OVERSEEN
AND AGE OF OFFICE AND LENGTH PRINCIPAL OCCUPATION(S) BY TRUSTEE/ OTHER DIRECTORSHIPS HELD
TRUSTEE/OFFICER OF TIME SERVED DURING PAST 5 YEARS OFFICER BY TRUSTEE
------------------------------------------------------------------------------------------------------------------------------
Joanna M. Chief Compliance Chief Compliance Officer of PADCO 147 Not Applicable
Haigney (41) Officer from 2004 Advisors, Inc. and PADCO Advisors II, Inc.
to present; and from May 2005 to present and Rydex Capital
Secretary from Partners I, LLC and Rydex Capital Partners
2000 to present. II, LLC from August 2006 to April 2007;
Vice President of Compliance of PADCO
Advisors, Inc. from August 2006 to present;
Assistant Secretary of Rydex Distributors,
Inc. from December 2001 to December 2003;
and Vice President of Rydex Distributors,
Inc. from December 2003 to May 2004 and
Rydex Fund Services, Inc. from December
2001 to August 2006
------------------------------------------------------------------------------------------------------------------------------
Joseph Arruda Assistant Vice President of PADCO Advisors, Inc. and 147 Not Applicable
(41) Treasurer from PADCO Advisors II, Inc. from 2004 to
2006 to present. present; Director of Accounting of PADCO
Advisors, Inc. and PADCO Advisors II, Inc.
from 2003 to 2004; Vice President of
Mutual Funds, State Street Bank & Trust
from 2000 to 2003
------------------------------------------------------------------------------------------------------------------------------
Paula Billos (33) Controller from Director of Fund Administration of PADCO 147 Not Applicable
2006 to present. Advisors, Inc. and PADCO Advisors II, Inc.
from 2001 to present
------------------------------------------------------------------------------------------------------------------------------
|
* Messrs. Verboncoeur and Byrum are "interested" persons of the Trust, as
that term is defined in the 1940 Act by virtue of their affiliation with
the Funds' Advisor.
BOARD STANDING COMMITTEES. The Board has established the following
standing committees:
AUDIT COMMITTEE. The Board has a standing Audit Committee that is composed
of each of the independent trustees of the Trust. The Audit Committee
operates pursuant to a written charter approved by the Board. The
principal responsibilities of the Audit Committee include: recommending
which firm to engage as the Trust's independent registered public
accounting firm and whether to terminate this relationship; reviewing the
independent registered public accounting firm's compensation, the proposed
scope and terms of its engagement, and the firm's independence; serving as
a channel of communication between the independent registered public
accounting firm and the Board; reviewing the results of each external
audit, including any qualifications in the independent registered public
accounting firm's opinion, any related management letter, management's
responses to recommendations made by the independent registered public
accounting firm in connection with the audit, if any, reports submitted to
the Committee by the Trust's service providers that are material to the
Trust as a whole, and management's responses to any such reports;
reviewing the Trust's audited financial statements and
31
considering any significant disputes between the Trust's management and the
independent registered public accounting firm that arose in connection with the
preparation of those financial statements; considering, in consultation with the
independent registered public accounting firm and the Trust's senior internal
accounting executive, the independent registered public accounting firm's report
on the adequacy of the Trust's internal financial controls; reviewing, in
consultation with the Trust's independent registered public accounting firm,
major changes regarding auditing and accounting principles and practices to be
followed when preparing the Trust's financial statements; and other audit
related matters. Messrs. Colehour, Dalton, Demaret, Keller, Lydon, McCarville
and Somers serve as members of the Audit Committee. The Audit Committee met four
(4) times during the most recently completed fiscal year.
GOVERNANCE AND NOMINATING COMMITTEE. The Board has a standing Governance and
Nominating Committee that is composed of each of the independent trustees of the
Trust. The Governance and Nominating Committee operates under a written charter
approved by the Board. The principal responsibility of the Governance and
Nominating Committee is to identify, recommend and nominate candidates to fill
vacancies, if any, on the Trust's Board. The Governance and Nominating Committee
does not currently have specific procedures in place to consider nominees
recommended by shareholders, but would consider such nominees if submitted in
accordance with Rule 14a-8 of the Exchange Act in conjunction with a shareholder
meeting to consider the election of Board members. The Governance and Nominating
Committee also reviews the compensation for the Board members. Messrs. Colehour,
Dalton, Demaret, Keller, Lydon, McCarville and Somers serve as members of the
Governance and Nominating Committee. The Governance and Nominating Committee met
twice during the most recently completed fiscal year.
FUND SHARES OWNED BY BOARD MEMBERS. The following table shows the dollar amount
range of each Trustee's "beneficial ownership" of shares of the Funds and all
Rydex Funds as of the end of the most recently completed calendar year. Other
than the Funds listed below, none of the Trustees beneficially own shares of the
Funds as of December 31, 2007. Dollar amount ranges disclosed are established by
the SEC. "Beneficial ownership" is determined in accordance with Rule
16a-1(a)(2) under the Exchange Act. The Trustees and officers of the Trust own
less than 1% of the outstanding shares of the Trust.
----------------------------------------------------------------------------------------
AGGREGATE DOLLAR
RANGE OF SHARES IN
DOLLAR RANGE ALL RYDEX FUNDS
NAME FUND NAME OF FUND SHARES OVERSEEN BY TRUSTEE*
----------------------------------------------------------------------------------------
INTERESTED TRUSTEES
----------------------------------------------------------------------------------------
Michael P. Byrum Rydex Equal Weight ETF $10,001-$50,000 Over $100,000
----------------------------------------------------------------------------------------
Carl G. Verboncoeur S&P Equal Weight ETF $50,001-$100,000 Over $100,000
----------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
----------------------------------------------------------------------------------------
Corey A. Colehour None None $50,001-$100,000
----------------------------------------------------------------------------------------
J. Kenneth Dalton None None $10,001-$50,000
----------------------------------------------------------------------------------------
John O. Demaret None None Over $100,000
----------------------------------------------------------------------------------------
Thomas F. Lydon None None None
----------------------------------------------------------------------------------------
Werner E. Keller None None Over $100,000
----------------------------------------------------------------------------------------
Patrick T. McCarville None None $50,001-$100,000
----------------------------------------------------------------------------------------
Roger J. Somers None None Over $100,000
----------------------------------------------------------------------------------------
|
* Includes shares held in series of the Trust, Rydex Series Funds, Rydex
Dynamic Funds and Rydex Variable Trust.
32
BOARD COMPENSATION. - The following table sets forth compensation paid by the
Trust for the fiscal year ended October 31, 2007:
-------------------------------------------------------------------------------------
PENSION OR
RETIREMENT
BENEFITS ESTIMATED TOTAL
AGGREGATE ACCRUED AS ANNUAL COMPENSATION
COMPENSATION PART OF TRUST'S BENEFITS UPON FROM FUND
NAME OF TRUSTEE FROM TRUST EXPENSES RETIREMENT COMPLEX *
-------------------------------------------------------------------------------------
INTERESTED TRUSTEES**
-------------------------------------------------------------------------------------
Carl Verboncoeur $ 0 $0 $0 $ 0
-------------------------------------------------------------------------------------
Michael P. Byrum $ 0 $0 $0 $ 0
-------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
-------------------------------------------------------------------------------------
Corey A. Colehour $19,200 $0 $0 $100,000
-------------------------------------------------------------------------------------
J. Kenneth Dalton $20,300 $0 $0 $105,000
-------------------------------------------------------------------------------------
John O. Demaret $23,200 $0 $0 $120,000
-------------------------------------------------------------------------------------
Patrick T. McCarville $19,800 $0 $0 $102,500
-------------------------------------------------------------------------------------
Roger J. Somers $19,200 $0 $0 $100,000
-------------------------------------------------------------------------------------
Werner E. Keller $19,200 $0 $0 $100,000
-------------------------------------------------------------------------------------
Thomas F. Lydon $19,200 $0 $0 $100,000
-------------------------------------------------------------------------------------
|
* Represents total compensation for service as Trustee of the Trust, Rydex
Dynamic Funds, Rydex Variable Trust, and Rydex Series Funds.
** Messrs. Verboncoeur and Byrum are Interested Trustees, as defined above.
As officers of the Advisor, they do not receive compensation from the
Trust.
CODE OF ETHICS
The Board has adopted a Combined Code of Ethics (the "Code of Ethics") pursuant
to Rule 17j-1 under the 1940 Act. The Advisor and Distributor are also covered
by the Code of Ethics. The Code of Ethics applies to the personal investing
activities of trustees, directors, officers and certain employees ("access
persons"). Rule 17j-1 and the Code of Ethics are designed to prevent unlawful
practices in connection with the purchase or sale of securities by access
persons. Under the Code of Ethics, access persons are permitted to engage in
personal securities transactions, but are required to report their personal
securities transactions for monitoring purposes. In addition, certain access
persons are required to obtain approval before investing in private placements
and are prohibited from investing in IPOs. The Code of Ethics is on file with
the SEC, and is available to the public.
33
PROXY VOTING
The Board has delegated responsibility for decisions regarding proxy voting for
securities held by the Funds to the Advisor. The Advisor will vote such proxies
in accordance with its proxy policies and procedures, which are included in
Appendix A to this SAI. The Board will periodically review each Fund's proxy
voting record.
The Trust annually discloses its complete proxy voting record on Form N-PX. The
Trust's most recent Form N-PX is available without charge, upon request by
calling 800.820.0888 or 301.296.5100 or by writing to the Trust at 9601
Blackwell Road, Suite 500, Rockville, Maryland 20850. The Trust's Form N-PX is
also available on the SEC's web site at www.sec.gov.
THE ADVISORY AGREEMENT
PADCO Advisors II, Inc., 9601 Blackwell Road, Suite 500, Rockville, Maryland
20850, is a registered investment adviser and provides portfolio management
services to each Fund pursuant to an advisory contract with the Trust. PADCO
Advisors II, Inc. was incorporated in the State of Maryland on July 5, 1994 and,
together with PADCO Advisors, Inc., a registered investment adviser under common
control, does business under the name Rydex Investments.
On January 18, 2008, Security Benefit Corporation and Security Benefit Life
Insurance Company (together, "Security Benefit") acquired Rydex Holdings, Inc.,
the Advisor's parent company, together with several other Rydex entities. As a
result, the Advisor has undergone a change of control and is now a subsidiary of
Security Benefit. Security Benefit is a financial services firm that provides a
broad variety of retirement plan and other financial products to customers in
the advisor, banking, education, government, institutional, and qualified plan
markets.
Under an investment advisory agreement with the Advisor, dated January 18, 2008
(the "Advisory Agreement"), the Advisor serves as the investment adviser for the
Trust and provides investment advice to the Funds, in accordance with the
investment objectives, policies, and limitations of the Funds, and oversees the
day-to-day operations of the Funds, subject to the general supervision and
control of the Board and the officers of the Trust. As of February 1, 2008, net
assets under management of the Advisor and its affiliates were approximately
$15.9 billion. Pursuant to the Advisory Agreement, the Advisor is responsible
for all expenses of the Funds, including the cost of transfer agency, custody,
fund administration, legal, audit and other services, except interest, taxes,
brokerage commissions and other expenses connected with the execution of
portfolio transactions, distribution fees, expenses of the Independent Trustees
(including any Independent Trustees' counsel fees) and extraordinary expenses.
For its investment management services, the Funds pay the Advisor the following
fees at an annual rate based on the average daily net assets for the Funds. The
Advisor, from its own resources, including profits from advisory fees received
from the Funds, provided such fees are legitimate and not excessive, may make
payments to broker-dealers and other financial institutions for their expenses
in connection with the distribution of Fund shares, and otherwise currently pay
all distribution costs for Fund shares. For the fiscal years ended October 31,
2007, October 31, 2006 and October 31, 2005, the Advisor received the following
investment advisory fees:
34
----------------------------------------------------------------------------------------------------
ADVISORY FEE ADVISORY FEE ADVISORY FEE
FUND PAID FOR THE PAID FOR THE PAID FOR THE
ADVISORY INCEPTION FISCAL YEAR FISCAL YEAR FISCAL YEAR
FUND NAME FEE DATE ENDED 2007 ENDED 2006 ENDED 2005
----------------------------------------------------------------------------------------------------
Rydex S&P Equal Weight ETF 0.40% 04/23/03 $8,585,186 $6,067,717 $3,381,391
----------------------------------------------------------------------------------------------------
Rydex Russell Top 50 ETF 0.20% 05/04/05 $1,114,984 $ 326,403 $ 99,610*
---------------------------------------------------------------------------------------------------
Rydex S&P 500 Pure Value ETF 0.35% 03/01/06 $ 127,146 $ 28,282*** **
---------------------------------------------------------------------------------------------------
Rydex S&P 500 Pure Growth ETF 0.35% 03/01/06 $ 153,595 $ 32,115*** **
---------------------------------------------------------------------------------------------------
Rydex S&P MidCap 400 Pure
Value ETF 0.35% 03/01/06 $ 66,220 $ 27,406*** **
---------------------------------------------------------------------------------------------------
Rydex S&P MidCap 400 Pure
Growth ETF 0.35% 03/01/06 $ 71,322 $ 42,331*** **
---------------------------------------------------------------------------------------------------
Rydex S&P SmallCap 600 Pure
Value ETF 0.35% 03/01/06 $ 67,159 $ 13,382*** **
---------------------------------------------------------------------------------------------------
Rydex S&P SmallCap 600 Pure
Growth ETF 0.35% 03/01/06 $ 34,036 $ 16,689*** **
---------------------------------------------------------------------------------------------------
Rydex S&P Equal Weight
Consumer Discretionary ETF 0.50% 11/01/06 $ 190,401 ** **
---------------------------------------------------------------------------------------------------
Rydex S&P Equal Weight
Consumer Staples ETF 0.50% 11/01/06 $ 37,892 ** **
---------------------------------------------------------------------------------------------------
Rydex S&P Equal Weight Energy
ETF 0.50% 11/01/06 $ 42,071 ** **
---------------------------------------------------------------------------------------------------
Rydex S&P Equal Weight
Financials ETF 0.50% 11/01/06 $ 28,645 ** **
---------------------------------------------------------------------------------------------------
Rydex S&P Equal Weight Health
Care ETF 0.50% 11/01/06 $ 95,572 ** **
---------------------------------------------------------------------------------------------------
Rydex S&P Equal Weight
Industrials ETF 0.50% 11/01/06 $ 41,190 ** **
---------------------------------------------------------------------------------------------------
Rydex S&P Equal Weight
Materials ETF 0.50% 11/01/06 $ 41,693 ** **
---------------------------------------------------------------------------------------------------
Rydex S&P Equal Weight
Technology ETF 0.50% 11/01/06 $ 54,839 ** **
---------------------------------------------------------------------------------------------------
Rydex S&P Equal Weight 0.50% 11/01/06 $ 41,757 ** **
Utilities ETF
---------------------------------------------------------------------------------------------------
|
* From commencement of operations on May 4, 2005.
** Not in operation for the period indicated.
*** From commencement of operations on March 1, 2006.
35
The Advisor manages the investment and the reinvestment of the assets of the
Funds, in accordance with the investment objectives, policies, and limitations
of the Funds, subject to the general supervision and control of the Board and
the officers of the Trust. The Advisor bears all costs associated with providing
these advisory services and the expenses of the member of the Board who are
affiliated with or interested persons of the Advisor. The Advisor, from its own
resources, including profits from advisory fees received from the Funds,
provided such fees are legitimate and not excessive, may make payments to
broker-dealers and other financial institutions for their expenses in connection
with the distribution of Fund shares, and otherwise currently pay all
distribution costs for Fund shares. The Advisor may from time to time reimburse
certain expenses of a Fund in order to limit the Fund's operating expenses as
described in the Prospectus.
PORTFOLIO MANAGERS
This section includes information about each Fund's portfolio managers,
including information about other accounts they manage, the dollar range of Fund
shares they own and how they are compensated.
ACCOUNTS MANAGED BY PORTFOLIO MANAGERS. Including the Funds, the portfolio
managers are responsible for the day-to-day management of certain other
accounts, as follows:
--------------------------------------------------------------------------------------------------
REGISTERED INVESTMENT OTHER POOLED INVESTMENT
COMPANIES 1,2 VEHICLES 1 OTHER ACCOUNTS 1
-------------------------------------------------------------------------------
NUMBER
NUMBER OF OF NUMBER OF
NAME ACCOUNTS TOTAL ASSETS ACCOUNTS TOTAL ASSETS ACCOUNTS TOTAL ASSETS
--------------------------------------------------------------------------------------------------
Michael P. Byrum 142 $16.9 Billion 0 N/A 1 < $5 Million
--------------------------------------------------------------------------------------------------
Michael Dellapa 142 $16.9 Billion 0 N/A 7 < $5 Million
--------------------------------------------------------------------------------------------------
James R. King 142 $16.9 Billion 0 N/A 3 < $5 Million
--------------------------------------------------------------------------------------------------
|
1 Information provided is as of October 31, 2007.
2 The portfolio managers manage two registered investment companies, the
Rydex Series Funds Multi-Cap Core Equity Fund and Rydex Variable Trust
Multi-Cap Core Equity Fund, that are subject to a performance based
advisory fee. The two Funds had $47.2 million in assets under management
as of December 31, 2007.
CONFLICTS OF INTEREST. The portfolio managers' management of "other accounts"
may give rise to potential conflicts of interest in connection with their
management of a Fund's investments, on the one hand, and the investments of the
other accounts, on the other. The other accounts may have the same investment
objective as one of the Funds. Therefore, a potential conflict of interest may
arise as a result of the identical investment objectives, whereby the portfolio
managers could favor one account over another. Another potential conflict could
include the portfolio managers' knowledge about the size, timing and possible
market impact of Fund trades, whereby a portfolio manager could use this
information to the advantage of other accounts and to the disadvantage of a
Fund. However, the Advisor has established policies and procedures to ensure
that the purchase and sale of securities among all accounts it manages are
fairly and equitably allocated.
PORTFOLIO MANAGER COMPENSATION. The Advisor compensates each portfolio manager
for his management of the Funds. The portfolio managers' compensation consists
of a fixed annual salary and a discretionary bonus. The amount of the
discretionary bonus is determined by three components. The first component is a
comparison of the portfolio manager's Fund performance, calculated on a pre-tax
basis, relative to a mutual fund peer's performance and/or to the performance of
applicable internal or external
36
benchmarks as measured over a one-year period. Mutual fund peers are those funds
with similar investment objectives to the Fund managed by the portfolio
managers. Mutual fund peers do not exist for all Rydex Funds. Rydex Funds that
do not have a mutual fund peer available for comparison purposes will instead be
compared to applicable internal or external benchmarks. An external benchmark,
such as the S&P 500(R) Index, will be used for each Rydex Fund that seeks to
track the performance of a published index. For a complete list and description
of the external benchmarks used by the Funds, see "More Information About the
Funds - Benchmarks and Investment Methodology" in the Funds' Prospectuses. An
internal benchmark, such as the inverse of the S&P 500(R) Index, will be used
when an external benchmark is not available. The second component used to
determine the discretionary bonus is based on the Advisor's overall
profitability as measured by its profit margin and assets under management. The
third component used to determine the discretionary bonus is based on a number
of more subjective, but equally important, factors, including a portfolio
manager's enhancements to existing products, creation of new products and
concepts, support of sales, marketing, and client service, and contributions to
the advancement of the organization as a whole.
FUND SHARES OWNED BY PORTFOLIO MANAGERS. The following table shows the dollar
amount range of each portfolio manager's "beneficial ownership" of shares of
each Fund as of October 31, 2007. Dollar amount ranges disclosed are established
by the SEC. "Beneficial ownership" is determined in accordance with Rule
16a-1(a)(2) under the Exchange Act. With the exception of those Funds listed
below, none of the portfolio managers beneficially owned shares of the Funds as
of October 31, 2007.
----------------------------------------------------------------------------
DOLLAR RANGE OF
PORTFOLIO MANAGER FUND NAME FUND SHARES
----------------------------------------------------------------------------
Michael P. Byrum Rydex S&P Equal Weight ETF $10,001 - $50,000
----------------------------------------------------------------------------
Michael Dellapa Rydex S&P MidCap 400 Pure Value ETF $10,001 - $50,000
----------------------------------------------------------------------------
Jim King None $0
----------------------------------------------------------------------------
|
ADMINISTRATION, CUSTODY AND TRANSFER AGENCY AGREEMENTS
State Street Bank and Trust Company (the "Administrator") serves as
Administrator, Custodian and Transfer Agent for the Funds. Its principal address
is P.O. Box 5049, Boston, Massachusetts 02206-5049. Under an Administration
Agreement with the Trust, the Administrator provides necessary administrative
and accounting services for the maintenance and operations of the Trust and the
Funds. In addition, the Administrator makes available the office space,
equipment, personnel and facilities required to provide such services. Under a
Custodian Agreement with the Trust, the Administrator maintains in separate
accounts cash, securities and other assets of the Trust and the Funds, keeps all
necessary accounts and records, and provides other services. The Administrator
is required, upon the order of the Trust, to deliver securities held by the
Custodian and to make payments for securities purchased by the Trust for the
Funds. Pursuant to a Transfer Agency and Service Agreement with the Trust, the
Administrator acts as a transfer agent for the Trust's authorized and issued
shares of beneficial interest, and as dividend disbursing agent of the Trust.
The Advisor compensates the Administrator directly for the foregoing services.
For the fiscal years ended October 31, 2007, October 31, 2006 and October 31,
2005, the Funds paid the following custody, administration and transfer agency
expenses:
37
-------------------------------------------------------------------------------------------------------------
CUSTODY, CUSTODY,
ADMINISTRATION ADMINISTRATION CUSTODY,
AND TRANSFER AND TRANSFER ADMINISTRATION
AGENCY EXPENSES AGENCY EXPENSES AND TRANSFER
PAID DURING THE PAID DURING THE AGENCY EXPENSES
FISCAL YEAR FISCAL YEAR PAID DURING FISCAL
FUND NAME FUND INCEPTION DATE ENDED 2007 ENDED 2006 YEAR ENDED 2005
-------------------------------------------------------------------------------------------------------------
Rydex S&P Equal Weight ETF 04/23/03 $1,119,344.28 $550,815.24 $29,982.40
-------------------------------------------------------------------------------------------------------------
Rydex Russell Top 50 ETF 05/04/05 $ 286,409.63 $ 59,541.06 $29,272.28*
-------------------------------------------------------------------------------------------------------------
Rydex S&P 500 Pure Value ETF 03/01/06 $ 44,199.15 $ 9,649.14*** **
-------------------------------------------------------------------------------------------------------------
Rydex S&P 500 Pure Growth ETF 03/01/06 $ 48,063.11 $ 12,699.53*** **
-------------------------------------------------------------------------------------------------------------
Rydex S&P MidCap 400 Pure
Value ETF 03/01/06 $ 36,017.96 $ 6,627.65*** **
-------------------------------------------------------------------------------------------------------------
Rydex S&P MidCap 400 Pure 03/01/06 $ 39,471.83 $ 12,575.06*** **
Growth ETF
-------------------------------------------------------------------------------------------------------------
Rydex S&P SmallCap 600 03/01/06 $ 51,196.07 $ 14,680.74*** **
Pure Value ETF
-------------------------------------------------------------------------------------------------------------
Rydex S&P SmallCap 600
Pure Growth ETF 03/01/06 $ 42,745.03 $ 11,867.99*** **
-------------------------------------------------------------------------------------------------------------
Rydex S&P Equal Weight
Consumer Discretionary ETF 11/01/06 $ 38,164.41 ** **
-------------------------------------------------------------------------------------------------------------
Rydex S&P Equal Weight
Consumer Staples ETF 11/01/06 $ 17,073.99 ** **
-------------------------------------------------------------------------------------------------------------
Rydex S&P Equal Weight
Energy ETF 11/01/06 $ 16,882.45 ** **
-------------------------------------------------------------------------------------------------------------
Rydex S&P Equal Weight
Financials ETF 11/01/06 $ 25,305.46 ** **
-------------------------------------------------------------------------------------------------------------
Rydex S&P Equal Weight
Health Care ETF 11/01/06 $ 26,152.47 ** **
-------------------------------------------------------------------------------------------------------------
Rydex S&P Equal Weight
Industrials ETF 11/01/06 $ 19,910.39 ** **
-------------------------------------------------------------------------------------------------------------
Rydex S&P Equal Weight
Materials ETF 11/01/06 $ 16,304.79 ** **
-------------------------------------------------------------------------------------------------------------
Rydex S&P Equal Weight
Technology ETF 11/01/06 $ 25,762.80 ** **
-------------------------------------------------------------------------------------------------------------
Rydex S&P Equal Weight
Utilities ETF 11/01/06 $ 17,866.85 ** **
-------------------------------------------------------------------------------------------------------------
|
* From commencement of operations on May 4, 2005.
** Not in operation for the period indicated.
*** From commencement of operations on March 1, 2006.
38
DISTRIBUTION
Pursuant to the Distribution Agreement adopted by the Trust, Rydex Distributors,
Inc. (the "Distributor"), 9601 Blackwell Road, Suite 500, Rockville, Maryland
20850, acts as distributor for the shares of each Fund under the general
supervision and control of the Board and the officers of the Trust. The
Distributor is a subsidiary of Security Benefit and an affiliate of the Advisor.
The Distribution Agreement grants the Distributor the exclusive right to
distribute the shares of each Fund. In addition, the Distribution Agreement
permits the Distributor to receive as compensation any front-end sales load or
other asset-based sales charges collected pursuant to any distribution or
shareholder services plans adopted by a Fund. Each Fund's current distribution
and shareholder services plan, as well as a description of the services
performed under the plan, is described below.
DISTRIBUTION PLAN. Each Fund has adopted a Distribution Plan applicable to the
shares. Under the Distribution Plan, the Distributor, or designated Service
Providers, may receive up to 0.25% of a Fund's assets attributable to shares as
compensation for distribution services pursuant to Rule 12b-1 of the 1940 Act.
Distribution services may include: (i) services in connection with distribution
assistance, or (ii) payments to financial institutions and other financial
intermediaries, such as broker-dealers, mutual fund "supermarkets" and the
Distributor's affiliates and subsidiaries, as compensation for services or
reimbursement of expenses incurred in connection with distribution assistance.
The Distributor may, at its discretion, retain a portion of such payments to
compensate itself for distribution services and distribution related expenses
such as the costs of preparation, printing, mailing or otherwise disseminating
sales literature, advertising, and prospectuses (other than those furnished to
current shareholders of the Funds), promotional and incentive programs, and such
other marketing expenses that the Distributor may incur.
No distribution fees are currently charged to the Funds; there are no plans to
impose these fees, and no such fees will be charged prior to March 1, 2009.
However, in the event that 12b-1 fees are charged in the future, because the
Funds pay these fees out of assets on an ongoing basis, over time these fees may
cost you more than other types of sales charges and will increase the cost of
your investment.
For the fiscal year ended October 31, 2007, the Funds did not pay the
Distributor any fees for services provided pursuant to the terms of the
Distribution Plan including: advertising, printing and mailing of prospectuses
to other than current shareholders; compensation to underwriters; compensation
to broker-dealers; compensation to sales personnel; interest, carrying, or other
financing charges.
COSTS AND EXPENSES. Each Fund bears all expenses of its operation other than
those assumed by the Advisor. Fund expenses include: interest, taxes, brokerage
commissions and other expenses connected with the execution of portfolio
transactions, distribution fees and extraordinary expenses.
BUSINESS CONTINUITY AND DISASTER RECOVERY. The Advisor and the Distributor
(collectively, the "Service Providers") have developed a joint Business
Continuity and Disaster Recovery Program that is designed to minimize the
disruption of normal business operations in the event of a disaster. While the
Service Providers believe that the Program is comprehensive and should enable
them to survive a disaster and reestablish normal business operations in a
timely manner, under certain unusual or unexpected circumstances the Service
Providers could be prevented or hindered from providing services to the Funds
for extended periods of time. These circumstances may include, without
limitation, acts of God, acts of government in its sovereign or contractual
capacity, any act of declared or undeclared war or of a public enemy (including
acts of terrorism), power shortages or failures, utility or communication
failure or delays, labor disputes, strikes, shortages, supply shortages, system
failures or malfunctions. Under each Service Provider's agreement with the
Trust, absent willful misfeasance, bad faith or gross negligence on the part of
the Service Provider, or the reckless disregard of their respective obligations,
the Service
39
Provider generally will not be liable for any related losses to the Funds or to
the Funds' shareholders as a result of such an occurrence.
PRINCIPAL HOLDERS OF SECURITIES
The following table sets forth the name, address and percentage of ownership of
each person who is known by the Trust to own, of record or beneficially, 5% or
more of any class of the Trust's outstanding equity securities as of January 31,
2008.
----------------------------------------------------------------------------------------------
NAME OF PERCENTAGE OF FUND
FUND NAME BENEFICIAL OWNER ADDRESS OF BENEFICIAL OWNER SHARES OWNED
----------------------------------------------------------------------------------------------
Rydex S&P Equal Charles Schwab & 211 Main Street, 19.97%
Weight ETF Co. Inc. San Francisco, CA 94105
----------------------------------------------------------------------
National Financial 200 Liberty Street, 11.71%
Services LLC New York, NY 10281
----------------------------------------------------------------------
Merrill Lynch 101 Hudson Street, 7.63%
Jersey City, NJ 07302
----------------------------------------------------------------------
Pershing LLC 1 Pershing Place, 7.44%
Jersey City, NJ 07399
----------------------------------------------------------------------
TD AMERITRADE 1005 N. Ameritrade Place, 5.27%
Clearing, Inc. Bellevue, NE 68005
----------------------------------------------------------------------
Citigroup Global 333 W. 34th Street, 5.07%
Markets New York, NY 10001
----------------------------------------------------------------------------------------------
Rydex Russell Top 50 Merrill Lynch 101 Hudson Street, 11.72%
ETF Jersey City, NJ 07302
----------------------------------------------------------------------
JP Morgan Chase 14201 Dallas Parkway, 11.03%
Bank NA Dallas, TX 75254
----------------------------------------------------------------------
Charles Schwab & 211 Main Street, 10.80%
Co. Inc. San Francisco, CA 94105
----------------------------------------------------------------------
Citigroup Global 333 W. 34th Street, 8.58%
Markets New York, NY 10001
----------------------------------------------------------------------
National Financial 200 Liberty Street, 7.33%
Services LLC New York, NY 10281
----------------------------------------------------------------------
Northern Trust 50 South LaSalle Street, 6.19%
Company Chicago, IL 60675
----------------------------------------------------------------------------------------------
Rydex S&P 500 Pure Charles Schwab & 211 Main Street, 25.58%
Value ETF Co. Inc. San Francisco, CA 94105
----------------------------------------------------------------------
TD AMERITRADE 1005 N. Ameritrade Place, 12.94%
Clearing, Inc. Bellevue, NE 68005
----------------------------------------------------------------------
JP Morgan Chase 14201 Dallas Parkway, 10.29%
Bank NA Dallas, TX 75254
----------------------------------------------------------------------
National Financial 200 Liberty Street, 7.18%
Services LLC New York, NY 10281
----------------------------------------------------------------------
Goldman Sachs 30 Hudson Street, 7.17%
Execution & Jersey City, NJ 07302
Clearing LP
----------------------------------------------------------------------------------------------
Rydex S&P 500 Pure Charles Schwab & 211 Main Street, 13.14%
Growth ETF Co. Inc. San Francisco, CA 94105
----------------------------------------------------------------------
TD AMERITRADE 1005 N. Ameritrade Place, 12.68%
Clearing, Inc. Bellevue, NE 68005
----------------------------------------------------------------------------------------------
|
40
----------------------------------------------------------------------------------------------
NAME OF PERCENTAGE OF FUND
FUND NAME BENEFICIAL OWNER ADDRESS OF BENEFICIAL OWNER SHARES OWNED
----------------------------------------------------------------------------------------------
Brown Brothers 140 Broadway, 9.85%
Harriman & Co. New York, NY 10005
----------------------------------------------------------------------
Pershing LLC 1 Pershing Place, 9.20%
Jersey City, NJ 07399
----------------------------------------------------------------------
Merrill Lynch 101 Hudson Street, 6.38%
Jersey City, NJ 07302
----------------------------------------------------------------------
Timber Hill 1 Pickwick Plaza, 6.11%
Greenwich, CT 06830
----------------------------------------------------------------------
Raymond James & 880 Carillon Parkway, 5.37%
Associates St. Petersburg, FL 33733
----------------------------------------------------------------------------------------------
Rydex S&P MidCap Pershing LLC 1 Pershing Place, 19.96%
400 Pure Value ETF Jersey City, NJ 07399
----------------------------------------------------------------------
Timber Hill 1 Pickwick Plaza, 14.75%
Greenwich, CT 06830
----------------------------------------------------------------------
Goldman Sachs 30 Hudson Street, 12.28%
Execution & Jersey City, NJ 07302
Clearing LP
----------------------------------------------------------------------
TD AMERITRADE 1005 N. Ameritrade Place, 11.73%
Clearing, Inc. Bellevue, NE 68005
----------------------------------------------------------------------
Charles Schwab & 211 Main Street, 10.89%
Co. Inc. San Francisco, CA 94105
----------------------------------------------------------------------
National Financial 200 Liberty Street, 10.74%
Services LLC New York, NY 10281
----------------------------------------------------------------------
Morgan Stanley Harborside Financial Center, 5.02%
Plaza 3, Jersey City,
NJ 07311
----------------------------------------------------------------------------------------------
Rydex S&P MidCap Goldman Sachs 30 Hudson Street, 31.87%
400 Pure Growth ETF Execution & Jersey City, NJ 07302
Clearing LP
----------------------------------------------------------------------
RBC Dain Rauscher 510 Marquette Avenue, 18.65%
Minneapolis, MN 55402
----------------------------------------------------------------------
Timber Hill 1 Pickwick Plaza, 15.12%
Greenwich, CT 06830
----------------------------------------------------------------------
TD AMERITRADE 1005 N. Ameritrade Place, 6.61%
Clearing, Inc. Bellevue, NE 68005
----------------------------------------------------------------------------------------------
Rydex S&P SmallCap Pershing LLC 1 Pershing Place, 29.27%
600 Pure Value ETF Jersey City, NJ 07399
----------------------------------------------------------------------
TD AMERITRADE 1005 N. Ameritrade Place, 18.59%
Clearing, Inc. Bellevue, NE 68005
----------------------------------------------------------------------
Charles Schwab & 211 Main Street, 12.05%
Co. Inc. San Francisco, CA 94105
----------------------------------------------------------------------
Timber Hill 1 Pickwick Plaza, 10.83%
Greenwich, CT 06830
----------------------------------------------------------------------
National Financial 200 Liberty Street, 9.88%
Services LLC New York, NY 10281
----------------------------------------------------------------------------------------------
Rydex S&P SmallCap Citigroup Global 333 W. 34th Street, 12.93%
600 Pure Growth ETF Markets New York, NY 10001
----------------------------------------------------------------------
Morgan Stanley Harborside Financial Center, 12.06%
Plaza 3, Jersey City,
NJ 07311
----------------------------------------------------------------------------------------------
|
41
----------------------------------------------------------------------------------------------
NAME OF PERCENTAGE OF FUND
FUND NAME BENEFICIAL OWNER ADDRESS OF BENEFICIAL OWNER SHARES OWNED
----------------------------------------------------------------------------------------------
Charles Schwab & 211 Main Street, 11.31%
Co. Inc. San Francisco, CA 94105
----------------------------------------------------------------------
National Financial 200 Liberty Street, 9.75%
Services LLC New York, NY 10281
----------------------------------------------------------------------
Goldman Sachs Co. 180 Maiden Lane, 9.07%
New York, NY 10038
----------------------------------------------------------------------
Bear Stearns One Metrotech Center North, 7.80%
Securities Corp. Brooklyn, NY 11201
----------------------------------------------------------------------
Linsco/Private One Beacon Street, 5.70%
Ledger Co. Boston, MA 02108
----------------------------------------------------------------------
Raymond James & 880 Carillon Parkway, 5.47%
Associates St. Petersburg, FL 33733
----------------------------------------------------------------------------------------------
Rydex S&P Equal PNC Bank NA 8800 Tinicum Boulevard, 27.50%
Weight Consumer Philadelphia, PA 19153
Discretionary ETF ----------------------------------------------------------------------
Citigroup Global 333 W. 34th Street, 23.52%
Markets New York, NY 10001
----------------------------------------------------------------------
Timber Hill 1 Pickwick Plaza, 22.46%
Greenwich, CT 06830
----------------------------------------------------------------------
The Bank of New One Wall Street, 8.25%
York Mellon Corp. New York, NY 10286
----------------------------------------------------------------------
JP Morgan Chase 14201 Dallas Parkway, 8.23%
Bank NA Dallas, TX 75254
----------------------------------------------------------------------------------------------
Rydex S&P Equal Charles Schwab & 211 Main Street, 43.77%
Weight Consumer Co. Inc. San Francisco, CA 94105
Staples ETF ----------------------------------------------------------------------
Timber Hill 1 Pickwick Plaza, 31.23%
Greenwich, CT 06830
----------------------------------------------------------------------
Goldman Sachs 30 Hudson Street, 5.26%
Execution & Jersey City, NJ 07302
Clearing LP
----------------------------------------------------------------------------------------------
Rydex S&P Equal Timber Hill 1 Pickwick Plaza, 28.85%
Weight Energy ETF Greenwich, CT 06830
----------------------------------------------------------------------
Charles Schwab & 211 Main Street, 17.01%
Co. Inc. San Francisco, CA 94105
----------------------------------------------------------------------
National Financial 200 Liberty Street, 15.17%
Services LLC New York, NY 10281
----------------------------------------------------------------------
Bear Stearns One Metrotech Center North, 9.42%
Securities Corp. Brooklyn, NY 11201
----------------------------------------------------------------------
RBC Dain Rauscher 510 Marquette Avenue, 5.24%
Minneapolis, MN 55402
----------------------------------------------------------------------------------------------
Rydex S&P Equal Timber Hill 1 Pickwick Plaza, 35.04%
Weight Financials ETF Greenwich, CT 06830
----------------------------------------------------------------------
Charles Schwab & 211 Main Street, 32.78%
Co. Inc. San Francisco, CA 94105
----------------------------------------------------------------------
Morgan Stanley Harborside Financial Center, 11.18%
Plaza 3, Jersey City,
NJ 07311
----------------------------------------------------------------------------------------------
Rydex S&P Equal Charles Schwab & 211 Main Street, 29.34%
Weight Health Care Co. Inc. San Francisco, CA 94105
----------------------------------------------------------------------------------------------
|
42
----------------------------------------------------------------------------------------------
NAME OF PERCENTAGE OF FUND
FUND NAME BENEFICIAL OWNER ADDRESS OF BENEFICIAL OWNER SHARES OWNED
----------------------------------------------------------------------------------------------
ETF Citigroup Global 333 W. 34th Street, 21.28%
Markets New York, NY 10001
----------------------------------------------------------------------
Merrill Lynch 101 Hudson Street, 15.69%
Jersey City, NJ 07302
----------------------------------------------------------------------------------------------
Rydex S&P Equal Goldman Sachs 30 Hudson Street, 42.63%
Weight Industrials Execution & Jersey City, NJ 07302
ETF Clearing LP
----------------------------------------------------------------------
National Financial 200 Liberty Street, 12.29%
Services LLC New York, NY 10281
----------------------------------------------------------------------
TD AMERITRADE 1005 N. Ameritrade Place, 9.80%
Clearing, Inc. Bellevue, NE 68005
----------------------------------------------------------------------
Charles Schwab & 211 Main Street, 8.45%
Co. Inc. San Francisco, CA 94105
----------------------------------------------------------------------
Citigroup Global 333 W. 34th Street, 7.88%
Markets New York, NY 10001
----------------------------------------------------------------------
Merrill Lynch 101 Hudson Street, 6.43%
Jersey City, NJ 07302
----------------------------------------------------------------------------------------------
Rydex S&P Equal Timber Hill 1 Pickwick Plaza, 50.41%
Weight Materials ETF Greenwich, CT 06830
----------------------------------------------------------------------
Charles Schwab & 211 Main Street, 24.20%
Co. Inc. San Francisco, CA 94105
----------------------------------------------------------------------
National Financial 200 Liberty Street, 9.29%
Services LLC New York, NY 10281
----------------------------------------------------------------------
Bear Stearns One Metrotech Center North, 6.90%
Securities Corp. Brooklyn, NY 11201
----------------------------------------------------------------------------------------------
Rydex S&P Equal Goldman Sachs Co. 180 Maiden Lane, 48.91%
Weight Technology New York, NY 10038
ETF
----------------------------------------------------------------------
Goldman Sachs 30 Hudson Street, 15.96%
Execution & Jersey City, NJ 07302
Clearing LP
----------------------------------------------------------------------
Timber Hill 1 Pickwick Plaza, 9.30%
Greenwich, CT 06830
----------------------------------------------------------------------------------------------
Rydex S&P Equal Timber Hill 1 Pickwick Plaza, 64.86%
Weight Utilities ETF Greenwich, CT 06830
----------------------------------------------------------------------
Bear Stearns One Metrotech Center North, 14.54%
Securities Corp. Brooklyn, NY 11201
----------------------------------------------------------------------------------------------
|
BOOK ENTRY ONLY SYSTEM
The following information supplements and should be read in conjunction with the
section in the Prospectus entitled "Shareholder Information."
DTC Acts as securities depository for each Fund's shares. Shares of each Fund
are represented by securities registered in the name of DTC or its nominee, Cede
& Co., and deposited with, or on behalf of, DTC.
DTC, a limited-purpose trust company, was created to hold securities of its
participants (the "DTC Participants") and to facilitate the clearance and
settlement of securities transactions among the DTC
43
Participants in such securities through electronic book-entry changes in
accounts of the DTC Participants, thereby eliminating the need for physical
movement of securities' certificates. DTC Participants include securities
brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations, some of whom (and/or their representatives) own DTC. More
specifically, DTC is owned by a number of its DTC Participants and by the NYSE,
the AMEX and the NASD. Access to the DTC system is also available to others such
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a DTC Participant, either directly or indirectly
(the "Indirect Participants").
Beneficial ownership of shares is limited to DTC Participants, Indirect
Participants and persons holding interests through DTC Participants and Indirect
Participants. Ownership of beneficial interests in shares (owners of such
beneficial interests are referred to herein as "Beneficial Owners") is shown on,
and the transfer of ownership is effected only through, records maintained by
DTC (with respect to DTC Participants) and on the records of DTC Participants
(with respect to Indirect Participants and Beneficial Owners that are not DTC
Participants). Beneficial Owners will receive from or through the DTC
Participant a written confirmation relating to their purchase of shares.
Conveyance of all notices, statements and other communications to Beneficial
Owners is effected as follows. Pursuant to the Depositary Agreement between the
Trust and DTC, DTC is required to make available to the Trust upon request and
for a fee to be charged to the Trust a listing of the shares of any Fund held by
each DTC Participant. The Trust shall inquire of each such DTC Participant as to
the number of Beneficial Owners holding shares, directly or indirectly, through
such DTC Participant. The Trust shall provide each such DTC Participant with
copies of such notice, statement or other communication, in such form, number
and at such place as such DTC Participant may reasonably request, in order that
such notice, statement or communication may be transmitted by such DTC
Participant, directly or indirectly, to such Beneficial Owners. In addition, the
Trust shall pay to each such DTC Participant a fair and reasonable amount as
reimbursement for the expenses attendant to such transmittal, all subject to
applicable statutory and regulatory requirements.
Share distributions shall be made to DTC or its nominee, Cede & Co., as the
registered holder of all shares. DTC or its nominee, upon receipt of any such
distributions, shall credit immediately DTC Participants' accounts with payments
in amounts proportionate to their respective beneficial interests in shares of a
Fund as shown on the records of DTC or its nominee. Payments by DTC Participants
to Indirect Participants and Beneficial Owners of shares held through such DTC
Participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers in bearer
form or registered in a "street name," and will be the responsibility of such
DTC Participants.
The Trust has no responsibility or liability for any aspect of the records
relating to or notices to Beneficial Owners, or payments made on account of
beneficial ownership interests in such shares, or for maintaining, supervising
or reviewing any records relating to such beneficial ownership interests, or for
any other aspect of the relationship between DTC and the DTC Participants or the
relationship between such DTC Participants and the Indirect Participants and
Beneficial Owners owning through such DTC Participants.
DTC may decide to discontinue providing its service with respect to shares at
any time by giving reasonable notice to the Trust and discharging its
responsibilities with respect thereto under applicable law. Under such
circumstances, the Trust shall take action to find a replacement for DTC to
perform its functions at a comparable cost.
44
CREATION AND REDEMPTION OF CREATION UNITS
CREATION
The Trust issues and sells shares of a Fund only in Creation Units on a
continuous basis through the Distributor, without a sales load, at their NAV
next determined after receipt, on any Business Day (as defined below), for an
order received in proper form.
A "Business Day" with respect to the Funds is any day on which the NYSE is open
for business. As of the date of the Prospectus, the NYSE observes the following
holidays: New Year's Day, Martin Luther King, Jr. Day, President's Day
(Washington's Birthday), Good Friday, Memorial Day (observed), Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.
FUND DEPOSIT. The consideration for purchase of a Creation Unit of a Fund
generally consists of an in-kind deposit of a designated portfolio of equity
securities - the "Deposit Securities" -- per each Creation Unit constituting a
substantial replication, or a representation, of the stocks included in the
Fund's Underlying Index and an amount of cash -- the Cash Component -- computed
as described below. Together, the Deposit Securities and the Cash Component
constitute the "Fund Deposit," which represents the minimum initial and
subsequent investment amount for a Creation Unit of a Fund. The Cash Component
is an amount equal to the difference between the NAV of the shares (per Creation
Unit) and the market value of the Deposit Securities. If the Cash Component is a
positive number (I.E., the NAV per Creation Unit exceeds the market value of the
Deposit Securities), the Cash Component shall be such positive amount. If the
Cash Component is a negative number (I.E., the NAV per Creation Unit is less
than the market value of the Deposit Securities), the Cash Component shall be
such negative amount and the creator will be entitled to receive cash from a
Fund in an amount equal to the Cash Component. The Cash Component serves the
function of compensating for any differences between the NAV per Creation Unit
and the market value of the Deposit Securities.
The Custodian, through the National Securities Clearing Corporation ("NSCC")
(discussed below), makes available on each Business Day, immediately prior to
the opening of business on the New York Stock Exchange (currently 9:30 a.m.,
Eastern Time), the list of the names and the required number of shares of each
Deposit Security to be included in the current Fund Deposit (based on
information at the end of the previous Business Day) for a Fund. Such Fund
Deposit is applicable, subject to any adjustments as described below, in order
to effect creations of Creation Units of a Fund until such time as the
next-announced composition of the Deposit Securities is made available.
The identity and number of shares of the Deposit Securities required for a Fund
Deposit for a Fund changes as rebalancing adjustments and corporate action
events are reflected from time to time by the Advisor with a view to the
investment objective of a Fund. The composition of the Deposit Securities may
also change in response to adjustments to the weighting or composition of the
Component Stocks of the Index. In addition, the Trust reserves the right to
permit or require the substitution of an amount of cash -- I.E., a "cash in
lieu" amount -- to be added to the Cash Component to replace any Deposit
Security which may not be available in sufficient quantity for delivery or which
may not be eligible for transfer through the Clearing Process (discussed below),
or which may not be eligible for trading by an authorized Participant (as
defined below) or the investor for which it is acting. Brokerage commissions
incurred in connection with acquisition of Deposit Securities not eligible for
transfer through the systems of DTC and hence not eligible for transfer through
the Clearing Process (discussed below) will be at the expense of a Fund and will
affect the value of the shares; but the Advisor, subject to the approval of the
Board, may adjust the transaction fee within the parameters described above to
protect ongoing shareholders. The adjustments described above will reflect
changes, known to the Advisor on the date of announcement to be in effect by the
time of delivery of the Fund Deposit, in the composition of the Index being
tracked by a Fund or resulting from certain corporate actions.
45
In addition to the list of names and numbers of securities constituting the
current Deposit Securities of a Fund Deposit, the Custodian, through the NSCC,
also makes available on each Business Day, the estimated Cash Component,
effective through and including the previous Business Day, per outstanding share
of a Fund.
PROCEDURES FOR CREATION OF CREATION UNITS. To be eligible to place orders with
the Distributor to create a Creation Unit of a Fund, an entity must be (i) a
"Participating Party", I.E., a broker-dealer or other participant in the
clearing process through the Continuous Net Settlement System of the NSCC (the
"Clearing Process"), a clearing agency that is registered with the SEC; or (ii)
a DTC Participant (see "Book Entry Only System"), and, in each case, must have
executed an agreement with the Trust, the Distributor and the Transfer Agent
with respect to creations and redemptions of Creation Units ("Participant
Agreement") (discussed below). A Participating Party and DTC Participant are
collectively referred to as an "Authorized Participant." Investors should
contact the Distributor for the names of Authorized Participants that have
signed a Participant Agreement with the Funds. All shares of a Fund, however
created, will be entered on the records of DTC in the name of Cede & Co. for the
account of a DTC Participant.
All orders to create Creation Units must be placed for one or more Creation Unit
size aggregations of shares (50,000 in the case of the Funds). All orders to
create Creation Units, whether through the Clearing Process (through a
Participating Party) or outside the Clearing Process (through a DTC
Participant), must be received by the Distributor no later than the close of the
regular trading session on the NYSE (ordinarily 4:00 p.m. Eastern Time)
("Closing Time"), if transmitted by mail, or 3:00 p.m. Eastern Time, if
transmitted by telephone, facsimile or other transmission method permitted under
the Participant Agreement, on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of shares of a Fund
as next determined on such date after receipt of the order in proper form. The
date on which an order to create Creation Units (or an order to redeem Creation
Units as discussed below) is placed is referred to as the "Transmittal Date".
Orders must be transmitted by an Authorized Participant by telephone or other
transmission method acceptable to the Distributor pursuant to procedures set
forth in the Participant Agreement, as described below (see "Placement of
Creation Orders Using Clearing Process" and "Placement of Creation Orders
Outside Clearing Process"). Severe economic or market disruptions or changes, or
telephone or other communication failure, may impede the ability to reach the
Distributor or an Authorized Participant.
Orders to create Creation Units of a Fund shall be placed with an Authorized
Participant, as applicable, in the form required by such Authorized Participant.
In addition, the Authorized Participant may request the investor to make certain
representations or enter into agreements with respect to the order, I.E., to
provide for payments of cash, when required. Investors should be aware that
their particular broker may not have executed a Participant Agreement, and that,
therefore, orders to create Creation Units of a Fund have to be placed by the
investor's broker through an Authorized Participant that has executed a
Participant Agreement. At any given time there may be only a limited number of
broker-dealers that have executed a Participant Agreement. Those placing orders
for Creation Units through the Clearing Process should afford sufficient time to
permit proper submission of the order to the Distributor prior to the Closing
Time on the Transmittal Date.
Orders for creation that are effected outside the Clearing Process are likely to
require transmittal by the DTC Participant earlier on the Transmittal Date than
orders effected using the Clearing Process. Those persons placing orders outside
the Clearing Process should ascertain the deadlines applicable to DTC and the
Federal Reserve Bank wire system by contacting the operations department of the
broker or depository institution effectuating such transfer of Deposit
Securities and Cash Component.
46
PLACEMENT OF CREATION ORDERS USING THE CLEARING PROCESS. The Clearing Process is
the process of creating or redeeming Creation Units through the Continuous Net
Settlement System of the NSCC. Fund Deposits made through the Clearing Process
must be delivered through a Participating Party that has executed a Participant
Agreement. The Participant Agreement authorizes the Distributor to transmit
through the Transfer Agent to NSCC, on behalf of the Participating Party, such
trade instructions as are necessary to effect the Participating Party's creation
order. Pursuant to such trade instructions to NSCC, the Participating Party
agrees to deliver the requisite Deposit Securities and the Cash Component to the
Trust, together with such additional information as may be required by the
Distributor. An order to create Creation Units through the Clearing Process is
deemed received by the Distributor on the Transmittal Date if (i) such order is
received by the Distributor not later than the Closing Time, if transmitted by
mail, or 3:00 p.m. Eastern Time, if transmitted by other means, on such
Transmittal Date and (ii) all other procedures set forth in the Participant
Agreement are properly followed.
PLACEMENT OF CREATION ORDERS OUTSIDE THE CLEARING PROCESS. Fund Deposits made
outside the Clearing Process must be delivered through a DTC Participant that
has executed a Participant Agreement with the Trust, the Distributor and the
Transfer Agent. A DTC Participant who wishes to place an order creating Creation
Units to be effected outside the Clearing Process need not be a Participating
Party, but such orders must state that the DTC Participant is not using the
Clearing Process and that the creation of Creation Units will instead be
effected through a transfer of securities and cash directly through DTC. A Fund
Deposit transfer must be ordered by the DTC Participant on the Transmittal Date
in a timely fashion so as to ensure the delivery of the requisite number of
Deposit Securities through DTC to the account of the Trust by no later than
11:00 a.m., Eastern Time, of the next Business Day immediately following the
Transmittal Date. All questions as to the number of Deposit Securities to be
delivered, and the validity, form and eligibility (including time of receipt)
for the deposit of any tendered securities, will be determined by the Trust,
whose determination shall be final and binding. The cash equal to the Cash
Component must be transferred directly to the Custodian through the Federal
Reserve wire system in a timely manner so as to be received by the Custodian no
later than 2:00 p.m., Eastern Time, on the next Business Day immediately
following such Transmittal Date. An order to create Creation Units outside the
Clearing Process is deemed received by the Distributor on the Transmittal Date
if (i) such order is received by the Distributor not later than the Closing Time
if transmitted by mail, or by 3:00 p.m. Eastern Time, if transmitted by other
means on such Transmittal Date; and (ii) all other procedures set forth in the
Participant Agreement are properly followed. However, if the Custodian does not
receive both the requisite Deposit Securities and the Cash Component by 11:00
a.m. and 2:00 p.m., respectively, on the next Business Day immediately following
the Transmittal Date, such order will be cancelled. Upon written notice to the
Distributor, such cancelled order may be resubmitted the following Business Day
using a Fund Deposit as newly constituted to reflect the then current NAV of a
Fund. The delivery of Creation Units of Funds so created will occur no later
than the third (3rd) Business Day following the day on which the purchase order
is deemed received by the Distributor.
Creation Units may be created in advance of receipt by the Trust of all or a
portion of the applicable Deposit Securities as described below. In these
circumstances, the initial deposit will have a value greater than the NAV of the
Shares on the date the order is placed in proper form since in addition to
available Deposit Securities, cash must be deposited in an amount equal to the
sum of (i) the Cash Component, plus (ii) 115% of the market value of the
undelivered Deposit Securities (the "Additional Cash Deposit"). The order shall
be deemed to be received on the Business Day on which the order is placed
provided that the order is placed in proper form prior to 3:00 p.m. or 4:00
p.m., Eastern Time, as applicable, on such date and federal funds in the
appropriate amount are deposited with the Trust's Custodian by 11:00 a.m.,
Eastern Time, the following Business Day. If the order is not placed in proper
form by 3:00 or 4:00 p.m., or federal funds in the appropriate amount are not
received by 11:00 a.m. the next Business Day, then the order may be deemed to be
rejected and the investor shall be liable to the Trust for losses, if any,
resulting therefrom. An additional amount of cash shall be required to be
deposited with the Trust, pending
47
delivery of the missing Deposit Securities to the extent necessary to maintain
the Additional Cash Deposit with the Trust in an amount at least equal to 115%
of the daily marked to market value of the missing Deposit Securities. To the
extent that missing Deposit Securities are not received by 1:00 p.m., Eastern
Time, on the third Business Day following the day on which the purchase order is
deemed received by the Distributor or in the event a mark to market payment is
not made within one Business Day following notification by the Distributor that
such a payment is required, the Trust may use the cash on deposit to purchase
the missing Deposit Securities. Authorized Participants will be liable to the
Trust for the costs incurred by the Trust in connection with any such purchases.
These costs will be deemed to include the amount by which the actual purchase
price of the Deposit Securities exceeds the market value of such Deposit
Securities on the day the purchase order was deemed received by the Distributor
plus the brokerage and related transaction costs associated with such purchases.
The Trust will return any unused portion of the Additional Cash Deposit once all
of the missing Deposit Securities have been properly received by the Custodian
or purchased by the Trust and deposited into the Trust. In addition, a
transaction fee will be charged in all cases. The delivery of Creation Units of
Funds so created will occur no later than the third Business Day following the
day on which the purchase order is deemed received by the Distributor.
ACCEPTANCE OF ORDERS FOR CREATION UNITS. The Trust reserves the absolute right
to reject a creation order transmitted to it by the Distributor in respect of
the Funds if (a) the order is not in proper form; (b) the investor(s), upon
obtaining the shares ordered, would own 80% or more of the currently outstanding
shares of any Fund; (c) the Deposit Securities delivered are not as disseminated
through the facilities of the Exchange for that date by the Custodian, as
described above; (d) acceptance of the Deposit Securities would have certain
adverse tax consequences to a Fund; (e) the acceptance of the Fund Deposit
would, in the opinion of counsel, be unlawful; (f) the acceptance of the Fund
Deposit would otherwise, in the discretion of the Trust or the Advisor, have an
adverse effect on the Trust or the rights of beneficial owners; or (g) in the
event that circumstances outside the control of the Trust, the Distributor and
the Advisor make it for all practical purposes impossible to process creation
orders. Examples of such circumstances include acts of God or public service or
utility problems such as fires, floods, extreme weather conditions and power
outages resulting in telephone, telecopy and computer failures; market
conditions or activities causing trading halts; systems failures involving
computer or other information systems affecting the Trust, the Advisor, the
Distributor, DTC, NSCC or any other participant in the creation process, and
similar extraordinary events. The Distributor shall notify a prospective creator
of a Creation Unit and/or the Authorized Participant acting on behalf of the
creator of a Creation Unit of its rejection of the order of such person. The
Trust, the Transfer Agent, the Custodian and the Distributor are under no duty,
however, to give notification of any defects or irregularities in the delivery
of Fund Deposits nor shall either of them incur any liability for the failure to
give any such notification.
All questions as to the number of shares of each security in the Deposit
Securities and the validity, form, eligibility and acceptance for deposit of any
securities to be delivered shall be determined by the Trust, and the Trust's
determination shall be final and binding.
CREATION TRANSACTION FEE. To compensate the Trust for transfer and other
transaction costs involved in creation transactions through the Clearing
Process, investors will be required to pay a fixed creation transaction fee,
assessed per transaction, as follows:
48
--------------------------------------------------------------------------
FUND CREATION TRANSACTION FEE
--------------------------------------------------------------------------
Rydex S&P Equal Weight ETF $2,000
--------------------------------------------------------------------------
Rydex Russell Top 50(R) ETF $ 500
--------------------------------------------------------------------------
Rydex S&P 500 Pure Value ETF $1,000
--------------------------------------------------------------------------
Rydex S&P 500 Pure Growth ETF $1,000
--------------------------------------------------------------------------
Rydex S&P MidCap 400 Pure Value ETF $ 750
--------------------------------------------------------------------------
Rydex S&P MidCap 400 Pure Growth ETF $ 750
--------------------------------------------------------------------------
Rydex S&P SmallCap 600 Pure Value ETF $1,000
--------------------------------------------------------------------------
Rydex S&P SmallCap 600 Pure Growth ETF $1,000
--------------------------------------------------------------------------
Rydex S&P Equal Weight Consumer
Discretionary ETF $ 750
--------------------------------------------------------------------------
Rydex S&P Equal Weight Consumer Staples ETF $ 500
--------------------------------------------------------------------------
Rydex S&P Equal Weight Energy ETF $ 500
--------------------------------------------------------------------------
Rydex S&P Equal Weight Financials ETF $ 750
--------------------------------------------------------------------------
Rydex S&P Equal Weight Health Care ETF $ 500
--------------------------------------------------------------------------
Rydex S&P Equal Weight Industrials ETF $ 500
--------------------------------------------------------------------------
Rydex S&P Equal Weight Materials ETF $ 500
--------------------------------------------------------------------------
Rydex S&P Equal Weight Technology ETF $ 750
--------------------------------------------------------------------------
Rydex S&P Equal Weight Utilities ETF $ 500
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|
An additional charge of up to four (4) times the fixed transaction fee
(expressed as a percentage of the value of the Deposit Securities) may be
imposed for (i) creations effected outside the Clearing Process; and (ii) cash
creations or partial cash creations (when cash creations are available) to
offset the Trust's brokerage and other transaction costs associated with using
cash to purchase the requisite Deposit Securities. Investors are responsible for
the costs of transferring the securities constituting the Deposit Securities to
the account of the Trust.
The Funds, subject to approval by the Board, may adjust the fee from time to
time based upon actual experience. Investors who use the services of a broker or
other such intermediary in addition to an Authorized Participant to effect a
creation of a Creation Unit may be charged a fee for such services.
REDEMPTION
Shares may be redeemed only in Creation Units at their NAV next determined after
receipt of a redemption request in proper form by a Fund through the Transfer
Agent and only on a Business Day. The Trust will not redeem shares in amounts
less than Creation Units. Beneficial Owners must accumulate enough shares in the
secondary market to constitute a Creation Unit in order to have such shares
redeemed by the Trust. There can be no assurance, however, that there will be
sufficient liquidity in the public trading market at any time to permit assembly
of a Creation Unit. Investors should expect to incur brokerage and other costs
in connection with assembling a sufficient number of shares to constitute a
redeemable Creation Unit.
With respect to the Funds, the Custodian, through the NSCC, makes available
immediately prior to the opening of business on the New York Stock Exchange
(currently 9:30 am, Eastern Time) on each Business Day, the Fund Securities that
will be applicable (subject to possible amendment or correction) to redemption
requests received in proper form (as defined below) on that day. Fund Securities
received on redemption may not be identical to Deposit Securities which are
applicable to creations of Creation Units.
Unless cash redemptions are available or specified for a Fund, the redemption
proceeds for a Creation Unit generally consist of Fund Securities - as announced
by the Custodian on the Business Day of the request for redemption received in
proper form -- plus cash in an amount equal to the difference between the NAV of
the shares being redeemed, as next determined after a receipt of a request in
proper form, and the value of the Fund Securities (the "Cash Redemption
Amount"), less a redemption transaction fee described below in the section
entitled "Redemption Transaction Fee". In the event that the Fund
49
Securities have a value greater than the NAV of the shares, a compensating cash
payment equal to the differential is required to be made by or through an
Authorized Participant by the redeeming shareholder.
PLACEMENT OF REDEMPTION ORDERS USING THE CLEARING PROCESS. Orders to redeem
Creation Units through the Clearing Process must be delivered through a
Participating Party that has executed the Participant Agreement. An order to
redeem Creation Units using the Clearing Process is deemed received on the
Transmittal Date if (i) such order is received by the Transfer Agent not later
than 4:00 p.m., Eastern Time, on such Transmittal Date; and (ii) all other
procedures set forth in the Participant Agreement are properly followed; such
order will be effected based on the NAV of a Fund as next determined. An order
to redeem Creation Units using the Clearing Process made in proper form but
received by a Fund after 4:00 p.m., Eastern Time, will be deemed received on the
next Business Day immediately following the Transmittal Date and will be
effected at the NAV next determined on such Business Day. The requisite Fund
Securities and the Cash Redemption Amount will be transferred by the third (3rd)
NSCC Business Day following the date on which such request for redemption is
deemed received.
PLACEMENT OF REDEMPTION ORDERS OUTSIDE OF THE CLEARING PROCESS. Orders to redeem
Creation Units outside the Clearing Process must be delivered through a DTC
Participant that has executed the Participant Agreement. A DTC Participant who
wishes to place an order for redemption of Creation Units to be effected outside
the Clearing Process need not be a Participating Party, but such orders must
state that the DTC Participant is not using the Clearing Process and that
redemption of Creation Units will instead be effected through transfer of shares
directly through DTC. An order to redeem Creation Units outside the Clearing
Process is deemed received by the Transfer Agent on the Transmittal Date if (i)
such order is received by the Transfer Agent not later than 4:00 p.m., Eastern
TIME, if transmitted by mail, or by 3:00 p.m. Eastern Time, if transmitted by
other means, on such Transmittal Date; (ii) such order is accompanied or
proceeded by the requisite number of shares of a Fund and the Cash Redemption
Amount specified in such order, which delivery must be made through DTC to the
Custodian no later than 11:00 a.m. and 2:00 p.m., respectively, Eastern Time, on
the next Business Day following such Transmittal Date (the "DTC Cut-Off-Time");
and (iii) all other procedures set forth in the Participant Agreement are
properly followed.
After the Transfer Agent has deemed an order for redemption outside the Clearing
Process received, the Transfer Agent will initiate procedures to transfer the
requisite Fund Securities which are expected to be delivered within three
Business Days and the Cash Redemption Amount to the Authorized Participant on
behalf of the redeeming Beneficial Owner by the third Business Day following the
Transmittal Date on which such redemption order is deemed received by the
Transfer Agent.
The calculation of the value of the Fund Securities and the Cash Redemption
Amount to be delivered upon redemption will be made by the Custodian according
to the procedures set forth under "Determination of Net Asset Value" computed on
the Business Day on which a redemption order is deemed received by the Transfer
Agent. Therefore, if a redemption order in proper form is submitted to the
Transfer Agent by a DTC Participant not later than the Closing Time if
transmitted by mail, or by 3:00 p.m. if transmitted by other means on the
Transmittal Date, and the requisite number of shares of the relevant Fund are
delivered to the Custodian prior to the DTC Cut-Off-Time, then the value of the
Fund Securities and the Cash Redemption Amount to be delivered will be
determined by the Custodian on such Transmittal Date. If, however, a redemption
order is submitted to the Transfer Agent by a DTC Participant not later than the
Closing Time on the Transmittal Date but either (1) the requisite number of
shares of the relevant Fund are not delivered by the DTC Cut-Off-Time as
described above on the next Business Day following the Transmittal Date or (2)
the redemption order is not submitted in proper form, then the redemption order
will not be deemed received as of the Transmittal Date. In such case, the value
of the Fund Securities and the Cash Redemption Amount to be delivered will be
computed on the
50
Business Day that such order is deemed received by the Transfer Agent, I.E., the
Business Day on which the shares of a Fund are delivered through DTC to the
Custodian by the DTC Cut-Off-Time on such Business Day pursuant to a properly
submitted redemption order.
If it is not possible to effect deliveries of the Fund Securities, the Trust may
in its discretion exercise its option to redeem such shares in cash, and the
redeeming Beneficial Owner will be required to receive its redemption proceeds
in cash. In addition, an investor may request a redemption in cash which the
Funds may, in their sole discretion, permit. In either case, the investor will
receive a cash payment equal to the NAV of its shares based on the NAV of shares
of a Fund next determined after the redemption request is received in proper
form (minus a redemption transaction fee and additional charge for requested
cash redemptions specified above, to offset the Trust's brokerage and other
transaction costs associated with the disposition of Fund Securities). Each Fund
may also, in its sole discretion, upon request of a shareholder, provide such
redeemer a portfolio of securities which differs from the exact composition of
the Fund Securities but does not differ in NAV.
Redemptions of shares for Fund Securities will be subject to compliance with
applicable federal and state securities laws and the Funds (whether or not it
otherwise permits cash redemptions) reserves the right to redeem Creation Units
for cash to the extent that the Funds could not lawfully deliver specific Fund
Securities upon redemptions or could not do so without first registering the
Fund Securities under such laws. An Authorized Participant or an investor for
which it is acting subject to a legal restriction with respect to a particular
stock included in the Fund Securities applicable to the redemption of a Creation
Unit may be paid an equivalent amount of cash. The Authorized Participant may
request the redeeming Beneficial Owner of the shares to complete an order form
or to enter into agreements with respect to such matters as compensating cash
payment, beneficial ownership of shares or delivery instructions.
The right of redemption may be suspended or the date of payment postponed with
respect to any Fund (1) for any period during which the NYSE is closed (other
than customary weekend and holiday closings); (2) for any period during which
trading on the NYSE is suspended or restricted; (3) for any period during which
an emergency exists as a result of which disposal of the shares of a Fund or
determination of the shares' NAV is not reasonably practicable; or (4) in such
other circumstance as is permitted by the SEC.
REDEMPTION TRANSACTION FEE. To compensate the Trust for transfer and other
transaction costs involved in redemption transactions through the Clearing
Process, investors will be required to pay a fixed redemption transaction fee,
assessed per transaction as follows:
--------------------------------------------------------------------------
FUND REDEMPTION TRANSACTION FEE
--------------------------------------------------------------------------
Rydex S&P Equal Weight ETF $2,000
--------------------------------------------------------------------------
Rydex Russell Top 50(R) ETF $ 500
--------------------------------------------------------------------------
Rydex S&P 500 Pure Value ETF $1,000
--------------------------------------------------------------------------
Rydex S&P 500 Pure Growth ETF $1,000
--------------------------------------------------------------------------
Rydex S&P MidCap 400 Pure Value ETF $ 750
--------------------------------------------------------------------------
Rydex S&P MidCap 400 Pure Growth ETF $ 750
--------------------------------------------------------------------------
Rydex S&P SmallCap 600 Pure Value ETF $1,000
--------------------------------------------------------------------------
Rydex S&P SmallCap 600 Pure Growth ETF $1,000
--------------------------------------------------------------------------
Rydex S&P Equal Weight Consumer
Discretionary ETF $ 750
--------------------------------------------------------------------------
Rydex S&P Equal Weight Consumer Staples ETF $ 500
--------------------------------------------------------------------------
Rydex S&P Equal Weight Energy ETF $ 500
--------------------------------------------------------------------------
Rydex S&P Equal Weight Financials ETF $ 750
--------------------------------------------------------------------------
Rydex S&P Equal Weight Health Care ETF $ 500
--------------------------------------------------------------------------
Rydex S&P Equal Weight Industrials ETF $ 500
--------------------------------------------------------------------------
Rydex S&P Equal Weight Materials ETF $ 500
--------------------------------------------------------------------------
Rydex S&P Equal Weight Technology ETF $ 750
--------------------------------------------------------------------------
Rydex S&P Equal Weight Utilities ETF $ 500
--------------------------------------------------------------------------
|
51
An additional charge of up to four (4) times the fixed transaction fee may be
imposed for (i) redemptions effected outside the Clearing Process; and (ii) cash
redemptions or partial cash redemptions (when cash redemptions are available).
The Funds, subject to approval by the Board, may adjust the fee from time to
time based upon actual experience. Investors who use the services of a broker or
other such intermediary in addition to an Authorized Participant to effect a
redemption of a Creation Unit may be charged a fee for such services.
DETERMINATION OF NET ASSET VALUE
The following information supplements and should be read in conjunction with the
section in the Prospectus entitled "Calculating NAV."
The NAV per share of a Fund is computed by dividing the value of the net assets
of the Fund (I.E., the value of its total assets less total liabilities) by the
total number of shares of the Fund outstanding, rounded to the nearest cent.
Expenses and fees, including without limitation, the management, administration
and distribution fees, are accrued daily and taken into account for purposes of
determining NAV. The NAV of per share for a Fund is calculated by the Custodian
and determined as of the close of the regular trading session on the NYSE
(ordinarily 4:00 p.m., Eastern Time) on each day that such exchange is open.
In computing a Fund's NAV, the Fund's securities holdings are valued based on
their last quoted current price. Price information on listed securities is taken
from the exchange where the security is primarily traded. Securities regularly
traded in an OTC market are valued at the latest quoted sales price on the
primary exchange or national securities market on which such securities are
traded. Securities not listed on an exchange or national securities market, or
securities in which there was no last reported sales price, are valued at the
most recent bid price. Other portfolio securities and assets for which market
quotations are not readily available are valued based on fair value as
determined in good faith by the Advisor in accordance with procedures adopted by
the Board.
DIVIDENDS, DISTRIBUTIONS, AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The following information supplements and should be read in conjunction with the
section in the Prospectus entitled "Shareholder Information."
GENERAL POLICIES. Dividends from net investment income, if any, are declared and
paid at least annually by the Funds. Distributions of net realized securities
gains, if any, generally are declared and paid once a year, but the Trust may
make distributions on a more frequent basis for the Funds. The Trust reserves
the right to declare special distributions if, in its reasonable discretion,
such action is necessary or advisable to preserve the status of a Fund as a
Regulated Investment Company (a "RIC") under the Internal Revenue Code of 1986,
as amended (the "Code"), or to avoid imposition of income or excise taxes on
undistributed income.
52
Dividends and other distributions on shares are distributed, as described below,
on a pro rata basis to Beneficial Owners of such shares. Dividend payments are
made through DTC Participants and Indirect Participants to Beneficial Owners
then of record with proceeds received from the Funds.
DIVIDEND REINVESTMENT SERVICE. No reinvestment service is provided by the Trust.
Broker-dealers may make available the DTC book-entry Dividend Reinvestment
Service for use by Beneficial Owners of the Funds for reinvestment of their
dividend distributions. Beneficial Owners should contact their broker to
determine the availability and costs of the service and the details of
participation therein. Brokers may require Beneficial Owners to adhere to
specific procedures and timetables. If this service is available and used,
dividend distributions of both income and realized gains will be automatically
reinvested in additional whole shares of a Fund purchased in the secondary
market.
FEDERAL INCOME TAXES
The following is only a summary of certain additional federal income tax
considerations generally affecting the Funds and their shareholders that are not
described in the Prospectus. No attempt is made to present a detailed
explanation of the federal, state, local or foreign tax treatment of the Funds
or their shareholders, and the discussion here and in the Prospectus is not
intended to be a substitute for careful tax planning.
The following general discussion of certain federal income tax consequences is
based on provisions of the Code and the regulations issued thereunder as in
effect on the date of this SAI. New legislation, as well as administrative
changes or court decisions, may significantly change the conclusions expressed
herein, and may have a retroactive effect with respect to the transactions
contemplated herein.
Shareholders are urged to consult their own tax advisers regarding the
application of the provisions of tax law described in this SAI in light of the
particular tax situations of the shareholders and regarding specific questions
as to federal, state, or local taxes.
REGULATED INVESTMENT COMPANY (RIC) STATUS
The Funds will seek to qualify for treatment as a RIC under the Code. Provided
that for each tax year each Fund: (i) meets the requirements to be treated as a
RIC (as discussed below); and (ii) distributes at least 90% of the Fund's net
investment income for such year (including, for this purpose, the excess of net
realized short-term capital gains over net long-term capital losses), the Fund
itself will not be subject to federal income taxes to the extent the Fund's net
investment income and the Fund's net realized capital gains, if any, are
distributed to the Fund's shareholders. One of several requirements for RIC
qualification is that a Fund must receive at least 90% of the Fund's gross
income each year from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of stock, securities or foreign
currencies, or other income derived with respect to the Fund's investments in
stock, securities, foreign currencies and net income from an interest in a
qualified publicly traded partnership (the "90% Test"). A second requirement for
qualification as a RIC is that a Fund must diversify its holdings so that, at
the end of each fiscal quarter of the Fund's taxable year: (a) at least 50% of
the market value of the Fund's total assets is represented by cash and cash
items, U.S. Government securities, securities of other RICs, and other
securities, with these other securities limited, in respect to any one issuer,
to an amount not greater than 5% of the value of the Fund's total assets or 10%
of the outstanding voting securities of such issuer; and (b) not more than 25%
of the value of its total assets are invested in the securities (other than U.S.
Government securities or securities of other RICs) of any one issuer or two or
more issuers which the Fund controls and which are engaged in the same, similar,
or related trades or businesses, or the securities of one or more qualified
publicly traded partnership (the "Asset Test").
53
In the event of a failure by a Fund to qualify as a RIC, the Fund's
distributions, to the extent such distributions are derived from the Fund's
current or accumulated earnings and profits, would constitute dividends that
would be taxable to the shareholders of the Fund as ordinary income and would be
eligible for the dividends received deduction for corporate shareholders and as
qualified dividend income for individual shareholders, subject to certain
limitations. This treatment would also apply to any portion of the distributions
that might have been treated in the shareholder's hands as long-term capital
gains, as discussed below, had a Fund qualified as a RIC. The Board reserves the
right not to maintain the qualification of a Fund as a RIC if it determines such
course of action to be beneficial to shareholders. If a Fund determines that it
will not qualify as a RIC under Subchapter M of the Code, the Fund will
establish procedures to reflect the anticipated tax liability in the Fund's NAV.
Each Fund will generally be subject to a nondeductible 4% federal excise tax to
the extent it fails to distribute by the end of any calendar year 98% of its
ordinary income for the year and 98% of its capital gain net income for the
one-year period ending on October 31 of that year, plus certain other amounts.
The Funds intend to make sufficient distributions, or deemed distributions, to
avoid imposition of the excise tax, but can make no assurances that all such tax
liability will be eliminated.
Each Fund intends to distribute substantially all its net investment income and
net realized capital gains to shareholders, at least annually. The distribution
of net investment income and net realized capital gains will be taxable to Fund
shareholders regardless of whether the shareholder elects to receive these
distributions in cash or in additional shares. All or a portion of the net
investment income distributions may be treated as qualified dividend income
(eligible for the reduced maximum rate to individuals of 15% (5% for individuals
in lower tax brackets)) to the extent that a Fund receives qualified dividend
income. Qualified dividend income is, in general, dividend income from taxable
domestic corporations and certain foreign corporations (I.E., foreign
corporations incorporated in a possession of the United States or in certain
countries with a comprehensive tax treaty with the United States, or the stock
of which is readily tradable on an established securities market in the United
States).
In order for some portion of the dividends received by a Fund shareholder to be
qualified dividend income, the Fund must meet holding period and other
requirements with respect to the dividend paying stocks in its portfolio, and
the shareholder must meet holding period and other requirements with respect to
the Fund's shares. Distributions reported to Fund shareholders as long-term
capital gains shall be taxable as such (currently at a maximum rate of 15%),
regardless of how long the shareholder has owned the shares. A Fund's
shareholders will be notified annually by the Fund as to the federal tax status
of all distributions made by the Fund. Distributions may be subject to state and
local taxes.
Absent further legislation, the maximum 15% tax rate on qualified dividend
income and long-term capital gains will cease to apply to taxable years
beginning after December 31, 2010.
Shareholders who have not held Fund shares for a full year should be aware that
the Funds may designate and distribute, as ordinary income or capital gain, a
percentage of income that is not equal to the actual amount of such income
earned during the period of investment in the Funds.
If a Fund's distributions exceed its taxable income and capital gains realized
during a taxable year, all or a portion of the distributions made in the same
taxable year may be recharacterized as a return of capital to shareholders. A
return of capital distribution will generally not be taxable, but will reduce
each shareholder's cost basis in a Fund and result in a higher reported capital
gain or lower reported capital loss when those shares on which the distribution
was received are sold.
Sales and redemptions of Fund shares are generally taxable transactions for
federal and state income tax purposes. In general, if you hold your shares as a
capital asset, gain or loss realized will be capital in
54
nature and will be classified as long-term or short-term, depending on the
length of the time shares have been held.
All or a portion of any loss realized upon the sale or redemption of Fund shares
will be disallowed to the extent that others shares in a Fund are purchased
(through reinvestment of dividends or otherwise) within 30 days before or after
a share redemption. Any loss disallowed under these rules will be added to the
tax basis in the newly purchased shares. In addition, any loss realized by a
shareholder on the disposition of shares held for six months or less is treated
as a long-term capital loss to the extent of any distributions of any net
long-term capital gains received by the shareholder with respect to such shares.
OPTIONS, SWAPS AND OTHER COMPLEX SECURITIES
The Funds may invest in complex securities such as equity options, index
options, repurchase agreements, foreign currency contracts, hedges and swaps,
and futures contracts. These investments may be subject to numerous special and
complex tax rules. These rules could affect whether gains and losses recognized
by a Fund are treated as ordinary income or capital gain, accelerate the
recognition of income to the Fund and/or defer the Fund's ability to recognize
losses. In turn, those rules may affect the amount, timing or character of the
income distributed by a Fund. The Funds may be subject to foreign withholding
taxes on income they may earn from investing in foreign securities, which may
reduce the return on such investments.
A Fund's transactions in swaps, under some circumstances, could preclude the
Fund's qualifying for the special tax treatment available to investment
companies meeting the requirements to be treated as a RIC under Subchapter M of
the Code. However, it is the intention of each Fund's portfolio management to
limit gains from such investments to less than 10% of the gross income of the
Fund during any fiscal year in order to maintain this qualification.
With respect to investments in zero coupon securities which are sold at original
issue discount and thus do not make periodic cash interest payments, a Fund will
be required to include as part of its current income the imputed interest on
such obligations even though the Fund has not received any interest payments on
such obligations during that period. Because each Fund distributes all of its
net investment income to its shareholders, a Fund may have to sell Fund
securities to distribute such imputed income which may occur at a time when the
Advisor would not have chosen to sell such securities and which may result in
taxable gain or loss.
BACK-UP WITHHOLDING
In certain cases a Fund will be required to withhold and remit to the U.S.
Treasury an amount equal to the applicable back-up withholding rate applied to
reportable taxable dividends and distributions, as well as the proceeds of any
redemptions of Fund shares, paid to a shareholder who: (1) has failed to provide
a correct taxpayer identification number (usually the shareholder's social
security number); (2) is subject to back-up withholding by the Internal Revenue
Service ("IRS"); (3) has failed to provide the Fund with the certifications
required by the IRS to document that the shareholder is not subject to back-up
withholding; or (4) has failed to certify that he or she is a U.S. person
(including a U.S. resident alien).
OTHER ISSUES
The Funds may be subject to tax or taxes in certain states where the Funds do
business. Furthermore, in those states which have income tax laws, the tax
treatment of the Funds and of Fund shareholders with respect to distributions by
the Funds may differ from federal tax treatment.
Shareholders are urged to consult their own tax advisers regarding the
application of the provisions of tax law described in this SAI in light of the
particular tax situations of the shareholders and regarding specific questions
as to federal, state, or local taxes.
55
OTHER INFORMATION
The Trust currently consists of twenty-three (23) Funds. The Board may designate
additional Funds. Each share issued by a Fund has a pro rata interest in the
assets of that Fund. Shares have no preemptive, exchange, subscription or
conversion rights and are freely transferable. Each share is entitled to
participate equally in dividends and distributions declared by the Board with
respect to the Funds, and in the net distributable assets of the Funds on
liquidation.
PORTFOLIO HOLDINGS
The Board has approved portfolio holdings disclosure policies that govern the
timing and circumstances of disclosure to shareholders and third parties of
information regarding the portfolio investments held by the Funds. These
policies and procedures, as described below, are designed to ensure that
disclosure of portfolio holdings is in the best interests of Fund shareholders,
and address conflicts of interest between the interests of Fund shareholders and
those of the Funds' Advisor, principal underwriter, or any affiliated person of
the Funds, the Advisor, or the principal underwriter.
Each business day, Fund portfolio holdings information will be provided to the
Distributor or other agent for dissemination through the facilities of the NSCC
and/or other fee-based subscription services to NSCC members and/or subscribers
to those other fee-based subscription services, including Authorized
Participants, and to entities that publish and/or analyze such information in
connection with the process of purchasing or redeeming Creation Units or trading
shares of a Fund in the secondary market. This information typically reflects a
Fund's anticipated holdings on the following business day. Daily access to
information concerning a Fund's portfolio holdings also is permitted (i) to
certain personnel of those service providers that are involved in portfolio
management and providing administrative, operational, risk management, or other
support to portfolio management, including affiliated broker-dealers and/or
Authorized Participants, and (ii) to other personnel of the Advisor and other
service providers, such as the Fund's administrator, custodian and fund
accountant, who deal directly with, or assist in, functions related to
investment management, administration, custody and fund accounting, as may be
necessary to conduct business in the ordinary course in a manner consistent with
agreements with the Funds and/or the terms of the Funds' current registration
statement. As of March 1, 2008, the Funds' portfolio holdings information is
disclosed to the following entities as part of ongoing arrangements that serve
legitimate business purposes: State Street Bank and Trust Company, Securities
Industry Automation Corporation, Goldman Sachs Execution and Clearing, LP,
Bloomberg, Thomson Financial News, ISS, and financial printers.
From time to time, information concerning Fund portfolio holdings, other than
portfolio holdings information made available in connection with the
creation/redemption process, as discussed above, may also be provided to other
entities that provide additional services to the Funds, including, among others,
rating or ranking organizations, in the ordinary course of business, no earlier
than one business day following the date of the information. Portfolio holdings
information made available in connection with the creation/redemption process
may be provided to other entities that provide additional services to the Funds
in the ordinary course of business after it has been disseminated to the NSCC.
The Funds' Chief Compliance Officer, or a Compliance Manager designated by the
Chief Compliance Officer, may also grant exceptions to permit additional
disclosure of Fund portfolio holdings information at differing times and with
different lag times (the period from the date of the information to the date the
information is made available), if any, in instances where a Fund has legitimate
business purposes for doing so, it is in the best interests of shareholders, and
the recipients are subject to a duty of confidentiality, including a duty not to
trade on the nonpublic information and are required to execute an agreement to
that effect. The Board will be informed of any such disclosures at its next
regularly scheduled meeting or as soon as is reasonably practicable thereafter.
In no event shall the Funds, the
56
Advisor, or any other party receive any direct or indirect compensation in
connection with the disclosure of information about a Fund's portfolio holdings.
The Board exercises continuing oversight of the disclosure of each Fund's
portfolio holdings by (1) overseeing the implementation and enforcement of
Portfolio Holdings Disclosure Policies and Procedures, the Code of Ethics, and
the Protection of Non-Public Information Policies and Procedures (collectively,
the portfolio holdings governing policies) by the Funds' Chief Compliance
Officer and the Fund, (2) considering reports and recommendations by the Chief
Compliance Officer concerning any material compliance matters (as defined in
Rule 38a-1 under the 1940 Act and Rule 206(4)-7 under the Investment Advisers
Act of 1940) that may arise in connection with any portfolio holdings governing
policies, and (3) considering whether to approve or ratify any amendment to any
portfolio holdings governing policies. The Board and the Funds reserve the right
to amend the Policies and Procedures at any time and from time to time without
prior notice in their sole discretion. For purposes of the Policies and
Procedures, the term "portfolio holdings" means the equity and debt securities
(e.g., stocks and bonds) held by a Fund and does not mean the cash investments,
derivatives, and other investment positions (collectively, other investment
positions) held by a Fund, which are not disclosed.
In addition to the permitted disclosures described above, each Fund must
disclose its complete holdings quarterly within 60 days of the end of each
fiscal quarter in the Annual Report and Semi-Annual Report to Fund shareholders
and in the quarterly holdings report on Form N-Q. These reports are available,
free of charge, on the EDGAR database on the SEC's web site at www.sec.gov.
VOTING RIGHTS
Each share has one vote with respect to matters upon which a shareholder vote is
required consistent with the requirements of the 1940 Act and the rules
promulgated thereunder. You receive one vote for every full Fund share owned.
Each Fund or class of a Fund, if applicable, will vote separately on matters
relating solely to that Fund or class. All shares of the Funds are freely
transferable.
As a Delaware statutory trust, the Trust is not required to hold annual
Shareholder meetings unless otherwise required by the 1940 Act. However, a
meeting may be called by Shareholders owning at least 10% of the outstanding
shares of the Trust. If a meeting is requested by Shareholders, the Trust will
provide appropriate assistance and information to the Shareholders who requested
the meeting. Shareholder inquiries can be made by calling 800.820.0888 or
301.296.5100, or by writing to the Trust at 9601 Blackwell Road, Suite 500,
Rockville, Maryland 20850.
SHAREHOLDER INQUIRIES
Shareholders may visit the Trust's web site at www.rydexinvestments.com or call
800.820.0888 or 301.296.5100 to obtain information on account statements,
procedures, and other related information.
INDEX PUBLISHERS INFORMATION
STANDARD & POOR'S
The Rydex S&P Equal Weight ETF, Rydex S&P Pure Style ETFs, and Rydex S&P Equal
Weight Sector ETFs (the "S&P Funds") are not sponsored, endorsed, sold or
promoted by Standard & Poor's ("S&P") or Citigroup Global Markets Inc.
("Citigroup"). S&P and Citigroup make no representation, condition, warranty,
express or implied, to the owners of the S&P Funds or any member of the public
regarding the advisability of investing in securities generally or in the S&P
Funds particularly or the ability of the S&P Equal Weight Index, S&P
500/Citigroup Pure Value Index, S&P 500/Citigroup Pure Growth Index, S&P MidCap
400/Citigroup Pure Value Index, S&P MidCap 400 Pure Growth Index, S&P SmallCap
600/Citigroup Pure Value Index, S&P SmallCap 600/Citigroup Pure Growth Index,
S&P Equal Weight Index Consumer Discretionary, S&P Equal Weight Index Consumer
Staples, S&P Equal Weight Index
57
Energy, S&P Equal Weight Index Financials, S&P Equal Weight Index Health Care,
S&P Equal Weight Index Industrials, S&P Equal Weight Index Information
Technology, S&P Equal Weight Index Materials and S&P Equal Weight Index
Telecommunication Services & Utilities (the "S&P Indices") to track general
stock market performance. S&P's and Citigroup's only relationship to Rydex
Investments (the "Licensee") is the licensing of certain of their trademarks and
of the S&P Indices which are determined, composed and calculated by S&P without
regard to Licensee or the S&P Funds. S&P and Citigroup have no obligation to
take the needs of Licensee or the owners of the S&P Funds into consideration in
determining, composing or calculating the S&P Indices. Neither S&P nor Citigroup
is responsible for and has not participated in the determination of the prices
and amount of the S&P Funds or the timing of the issuance or sale of the S&P
Funds or in the determination or calculation of the equation by which the S&P
Funds are to be converted into cash. S&P and Citigroup have no obligation or
liability in connection with the administration, marketing, or trading of the
S&P Funds.
S&P and Citigroup do not guarantee the accuracy and/or the completeness of the
S&P Indices or any data included therein and S&P and Citigroup shall have no
liability for any errors, omissions, or interruptions therein. S&P and Citigroup
make no warranty or condition, express or implied, as to the results to be
obtained by Licensee, owners of the S&P Funds, or any other person or entity
from the use of the S&P Indices or any data included therein. S&P and Citigroup
make no express or implied warranties or conditions, and expressly disclaim all
warranties or conditions of merchantability or fitness for a particular purpose
or use with respect to the S&P Indices or any data included therein. Without
limiting any of the foregoing, in no event shall S&P or Citigroup have any
liability for any special, punitive, indirect, or consequential damages
(including lost profits) resulting from the use of the Indexes or any data
included therein, even if notified of the possibility of such damages.
"Standard & Poor's(R)," S&P(R)," "S&P 500(R)," "Standard & Poor's 500," "500,"
"Standard & Poor's MidCap 400," "S&P MidCap 400," Standard & Poor's SmallCap,"
"S&P SmallCap 600," "S&P 500/Citigroup Pure Value," "S&P 500/Citigroup Pure
Growth," "S&P MidCap 400/Citigroup Pure Value," "S&P MidCap 400/Citigroup Pure
Growth," "S&P SmallCap 600/Citigroup Pure Value," and "S&P SmallCap
600/Citigroup Pure Growth" are trademarks of The McGraw-Hill Companies, Inc. and
Citigroup, Inc. and have been licensed for use by Rydex Investments.
FRANK RUSSELL COMPANY ("RUSSELL")
The Rydex Russell Top 50(R) ETF is not sponsored, endorsed, sold or promoted by
Russell. Russell makes no representation or warranty, express or implied, to the
owners of the Rydex Russell Top 50(R) ETF or any member of the public regarding
the advisability of investing in securities generally or in the Rydex Russell
Top 50(R) ETF particularly or the ability of the Russell Top 50(R) Index to
track general stock market performance or a segment of the same. Russell's
publication of the Russell Top 50(R) Index in no way suggests or implies an
opinion by Russell as to the advisability of investment in any or all of the
securities upon which the Russell Top 50(R) Index is based. Russell's only
relationship to Rydex Investments (the "Licensee") is the licensing of certain
trademarks and trade names of Russell and of the Russell Top 50(R) Index which
is determined, composed and calculated by Russell without regard to the Licensee
or the Rydex Russell Top 50(R) ETF. Russell is not responsible for and has not
reviewed the Rydex Russell Top 50(R) ETF nor any associated literature or
publications and Russell makes no representation or warranty express or implied
as to their accuracy or completeness, or otherwise. Russell reserves the right,
at any time and without notice, to alter, amend, terminate or in any way change
the Russell Top 50(R) Index. Russell has no obligation or liability in
connection with the administration, marketing or trading of the Rydex Russell
Top 50(R) ETF.
Russell does not guarantee the accuracy and/or the completeness of the Russell
Top 50(R) Index or any data included therein and Russell shall have no liability
for any errors, omissions, or interruptions therein. Russell makes no warranty,
express or implied, as to results to be obtained by the Licensee, investors,
58
owners of the Rydex Russell Top 50(R) ETF, or any other person or entity from
the use of the Russell Top 50(R) Index or any data included therein. Russell
makes no express or implied warranties, and expressly disclaims all warranties
of merchantability or fitness for a particular purpose of use with respect to
the Russell Top 50(R) Index or any data included therein. Without limiting any
of the foregoing, in no event shall Russell have any liability for any special,
punitive, indirect, or consequential damages (including lost profits), even if
notified of the possibility of such damages.
"Frank Russell(R)," "Russell(R)," and "Russell 2000(R)" are trademarks of
Russell and have been licensed for use by the Licensee.
COUNSEL
Morgan, Lewis & Bockius LLP serves as counsel to the Trust.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young LLP, 200 Clarendon Street, Boston, Massachusetts 02116-5072,
serves as the independent registered public accounting firm to the Trust and the
Funds and provides audit services, tax return review, and assistance and
consultation with respect to the preparation of filings with the SEC.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian"), P.O. Box 5049, Boston, MA
02206-5049, serves as custodian for the Fund under a custody agreement between
the Trust and the Custodian. Under the custody agreement, the Custodian holds
the portfolio securities of each Fund and maintains all necessary related
accounts and records.
FINANCIAL STATEMENTS
The Trust's financial statements and financial highlights for the fiscal year
ended October 31, 2007 appearing in the Trust's Annual Report, filed with the
SEC on January 7, 2008 via EDGAR Accession No. 0000950135-08-000062 are
incorporated by reference into this SAI. Those financial statements and
financial highlights have been audited by Ernst & Young LLP, independent
registered public accounting firm, as indicated in their report thereon, and are
incorporated herein by reference in reliance upon such report, given on the
authority of Ernst & Young LLP as experts in accounting and auditing.
The financial highlights for each of the three years in the period ended October
31, 2005 for the Rydex S&P Equal Weight ETF and the Rydex Russell Top 50(R) ETF
have been audited by PricewaterhouseCoopers LLP, independent registered public
accounting firm, as indicated in their report thereon, and are included in
reliance upon such report, given on the authority of PricewaterhouseCoopers LLP
as experts in accounting and auditing.
The Trust's Annual Report includes the financial statements referenced above and
is available without charge upon request by calling Shareholder Services at
1-800-820-0888.
59
APPENDIX A
RYDEX INVESTMENTS
PROXY VOTING POLICIES AND PROCEDURES
I. INTRODUCTION
PADCO Advisors, Inc. and PADCO Advisors II, Inc., together doing business
as Rydex Investments, generally are responsible for voting proxies with respect
to securities held in client accounts, including clients registered as
investment companies under the Investment Company Act of 1940 ("Funds") and
clients that are pension plans ("Plans") subject to the Employee Retirement
Income Security Act of 1974 ("ERISA"). This document sets forth Rydex
Investments' policies and guidelines with respect to proxy voting and its
procedures to comply with SEC Rule 206(4)-6 under the Investment Advisers Act of
1940. Specifically, Rule 206(4)-6 requires that we:
o Adopt and implement written policies and procedures reasonably
designed to ensure that we vote client securities in the best
interest of clients;
o Disclose to clients how they may obtain information from us about
how we voted proxies for their securities; and
o Describe our proxy voting policies and procedures to clients and
furnish them a copy of our policies and procedures on request.
II. PROXY VOTING POLICIES AND PROCEDURES
A. Proxy Voting Policies
Proxies may have economic value and, where Rydex Investments is given
responsibility for voting proxies, we must take reasonable steps under the
circumstances to ensure that proxies are received and voted in the best
long-term economic interests of our clients, which generally means voting
proxies with a view to enhancing the value of the shares of stock held in client
accounts, considering all relevant factors and without undue influence from
individuals or groups who may have an economic interest in the outcome of the
proxy vote. Our authority is initially established by our advisory contracts or
comparable documents. Clients, however, may change their proxy voting direction
at any time.
The financial interest of our clients is the primary consideration in
determining how proxies should be voted. Any material conflicts of interest
between Rydex Investments and our clients with respect to proxy voting are
resolved in the best interests of clients, in accordance with the procedures
described in Section III, below.
B. Proxy Voting Procedures
Rydex Investments utilizes the services of an outside proxy voting firm,
Institutional Shareholder Services ("ISS"), to act as agent for the proxy
process, to maintain records on proxy votes for our clients, and to provide
independent research on corporate governance, proxy and corporate responsibility
issues. In the absence of contrary instructions received from Rydex Investments,
ISS will vote proxies in accordance with the proxy voting guidelines (the
"Guidelines") attached as SCHEDULE A hereto, as such
A-1
Guidelines may be revised from time to time by Rydex Investments' portfolio
management group (the "Committee"). Under its arrangement with ISS, Rydex
Investments has agreed to:
o provide ISS with a copy of the Guidelines and to inform ISS promptly
of any changes to the Guidelines;
o deliver to ISS, on a timely basis, all documents, information and
materials necessary to enable ISS to provide the services
contemplated to be performed by it on a timely and efficient basis
(such as conveying to ISS a power of attorney with respect to the
services to be provided hereunder and providing ISS on a timely
basis with Rydex Investments' authorized stamp, proxy cards, special
voting instructions, authorization letters to custodian banks and
any other materials necessary for the performance by ISS of its
duties);
o provide ISS with a data file containing portfolio information (such
as account numbers, share amounts, and security identifiers such as
cusip and/or serial numbers) on a regular basis; and
o coordinate with ISS with respect to the classification of proxy
items and for the treatment of items not clearly defined under the
Guidelines.
III. RESOLVING POTENTIAL CONFLICTS OF INTEREST
The Committee is responsible for identifying potential conflicts of
interest in regard to the proxy voting process. Examples of potential conflicts
of interest include:
o managing a pension plan for a company whose management is soliciting
proxies;
o having a material business relationship with a proponent of a proxy
proposal in which this business relationship may influence how the
proxy vote is cast; and
o Rydex Investments, its employees or affiliates having a business or
personal relationship with participants in a proxy contest,
corporate directors or candidates for directorships.
To ensure that all proxies are voted in the best interests of clients and
are not the product of any potential conflict of interest, if a potential
conflict of interest exists Rydex Investments will instruct ISS to vote in
accordance with the established Guidelines. In the absence of established
Guidelines (I.E., in instances where the Guidelines provide for a "case-by-case"
review), Rydex Investments may vote a proxy regarding that proposal in any of
the following manners:
o REFER PROPOSAL TO THE CLIENT - Rydex Investments may refer the
proposal to the client and obtain instructions from the client on
how to vote the proxy relating to that proposal.
o OBTAIN CLIENT RATIFICATION - If Rydex Investments is in a position
to disclose the conflict to the client (I.E., such information is
not confidential), Rydex Investments may determine how it proposes
to vote the proposal on which it has a conflict, fully disclose the
nature of the conflict to the client, and obtain the client's
consent to how Rydex Investments will vote on the proposal (or
otherwise obtain instructions from the client on how the proxy on
the proposal should be voted).
A-2
o USE AN INDEPENDENT THIRD PARTY FOR ALL PROPOSALS - Subject to any
client imposed proxy voting policies, Rydex Investments may vote all
proposals in a proxy according to the policies of an independent
third party, such as ISS or a similar entity (or to have the third
party vote such proxies).
o USE AN INDEPENDENT THIRD PARTY TO VOTE THE SPECIFIC PROPOSALS THAT
INVOLVE A CONFLICT - Subject to any client imposed proxy voting
policies, Rydex Investments may use an independent third party (such
as ISS) to recommend how the proxy for specific proposals that
involve a conflict should be voted (or to have the third party vote
such proxies).
IV. SECURITIES SUBJECT TO LENDING ARRANGEMENTS
For various legal or administrative reasons, Rydex Investments is often
unable to vote securities that are, at the time of such vote, on loan pursuant
to a client's securities lending arrangement with the client's custodian. Rydex
Investments will refrain from voting such securities where the costs to the
client and/or administrative inconvenience of retrieving securities then on loan
outweighs the benefit of voting, assuming retrieval under such circumstances is
even feasible and/or possible. In certain extraordinary situations, Rydex
Investments may seek to have securities then on loan pursuant to such securities
lending arrangements retrieved by the client's custodian for voting purposes.
This decision will generally be made on a case-by-case basis depending on
whether, in Rydex Investments' judgment, the matter to be voted on has critical
significance to the potential value of the securities in question, the relative
cost and/or administrative inconvenience of retrieving the securities, the
significance of the holding and whether the stock is considered a long-term
holding. There can be no guarantee that any such securities can be retrieved for
such purpose.
V. SPECIAL ISSUES WITH VOTING FOREIGN PROXIES
Voting proxies with respect to shares of foreign stocks may involve
significantly greater effort and corresponding cost due to the variety of
regulatory schemes and corporate practices in foreign countries with respect to
proxy voting. Because the cost of voting on a particular proxy proposal could
exceed the expected benefit to a client (including an ERISA Plan), Rydex
Investments may weigh the costs and benefits of voting on proxy proposals
relating to foreign securities and make an informed decision on whether voting a
given proxy proposal is prudent.
VI. ASSISTANCE WITH FORM N-PX AND PROXY VOTING RECORD
Rydex Investments shall assist its Fund clients in disclosing the
following information on Form N-PX for each proxy matter relating to a portfolio
security considered at any shareholder meeting held during the period covered by
the report and with respect to which Rydex Investments, or ISS as its agent,
voted on the client's behalf by providing the following information to the Fund
on a regular quarterly basis within 30 days after the end of the quarter:
(i) The name of the issuer of the portfolio security;
(ii) The exchange ticker symbol of the portfolio security (if available
through reasonably practicable means);
(iii) The Council on Uniform Security Identification Procedures ("CUSIP")
number for the portfolio security (if available through reasonably
practicable means);
A-3
(iv) The shareholder meeting date;
(v) A brief identification of the matter voted on;
(vi) Whether the matter was proposed by the issuer or by a security
holder;
(vii) Whether Rydex Investments (or ISS as its agent) cast the client's
vote on the matter;
(viii) How Rydex Investments (or ISS as its agent) cast the client's vote
(I.E., for or against proposal, or abstain; for or withhold
regarding election of directors); and
(ix) Whether Rydex Investments (or ISS as its agent) cast the client's
vote for or against management.
VII. DISCLOSURE OF HOW TO OBTAIN VOTING INFORMATION
On or before August 6, 2003, Rule 206(4)-6 requires Rydex Investments to
disclose in response to any client request how the client can obtain information
from Rydex Investments on how its securities were voted. Rydex Investments will
disclose in Part II of its Form ADV that clients can obtain information on how
their securities were voted by making a written request to Rydex Investments.
Upon receiving a written request from a client, Rydex Investments will provide
the information requested by the client within a reasonable amount of time.
Rule 206(4)-6 also requires Rydex Investments to describe its proxy voting
policies and procedures to clients, and upon request, to provide clients with a
copy of those policies and procedures. Rydex Investments will provide such a
description in Part II of its Form ADV. Upon receiving a written request from a
client, Rydex Investments will provide a copy of this policy within a reasonable
amount of time.
If approved by the client, this policy and any requested records may be
provided electronically.
VIII. RECORDKEEPING
Rydex Investments shall keep the following records for a period of at least five
years, the first two in an easily accessible place:
(i) A copy of this Policy;
(ii) Proxy Statements received regarding client securities;
(iii) Records of votes cast on behalf of clients;
(iv) Any documents prepared by Rydex Investments that were material to
making a decision how to vote, or that memorialized the basis for
the decision; and
(v) Records of client requests for proxy voting information,
A-4
With respect to Rydex Investments' Fund clients, the Fund shall maintain a
copy of each of the records that is related to proxy votes on behalf of the Fund
by Rydex Investments. Additionally, Rydex Investments may keep Fund client
records as part of Rydex Investments' records.
Rydex Investments may rely on proxy statements filed on the SEC's EDGAR
system instead of keeping its own copies, and may rely on proxy statements and
records of proxy votes cast by Rydex Investments that are maintained with a
third party, such as ISS, provided that Rydex Investments has obtained an
undertaking from the third party to provide a copy of the documents promptly
upon request.
A-5
SCHEDULE A
TO
RYDEX INVESTMENTS
PROXY VOTING POLICIES AND PROCEDURES
PROXY VOTING GUIDELINES
Rydex Investments believes that management is generally in the best
position to make decisions that are essential to the ongoing operation of the
company and which are not expected to have a major impact on the corporation and
its shareholders. Accordingly, Rydex Investments will generally vote with
management on "routine items" of a corporate administrative nature. Rydex
Investments will generally review all "non-routine items" (I.E., those items
having the potential for major economic impact on the corporation and the
long-term value of its shares) on a case-by-case basis.
BOARD OF DIRECTORS
A. Director Nominees in Uncontested Elections Vote With Mgt.
B. Chairman and CEO is the Same Person Vote With Mgt.
C. Majority of Independent Directors Vote With Mgt.
D. Stock Ownership Requirements Vote With Mgt.
E. Limit Tenure of Outside Directors Vote With Mgt.
F. Director and Officer Indemnification and Liability
Protection Vote With Mgt.
G. Eliminate or Restrict Charitable Contributions Vote With Mgt.
PROXY CONTESTS
A. Voting for Director Nominees in Contested Election Vote With Mgt.
B. Reimburse Proxy Solicitation Vote With Mgt.
AUDITORS
A. Ratifying Auditors Vote With Mgt.
PROXY CONTEST DEFENSES
A. Board Structure - Classified Board Vote With Mgt.
B. Cumulative Voting Vote With Mgt.
C. Shareholder Ability to Call Special Meetings Vote With Mgt.
TENDER OFFER DEFENSES
A. Submit Poison Pill for shareholder ratification Case-by-Case
B. Fair Price Provisions Vote With Mgt.
C. Supermajority Shareholder Vote Requirement Vote With Mgt.
To Amend the Charter or Bylaws
D. Supermajority Shareholder Vote Requirement Vote With Mgt.
MISCELLANEOUS GOVERNANCE PROVISIONS
A. Confidential Voting Vote With Mgt.
B. Equal Access Vote With Mgt.
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A-6
C. Bundled Proposals Vote With Mgt.
CAPITAL STRUCTURE
A. Common Stock Authorization Vote With Mgt.
B. Stock Splits Vote With Mgt.
C. Reverse Stock Splits Vote With Mgt.
D. Preemptive Rights Vote With Mgt.
E. Share Repurchase Programs Vote With Mgt.
EXECUTIVE AND DIRECTOR COMPENSATION
A. Shareholder Proposals to Limit Executive and Case-by-Case
Directors Pay
B. Shareholder Ratification of Golden and Tin Parachutes Vote With Mgt.
C. Employee Stock Ownership Plans Vote With Mgt.
D. 401(k) Employee Benefit Plans Vote With Mgt.
STATE OF INCORPORATION
A. Voting on State Takeover Plans Vote With Mgt.
B. Voting on Reincorporation Proposals Vote With Mgt.
MERGERS AND CORPORATE RESTRUCTURINGS
A. Mergers and Acquisitions Case-by-Case
B. Corporate Restructuring Vote With Mgt.
C. Spin-Offs Vote With Mgt.
D. Liquidations Vote With Mgt.
SOCIAL AND ENVIRONMENTAL ISSUES
A. Issues with Social/Moral Implications Vote With Mgt.
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A-7
STATEMENT OF ADDITIONAL INFORMATION
RYDEX ETF TRUST
9601 BLACKWELL ROAD, SUITE 500
ROCKVILLE, MARYLAND 20850
800.820.0888 OR 301.296.5100
WWW.RYDEXINVESTMENTS.COM
Rydex ETF Trust (the "Trust") is an investment company offering professionally
managed investment portfolios. This Statement of Additional Information ("SAI")
relates to shares of the following portfolios (each a "Fund" and collectively,
the "Funds"):
RYDEX 2X S&P 500 ETF
RYDEX INVERSE 2X S&P 500 ETF
RYDEX 2X S&P MIDCAP 400 ETF
RYDEX INVERSE 2X S&P MIDCAP 400 ETF
RYDEX 2X RUSSELL 2000(R) ETF
RYDEX INVERSE 2X RUSSELL 2000(R) ETF
This SAI is not a prospectus. It should be read in conjunction with the Funds'
Prospectus, dated March 1, 2008. Capitalized terms not defined herein are
defined in the Prospectus. Copies of the Funds' Prospectus are available,
without charge, upon request to the Trust at the address above or by telephoning
the Trust at the telephone numbers above.
The date of this SAI is March 1, 2008
GENERAL INFORMATION ABOUT THE TRUST ....................................... 1
INVESTMENT POLICIES, TECHNIQUES AND RISK FACTORS .......................... 1
SPECIAL CONSIDERATIONS REGARDING THE USE OF LEVERAGED AND
INVERSE INVESTMENT STRATEGIES .......................................... 12
MORE INFORMATION ABOUT THE UNDERLYING INDICES ............................. 15
INVESTMENT RESTRICTIONS ................................................... 17
CONTINUOUS OFFERING ....................................................... 19
EXCHANGE LISTING AND TRADING .............................................. 20
PORTFOLIO TRANSACTIONS AND BROKERAGE ...................................... 20
MANAGEMENT OF THE TRUST ................................................... 22
PRINCIPAL HOLDERS OF SECURITIES ........................................... 34
BOOK ENTRY ONLY SYSTEM .................................................... 35
CREATION AND REDEMPTION OF CREATION UNITS ................................. 37
DETERMINATION OF NET ASSET VALUE .......................................... 44
DIVIDENDS, DISTRIBUTIONS, AND TAXES ....................................... 44
OTHER INFORMATION ......................................................... 47
INDEX PUBLISHERS INFORMATION .............................................. 49
COUNSEL ................................................................... 50
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ............................. 50
CUSTODIAN ................................................................. 50
APPENDIX A - RYDEX INVESTMENTS PROXY VOTING POLICIES AND
PROCEDURES ............................................................. A-1
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-i-
GENERAL INFORMATION ABOUT THE TRUST
The Trust, an open-end management investment company, was organized as a
Delaware statutory trust on November 22, 2002. The Trust currently consists of
twenty-three (23) investment portfolios (I.E., funds). This SAI relates to
shares of the following portfolios: Rydex 2x S&P 500 ETF, Rydex 2x S&P MidCap
400 ETF, and Rydex 2x Russell 2000(R) ETF (each, a "Leveraged Fund" and
collectively, the "Leveraged Funds"); and Rydex Inverse 2x S&P 500 ETF, Rydex
Inverse 2x S&P MidCap 400 ETF, and Rydex Inverse 2x Russell 2000(R) ETF (each, a
"Leveraged Inverse Fund" and collectively, the "Leveraged Inverse Funds"). All
payments received by the Trust for shares of any Fund belong to that Fund. Each
Fund has its own assets and liabilities. Additional series and/or classes may be
created from time to time.
The shares of the Funds are listed and traded on the American Stock Exchange LLC
(the "Exchange"), subject to notice of issuance. The shares of each Fund will
trade on the Exchange at market prices that may be below, at, or above net asset
value ("NAV") of such Fund.
Each Fund offers and issues shares at NAV only in aggregated lots of 50,000
shares (each a "Creation Unit" or a "Creation Unit Aggregation"). Generally each
Leveraged Fund issues Creation Units in exchange for: (i) a basket of equity
securities included in its Underlying Index, as defined below, (the "Deposit
Securities"); and (ii) an amount of cash (the "Cash Component"). Each Leveraged
Inverse Fund issues and redeems Creation Units for cash.
The Trust reserves the right to offer an "all cash" option for creations and
redemptions of Creation Units for any Fund. In addition, Creation Units may be
issued in advance of receipt of Deposit Securities subject to various
conditions, including a requirement to maintain a cash deposit with the Trust at
least equal to 115% of the market value of the missing Deposit Securities. In
each instance, transaction fees may be imposed that will be higher than the
transaction fees associated with traditional in-kind creations or redemptions.
In all cases, such fees will be limited in accordance with U.S. Securities and
Exchange Commission ("SEC") requirements applicable to management investment
companies offering redeemable securities. See the "Creation and Redemption of
Creation Units" section for detailed information.
INVESTMENT POLICIES, TECHNIQUES AND RISK FACTORS
GENERAL
Each Fund's investment objective is to seek to provide investment results that
match, before fees and expenses, the performance of a specific benchmark on a
daily basis. Each Leveraged Fund's benchmark is 200% of the performance of its
Underlying Index. Each Inverse Leveraged Fund's benchmark is 200% of the inverse
(opposite) performance of its Underlying Index. Each Fund's investment objective
is non-fundamental and may be changed without the consent of the holders of a
majority of that Fund's outstanding shares. Additional information concerning
each Fund's investment objective and principal investment strategies is
contained in the Prospectus. Additional information concerning each Fund's
Underlying Index is included below under the heading "More Information About the
Underlying Indices." The following information supplements, and should be read
in conjunction with the Funds' Prospectus.
Portfolio management is provided to the Funds by the Trust's investment adviser,
PADCO Advisors II, Inc. (the "Advisor"). The Advisor, a Maryland corporation
with offices at 9601 Blackwell Road, Suite 500, Rockville, Maryland 20850,
operates under the name Rydex Investments. The investment strategies of the
Funds discussed below and in the Prospectus may be used by the Funds if, in the
opinion of the Advisor, these strategies will be advantageous to the Funds. The
Funds are free to modify or eliminate their activity with respect to any of the
following investment strategies. There is no assurance that any of these
strategies or any other strategies and methods of investment available to the
Funds will result in the achievement of the Funds' respective objectives.
1
BORROWING
While the Funds do not anticipate doing so, each Fund may borrow money for
investment purposes. Borrowing for investment is one form of leveraging.
Leveraging investments, by purchasing securities with borrowed money, is a
speculative technique that increases investment risk, but also increases
investment opportunity. Since substantially all of a Fund's assets will
fluctuate in value, whereas the interest obligations on borrowings may be fixed,
the NAV of the Fund will increase more when the Fund's portfolio assets increase
in value and decrease more when the Fund's portfolio assets decrease in value
than would otherwise be the case. Moreover, interest costs on borrowings may
fluctuate with changing market rates of interest and may partially offset or
exceed the returns on the borrowed funds. Under adverse conditions, a Fund might
have to sell portfolio securities to meet interest or principal payments at a
time when investment considerations would not favor such sales. The Funds intend
to use leverage during periods when the Advisor believes that the respective
Fund's investment objective would be furthered.
Each Fund may also borrow money to facilitate management of the Fund's portfolio
by enabling the Fund to meet redemption requests when the liquidation of
portfolio instruments would be inconvenient or disadvantageous. Such borrowing
is not for investment purposes and will be repaid by the borrowing Fund
promptly. As required by the Investment Company Act of 1940, as amended (the
"1940 Act"), a Fund must maintain continuous asset coverage (total assets,
including assets acquired with borrowed funds, less liabilities exclusive of
borrowings) of 300% of all amounts borrowed. If, at any time, the value of a
Fund's assets should fail to meet this 300% coverage test, a Fund, within three
days (not including Sundays and holidays), will reduce the amount of a Fund's
borrowings to the extent necessary to meet this 300% coverage. Maintenance of
this percentage limitation may result in the sale of portfolio securities at a
time when investment considerations otherwise indicate that it would be
disadvantageous to do so.
In addition to the foregoing, the Funds are authorized to borrow money as a
temporary measure for extraordinary or emergency purposes in amounts not in
excess of 5% of the value of a Fund's total assets. Borrowings for extraordinary
or emergency purposes are not subject to the foregoing 300% asset coverage
requirement. The Funds are authorized to pledge portfolio securities as the
Advisor deems appropriate in connection with any borrowings for extraordinary or
emergency purposes.
EQUITY SECURITIES
The Funds may invest in equity securities. Equity securities represent ownership
interests in a company or partnership and consist of common stocks, preferred
stocks, warrants to acquire common stock, securities convertible into common
stock, and investments in master limited partnerships. Investments in equity
securities in general are subject to market risks that may cause their prices to
fluctuate over time. Fluctuations in the value of equity securities in which a
Fund invests will cause the NAV of the Fund to fluctuate. The U.S. stock market
tends to be cyclical, with periods when stock prices generally rise and periods
when stock prices generally decline. The Funds may purchase equity securities
traded in the U.S. on registered exchanges or the over-the-counter market.
Equity securities are described in more detail below.
o COMMON STOCK. Common stock represents an equity or ownership interest in
an issuer. In the event an issuer is liquidated or declares bankruptcy,
the claims of owners of bonds and preferred stock take precedence over the
claims of those who own common stock.
o PREFERRED STOCK. Preferred stock represents an equity or ownership
interest in an issuer that pays dividends at a specified rate and that has
precedence over common stock in the payment of dividends.
2
In the event an issuer is liquidated or declares bankruptcy, the claims of
owners of bonds take precedence over the claims of those who own preferred
and common stock.
o WARRANTS. Warrants are instruments that entitle the holder to buy an
equity security at a specific price for a specific period of time. Changes
in the value of a warrant do not necessarily correspond to changes in the
value of its underlying security. The price of a warrant may be more
volatile than the price of its underlying security, and a warrant may
offer greater potential for capital appreciation as well as capital loss.
Warrants do not entitle a holder to dividends or voting rights with
respect to the underlying security and do not represent any rights in the
assets of the issuing company. A warrant ceases to have value if it is not
exercised prior to its expiration date. These factors can make warrants
more speculative than other types of investments.
o CONVERTIBLE SECURITIES. Convertible securities are bonds, debentures,
notes, preferred stocks or other securities that may be converted or
exchanged (by the holder or by the issuer) into shares of the underlying
common stock (or cash or securities of equivalent value) at a stated
exchange ratio. A convertible security may also be called for redemption
or conversion by the issuer after a particular date and under certain
circumstances (including a specified price) established upon issue. If a
convertible security held by a Fund is called for redemption or
conversion, the Fund could be required to tender it for redemption,
convert it into the underlying common stock, or sell it to a third party.
Convertible securities generally have less potential for gain or loss than
common stocks. Convertible securities generally provide yields higher than
the underlying common stocks, but generally lower than comparable
non-convertible securities. Because of this higher yield, convertible
securities generally sell at a price above their "conversion value," which
is the current market value of the stock to be received upon conversion.
The difference between this conversion value and the price of convertible
securities will vary over time depending on changes in the value of the
underlying common stocks and interest rates. When the underlying common
stocks decline in value, convertible securities will tend not to decline
to the same extent because of the interest or dividend payments and the
repayment of principal at maturity for certain types of convertible
securities. However, securities that are convertible other than at the
option of the holder generally do not limit the potential for loss to the
same extent as securities convertible at the option of the holder. When
the underlying common stocks rise in value, the value of convertible
securities may also be expected to increase. At the same time, however,
the difference between the market value of convertible securities and
their conversion value will narrow, which means that the value of
convertible securities will generally not increase to the same extent as
the value of the underlying common stocks. Because convertible securities
may also be interest-rate sensitive, their value may increase as interest
rates fall and decrease as interest rates rise. Convertible securities are
also subject to credit risk, and are often lower-quality securities.
o SMALL AND MEDIUM CAPITALIZATION ISSUERS. Investing in equity securities of
small and medium capitalization companies often involves greater risk than
is customarily associated with investments in larger capitalization
companies. This increased risk may be due to the greater business risks of
smaller size, limited markets and financial resources, narrow product
lines and frequent lack of depth of management. The securities of smaller
companies are often traded in the over-the-counter market and even if
listed on a national securities exchange may not be traded in volumes
typical for that exchange. Consequently, the securities of smaller
companies are less likely to be liquid, may have limited market stability,
and may be subject to more abrupt or erratic market movements than
securities of larger, more established growth companies or the market
averages in general.
o MASTER LIMITED PARTNERSHIPS ("MLPS"). MLPs are limited partnerships in
which the ownership units are publicly traded. MLP units are registered
with the SEC and are freely traded on a securities exchange or in the
over-the-counter market. MLPs often own several properties or businesses
(or
3
own interests) that are related to real estate development and oil and gas
industries, but they also may finance motion pictures, research and
development and other projects. Generally, a MLP is operated under the
supervision of one or more managing general partners. Limited partners are
not involved in the day-to-day management of the partnership.
The risks of investing in a MLP are generally those involved in investing
in a partnership as opposed to a corporation. For example, state law
governing partnerships is often less restrictive than state law governing
corporations. Accordingly, there may be fewer protections afforded
investors in a MLP than investors in a corporation. Additional risks
involved with investing in a MLP are risks associated with the specific
industry or industries in which the partnership invests, such as the risks
of investing in real estate, or oil and gas industries.
FUTURES AND OPTIONS TRANSACTIONS
FUTURES AND OPTIONS ON FUTURES. Futures contracts provide for the future sale by
one party and purchase by another party of a specified amount of a specific
security at a specified future time and at a specified price. An option on a
futures contract gives the purchaser the right, in exchange for a premium, to
assume a position in a futures contract at a specified exercise price during the
term of the option. A Fund will reduce the risk that it will be unable to close
out a futures contract by only entering into futures contracts that are traded
on a national futures exchange regulated by the Commodities Futures Trading
Commission ("CFTC"). The Funds may use futures contracts and related options for
BONA FIDE hedging; attempting to offset changes in the value of securities held
or expected to be acquired or be disposed of; attempting to gain exposure to a
particular market, index or instrument; or other risk management purposes. To
the extent a Fund uses futures and/or options on futures, it will do so in
accordance with Rule 4.5 under the Commodity Exchange Act ("CEA"). The Trust, on
behalf of all of its series, including the Funds, has filed a notice of
eligibility for exclusion from the definition of the term "commodity pool
operator" in accordance with Rule 4.5 and therefore, the Funds are not subject
to registration or regulation as a commodity pool operator under the CEA.
Each Fund may buy and sell index futures contracts with respect to any stock
index traded on a recognized stock exchange or board of trade. An index futures
contract is a bilateral agreement pursuant to which two parties agree to take or
make delivery of an amount of cash equal to a specified dollar amount times the
difference between the index value at the close of trading of the contract and
the price at which the futures contract is originally struck. No physical
delivery of the securities comprising the index is made. Instead, settlement in
cash must occur upon the termination of the contract, with the settlement being
the difference between the contract price and the actual level of the stock
index at the expiration of the contract. Generally, contracts are closed out
prior to the expiration date of the contract.
When a Fund purchases or sells a futures contract, or sells an option thereon,
the Fund is required to "cover" its position in order to limit leveraging and
related risks. To cover its position, a Fund may maintain with its custodian
bank (and marked-to-market on a daily basis), a segregated account consisting of
cash or liquid securities that, when added to any amounts deposited with a
futures commission merchant as margin, are equal to the market value of the
futures contract or otherwise "cover" its position in a manner consistent with
the 1940 Act or the rules and SEC interpretations thereunder. If a Fund
continues to engage in the described securities trading practices and properly
segregates assets, the segregated account will function as a practical limit on
the amount of leverage which the Fund may undertake and on the potential
increase in the speculative character of the Fund's outstanding portfolio
securities. Additionally, such segregated accounts will generally assure the
availability of adequate funds to meet the obligations of the fund arising from
such investment activities.
Each Fund may also cover its long position in a futures contract by purchasing a
put option on the same futures contract with a strike price (I.E., an exercise
price) as high or higher than the price of the futures
4
contract. In the alternative, if the strike price of the put is less than the
price of the futures contract, a Fund will maintain, in a segregated account,
cash or liquid securities equal in value to the difference between the strike
price of the put and the price of the futures contract. Each Fund may also cover
its long position in a futures contract by taking a short position in the
instruments underlying the futures contract (or, in the case of an index futures
contract, a portfolio with a volatility substantially similar to that of the
index on which the futures contract is based), or by taking positions in
instruments with prices which are expected to move relatively consistently with
the futures contract. Each Fund may cover its short position in a futures
contract by taking a long position in the instruments underlying the futures
contracts, or by taking positions in instruments with prices which are expected
to move relatively consistently with the futures contract.
Each Fund may cover its sale of a call option on a futures contract by taking a
long position in the underlying futures contract at a price less than or equal
to the strike price of the call option. In the alternative, if the long position
in the underlying futures contract is established at a price greater than the
strike price of the written (sold) call, a Fund will maintain, in a segregated
account, cash or liquid securities equal in value to the difference between the
strike price of the call and the price of the futures contract. Each Fund may
also cover its sale of a call option by taking positions in instruments with
prices which are expected to move relatively consistently with the call option.
Each Fund may cover its sale of a put option on a futures contract by taking a
short position in the underlying futures contract at a price greater than or
equal to the strike price of the put option, or, if the short position in the
underlying futures contract is established at a price less than the strike price
of the written put, a Fund will maintain, in a segregated account, cash or
liquid securities equal in value to the difference between the strike price of
the put and the price of the futures contract. Each Fund may also cover its sale
of a put option by taking positions in instruments with prices which are
expected to move relatively consistently with the put option.
There are significant risks associated with the Funds' use of futures contracts
and related options, including the following: (1) the success of a hedging
strategy may depend on the Advisor's ability to predict movements in the prices
of individual securities, fluctuations in markets and movements in interest
rates; (2) there may be an imperfect or no correlation between the changes in
market value of the securities held by a Fund and the prices of futures and
options on futures; (3) there may not be a liquid secondary market for a futures
contract or option; (4) trading restrictions or limitations may be imposed by an
exchange; and (5) government regulations may restrict trading in futures
contracts and options on futures. In addition, some strategies reduce a Fund's
exposure to price fluctuations, while others tend to increase its market
exposure.
OPTIONS. The Funds may purchase and write put and call options on securities and
stock indices and enter into related closing transactions. A put option on a
security gives the purchaser of the option the right to sell, and the writer of
the option the obligation to buy, the underlying security at any time during the
option period. A call option on a security gives the purchaser of the option the
right to buy, and the writer of the option the obligation to sell, the
underlying security at any time during the option period. The premium paid to
the writer is the consideration for undertaking the obligations under the option
contract.
Put and call options on indices are similar to options on securities except that
options on an index give the holder the right to receive, upon exercise of the
option, an amount of cash if the closing level of the Underlying Index is
greater than (or less than, in the case of puts) the exercise price of the
option. This amount of cash is equal to the difference between the closing price
of the index and the exercise price of the option, expressed in dollars
multiplied by a specified number. Thus, unlike options on individual securities,
all settlements are in cash, and gain or loss depends on price movements in the
particular market represented by the index generally, rather than the price
movements in individual securities.
5
All options written on indices or securities must be covered. When a Fund writes
an option on a security, an index or a foreign currency, it will establish a
segregated account containing cash or liquid securities in an amount at least
equal to the market value of the option and will maintain the account while the
option is open or will otherwise cover the transaction.
The Funds may trade put and call options on securities, securities indices and
currencies, as the investment adviser determines is appropriate in seeking a
Fund's investment objective, and except as restricted by a Fund's investment
limitations. See "Investment Restrictions."
The initial purchase (sale) of an option contract is an "opening transaction."
In order to close out an option position, a Fund may enter into a "closing
transaction," which is simply the sale (purchase) of an option contract on the
same security with the same exercise price and expiration date as the option
contract originally opened. If a Fund is unable to effect a closing purchase
transaction with respect to an option it has written, it will not be able to
sell the underlying security until the option expires or the Fund delivers the
security upon exercise.
Each Fund may purchase put and call options on securities to protect against a
decline in the market value of the securities in its portfolio or to anticipate
an increase in the market value of securities that a Fund may seek to purchase
in the future. A Fund purchasing put and call options pays a premium; therefore,
if price movements in the underlying securities are such that exercise of the
options would not be profitable for a Fund, loss of the premium paid may be
offset by an increase in the value of the Fund's securities or by a decrease in
the cost of acquisition of securities by the Fund.
A Fund may write covered call options on securities as a means of increasing the
yield on its assets and as a means of providing limited protection against
decreases in its market value. When a Fund writes an option, if the underlying
securities do not increase or decrease to a price level that would make the
exercise of the option profitable to the holder thereof, the option generally
will expire without being exercised and the Fund will realize as profit the
premium received for such option. When a call option of which a Fund is the
writer is exercised, the Fund will be required to sell the underlying securities
to the option holder at the strike price, and will not participate in any
increase in the price of such securities above the strike price. When a put
option of which a Fund is the writer is exercised, the Fund will be required to
purchase the underlying securities at a price in excess of the market value of
such securities.
The Funds may purchase and write options on an exchange or over-the-counter
("OTC"). OTC options differ from exchange-traded options in several respects.
They are transacted directly with dealers and not with a clearing corporation,
and therefore entail the risk of non-performance by the dealer. OTC options are
available for a greater variety of securities and for a wider range of
expiration dates and exercise prices than are available for exchange-traded
options. Because OTC options are not traded on an exchange, pricing is done
normally by reference to information from a market maker. It is the SEC's
position that OTC options are generally illiquid.
The market value of an option generally reflects the market price of an
underlying security. Other principal factors affecting market value include
supply and demand, interest rates, the pricing volatility of the underlying
security and the time remaining until the expiration date.
Risks associated with options transactions include: (1) the success of a hedging
strategy may depend on an ability to predict movements in the prices of
individual securities, fluctuations in markets and movements in interest rates;
(2) there may be an imperfect correlation between the movement in prices of
options and the securities underlying them; (3) there may not be a liquid
secondary market for options; and (4) while a Fund will receive a premium when
it writes covered call options, it may not participate fully in a rise in the
market value of the underlying security.
6
ILLIQUID SECURITIES
While none of the Funds anticipate doing so, each Fund may purchase or hold
illiquid securities, including securities that are not readily marketable and
securities that are not registered ("restricted securities") under the
Securities Act of 1933, as amended (the "1933 Act"), but which can be offered
and sold to "qualified institutional buyers" under Rule 144A under the 1933 Act.
A Fund will not invest more than 15% of the Fund's net assets in illiquid
securities. If the percentage of a Fund's net assets invested in illiquid
securities exceeds 15% due to market activity, the Fund will take appropriate
measures to reduce its holdings of illiquid securities. The term "illiquid
securities" for this purpose means securities that cannot be disposed of within
seven days in the ordinary course of business at approximately the amount at
which a Fund has valued the securities. Under the current guidelines of the
staff of the SEC, illiquid securities also are considered to include, among
other securities, purchased OTC options, certain cover for OTC options,
repurchase agreements with maturities in excess of seven days, and certain
securities whose disposition is restricted under the federal securities laws. A
Fund may not be able to sell illiquid securities when the Advisor considers it
desirable to do so or may have to sell such securities at a price that is lower
than the price that could be obtained if the securities were more liquid. In
addition, the sale of illiquid securities also may require more time and may
result in higher dealer discounts and other selling expenses than does the sale
of securities that are not illiquid. Illiquid securities also may be more
difficult to value due to the unavailability of reliable market quotations for
such securities, and investment in illiquid securities may have an adverse
impact on NAV.
Institutional markets for restricted securities have developed as a result of
the promulgation of Rule 144A under the 1933 Act, which provides a "safe harbor"
from 1933 Act registration requirements for qualifying sales to institutional
investors. When Rule 144A restricted securities present an attractive investment
opportunity and meet other selection criteria, a Fund may make such investments
whether or not such securities are "illiquid" depending on the market that
exists for the particular security. The board of trustees of the Trust (the
"Board") has delegated the responsibility for determining the liquidity of Rule
144A restricted securities, which may be invested in by a Fund, to the Advisor.
INVESTMENTS IN OTHER INVESTMENT COMPANIES
The Funds may invest in the securities of other investment companies to the
extent that such an investment would be consistent with the requirements of
Section 12(d)(1) of the 1940 Act, or any rule, regulation or order of the SEC. A
Fund, therefore, may invest in the securities of another investment company (the
"acquired company") provided that the Fund, immediately after such purchase or
acquisition, does not own in the aggregate: (i) more than 3% of the total
outstanding voting stock of the acquired company; (ii) securities issued by the
acquired company having an aggregate value in excess of 5% of the value of the
total assets of the Fund; or (iii) securities issued by the acquired company and
all other investment companies (other than Treasury stock of the Fund) having an
aggregate value in excess of 10% of the value of the total assets of the Fund. A
Fund may also invest in the securities of other investment companies if such
securities are the only investment securities held by the Fund.
If a Fund invests in, and thus, is a shareholder of, another investment company,
the Fund's shareholders will indirectly bear the Fund's proportionate share of
the fees and expenses paid by such other investment company, including advisory
fees, in addition to both the management fees payable directly by the Fund to
the Fund's own investment adviser and the other expenses that the Fund bears
directly in connection with the Fund's own operations.
Investment companies may include index-based investments, such as other ETFs
that hold substantially all of their assets in securities representing a
specific index. The main risk of investing in index-based investments is the
same as investing in a portfolio of equity securities comprising the index. The
market prices of ETFs will fluctuate in accordance with both changes in the
market value of their underlying portfolio
7
securities and due to supply and demand for the instruments on the exchanges on
which they are traded (which may result in their trading at a discount or
premium to their NAVs). ETFs may not replicate exactly the performance of their
specific index because of transaction costs and because of the temporary
unavailability of certain component securities of the index.
LENDING OF PORTFOLIO SECURITIES
Each Fund may lend portfolio securities to brokers, dealers and other financial
organizations that meet capital and other credit requirements or other criteria
established by the Funds' Board. These loans, if and when made, may not exceed
33 1/3% of the total asset value of a Fund (including the loan collateral). No
Fund will lend portfolio securities to the Advisor or its affiliates unless it
has applied for and received specific authority to do so from the SEC. Loans of
portfolio securities will be fully collateralized by cash, letters of credit or
U.S. Government securities, and the collateral will be maintained in an amount
equal to at least 100% of the current market value of the loaned securities by
marking to market daily. Any gain or loss in the market price of the securities
loaned that might occur during the term of the loan would be for the account of
the Funds. The Funds may pay a part of the interest earned from the investment
of collateral, or other fee, to an unaffiliated third party for acting as the
Funds' securities lending agent. By lending its securities, a Fund may increase
its income by receiving payments from the borrower that reflect the amount of
any interest or any dividends payable on the loaned securities as well as by
either investing cash collateral received from the borrower in short-term
instruments or obtaining a fee from the borrower when U.S. Government securities
or letters of credit are used as collateral.
Each Fund will adhere to the following conditions whenever its portfolio
securities are loaned: (i) the Fund must receive at least 100% cash collateral
or equivalent securities of the type discussed in the preceding paragraph from
the borrower; (ii) the borrower must increase such collateral whenever the
market value of the securities rises above the level of such collateral; (iii)
the Fund must be able to terminate the loan on demand; (iv) the Fund must
receive reasonable interest on the loan, as well as any dividends, interest or
other distributions on the loaned securities and any increase in market value;
(v) the Fund may pay only reasonable fees in connection with the loan (which
fees may include fees payable to the lending agent, the borrower, the Fund's
administrator and the custodian); and (vi) voting rights on the loaned
securities may pass to the borrower, provided, however, that if a material event
adversely affecting the investment occurs, the Fund must terminate the loan and
regain the right to vote the securities. The Board has adopted procedures
reasonably designed to ensure that the foregoing criteria will be met. Loan
agreements involve certain risks in the event of default or insolvency of the
borrower, including possible delays or restrictions upon a Fund's ability to
recover the loaned securities or dispose of the collateral for the loan, which
could give rise to loss because of adverse market action, expenses and/or delays
in connection with the disposition of the underlying securities.
PORTFOLIO TURNOVER
Portfolio turnover may vary from year to year, as well as within a year. A
higher portfolio turnover rate would likely involve correspondingly greater
brokerage commissions and transaction and other expenses which would be borne by
the Funds. In addition, a Fund's portfolio turnover level may adversely affect
the ability of the Fund to achieve its investment objective. Because each Fund's
portfolio turnover rate, to a great extent, will depend on the creation and
redemption activity of investors, it is difficult to estimate what the Fund's
actual portfolio turnover rate will be in the future. However, the Trust expects
that the portfolio turnover experienced by the Funds will be substantial.
"Portfolio Turnover Rate" is defined under the rules of the SEC as the lesser of
the value of the securities purchased or of the securities sold, excluding all
securities whose maturities at the time of acquisition were one-year or less,
divided by the average monthly value of such securities owned during the year.
Based on this definition, instruments with a remaining maturity of less than
one-year are excluded from the calculation of the portfolio turnover rate.
Instruments excluded from the calculation of portfolio
8
turnover generally would include the futures contracts and option contracts in
which the Funds invest since such contracts generally have a remaining maturity
of less than one-year.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with financial institutions. Each
Fund follows certain procedures designed to minimize the risks inherent in such
agreements. These procedures include effecting repurchase transactions only with
large, well-capitalized and well-established financial institutions whose
condition will be continually monitored by the Advisor. In addition, the value
of the collateral underlying the repurchase agreement will always be at least
equal to the repurchase price, including any accrued interest earned on the
repurchase agreement. In the event of a default or bankruptcy by a selling
financial institution, a Fund will seek to liquidate such collateral. However,
the exercising of a Fund's right to liquidate such collateral could involve
certain costs or delays and, to the extent that proceeds from any sale upon a
default of the obligation to repurchase were less than the repurchase price, the
Fund could suffer a loss. It is the current policy of each Fund not to invest in
repurchase agreements that do not mature within seven days if any such
investment, together with any other illiquid assets held by the Fund, amounts to
more than 15% of the Fund's net assets. The investments of a Fund in repurchase
agreements, at times, may be substantial when, in the view of the Advisor,
liquidity or other considerations so warrant.
REVERSE REPURCHASE AGREEMENTS
Each Fund may use reverse repurchase agreements as part of the Fund's investment
strategy. Reverse repurchase agreements involve sales by a Fund of portfolio
assets concurrently with an agreement by the Fund to repurchase the same assets
at a later date at a fixed price. Generally, the effect of such a transaction is
that the Fund can recover all or most of the cash invested in the portfolio
securities involved during the term of the reverse repurchase agreement, while
the Fund will be able to keep the interest income associated with those
portfolio securities. Such transactions are advantageous only if the interest
cost to the Fund of the reverse repurchase transaction is less than the cost of
obtaining the cash otherwise. Opportunities to achieve this advantage may not
always be available, and each Fund intends to use the reverse repurchase
technique only when it will be advantageous to the Fund. Each Fund will
establish a segregated account with the Trust's custodian bank in which the Fund
will maintain cash or cash equivalents or other portfolio securities equal in
value to the Fund's obligations in respect of reverse repurchase agreements.
SHORT SALES
The Leveraged Inverse Funds may engage in short sales transactions under which a
Fund sells a security it does not own. To complete such a transaction, a Fund
must borrow or otherwise obtain the security to make delivery to the buyer. The
Fund then is obligated to replace the security borrowed by purchasing the
security at the market price at the time of replacement. The price at such time
may be more or less than the price at which the security was sold by the Fund.
Until the security is replaced, the Fund is required to pay to the lender
amounts equal to any dividends or interest, which accrue during the period of
the loan. To borrow the security, the Fund also may be required to pay a
premium, which would increase the cost of the security sold. The Fund may also
use repurchase agreements to satisfy delivery obligations in short sales
transactions. The proceeds of the short sale will be retained by the broker, to
the extent necessary to meet the margin requirements, until the short position
is closed out.
Until a Fund closes its short position or replaces the borrowed security, the
Fund will: (a) maintain a segregated account containing cash or liquid
securities at such a level that: (i) the amount deposited in the account plus
the amount deposited with the broker as collateral will equal the current value
of the security sold short; and (ii) the amount deposited in the segregated
account plus the amount deposited with the broker as collateral will not be less
than the market value of the security at the time the security was sold
9
short; or (b) otherwise cover the Fund's short position. Each of the Funds may
use up to 100% of its portfolio to engage in short sales transactions and
collateralize its open short positions.
SWAP AGREEMENTS
The Funds may enter into swap agreements, including, but not limited to, equity
index swaps and interest rate swap agreements. A Fund may utilize swap
agreements in an attempt to gain exposure to the stocks making up an index of
securities in a market without actually purchasing those stocks, or to hedge a
position. Swap agreements are two-party contracts entered into primarily by
institutional investors for periods ranging from a day to more than one year. In
a standard "swap" transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on particular predetermined
investments or instruments. The gross returns to be exchanged or "swapped"
between the parties are calculated with respect to a "notional amount," I.E.,
the return on or increase in value of a particular dollar amount invested in a
"basket" of securities representing a particular index. Forms of swap agreements
include interest rate caps, under which, in return for a premium, one party
agrees to make payments to the other to the extent that interest rates exceed a
specified rate, or "cap," interest rate floors, under which, in return for a
premium, one party agrees to make payments to the other to the extent that
interest rates fall below a specified level, or "floor;" and interest rate
dollars, under which a party sells a cap and purchases a floor or vice versa in
an attempt to protect itself against interest rate movements exceeding given
minimum or maximum levels.
Most swap agreements entered into by the Funds calculate the obligations of the
parties to the agreement on a "net basis." Consequently, a Fund's current
obligations (or rights) under a swap agreement will generally be equal only to
the net amount to be paid or received under the agreement based on the relative
values of the positions held by each party to the agreement (the "net amount").
A Fund's current obligations under a swap agreement will be accrued daily
(offset against any amounts owing to the Fund) and any accrued but unpaid net
amounts owed to a swap counterparty will be covered by segregating assets
determined to be liquid. Obligations under swap agreements so covered will not
be construed to be "senior securities" for purposes of a Fund's investment
restriction concerning senior securities. Because they are two party contracts
and because they may have terms of greater than seven days, swap agreements may
be considered to be illiquid for a Fund's illiquid investment limitations. No
Fund will enter into any swap agreement unless the Advisor believes that the
other party to the transaction is creditworthy. A Fund bears the risk of loss of
the amount expected to be received under a swap agreement in the event of the
default or bankruptcy of a swap agreement counterparty.
Each Fund may enter into swap agreements to invest in a market without owning or
taking physical custody of securities in circumstances in which direct
investment is restricted for legal reasons or is otherwise impracticable. The
counterparty to any swap agreement will typically be a bank, investment banking
firm or broker/dealer. The counterparty will generally agree to pay a Fund the
amount, if any, by which the notional amount of the swap agreement would have
increased in value had it been invested in the particular stocks, plus the
dividends that would have been received on those stocks. A Fund will agree to
pay to the counterparty a floating rate of interest on the notional amount of
the swap agreement plus the amount, if any, by which the notional amount would
have decreased in value had it been invested in such stocks. Therefore, the
return to a Fund on any swap agreement should be the gain or loss on the
notional amount plus dividends on the stocks less the interest paid by the Fund
on the notional amount.
Swap agreements typically are settled on a net basis, which means that the two
payment streams are netted out, with a Fund receiving or paying, as the case may
be, only the net amount of the two payments. Payments may be made at the
conclusion of a swap agreement or periodically during its term.
10
Swap agreements do not involve the delivery of securities or other underlying
assets. Accordingly, the risk of loss with respect to swap agreements is limited
to the net amount of payments that a Fund is contractually obligated to make. If
the other party to a swap agreement defaults, a Fund's risk of loss consists of
the net amount of payments that the Fund is contractually entitled to receive,
if any. The net amount of the excess, if any, of a Fund's obligations over its
entitlements with respect to each equity swap will be accrued on a daily basis
and an amount of cash or liquid assets, having an aggregate NAV at least equal
to such accrued excess will be maintained in a segregated account by the Fund's
custodian. Inasmuch as these transactions are entered into for hedging purposes
or are offset by segregated cash of liquid assets, as permitted by applicable
law, the Funds and the Advisor believe that these transactions do not constitute
senior securities under the 1940 Act and, accordingly, will not treat them as
being subject to a Fund's borrowing restrictions.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become relatively liquid in comparison with the markets for other similar
instruments which are traded in the OTC market. The Advisor, under the
supervision of the Board, is responsible for determining and monitoring the
liquidity of Fund transactions in swap agreements.
The use of swap agreements is a highly specialized activity that involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions.
TRACKING ERROR
The following factors may affect the ability of the Funds to achieve correlation
with the performance of their respective benchmarks: (1) Fund expenses,
including brokerage (which may be increased by high portfolio turnover); (2) a
Fund holding less than all of the securities in the Underlying Index and/or
securities not included in the Underlying Index being held by a Fund; (3) an
imperfect correlation between the performance of instruments held by a Fund,
such as futures contracts and options, and the performance of the underlying
securities in the market; (4) bid-ask spreads (the effect of which may be
increased by portfolio turnover); (5) a Fund holding instruments traded in a
market that has become illiquid or disrupted; (6) Fund share prices being
rounded to the nearest cent; (7) changes to the Underlying Index that are not
disseminated in advance; (8) the need to conform a Fund's portfolio holdings to
comply with investment restrictions or policies or regulatory or tax law
requirements; (9) early or unanticipated closings of the markets on which the
holdings of a Fund trade, resulting in the inability of the Fund to execute
intended portfolio transactions; or (10) market movements that run counter to a
leveraged Fund's investments. Market movements that run counter to a leveraged
Fund's investments will cause some divergence between the Fund and its benchmark
over time due to the mathematical effects of leveraging. The magnitude of the
divergence is dependent upon the magnitude of the market movement, its duration,
and the degree to which the Fund is leveraged. The tracking error of a leveraged
Fund is generally small during a well-defined up trend or downtrend in the
market when measured from price peak to price peak, absent a market decline and
subsequent recovery, however, the deviation of the Fund from its benchmark may
be significant. The Funds' performance attempts to correlate highly with the
movement in their respective benchmarks over time.
U.S. GOVERNMENT SECURITIES
The Funds may make short-term investments in U.S. Government securities.
Securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities include U.S. Treasury securities, which are backed by the full
faith and credit of the U.S. Treasury and which differ only in their interest
rates, maturities, and times of issuance. U.S. Treasury bills have initial
maturities of one year or less; U.S. Treasury notes have initial maturities of
one to ten years; and U.S. Treasury bonds generally have initial maturities of
greater than ten years. Certain U.S. Government securities are issued or
guaranteed by agencies or instrumentalities of the U.S. Government including,
but not limited to, obligations of U.S.
11
Government agencies or instrumentalities such as Fannie Mae, the Government
National Mortgage Association, the Small Business Administration, the Federal
Farm Credit Administration, the Federal Home Loan Banks, Banks for Cooperatives
(including the Central Bank for Cooperatives), the Federal Land Banks, the
Federal Intermediate Credit Banks, the Tennessee Valley Authority, the
Export-Import Bank of the United States, the Commodity Credit Corporation, the
Federal Financing Bank, the Student Loan Marketing Association, and the National
Credit Union Administration.
Some obligations issued or guaranteed by U.S. Government agencies and
instrumentalities, including, for example, the Government National Mortgage
Association pass-through certificates, are supported by the full faith and
credit of the U.S. Treasury. Other obligations issued by or guaranteed by
federal agencies, such as those securities issued by Fannie Mae, are supported
by the discretionary authority of the U.S. Government to purchase certain
obligations of the federal agency, while other obligations issued by or
guaranteed by federal agencies, such as those of the Federal Home Loan Banks,
are supported by the right of the issuer to borrow from the U.S. Treasury, while
the U.S. Government provides financial support to such U.S. Government-sponsored
federal agencies, no assurance can be given that the U.S. Government will always
do so, since the U.S. Government is not so obligated by law. U.S. Treasury notes
and bonds typically pay coupon interest semi-annually and repay the principal at
maturity.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES
The Funds, from time to time, in the ordinary course of business, may purchase
securities on a when-issued or delayed-delivery basis (I.E., delivery and
payment can take place between a month and 120 days after the date of the
transaction). These securities are subject to market fluctuation and no interest
accrues to the purchaser during this period. At the time a Fund makes the
commitment to purchase securities on a when-issued or delayed-delivery basis,
the Fund will record the transaction and thereafter reflect the value of the
securities, each day, in determining the Fund's NAV. A Fund will not purchase
securities on a when-issued or delayed-delivery basis if, as a result, more than
15% of the Fund's net assets would be so invested. At the time of delivery of
the securities, the value of the securities may be more or less than the
purchase price. Each Fund will also establish a segregated account with the
Fund's custodian bank in which the Fund will maintain cash or liquid securities
equal to or greater in value than the Fund's purchase commitments for such
when-issued or delayed-delivery securities. The Trust does not believe that a
Fund's NAV or income will be adversely affected by the Fund's purchase of
securities on a when-issued or delayed-delivery basis.
SPECIAL CONSIDERATIONS REGARDING THE USE OF LEVERAGED AND INVERSE INVESTMENT
STRATEGIES
To the extent discussed above and in the Prospectus, the Leveraged Funds and
Leveraged Inverse Funds present certain risks, some of which are further
described below.
LEVERAGE. The Leveraged Funds and Leveraged Inverse Funds employ leverage as a
principal investment strategy and all of the Leveraged Funds and Leveraged
Inverse Funds may borrow or use other forms of leverage for investment purposes.
Utilization of leverage involves special risks and should be considered to be
speculative. Leverage exists when a Leveraged Fund or Leveraged Inverse Fund
achieves the right to a return on a capital base that exceeds the amount the
Leveraged Fund or Leveraged Inverse Fund has invested. Leverage creates the
potential for greater gains to shareholders of the Leveraged Funds and Leveraged
Inverse Funds during favorable market conditions and the risk of magnified
losses during adverse market conditions. Leverage should cause higher volatility
of the NAVs of the shares of the Leveraged Funds and Leveraged Inverse Funds.
Leverage may involve the creation of a liability that does not entail any
interest costs or the creation of a liability that requires the Leveraged Funds
and Leveraged Inverse Funds to pay interest, which would decrease the Leveraged
Funds' and Leveraged Inverse Funds' total return to shareholders. If the
Leveraged Funds and Leveraged Inverse Funds achieve their
12
investment objectives, during adverse market conditions, shareholders should
experience a loss greater than they would have incurred had the Leveraged Funds
and Leveraged Inverse Funds not been leveraged.
SPECIAL NOTE REGARDING THE CORRELATION RISKS OF THE LEVERAGED FUNDS AND
LEVERAGED INVERSE FUNDS. As discussed in the Prospectus, each of the Leveraged
Funds and Leveraged Inverse Funds are "leveraged" funds in the sense that each
has an investment objective to match a multiple of the performance of an index
on a given day. The Leveraged Funds and Leveraged Inverse Funds are subject to
all of the risks described in the Prospectus. In addition, there is a special
form of correlation risk that derives from the Leveraged Funds and Leveraged
Inverse Funds use of leverage. For periods greater than one day, the use of
leverage tends to cause the performance of a Leveraged Fund or Leveraged Inverse
Fund to be either greater than, or less than, the Underlying Index performance
times the stated multiple in the fund objective.
A Leveraged Fund's or Leveraged Inverse Fund's return for periods longer than
one day is primarily a function of the following: (a) index performance; (b)
index volatility; (c) financing rates associated with leverage; (d) other fund
expenses; (e) dividends paid by companies in the index; and (f) period of time.
A leveraged fund's performance can be estimated given any set of assumptions for
the factors described above. The tables below illustrate the impact of two
factors, index volatility and index performance, on a leveraged fund. Index
volatility is a statistical measure of the magnitude of fluctuations in the
returns of an index and is calculated as the standard deviation of the natural
logarithms of one plus the index return (calculated daily), multiplied by the
square root of the number of trading days per year (assumed to be 252). The
tables show estimated fund returns for a number of combinations of index
performance and index volatility over a one year period. Assumptions used in the
tables include: a) no dividends paid by the companies included in the index; b)
no fund expenses; and c) borrowing/lending rates (to obtain leverage) of zero
percent. If fund expenses were included, the fund's performance would be lower
than shown.
The first table below shows the estimated fund return over a one-year period for
a leveraged fund that has an investment objective to correspond to twice (200%
of) the daily performance of an index. The leveraged fund could be expected to
achieve a 30% return on a yearly basis if the index performance was 15%, absent
any costs or the correlation risk or other factors described above and in the
Prospectus under "Understanding Compounding & the Effect of Leverage." However,
as the table shows, with an index volatility of 20%, such a fund would return
27%, again absent any costs or other factors described above and in the
Prospectus under "Understanding Compounding & the Effect of Leverage." In the
charts below, unshaded areas represent those scenarios where a leveraged fund
with the investment objective described will outperform (I.E., return more than)
the index performance times the stated multiple in the leveraged fund's
investment objective; conversely, shaded areas represent those scenarios where
the leveraged fund will underperform (I.E., return less than) the index
performance times the stated multiple in the fund's investment objective.
13
LEVERAGED FUND MEDIAN ANNUAL RETURNS
-------------------------------------------------------------------------------------------------------------
INDEX PERFORMANCE MARKET VOLATILITY
-------------------------------------------------------------------------------------------------------------
200% OF
ONE YEAR ONE YEAR
INDEX INDEX
PERFORMANCE PERFORMANCE 10% 15% 20% 25% 30% 35% 40% 45% 50%
-------------------------------------------------------------------------------------------------------------
-40% -80% -64% -64% -65% -65% -67% -68% -69% -70% -71%
-------------------------------------------------------------------------------------------------------------
-35% -70% -58% -59% -59% -60% -62% -63% -64% -65% -66%
-------------------------------------------------------------------------------------------------------------
-30% -60% -52% -53% -52% -53% -55% -56% -58% -60% -61%
-------------------------------------------------------------------------------------------------------------
-25% -50% -45% -46% -46% -47% -48% -50% -52% -53% -55%
-------------------------------------------------------------------------------------------------------------
-20% -40% -36% -37% -39% -40% -41% -43% -44% -47% -50%
-------------------------------------------------------------------------------------------------------------
-15% -30% -29% -29% -30% -32% -33% -36% -38% -40% -43%
-------------------------------------------------------------------------------------------------------------
-10% -20% -20% -21% -23% -23% -26% -28% -31% -32% -36%
-------------------------------------------------------------------------------------------------------------
-5% -10% -11% -12% -13% -16% -18% -20% -23% -25% -29%
-------------------------------------------------------------------------------------------------------------
0% 0% -1% -2% -4% -6% -8% -11% -14% -17% -20%
-------------------------------------------------------------------------------------------------------------
5% 10% 9% 8% 6% 3% 2% -3% -5% -8% -12%
-------------------------------------------------------------------------------------------------------------
10% 20% 19% 19% 16% 15% 10% 9% 4% 0% -5%
-------------------------------------------------------------------------------------------------------------
15% 30% 31% 29% 27% 25% 21% 19% 15% 11% 6%
-------------------------------------------------------------------------------------------------------------
20% 40% 43% 41% 38% 35% 32% 27% 23% 18% 13%
-------------------------------------------------------------------------------------------------------------
25% 50% 54% 52% 50% 48% 43% 39% 34% 29% 22%
-------------------------------------------------------------------------------------------------------------
30% 60% 69% 64% 62% 58% 56% 49% 43% 39% 34%
-------------------------------------------------------------------------------------------------------------
35% 70% 79% 77% 75% 70% 68% 61% 57% 50% 43%
-------------------------------------------------------------------------------------------------------------
40% 80% 92% 91% 88% 82% 81% 73% 67% 62% 54%
-------------------------------------------------------------------------------------------------------------
|
The second table below shows the estimated fund return over a one-year period
for a leveraged inverse fund that has an investment objective to correspond to
twice (200% of) the opposite of the daily performance of an index. The leveraged
inverse fund could be expected to achieve a -30% return on a yearly basis if the
index performance was 15%, absent any costs or the correlation risk or other
factors described above and in the Prospectus under "Understanding Compounding &
the Effect of Leverage." However, as the table shows, with an index volatility
of 20%, such a fund would return -33%, again absent any costs or other factors
described above and in the Prospectus under "Understanding Compounding & the
Effect of Leverage." In the charts below, unshaded areas represent those
scenarios where a leveraged fund with the investment objective described will
outperform (I.E., return more than) the index performance times the stated
multiple in the leveraged fund's investment objective; conversely, shaded areas
represent those scenarios where the leveraged fund will underperform (I.E.,
return less than) the index performance times the stated multiple in the fund's
investment objective.
14
LEVERAGED INVERSE FUND MEDIAN ANNUAL RETURNS
-------------------------------------------------------------------------------------------------------------
INDEX PERFORMANCE MARKET VOLATILITY
-------------------------------------------------------------------------------------------------------------
200%
INVERSE OF
ONE YEAR ONE YEAR
INDEX INDEX
PERFORMANCE PERFORMANCE 10% 15% 20% 25% 30% 35% 40% 45% 50%
-------------------------------------------------------------------------------------------------------------
-40% 80% 165% 153% 145% 127% 114% 99% 74% 57% 35%
-------------------------------------------------------------------------------------------------------------
-35% 70% 130% 122% 109% 96% 84% 68% 51% 32% 17%
-------------------------------------------------------------------------------------------------------------
-30% 60% 98% 93% 79% 68% 58% 46% 29% 16% 1%
-------------------------------------------------------------------------------------------------------------
-25% 50% 73% 68% 58% 49% 36% 26% 13% 2% -13%
-------------------------------------------------------------------------------------------------------------
-20% 40% 51% 45% 39% 31% 20% 12% -2% -11% -23%
-------------------------------------------------------------------------------------------------------------
-15% 30% 35% 29% 23% 16% 6% -2% -12% -22% -30%
-------------------------------------------------------------------------------------------------------------
-10% 20% 20% 16% 9% 3% -5% -13% -21% -30% -39%
-------------------------------------------------------------------------------------------------------------
-5% 10% 8% 5% -2% -8% -14% -21% -30% -38% -46%
-------------------------------------------------------------------------------------------------------------
0% 0% -3% -7% -12% -17% -23% -28% -37% -44% -51%
-------------------------------------------------------------------------------------------------------------
5% -10% -12% -15% -19% -25% -31% -35% -43% -47% -55%
-------------------------------------------------------------------------------------------------------------
10% -20% -19% -23% -27% -32% -36% -43% -47% -53% -59%
-------------------------------------------------------------------------------------------------------------
15% -30% -27% -29% -32% -37% -42% -46% -53% -58% -63%
-------------------------------------------------------------------------------------------------------------
20% -40% -33% -35% -38% -42% -46% -50% -56% -60% -66%
-------------------------------------------------------------------------------------------------------------
25% -50% -38% -40% -43% -47% -51% -55% -59% -64% -68%
-------------------------------------------------------------------------------------------------------------
30% -60% -43% -44% -47% -51% -55% -59% -62% -66% -71%
-------------------------------------------------------------------------------------------------------------
35% -70% -46% -49% -52% -53% -58% -61% -66% -68% -73%
-------------------------------------------------------------------------------------------------------------
40% -80% -50% -52% -55% -57% -61% -64% -68% -71% -75%
-------------------------------------------------------------------------------------------------------------
|
The foregoing tables are intended to isolate the effect of index volatility and
index performance on the return of a leveraged fund. The Leveraged Fund's or
Leveraged Inverse Fund's actual returns may be significantly greater or less
than the returns shown above as a result of any of the factors discussed above
or under "Understanding Compounding & the Effect of Leverage" in the Prospectus.
MORE INFORMATION ABOUT THE UNDERLYING INDICES
INDEX DESCRIPTIONS. The Funds seek to provide investment results that match the
performance of a specific benchmark on a daily basis. The current benchmark for
each Fund is set forth below and a description of each Fund's Underlying Index
(each an "Underlying Index" and collectively, the "Underlying Indices") is set
forth in the Funds' Prospectus under "More Information About the Funds -
Benchmarks and Investment Methodology."
FUND BENCHMARK
Rydex 2x S&P 500 ETF 200% of the Performance of the S&P 500
Index
--------------------------------------------------------------------------------
Rydex Inverse 2x S&P 500 ETF 200% of the Inverse (Opposite) of the
Performance of the S&P 500 Index
--------------------------------------------------------------------------------
Rydex 2x S&P MidCap 400 ETF 200% of the Performance of the S&P MidCap
400 Index
--------------------------------------------------------------------------------
Rydex Inverse 2x S&P MidCap 400 ETF 200% of the Inverse (Opposite) of the
Performance of the S&P MidCap 400 Index
--------------------------------------------------------------------------------
Rydex 2x Russell 2000(R) ETF 200% of the Performance of the Russell
2000(R) Index
--------------------------------------------------------------------------------
Rydex Inverse 2x Russell 2000(R) ETF 200% of the Inverse (Opposite) of the
Performance of the Russell 2000(R) Index
--------------------------------------------------------------------------------
|
INDEX PROVIDERS. The Rydex 2x S&P 500 ETF, Rydex Inverse 2x S&P 500 ETF; and The
Rydex 2x S&P MidCap 400 ETF, and Rydex Inverse 2x S&P MidCap 400 ETF will be
based upon the S&P 500 Index and the S&P MidCap 400 Index, respectively,
compiled by Standard & Poor's, which is not affiliated with the Funds or with
the Advisor or its affiliates. The Funds are entitled to use the applicable
Underlying Indices pursuant to a sub-licensing agreement with the Advisor, which
in turn has a licensing agreement with the index provider. The Advisor has
provided the sub-license without charge to the Funds.
15
The Rydex 2x Russell 2000(R) ETF and Rydex Inverse 2x Russell 2000(R) ETF will
track a benchmark based upon the Russell 2000(R) Index, compiled by Frank
Russell Company, which is not affiliated with the Funds or with the Advisor or
its affiliates. The Funds are entitled to use the applicable Underlying Index
pursuant to a sub-licensing agreement with the Advisor, which in turn has a
licensing agreement with the index provider. The Advisor has provided the
sub-license without charge to the Funds.
The following sections provide additional information about the maintenance and
operation of the S&P and Russell Indices included in the Funds' benchmarks.
S&P INDEX CALCULATION
S&P U.S. INDICES. On any given day, the index value is the quotient of the total
float-adjusted market capitalization of the index's constituents and its
divisor. Continuity in index values is maintained by adjusting the divisor for
all changes in the constituents' share capital after the base date. This
includes additions and deletions to the index, rights issues, share buybacks and
issuances, and spin-offs. The divisor's time series is, in effect, a
chronological summary of all changes affecting the base capital of the index.
The divisor is adjusted such that the index value at an instant just prior to a
change in base capital equals the index value at an instant immediately
following that change.
S&P INDEX MAINTENANCE
Maintaining the S&P Indices includes monitoring and completing the adjustments
for company additions and deletions, share changes, stock splits, stock
dividends and stock price adjustments due to restructuring and spin-offs. Share
changes of less than 5% are only updated on quarterly basis on the Friday near
the end of the calendar year.
A company will be removed from the S&P Indices as a result of
mergers/acquisitions, bankruptcy, restructuring, or if it no longer
representative of its industry group. A company is removed from the relevant
index as close as possible to the actual date on which the event occurred. A
company can be removed from an index because it no longer meets current criteria
for inclusion and/or is no longer representative of its industry group.
When calculating index weights, individual constituents' shares held by
governments, corporations, strategic partners, or other control groups are
excluded from the company's shares outstanding. Shares owned by other companies
are also excluded regardless of whether they are index constituents.
Once a year, the float adjustments will be reviewed. Each company's financial
statements will be used to update the major shareholders' ownership. However,
any Investable Weight Factor (IWF) changes, equal to or greater than 5% will be
implemented as soon as reasonably possible when it results from a major
corporate action (i.e. privatization, merger, takeover, or share offering.)
Changes in the number of shares outstanding driven by corporate events, such as
stock dividends, splits, and rights issues will be adjusted on the ex-date.
Share changes of 5% or greater are implemented when they occur. All share
changes of less than 5% are updated on a quarterly basis (third Friday of March,
June, September, and December or at the close of the expiration of futures
contracts). Implementations of new additions, deletions, and changes to the
float adjustment, due to corporate actions, will be made available at the close
of the third Friday in March, June, September, and December. Generally, index
changes due to rebalancing are announced two days before the effective date by
way of a news release posted on www.spglobal.com.
16
RUSSELL INDEX CALCULATION
The securities in the Russell 2000(R) Index (sometimes referred to as the
"components") are reconstituted annually after the close on the last Friday in
June to reflect changes in the marketplace. All U.S. incorporated companies
listed on a U.S. exchange are considered for inclusion with the following rules
and exceptions. Stocks must trade at or above $1.00 on May 31 to be eligible for
inclusion. Although only one class of security is allowed into the indices, all
common classes are combined to determine total market capitalization and
available float. Tracking stocks are considered individually for membership.
Also excluded are preferred and convertible preferred stock, participating
preferred stock, redeemable shares, warrants and rights, trust receipts, royalty
trusts, limited liability companies, OTC bulletin boards and pink sheet stocks,
closed-end investment companies, limited partnerships, and foreign stocks
including American Depositary Receipts (ADRs). After component selection, stocks
are weighted by their available market capitalization.
RUSSELL INDEX MAINTENANCE
The Russell 2000(R) Index will be reconstituted annually. Securities that leave
the Russell 2000(R) Index, between reconstitution dates, for any reason (I.E.,
mergers, acquisitions, or other similar corporate activity) are not replaced.
Thus, the number of securities in the Russell 2000(R) Index over the year will
fluctuate according to corporate activity.
When a stock is acquired, delisted, reincorporated outside of the U.S. or moves
to the pink sheets on OTC bulletin boards, the stock is deleted from the
relevant indices. When acquisitions or mergers take place within the Russell
2000(R) Index, the stock's capitalization moves to the acquiring stock, hence,
mergers have no effect on index total capitalization if the acquiring stock is
part of the Russell 2000(R) Index. The only additions between reconstitution
dates are as a result of spin-offs and eligible initial public offerings (IPOs).
Maintaining the Russell 2000(R) Index includes monitoring and completing the
adjustments for company additions and deletions, share changes, stock splits,
stock dividends, and stock price adjustments due to restructuring and spin-offs.
In addition, significant changes to outstanding share capital changes are made
at month-end. The divisor is adjusted for all changes in company market value to
leave the value of the investments unaffected. All divisor adjustments will be
made at the open of the ex-date using previous day closing prices.
COMMENCEMENT DATES OF THE UNDERLYING INDICES
The inception date of each Underlying Index is as follows:
--------------------------------------------------------------------------------
BENCHMARK INCEPTION DATE
--------------------------------------------------------------------------------
S&P 500 Index March 4, 1957
--------------------------------------------------------------------------------
S&P MidCap 400 Index June 19, 1991
--------------------------------------------------------------------------------
Russell 2000(R) Index December 31, 1986
--------------------------------------------------------------------------------
|
INDEX AVAILABILITY
Each Underlying Index is calculated continuously and widely disseminated to
major data vendors.
INVESTMENT RESTRICTIONS
FUNDAMENTAL POLICIES
The following investment limitations (and those set forth in the Prospectus) are
fundamental policies of the Funds, which cannot be changed with respect to a
Fund without the consent of the holders of a majority of that Fund's outstanding
shares. The term "majority of the outstanding shares" means the vote
17
of (i) 67% or more of a Fund's shares present at a meeting, if more than 50% of
the outstanding shares of that Fund are present or represented by proxy, or (ii)
more than 50% of that Fund's outstanding shares, whichever is less.
FUNDAMENTAL POLICIES OF THE FUNDS
Each Fund shall not:
1. Borrow money in an amount exceeding 33 1/3% of the value of its total
assets, provided that, for purposes of this limitation, investment
strategies which either obligate a Fund to purchase securities or require
a Fund to segregate assets are not considered to be borrowing. Asset
coverage of a least 300% is required for all borrowing, except where a
Fund has borrowed money for temporary purposes in amounts not exceeding 5%
of its total assets. A Fund will not purchase securities while its
borrowing exceeds 5% of its total assets.
2. Make loans if, as a result, more than 33 1/3% of its total assets would be
lent to other parties, except that a Fund may: (i) purchase or hold debt
instruments in accordance with its investment objective and policies; (ii)
enter into repurchase agreements; and (iii) lend its securities.
3. Purchase or sell real estate, physical commodities, or commodities
contracts, except that a Fund may purchase: (i) marketable securities
issued by companies which own or invest in real estate (including real
estate investment trusts), commodities, or commodities contracts; and (ii)
commodities contracts relating to financial instruments, such as financial
futures contracts and options on such contracts.
4. Issue senior securities (as defined in the 1940 Act) except as permitted
by rule, regulation or order of the SEC.
5. Act as an underwriter of securities of other issuers except as it may be
deemed an underwriter in selling a portfolio security.
6. Invest in interests in oil, gas, or other mineral exploration or
development programs and oil, gas or mineral leases.
7. Invest 25% or more of the value of a Fund's total assets in the securities
of one or more issuers conducting their principal business activities in
the same industry; except that, to the extent the benchmark selected for a
particular Fund is concentrated in a particular industry, the Fund will
necessarily be concentrated in that industry. This limitation does not
apply to investments or obligations of the U.S. Government or any of its
agencies or instrumentalities, or shares of investment companies.
NON-FUNDAMENTAL POLICIES
The following investment limitations are non-fundamental policies of the Funds
and may be changed with respect to any Fund by the Board.
Each Fund may not:
1. Invest in warrants.
2. Invest in real estate limited partnerships.
18
3. Invest in mineral leases.
4. Purchase or hold illiquid securities, I.E., securities that cannot be
disposed of for their approximate carrying value in seven days or less
(which term includes repurchase agreements and time deposits maturing in
more than seven days) if, in the aggregate, more than 15% of its net
assets would be invested in illiquid securities.
5. Change its investment strategy to invest at least 80% of its net assets,
plus any borrowings for investment purposes, in financial instruments with
economic characteristics similar to those of its benchmark without 60
days' prior notice to shareholders.
With respect to both the fundamental and non-fundamental policies of the Funds,
the foregoing percentages: (i) are based on total assets (except for the
limitations in 4 and 5 above that are specifically based on net assets); (ii)
will apply at the time of the purchase of a security; and (iii) shall not be
considered violated unless an excess or deficiency occurs or exists immediately
after and as a result of a purchase of such security, except for the fundamental
limitation on borrowing described in paragraph 1 above, under the heading
"Fundamental Policies of the Funds." With respect to borrowings in accordance
with the limitations set forth in paragraph 1, in the event that such asset
coverage shall at any time fall below 300 per centum, a Fund must reduce the
amount of its borrowings to an extent that the asset coverage of such borrowings
shall be at least 300 per centum within three days thereafter.
CONTINUOUS OFFERING
The method by which Creation Units are created and traded may raise certain
issues under applicable securities laws. Because new Creation Unit of shares are
issued and sold by the Funds on an ongoing basis, at any point a "distribution",
as such term is used in the 1933 Act, may occur. Broker-dealers and other
persons are cautioned that some activities on their part may, depending on the
circumstances, result in their being deemed participants in a distribution in a
manner which could render them statutory underwriters and subject them to the
prospectus delivery requirement and liability provisions of the 1933 Act.
For example, a broker-dealer firm or its client may be deemed a statutory
underwriter if it takes Creation Units after placing an order with the
Distributor (as defined below), breaks them down into constituent shares, and
sells such shares directly to customers, or if it chooses to couple the creation
of a supply of new shares with an active selling effort involving solicitation
of secondary market demand for shares. A determination of whether one is an
underwriter for purposes of the 1933 Act must take into account all the facts
and circumstances pertaining to the activities of the broker-dealer or its
client in the particular case, and the examples mentioned above should not be
considered a complete description of all the activities that could lead to a
categorization as an underwriter.
Broker-dealer firms should also note that dealers who are not "underwriters,"
but are effecting transactions in shares, whether or not participating in the
distribution of shares, are generally required to deliver a prospectus. This is
because the prospectus delivery exemption in Section 4(3) of the 1933 Act is not
available with respect to such transactions as a result of Section 24(d) of the
1940 Act. Firms that incur a prospectus-delivery obligation with respect to
shares are reminded that, under Rule 153 of the 1933 Act, a prospectus-delivery
obligation under Section 5(b)(2) of the 1933 Act owed to an exchange member in
connection with a sale on an exchange is satisfied by the fact that the
prospectus is available at the exchange upon request. The prospectus delivery
mechanism provided in Rule 153 is only available with respect to transactions on
an exchange.
19
EXCHANGE LISTING AND TRADING
A discussion of exchange listing and trading matters associated with an
investment in the Funds is contained in the Prospectus. The discussion below
supplements, and should be read in conjunction with, such sections of the
Prospectus.
The shares of the Funds are listed and traded on the Exchange. The shares of
each Fund will trade on the Exchange at prices that may differ to some degree
from a Fund's NAV. There can be no assurance that the requirements of the
Exchange necessary to maintain the listing of shares will continue to be met.
The Exchange may, but is not required to, remove the shares of a Fund from
listing if (i) following the initial 12-month period beginning at the
commencement of trading of the Fund, there are fewer than 50 beneficial owners
of the shares of the Fund for 30 or more consecutive trading days; (ii) the
value of the Underlying Index is no longer calculated or available; or (iii)
such other event shall occur or condition exist that, in the opinion of the
Exchange, makes further dealings on the Exchange inadvisable. The Exchange will
remove the shares of a Fund from listing and trading upon termination of the
Fund.
As in the case of other stocks traded on the Exchange, broker's commissions on
purchases or sales of shares in market transactions will be based on negotiated
commission rates at customary levels.
The Trust reserves the right to adjust the price levels of shares in the future
to help maintain convenient trading ranges for investors. Any adjustments would
be accomplished through stock splits or reverse stock splits, which would have
no effect on the net assets of a Fund.
PORTFOLIO TRANSACTIONS AND BROKERAGE
BROKERAGE TRANSACTIONS. Generally, equity securities are bought and sold through
brokerage transactions for which commissions are payable. Purchases from
underwriters will include the underwriting commission or concession, and
purchases from dealers serving as market makers will include a dealer's mark-up
or reflect a dealer's mark-down. Money market securities and other debt
securities are usually bought and sold directly from the issuer or an
underwriter or market maker for the securities. Generally, a Fund will not pay
brokerage commissions for such purchases. When a debt security is bought from an
underwriter, the purchase price will usually include an underwriting commission
or concession. The purchase price for securities bought from dealers serving as
market makers will similarly include the dealer's mark up or reflect a dealer's
mark down. When a Fund executes transactions in the over-the-counter market, it
will generally deal with primary market makers unless prices that are more
favorable are otherwise obtainable.
In addition, the Advisor may place a combined order, often referred to as
"bunching," for two or more accounts it manages, including any of the Funds,
engaged in the purchase or sale of the same security or other instrument if, in
its judgment, joint execution is in the best interest of each participant and
will result in best price and execution. Transactions involving commingled
orders are allocated in a manner deemed equitable to each account or Fund.
Although it is recognized that, in some cases, the joint execution of orders
could adversely affect the price or volume of the security that a particular
account or a Fund may obtain, it is the opinion of the Advisor and the Trust's
Board that the advantages of combined orders outweigh the possible disadvantages
of separate transactions. In addition, in some instances a Fund effecting the
larger portion of a combined order may not benefit to the same extent as
participants effecting smaller portions of the combined order. Nonetheless, the
Advisor believes that the ability of a Fund to participate in higher volume
transactions will generally be beneficial to the Fund.
Because the Funds commenced operations on November 1, 2007, none of the Funds
paid any aggregate brokerage commissions for the most recently completed Trust
fiscal year.
20
BROKERAGE SELECTION. The Trust does not expect to use one particular broker or
dealer, and when one or more brokers is believed capable of providing the best
combination of price and execution, the Funds' Advisor may select a broker based
upon brokerage or research services provided to the Advisor. The Advisor may pay
a higher commission than otherwise obtainable from other brokers in return for
such services only if a good faith determination is made that the commission is
reasonable in relation to the services provided.
Section 28(e) of the Securities Exchange Act of 1934, as amended, permits the
Advisor, under certain circumstances, to cause each Fund to pay a broker or
dealer a commission for effecting a transaction in excess of the amount of
commission another broker or dealer would have charged for effecting the
transaction in recognition of the value of brokerage and research services
provided by the broker or dealer. In addition to agency transactions, the
Advisor may receive brokerage and research services in connection with certain
riskless principal transactions, in accordance with applicable SEC guidance.
Brokerage and research services include: (1) furnishing advice as to the value
of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities; (2) furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy, and the performance
of accounts; and (3) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement, and custody). In the case of
research services, the Advisor believes that access to independent investment
research is beneficial to their investment decision-making processes and,
therefore, to each Fund.
To the extent research services may be a factor in selecting brokers, such
services may be in written form or through direct contact with individuals and
may include information as to particular companies and securities as well as
market, economic, or institutional areas and information which assists in the
valuation and pricing of investments. Examples of research-oriented services for
which the Advisor might utilize Fund commissions include research reports and
other information on the economy, industries, sectors, groups of securities,
individual companies, statistical information, political developments, technical
market action, pricing and appraisal services, credit analysis, risk measurement
analysis, performance and other analysis. The Advisor may use research services
furnished by brokers in servicing all client accounts and not all services may
necessarily be used in connection with the account that paid commissions to the
broker providing such services. Information so received by the Advisor will be
in addition to and not in lieu of the services required to be performed by the
Funds' Advisor under the Advisory Agreement. Any advisory or other fees paid to
the Advisor are not reduced as a result of the receipt of research services.
In some cases the Advisor may receive a service from a broker that has both a
"research" and a "non-research" use. When this occurs, the Advisor makes a good
faith allocation, under all the circumstances, between the research and
non-research uses of the service. The percentage of the service that is used for
research purposes may be paid for with client commissions, while the Advisor
will use its own funds to pay for the percentage of the service that is used for
non-research purposes. In making this good faith allocation, the Advisor faces a
potential conflict of interest, but the Advisor believes that its allocation
procedures are reasonably designed to ensure that it appropriately allocates the
anticipated use of such services to their research and non-research uses.
From time to time, a Fund may purchase new issues of securities for clients in a
fixed price offering. In these situations, the seller may be a member of the
selling group that will, in addition to selling securities, provide the Advisor
with research services. The NASD has adopted rules expressly permitting these
types of arrangements under certain circumstances. Generally, the seller will
provide research "credits" in these situations at a rate that is higher than
that which is available for typical secondary market transactions. These
arrangements may not fall within the safe harbor of Section 28(e).
21
Because the Funds commenced operations on November 1, 2007, none of the Funds
paid any commissions on brokerage transactions directed to brokers pursuant to
an agreement or understanding whereby the broker provides research or other
brokerage services to the Advisor for the most recently completed Trust fiscal
year.
BROKERAGE WITH FUND AFFILIATES. The Funds may execute brokerage or other agency
transactions through registered broker-dealer affiliates of the Funds, the
Advisor or the Distributor for a commission in conformity with the 1940 Act, the
Exchange Act and rules promulgated by the SEC. Under the 1940 Act and the
Exchange Act, affiliated broker-dealers are permitted to receive and retain
compensation for effecting portfolio transactions for the Funds on an exchange
if a written contract is in effect between the affiliate and the Funds expressly
permitting the affiliate to receive and retain such compensation. These rules
further require that commissions paid to the affiliate by the Funds for exchange
transactions not exceed "usual and customary" brokerage commissions. The rules
define "usual and customary" commissions to include amounts which are
"reasonable and fair compared to the commission, fee or other remuneration
received or to be received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time." The Board, including
those who are not "interested persons" of the Funds, has adopted procedures for
evaluating the reasonableness of commissions paid to affiliates and reviews
these procedures periodically.
Because the Funds commenced operations on November 1, 2007, none of the Funds
paid any brokerage commissions to the Distributor for the most recently
completed Trust fiscal year.
SECURITIES OF "REGULAR BROKER-DEALERS." Each Fund is required to identify any
securities of its "regular brokers and dealers" (as such term is defined in the
1940 Act) which the Fund may hold at the close of its most recent fiscal year.
"Regular brokers or dealers" of the Trust are the ten brokers or dealers that,
during the most recent fiscal year: (i) received the greatest dollar amounts of
brokerage commissions from the Trust's portfolio transactions; (ii) engaged as
principal in the largest dollar amounts of portfolio transactions of the Trust;
or (iii) sold the largest dollar amounts of the Trust's shares. Because the
Funds commenced operations on November 1, 2007, none of the Funds held
securities of the Trust's "regular brokers or dealers" as of the most recently
completed Trust fiscal year.
PORTFOLIO TURNOVER. Portfolio turnover may vary from year to year, as well as
within a year. High turnover rates are likely to result in comparatively greater
brokerage expenses. Because the Funds commenced operations on November 1, 2007,
the Funds do not have a portfolio turnover rate to report for the most recently
completed Trust fiscal year.
MANAGEMENT OF THE TRUST
BOARD RESPONSIBILITIES. The management and affairs of the Trust are supervised
by the Board under the laws of the State of Delaware and the 1940 Act. The Board
has approved contracts, as described below, under which certain companies
provide essential management services to the Trust.
MEMBERS OF THE BOARD AND OFFICERS OF THE TRUST. Set forth below are the names,
ages, position with the Trust, term of office, and the principal occupations for
a minimum of the last five years of each of the persons currently serving as
members of the Board and as Executive Officers of the Trust. Also included below
is the term of office for each of the Executive Officers of the Trust. The
members of the Board serve as Trustees for the life of the Trust or until
retirement, removal, or their office is terminated pursuant
22
to the Trust's Declaration of Trust. Unless otherwise noted, the business
address of each Trustee and Officer is 9601 Blackwell Road, Suite 500,
Rockville, Maryland 20850.
---------------------------------------------------------------------------------------------------------------------------------
NUMBER OF
POSITION(S) HELD PORTFOLIOS IN
WITH FUND
THE TRUST, COMPLEX
NAME, ADDRESS TERM OF OFFICE OVERSEEN
AND AGE OF AND LENGTH OF PRINCIPAL OCCUPATION(S) BY TRUSTEE/ OTHER DIRECTORSHIPS
TRUSTEE/OFFICER TIME SERVED DURING PAST 5 YEARS OFFICER HELD BY TRUSTEE
---------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
---------------------------------------------------------------------------------------------------------------------------------
Michael P. Trustee from 2005 to PADCO ADVISORS, INC.: 147 None
Byrum (37) present. Chief Investment Officer from August
2006 to present; Chief Operating Officer
of PADCO Advisors, Inc. from October
2003 to May 2004; Executive Vice
President from December 2002 to May
2004; President from May 2004 to
present; and Secretary from December
2002 to present
PADCO ADVISORS II, INC.:
Chief Investment Officer from August 2006 to
present; Chief Operating Officer of
PADCO Advisors II, Inc. from December
2003 to May 2004; Executive Vice
President from December 2002 to May
2004; President from May 2004 to
present; and Secretary from December
2002 to present
RYDEX ADVISORY SERVICES:
President from August 2004 to present
RYDEX CAPITAL PARTNERS I, LLC:
President and Secretary from October 2003
to April 2007
RYDEX CAPITAL PARTNERS II, LLC:
President and Secretary from October 2003
to April 2007
RYDEX DISTRIBUTORS, INC.:
Secretary from December 2001 to May 2004;
Executive Vice President from December
2002 to May 2004; and Chief Operating
Officer from December 2003 to May 2004
---------------------------------------------------------------------------------------------------------------------------------
|
23
---------------------------------------------------------------------------------------------------------------------------------
NUMBER OF
POSITION(S) HELD PORTFOLIOS IN
WITH FUND
THE TRUST, COMPLEX
NAME, ADDRESS TERM OF OFFICE OVERSEEN
AND AGE OF AND LENGTH OF PRINCIPAL OCCUPATION(S) BY TRUSTEE/ OTHER DIRECTORSHIPS
TRUSTEE/OFFICER TIME SERVED DURING PAST 5 YEARS OFFICER HELD BY TRUSTEE
---------------------------------------------------------------------------------------------------------------------------------
RYDEX FUND SERVICES, INC.:
Secretary from December 2002 to present;
Executive Vice President from December
2002 to August 2006; and Chief Operating
Officer from December 2003 to May 2004
RYDEX HOLDINGS, INC.:
Secretary from December 2005 to present
and Executive Vice President from
December 2005 to August 2006
ADVISOR RESEARCH CENTER, INC.:
Secretary from May 2006 to present and
Executive Vice President from May 2006
to August 2006
RYDEX SPECIALIZED PRODUCTS, LLC:
Director and Secretary from September
2005 to present
--------------------------------------------------------------------------------------------------------------------------------
Carl G. Trustee from 2004 to PADCO ADVISORS, INC.: 147 None
Verboncoeur (55) present; President Chief Executive Officer from October 2003
from 2003 to present; to present; Executive Vice President of
Vice President from PADCO Advisors, Inc. from December 2002 to
1997 to present; and October 2003; President of PADCO Advisors,
Treasurer from 1997 Inc. from October 2003 to May 2004; and
to 2003. Treasurer from December 2002 to present
PADCO ADVISORS II, INC.:
Chief Executive Officer from December 2003
to present; Executive Vice President of
PADCO Advisors II, Inc. from December 2002
to December 2003; President of PADCO
Advisors II, Inc. from December 2002 to May
2004 and Treasurer from December 2003 to
present
RYDEX CAPITAL PARTNERS I, LLC:
Treasurer from October 2003 to April 2007,
and Executive Vice President from October
2003 to August 2006
--------------------------------------------------------------------------------------------------------------------------------
|
24
---------------------------------------------------------------------------------------------------------------------------------
NUMBER OF
POSITION(S) HELD PORTFOLIOS IN
WITH FUND
THE TRUST, COMPLEX
NAME, ADDRESS TERM OF OFFICE OVERSEEN
AND AGE OF AND LENGTH OF PRINCIPAL OCCUPATION(S) BY TRUSTEE/ OTHER DIRECTORSHIPS
TRUSTEE/OFFICER TIME SERVED DURING PAST 5 YEARS OFFICER HELD BY TRUSTEE
---------------------------------------------------------------------------------------------------------------------------------
RYDEX CAPITAL PARTNERS II, LLC:
Treasurer from October 2003 to April 2007,
and Executive Vice President from October
2003 to August 2006
RYDEX ADVISORY SERVICES:
Chief Executive Officer from August 2004 to
present
RYDEX DISTRIBUTORS, INC.:
President and Chief Executive Officer from
December 2003 to present; Treasurer from
December 2002 to present; Executive Vice
President from December 2002 to December
2003; and Vice President from December 2001
to December 2002
RYDEX FUND SERVICES, INC.:
Chief Executive Officer from December 2003
to present; President and Treasurer from
December 2002 to present; and Executive
Vice President from December 2001 to
December 2002
RYDEX HOLDINGS, INC.:
Chief Executive Officer, President and
Treasurer from December 2005 to present
ADVISOR RESEARCH CENTER, INC.:
Chief Executive Officer, President and
Treasurer from May 2006 to present
RYDEX SPECIALIZED PRODUCTS, LLC:
Chief Executive Officer, Director and
Treasurer from September 2005 to present
--------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
--------------------------------------------------------------------------------------------------------------------------------
Corey A. Trustee and Member of Retired from August 2006 to present. 147 None
Colehour (62) the Audit and President and Senior Vice President of
Governance and Schield Management Company (registered
Nominating Committees investment adviser) from 2003 to 2006
from 2003 to present.
--------------------------------------------------------------------------------------------------------------------------------
|
25
---------------------------------------------------------------------------------------------------------------------------------
NUMBER OF
POSITION(S) HELD PORTFOLIOS IN
WITH FUND
THE TRUST, COMPLEX
NAME, ADDRESS TERM OF OFFICE OVERSEEN
AND AGE OF AND LENGTH OF PRINCIPAL OCCUPATION(S) BY TRUSTEE/ OTHER DIRECTORSHIPS
TRUSTEE/OFFICER TIME SERVED DURING PAST 5 YEARS OFFICER HELD BY TRUSTEE
---------------------------------------------------------------------------------------------------------------------------------
J. Kenneth Trustee and Member of Retired 147 None
Dalton (67) the Governance and
Nominating Committee
from 2003 to present;
and Chairman of the
Audit Committee from
2006 to present.
--------------------------------------------------------------------------------------------------------------------------------
John O. Demaret Chairman of the Board Retired 147 None
(68) from 2006 to present;
and Trustee and
Member of the Audit
and Governance and
Nominating Committees
from 2003 to present.
--------------------------------------------------------------------------------------------------------------------------------
Werner E. Keller Trustee and Member of Founder and President of Keller Partners, 147 None
(67) the Audit and LLC (registered investment adviser) from
Governance and 2005 to present; and Retired from 2001 to
Nominating Committees 2005
from 2005 to present.
--------------------------------------------------------------------------------------------------------------------------------
Thomas F. Lydon Trustee and Member of President of Global Trends Investments 147 None
(48) the Audit and (registered investment adviser) from 1996
Governance and to present
Nominating
Committees from 2005
to present.
--------------------------------------------------------------------------------------------------------------------------------
|
26
---------------------------------------------------------------------------------------------------------------------------------
NUMBER OF
POSITION(S) HELD PORTFOLIOS IN
WITH FUND
THE TRUST, COMPLEX
NAME, ADDRESS TERM OF OFFICE OVERSEEN
AND AGE OF AND LENGTH OF PRINCIPAL OCCUPATION(S) BY TRUSTEE/ OTHER DIRECTORSHIPS
TRUSTEE/OFFICER TIME SERVED DURING PAST 5 YEARS OFFICER HELD BY TRUSTEE
---------------------------------------------------------------------------------------------------------------------------------
Patrick T. Trustee, Chairman of Chief Executive Officer of Par Industries, 147 None
McCarville (64) the Governance and Inc., d/b/a Par Leasing from 1977 to
Nominating Committee present
and Member of the
Audit Committee from
2003 to present.
--------------------------------------------------------------------------------------------------------------------------------
Roger Somers Trustee and Member of Founder and Chief Executive Officer of 147 None
(63) the Audit and Arrow Limousine from 1965 to present
Governance and
Nominating Committees
from 2003 to present.
--------------------------------------------------------------------------------------------------------------------------------
OFFICERS
--------------------------------------------------------------------------------------------------------------------------------
Nick Bonos Vice President and Senior Vice President of Fund Services of 147 Not Applicable
(44) Treasurer from 2003 PADCO Advisors, Inc. from August 2006 to
to present. present; Senior Vice President of Rydex
Fund Services, Inc. from December 2003 to
August 2006; Vice President of Accounting,
Rydex Fund Services, Inc. from 2001 to
2003; and Chief Financial Officer and
Manager of Rydex Specialized Products, LLC
from September 2005 to present
--------------------------------------------------------------------------------------------------------------------------------
Joanna M. Chief Compliance Chief Compliance Officer of PADCO Advisors, 147 Not Applicable
Haigney (41) Officer from 2004 to Inc. and PADCO Advisors II, Inc. from May
present; and 2005 to present and Rydex Capital Partners
Secretary from 2000 I, LLC and Rydex Capital Partners II, LLC
to present. from August 2006 to April 2007; Vice
President of Compliance of PADCO Advisors,
Inc. from August 2006 to present; Assistant
Secretary of Rydex Distributors, Inc. from
December 2001 to December 2003; and Vice
President of Rydex Distributors, Inc. from
December 2003 to May 2004 and Rydex Fund
Services, Inc. from December 2001 to August
2006
--------------------------------------------------------------------------------------------------------------------------------
|
27
---------------------------------------------------------------------------------------------------------------------------------
NUMBER OF
POSITION(S) HELD PORTFOLIOS IN
WITH FUND
THE TRUST, COMPLEX
NAME, ADDRESS TERM OF OFFICE OVERSEEN
AND AGE OF AND LENGTH OF PRINCIPAL OCCUPATION(S) BY TRUSTEE/ OTHER DIRECTORSHIPS
TRUSTEE/OFFICER TIME SERVED DURING PAST 5 YEARS OFFICER HELD BY TRUSTEE
---------------------------------------------------------------------------------------------------------------------------------
Joseph Arruda Assistant Treasurer Vice President of PADCO Advisors, Inc. and 147 Not Applicable
(41) from 2006 to present. PADCO Advisors II, Inc. from 2004 to
present; Director of Accounting of PADCO
Advisors, Inc. and PADCO Advisors II, Inc.
from 2003 to 2004; Vice President of Mutual
Funds, State Street Bank & Trust from 2000
to 2003
--------------------------------------------------------------------------------------------------------------------------------
Paula Billos Controller from 2006 Director of Fund Administration of PADCO 147 Not Applicable
(33) to present. Advisors, Inc. and PADCO Advisors II, Inc.
from 2001 to present
--------------------------------------------------------------------------------------------------------------------------------
|
* Messrs. Verboncoeur and Byrum are "interested" persons of the Trust, as
that term is defined in the 1940 Act by virtue of their affiliation with
the Funds' Advisor.
BOARD STANDING COMMITTEES. The Board has established the following standing
committees:
AUDIT COMMITTEE. The Board has a standing Audit Committee that is composed of
each of the independent Board members of the Trust. The Audit Committee operates
pursuant to a written charter approved by the Board. The principal
responsibilities of the Audit Committee include: recommending which firm to
engage as the Trust's independent registered public accounting firm and whether
to terminate this relationship; reviewing the independent registered public
accounting firm's compensation, the proposed scope and terms of its engagement,
and the firm's independence; serving as a channel of communication between the
independent registered public accounting firm and the Board; reviewing the
results of each external audit, including any qualifications in the independent
registered public accounting firm's opinion, any related management letter,
management's responses to recommendations made by the independent registered
public accounting firm in connection with the audit, if any, reports submitted
to the Committee by the Trust's service providers that are material to the Trust
as a whole, and management's responses to any such reports; reviewing the
Trust's audited financial statements and considering any significant disputes
between the Trust's management and the independent registered public accounting
firm that arose in connection with the preparation of those financial
statements; considering, in consultation with the independent registered public
accounting firm and the Trust's senior internal accounting executive, the
independent registered public accounting firm's report on the adequacy of the
Trust's internal financial controls; reviewing, in consultation with the Trust's
independent registered public accounting firm, major changes regarding auditing
and accounting principles and practices to be followed when preparing the
Trust's financial statements; and other audit related matters. Messrs. Colehour,
Dalton, Demaret, Keller, Lydon, McCarville and Somers serve as members of the
Audit Committee. The Audit Committee met four (4) times during the most recently
completed fiscal year.
GOVERNANCE AND NOMINATING COMMITTEE. The Board has a standing Governance and
Nominating Committee that is composed of each of the independent trustees of the
Trust. The Governance and
28
Nominating Committee operates under a written charter approved by the Board. The
principal responsibility of the Governance and Nominating Committee is to
identify, recommend and nominate candidates to fill vacancies, if any, on the
Trust's Board. The Governance and Nominating Committee does not currently have
specific procedures in place to consider nominees recommended by shareholders,
but would consider such nominees if submitted in accordance with Rule 14a-8 of
the Exchange Act in conjunction with a shareholder meeting to consider the
election of Board members. The Governance and Nominating Committee also reviews
the compensation for the Board members. Messrs. Colehour, Dalton, Demaret,
Keller, Lydon, McCarville and Somers serve as members of the Governance and
Nominating Committee. The Governance and Nominating Committee met twice during
the most recently completed fiscal year.
FUND SHARES OWNED BY BOARD MEMBERS. The following table shows the dollar amount
range of each Trustee's "beneficial ownership" of shares of the Funds and all
Rydex Funds as of the end of the most recently completed calendar year. As of
December 31, 2007, none of the Trustees beneficially own shares of the Funds.
Dollar amount ranges disclosed are established by the SEC. "Beneficial
ownership" is determined in accordance with Rule 16a-1(a)(2) under the Exchange
Act. The Trustees and officers of the Trust own less than 1% of the outstanding
shares of the Trust.
-----------------------------------------------------------------------------------------
AGGREGATE DOLLAR
RANGE OF SHARES IN
DOLLAR RANGE ALL RYDEX FUNDS
NAME FUND NAME OF FUND SHARES OVERSEEN BY TRUSTEE*
-----------------------------------------------------------------------------------------
INTERESTED TRUSTEES
-----------------------------------------------------------------------------------------
Michael P. Byrum None None Over $100,000
-----------------------------------------------------------------------------------------
Carl G. Verboncoeur None None Over $100,000
-----------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
-----------------------------------------------------------------------------------------
Corey A. Colehour None None $50,001-$100,000
-----------------------------------------------------------------------------------------
J. Kenneth Dalton None None $10,001-$50,000
-----------------------------------------------------------------------------------------
John O. Demaret None None Over $100,000
-----------------------------------------------------------------------------------------
Thomas F. Lydon None None None
-----------------------------------------------------------------------------------------
Werner E. Keller None None Over $100,000
-----------------------------------------------------------------------------------------
Patrick T. McCarville None None $50,001-$100,000
-----------------------------------------------------------------------------------------
Roger J. Somers None None Over $100,000
-----------------------------------------------------------------------------------------
|
* Includes shares held in series of the Trust, Rydex Series Funds, Rydex
Dynamic Funds and Rydex Variable Trust.
BOARD COMPENSATION. - The following table sets forth compensation paid by the
Trust for the fiscal year ended October 31, 2007:
29
---------------------------------------------------------------------------------------------
PENSION OR
RETIREMENT
BENEFITS ESTIMATED TOTAL
AGGREGATE ACCRUED AS ANNUAL COMPENSATION
COMPENSATION PART OF TRUST'S BENEFITS UPON FROM
NAME OF TRUSTEE FROM TRUST EXPENSES RETIREMENT FUND COMPLEX*
---------------------------------------------------------------------------------------------
INTERESTED TRUSTEES**
---------------------------------------------------------------------------------------------
Carl Verboncoeur $ 0 $ 0 $ 0 $ 0
---------------------------------------------------------------------------------------------
Michael P. Byrum $ 0 $ 0 $ 0 $ 0
---------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
---------------------------------------------------------------------------------------------
Corey A. Colehour $ 19,200 $ 0 $ 0 $ 100,000
---------------------------------------------------------------------------------------------
J. Kenneth Dalton $ 20,300 $ 0 $ 0 $ 105,000
---------------------------------------------------------------------------------------------
John O. Demaret $ 23,200 $ 0 $ 0 $ 120,000
---------------------------------------------------------------------------------------------
Patrick T. McCarville $ 19,800 $ 0 $ 0 $ 102,500
---------------------------------------------------------------------------------------------
Roger J. Somers $ 19,200 $ 0 $ 0 $ 100,000
---------------------------------------------------------------------------------------------
Werner E. Keller $ 19,200 $ 0 $ 0 $ 100,000
---------------------------------------------------------------------------------------------
Thomas F. Lydon $ 19,200 $ 0 $ 0 $ 100,000
---------------------------------------------------------------------------------------------
|
* Represents total compensation for service as Trustee of the Trust, Rydex
Dynamic Funds, Rydex Variable Trust, and Rydex Series Funds.
** Messrs. Verboncoeur and Byrum are Interested Trustees, as defined above.
As officers of the Advisor, they do not receive compensation from the
Trust.
CODE OF ETHICS
The Board has adopted a Combined Code of Ethics (the "Code of Ethics") pursuant
to Rule 17j-1 under the 1940 Act. The Advisor and Distributor are also covered
by the Code of Ethics. The Code of Ethics applies to the personal investing
activities of trustees, directors, officers and certain employees ("access
persons"). Rule 17j-1 and the Code of Ethics are designed to prevent unlawful
practices in connection with the purchase or sale of securities by access
persons. Under the Code of Ethics, access persons are permitted to engage in
personal securities transactions, but are required to report their personal
securities transactions for monitoring purposes. In addition, certain access
persons are required to obtain approval before investing in private placements
and are prohibited from investing in IPOs. The Code of Ethics is on file with
the SEC, and is available to the public.
PROXY VOTING
The Board has delegated responsibility for decisions regarding proxy voting for
securities held by the Funds to the Advisor. The Advisor will vote such proxies
in accordance with its proxy policies and procedures, which are included in
Appendix A to this SAI. The Board will periodically review each Fund's proxy
voting record.
30
The Trust annually discloses its complete proxy voting record on Form N-PX. The
Trust's most recent Form N-PX is available without charge, upon request by
calling 800.820.0888 or 301.296.5100 or by writing to the Trust at 9601
Blackwell Road, Suite 500, Rockville, Maryland 20850. The Trust's Form N-PX is
also available on the SEC's web site at www.sec.gov.
THE ADVISORY AGREEMENT
PADCO Advisors II, Inc., 9601 Blackwell Road, Suite 500, Rockville, Maryland
20850, is a registered investment adviser and provides portfolio management
services to each Fund pursuant to an advisory contract with the Trust. PADCO
Advisors II, Inc. was incorporated in the State of Maryland on July 5, 1994 and,
together with PADCO Advisors, Inc., a registered investment adviser under common
control, does business under the name Rydex Investments.
On January 18, 2008, Security Benefit Corporation and Security Benefit Life
Insurance Company (together, "Security Benefit") acquired Rydex Holdings, Inc.,
the Advisor's parent company, together with several other Rydex entities. As a
result, the Advisor has undergone a change of control and is now a subsidiary of
Security Benefit. Security Benefit is a financial services firm that provides a
broad variety of retirement plan and other financial products to customers in
the advisor, banking, education, government, institutional, and qualified plan
markets.
Under an investment advisory agreement with the Advisor, dated January 18, 2008
(the "Advisory Agreement"), the Advisor serves as the investment adviser for the
Trust and provides investment advice to the Funds, in accordance with the
investment objectives, policies, and limitations of the Funds, and oversees the
day-to-day operations of the Funds, subject to the general supervision and
control of the Board and the officers of the Trust. As of February 1, 2008, net
assets under management of the Advisor and its affiliates were approximately
$15.9 billion. Pursuant to the Advisory Agreement, the Advisor is responsible
for all expenses of the Funds, including the cost of transfer agency, custody,
fund administration, legal, audit and other services, except interest, taxes,
brokerage commissions and other expenses connected with the execution of
portfolio transactions, distribution fees, expenses of the Independent Trustees
(including any Independent Trustees' counsel fees) and extraordinary expenses.
For its investment management services, the Funds pay the Advisor the following
fees at an annual rate based on the average daily net assets for the Funds. The
Advisor, from its own resources, including profits from advisory fees received
from the Funds, provided such fees are legitimate and not excessive, may make
payments to broker-dealers and other financial institutions for their expenses
in connection with the distribution of Fund shares, and otherwise currently pay
all distribution costs for Fund shares.
Because the Funds commenced operations on November 1, 2007, the Advisor did not
receive any investment advisory fees from the Funds for the most recently
completed Trust fiscal year.
PORTFOLIO MANAGERS
This section includes information about each Fund's portfolio managers,
including information about other accounts they manage, the dollar range of Fund
shares they own and how they are compensated.
ACCOUNTS MANAGED BY PORTFOLIO MANAGERS. Including the Funds, the portfolio
managers are responsible for the day-to-day management of certain other
accounts, as follows:
31
-------------------------------------------------------------------------------------------------------------------------
REGISTERED INVESTMENT OTHER POOLED INVESTMENT
COMPANIES 1,2 VEHICLES 1 OTHER ACCOUNTS 1
-------------------------------------------------------------------------------------------------------------------------
NUMBER
NUMBER OF OF NUMBER OF
NAME ACCOUNTS TOTAL ASSETS ACCOUNTS TOTAL ASSETS ACCOUNTS TOTAL ASSETS
-------------------------------------------------------------------------------------------------------------------------
Michael P.
Byrum 142 $16.9 Billion 0 N/A 1 < $5 Million
-------------------------------------------------------------------------------------------------------------------------
Michael
Dellapa 142 $16.9 Billion 0 N/A 7 < $5 Million
-------------------------------------------------------------------------------------------------------------------------
James R.
King 142 $16.9 Billion 0 N/A 3 < $5 Million
-------------------------------------------------------------------------------------------------------------------------
|
1 Information provided is as of October 31, 2007.
2 The portfolio managers manage two registered investment companies, the
Rydex Series Funds Multi-Cap Core Equity Fund and Rydex Variable Trust
Multi-Cap Core Equity Fund, that are subject to a performance based
advisory fee. The two Funds had $47.2 million in assets under management
as of December 31, 2007.
CONFLICTS OF INTEREST. The portfolio managers' management of "other accounts"
may give rise to potential conflicts of interest in connection with their
management of a Fund's investments, on the one hand, and the investments of the
other accounts, on the other. The other accounts may have the same investment
objective as one of the Funds. Therefore, a potential conflict of interest may
arise as a result of the identical investment objectives, whereby the portfolio
managers could favor one account over another. Another potential conflict could
include the portfolio managers' knowledge about the size, timing and possible
market impact of Fund trades, whereby a portfolio manager could use this
information to the advantage of other accounts and to the disadvantage of a
Fund. However, the Advisor has established policies and procedures to ensure
that the purchase and sale of securities among all accounts it manages are
fairly and equitably allocated.
PORTFOLIO MANAGER COMPENSATION. The Advisor compensates each portfolio manager
for his management of the Funds. The portfolio managers' compensation consists
of a fixed annual salary and a discretionary bonus. The amount of the
discretionary bonus is determined by three components. The first component is a
comparison of the portfolio manager's Fund performance, calculated on a pre-tax
basis, relative to a mutual fund peer's performance and/or to the performance of
applicable internal or external benchmarks as measured over a one-year period.
Mutual fund peers are those funds with similar investment objectives to the Fund
managed by the portfolio managers. Mutual fund peers do not exist for all Rydex
Funds. Rydex Funds that do not have a mutual fund peer available for comparison
purposes will instead be compared to applicable internal or external benchmarks.
An external benchmark, such as the S&P 500(R) Index, will be used for each Rydex
Fund that seeks to track the performance of a published index. For a complete
list and description of the external benchmarks used by the Funds, see "More
Information About the Funds - Benchmarks and Investment Methodology" in the
Funds' Prospectuses. An internal benchmark, such as the inverse of the S&P
500(R) Index, will be used when an external benchmark is not available. The
second component used to determine the discretionary bonus is based on the
Advisor's overall profitability as measured by its profit margin and assets
under management. The third component used to determine the discretionary bonus
is based on a number of more subjective, but equally important, factors,
including a portfolio manager's enhancements to existing products, creation of
new products and concepts, support of sales, marketing, and client service, and
contributions to the advancement of the organization as a whole.
FUND SHARES OWNED BY PORTFOLIO MANAGERS. The following table shows the dollar
amount range of each portfolio manager's "beneficial ownership" of shares of
each Fund as of October 31, 2007. Dollar
32
amount ranges disclosed are established by the SEC. "Beneficial ownership" is
determined in accordance with Rule 16a-1(a)(2) under the Exchange Act. Because
the Funds commenced operations on November 1, 2007, none of the portfolio
managers beneficially owned shares of the Funds as of the most recently
completed Trust fiscal year.
--------------------------------------------------------------------------------
DOLLAR RANGE OF
PORTFOLIO MANAGER FUND NAME FUND SHARES
--------------------------------------------------------------------------------
Michael P. Byrum None None
--------------------------------------------------------------------------------
Michael Dellapa None None
--------------------------------------------------------------------------------
Jim King None None
--------------------------------------------------------------------------------
|
ADMINISTRATION, CUSTODY AND TRANSFER AGENCY AGREEMENTS
State Street Bank and Trust Company (the "Administrator") serves as
Administrator, Custodian and Transfer Agent for the Funds. Its principal address
is P.O. Box 5049, Boston, Massachusetts 02206-5049. Under an Administration
Agreement with the Trust, the Administrator provides necessary administrative
and accounting services for the maintenance and operations of the Trust and the
Funds. In addition, the Administrator makes available the office space,
equipment, personnel and facilities required to provide such services. Under a
Custodian Agreement with the Trust, the Administrator maintains in separate
accounts cash, securities and other assets of the Trust and the Funds, keeps all
necessary accounts and records, and provides other services. The Administrator
is required, upon the order of the Trust, to deliver securities held by the
Custodian and to make payments for securities purchased by the Trust for the
Funds. Pursuant to a Transfer Agency and Service Agreement with the Trust, the
Administrator acts as a transfer agent for the Trust's authorized and issued
shares of beneficial interest, and as dividend disbursing agent of the Trust.
The Advisor compensates the Administrator directly for the foregoing services.
Because the Funds commenced operations on November 1, 2007, the Funds did not
pay any custody, administration and transfer agency expenses for the most
recently completed Trust fiscal year.
DISTRIBUTION
Pursuant to the Distribution Agreement adopted by the Trust, Rydex Distributors,
Inc. (the "Distributor"), 9601 Blackwell Road, Suite 500, Rockville, Maryland
20850, acts as distributor for the shares of each Fund under the general
supervision and control of the Board and the officers of the Trust. The
Distributor is a subsidiary of Security Benefit and an affiliate of the Advisor.
The Distribution Agreement grants the Distributor the exclusive right to
distribute the shares of each Fund. In addition, the Distribution Agreement
permits the Distributor to receive as compensation any front-end sales load or
other asset-based sales charges collected pursuant to any distribution or
shareholder services plans adopted by a Fund. Each Fund's current distribution
and shareholder services plan, as well as a description of the services
performed under the plan, is described below.
DISTRIBUTION PLAN. Each Fund has adopted a Distribution Plan applicable to the
shares. Under the Distribution Plan, the Distributor, or designated Service
Providers, may receive up to 0.25% of a Fund's assets attributable to shares as
compensation for distribution services pursuant to Rule 12b-1 of the 1940 Act.
Distribution services may include: (i) services in connection with distribution
assistance, or (ii) payments to financial institutions and other financial
intermediaries, such as broker-dealers, mutual fund "supermarkets" and the
Distributor's affiliates and subsidiaries, as compensation for services or
reimbursement of expenses incurred in connection with distribution assistance.
The Distributor may, at its discretion, retain a portion of such payments to
compensate itself for distribution services and distribution related expenses
such as the costs of preparation, printing, mailing or otherwise disseminating
sales literature, advertising, and prospectuses (other than those furnished to
current shareholders of the Funds), promotional and incentive programs, and such
other marketing expenses that the Distributor may incur.
33
No distribution fees are currently charged to the Funds; there are no plans to
impose these fees, and no such fees will be charged prior to March 1, 2009.
However, in the event that 12b-1 fees are charged in the future, because the
Funds pay these fees out of assets on an ongoing basis, over time these fees may
cost you more than other types of sales charges and will increase the cost of
your investment.
Because the Funds commenced operations on November 1, 2007, the Funds did not
pay the Distributor any fees for services provided pursuant to the terms of the
Distribution Plan including: advertising, printing and mailing of prospectuses
to other than current shareholders; compensation to underwriters; compensation
to broker-dealers; compensation to sales personnel; interest, carrying, or other
financing charges, for the most recently completed Trust fiscal year.
COSTS AND EXPENSES. Each Fund bears all expenses of its operation other than
those assumed by the Advisor. Fund expenses include: interest, taxes, brokerage
commissions and other expenses connected with the execution of portfolio
transactions, distribution fees and extraordinary expenses.
BUSINESS CONTINUITY AND DISASTER RECOVERY. The Advisor and the Distributor
(collectively, the "Service Providers") have developed a joint Business
Continuity and Disaster Recovery Program that is designed to minimize the
disruption of normal business operations in the event of a disaster. While the
Service Providers believe that the Program is comprehensive and should enable
them to survive a disaster and reestablish normal business operations in a
timely manner, under certain unusual or unexpected circumstances the Service
Providers could be prevented or hindered from providing services to the Funds
for extended periods of time. These circumstances may include, without
limitation, acts of God, acts of government in its sovereign or contractual
capacity, any act of declared or undeclared war or of a public enemy (including
acts of terrorism), power shortages or failures, utility or communication
failure or delays, labor disputes, strikes, shortages, supply shortages, system
failures or malfunctions. Under each Service Provider's agreement with the
Trust, absent willful misfeasance, bad faith or gross negligence on the part of
the Service Provider, or the reckless disregard of their respective obligations,
the Service Provider generally will not be liable for any related losses to the
Funds or to the Funds' shareholders as a result of such an occurrence.
PRINCIPAL HOLDERS OF SECURITIES
The following table sets forth the name, address and percentage of ownership of
each person who is known by the Trust to own, of record or beneficially, 5% or
more of any class of the Trust's outstanding equity securities as of January 31,
2008.
34
-------------------------------------------------------------------------------------------------------------------------
NAME OF PERCENTAGE OF FUND
FUND NAME BENEFICIAL OWNER ADDRESS OF BENEFICIAL OWNER SHARES OWNED
-------------------------------------------------------------------------------------------------------------------------
Rydex 2x S&P 500 ETF TD AMERITRADE Clearing, 1005 N. Ameritrade Place, 17.98%
Inc. Bellevue, NE 68005
-------------------------------------------------------------------------------------------------------------------------
Pershing LLC 1 Pershing Place, 16.47%
Jersey City, NJ 07399
-------------------------------------------------------------------------------------------------------------------------
Charles Schwab & Co. 211 Main Street, 14.67%
Inc. San Francisco, CA 94105
-------------------------------------------------------------------------------------------------------------------------
KEYBANK NA 300 Park Avenue, 11.07%
New York, NY 10022
-------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Execution 30 Hudson Street, 6.37%
& Clearing LP Jersey City, NJ 07302
-------------------------------------------------------------------------------------------------------------------------
National Financial 200 Liberty Street, 5.06%
Services LLC New York, NY 10281
-------------------------------------------------------------------------------------------------------------------------
Rydex Inverse 2x S&P 500 ETF Charles Schwab & Co. 211 Main Street, 20.19%
Inc. San Francisco, CA 94105
-------------------------------------------------------------------------------------------------------------------------
National Financial 200 Liberty Street, 14.44%
Services LLC New York, NY 10281
-------------------------------------------------------------------------------------------------------------------------
Citigroup Global Markets 333 W. 34th Street, 12.22%
New York, NY 10001
-------------------------------------------------------------------------------------------------------------------------
Pershing LLC 1 Pershing Place, 10.34%
Jersey City, NJ 07399
-------------------------------------------------------------------------------------------------------------------------
Rydex 2x S&P MidCap 400 ETF Goldman Sachs Execution 30 Hudson Street, 73.81%
& Clearing LP Jersey City, NJ 07302
-------------------------------------------------------------------------------------------------------------------------
Timber Hill 1 Pickwick Plaza, 6.00%
Greenwich, CT 06830
-------------------------------------------------------------------------------------------------------------------------
Rydex Inverse 2x S&P MidCap Goldman Sachs Execution 30 Hudson Street, 69.86%
400 ETF & Clearing LP Jersey City, NJ 07302
-------------------------------------------------------------------------------------------------------------------------
Charles Schwab & Co. 211 Main Street, 9.34%
Inc. San Francisco, CA 94105
-------------------------------------------------------------------------------------------------------------------------
Rydex 2x Russell 2000(R) ETF Goldman Sachs Execution 30 Hudson Street, 47.33%
& Clearing LP Jersey City, NJ 07302
-------------------------------------------------------------------------------------------------------------------------
National Financial 200 Liberty Street, 19.65%
Services LLC New York, NY 10281
-------------------------------------------------------------------------------------------------------------------------
TD AMERITRADE Clearing, 1005 N. Ameritrade Place, 18.95%
Inc. Bellevue, NE 68005
-------------------------------------------------------------------------------------------------------------------------
Rydex Inverse 2x Russell National Financial 200 Liberty Street, 32.03%
2000(R) ETF Services LLC New York, NY 10281
-------------------------------------------------------------------------------------------------------------------------
Charles Schwab & Co. 211 Main Street, 19.70%
Inc. San Francisco, CA 94105
-------------------------------------------------------------------------------------------------------------------------
Timber Hill 1 Pickwick Plaza, 17.67%
Greenwich, CT 06830
-------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Execution 30 Hudson Street, 5.14%
& Clearing LP Jersey City, NJ 07302
-------------------------------------------------------------------------------------------------------------------------
|
BOOK ENTRY ONLY SYSTEM
The following information supplements and should be read in conjunction with the
section in the Prospectus entitled "Shareholder Information."
DTC Acts as securities depository for each Fund's shares. Shares of each Fund
are represented by securities registered in the name of DTC or its nominee, Cede
& Co., and deposited with, or on behalf of, DTC.
DTC, a limited-purpose trust company, was created to hold securities of its
participants (the "DTC Participants") and to facilitate the clearance and
settlement of securities transactions among the DTC
35
Participants in such securities through electronic book-entry changes in
accounts of the DTC Participants, thereby eliminating the need for physical
movement of securities' certificates. DTC Participants include securities
brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations, some of whom (and/or their representatives) own DTC. More
specifically, DTC is owned by a number of its DTC Participants and by the NYSE,
the AMEX and the NASD. Access to the DTC system is also available to others such
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a DTC Participant, either directly or indirectly
(the "Indirect Participants").
Beneficial ownership of shares is limited to DTC Participants, Indirect
Participants and persons holding interests through DTC Participants and Indirect
Participants. Ownership of beneficial interests in shares (owners of such
beneficial interests are referred to herein as "Beneficial Owners") is shown on,
and the transfer of ownership is effected only through, records maintained by
DTC (with respect to DTC Participants) and on the records of DTC Participants
(with respect to Indirect Participants and Beneficial Owners that are not DTC
Participants). Beneficial Owners will receive from or through the DTC
Participant a written confirmation relating to their purchase of shares.
Conveyance of all notices, statements and other communications to Beneficial
Owners is effected as follows. Pursuant to the Depositary Agreement between the
Trust and DTC, DTC is required to make available to the Trust upon request and
for a fee to be charged to the Trust a listing of the shares of any Fund held by
each DTC Participant. The Trust shall inquire of each such DTC Participant as to
the number of Beneficial Owners holding shares, directly or indirectly, through
such DTC Participant. The Trust shall provide each such DTC Participant with
copies of such notice, statement or other communication, in such form, number
and at such place as such DTC Participant may reasonably request, in order that
such notice, statement or communication may be transmitted by such DTC
Participant, directly or indirectly, to such Beneficial Owners. In addition, the
Trust shall pay to each such DTC Participant a fair and reasonable amount as
reimbursement for the expenses attendant to such transmittal, all subject to
applicable statutory and regulatory requirements.
Share distributions shall be made to DTC or its nominee, Cede & Co., as the
registered holder of all shares. DTC or its nominee, upon receipt of any such
distributions, shall credit immediately DTC Participants' accounts with payments
in amounts proportionate to their respective beneficial interests in shares of a
Fund as shown on the records of DTC or its nominee. Payments by DTC Participants
to Indirect Participants and Beneficial Owners of shares held through such DTC
Participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers in bearer
form or registered in a "street name," and will be the responsibility of such
DTC Participants.
The Trust has no responsibility or liability for any aspect of the records
relating to or notices to Beneficial Owners, or payments made on account of
beneficial ownership interests in such shares, or for maintaining, supervising
or reviewing any records relating to such beneficial ownership interests, or for
any other aspect of the relationship between DTC and the DTC Participants or the
relationship between such DTC Participants and the Indirect Participants and
Beneficial Owners owning through such DTC Participants.
DTC may decide to discontinue providing its service with respect to shares at
any time by giving reasonable notice to the Trust and discharging its
responsibilities with respect thereto under applicable law. Under such
circumstances, the Trust shall take action to find a replacement for DTC to
perform its functions at a comparable cost.
36
CREATION AND REDEMPTION OF CREATION UNITS
CREATION
The Trust issues and sells shares of a Fund only in Creation Units on a
continuous basis through the Distributor, without a sales load, at their NAV
next determined after receipt, on any Business Day (as defined below), for an
order received in proper form.
A "Business Day" with respect to the Funds is any day on which the NYSE is open
for business. As of the date of the Prospectus, the NYSE observes the following
holidays: New Year's Day, Martin Luther King, Jr. Day, President's Day
(Washington's Birthday), Good Friday, Memorial Day (observed), Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.
FUND DEPOSIT (LEVERAGED FUNDS ONLY). The consideration for purchase of a
Creation Unit of a Fund generally consists of an in-kind deposit of a designated
portfolio of equity securities - the "Deposit Securities" -- per each Creation
Unit constituting a substantial replication, or a representation, of the stocks
included in the Fund's Underlying Index and an amount of cash -- the Cash
Component -- computed as described below. Together, the Deposit Securities and
the Cash Component constitute the "Fund Deposit," which represents the minimum
initial and subsequent investment amount for a Creation Unit of a Fund. The Cash
Component is an amount equal to the difference between the NAV of the shares
(per Creation Unit) and the market value of the Deposit Securities. If the Cash
Component is a positive number (I.E., the NAV per Creation Unit exceeds the
market value of the Deposit Securities), the Cash Component shall be such
positive amount. If the Cash Component is a negative number (I.E., the NAV per
Creation Unit is less than the market value of the Deposit Securities), the Cash
Component shall be such negative amount and the creator will be entitled to
receive cash from a Fund in an amount equal to the Cash Component. The Cash
Component serves the function of compensating for any differences between the
NAV per Creation Unit and the market value of the Deposit Securities.
The Custodian, through the National Securities Clearing Corporation ("NSCC")
(discussed below), makes available on each Business Day, immediately prior to
the opening of business on the New York Stock Exchange (currently 9:30 a.m.,
Eastern Time), the list of the names and the required number of shares of each
Deposit Security to be included in the current Fund Deposit (based on
information at the end of the previous Business Day) for a Fund. Such Fund
Deposit is applicable, subject to any adjustments as described below, in order
to effect creations of Creation Units of a Fund until such time as the
next-announced composition of the Deposit Securities is made available.
The identity and number of shares of the Deposit Securities required for a Fund
Deposit for a Fund changes as rebalancing adjustments and corporate action
events are reflected from time to time by the Advisor with a view to the
investment objective of a Fund. The composition of the Deposit Securities may
also change in response to adjustments to the weighting or composition of the
Component Stocks of the Index. In addition, the Trust reserves the right to
permit or require the substitution of an amount of cash -- I.E., a "cash in
lieu" amount -- to be added to the Cash Component to replace any Deposit
Security which may not be available in sufficient quantity for delivery or which
may not be eligible for transfer through the Clearing Process (discussed below),
or which may not be eligible for trading by an authorized Participant (as
defined below) or the investor for which it is acting. Brokerage commissions
incurred in connection with acquisition of Deposit Securities not eligible for
transfer through the systems of DTC and hence not eligible for transfer through
the Clearing Process (discussed below) will be at the expense of a Fund and will
affect the value of the shares; but the Advisor, subject to the approval of the
Board, may adjust the transaction fee within the parameters described above to
protect ongoing shareholders. The adjustments described above will reflect
changes, known to the Advisor on the date of announcement to be in effect by the
time of delivery of the Fund Deposit, in the composition of the Index being
tracked by a Fund or resulting from certain corporate actions.
37
In addition to the list of names and numbers of securities constituting the
current Deposit Securities of a Fund Deposit, the Custodian, through the NSCC,
also makes available on each Business Day, the estimated Cash Component,
effective through and including the previous Business Day, per outstanding share
of a Fund.
CASH PURCHASE (LEVERAGED INVERSE FUNDS ONLY). Creation Units of the Leveraged
Inverse Funds are sold only for cash ("Cash Purchase Amount"). Creation Units
are sold at the net asset value next computed, plus a transaction fee, as
described below.
PROCEDURES FOR CREATION OF CREATION UNITS. To be eligible to place orders with
the Distributor to create a Creation Unit of a Fund, an entity must be (i) a
"Participating Party", I.E., a broker-dealer or other participant in the
clearing process through the Continuous Net Settlement System of the NSCC (the
"Clearing Process"), a clearing agency that is registered with the SEC; or (ii)
a DTC Participant (see "Book Entry Only System"), and, in each case, must have
executed an agreement with the Trust, the Distributor and the Transfer Agent
with respect to creations and redemptions of Creation Units ("Participant
Agreement") (discussed below). A Participating Party and DTC Participant are
collectively referred to as an "Authorized Participant." Investors should
contact the Distributor for the names of Authorized Participants that have
signed a Participant Agreement with the Funds. All shares of a Fund, however
created, will be entered on the records of DTC in the name of Cede & Co. for the
account of a DTC Participant.
All orders to create Creation Units must be placed for one or more Creation Unit
size aggregations of shares (50,000 in the case of the Funds). All orders to
create Creation Units, whether through the Clearing Process (through a
Participating Party) or outside the Clearing Process (through a DTC
Participant), must be received by the Distributor no later than the close of the
regular trading session on the NYSE (ordinarily 4:00 p.m. Eastern Time)
("Closing Time"), if transmitted by mail, or 3:00 p.m. Eastern Time, if
transmitted by telephone, facsimile or other transmission method permitted under
the Participant Agreement, on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of shares of a Fund
as next determined on such date after receipt of the order in proper form. The
date on which an order to create Creation Units (or an order to redeem Creation
Units as discussed below) is placed is referred to as the "Transmittal Date".
Orders must be transmitted by an Authorized Participant by telephone or other
transmission method acceptable to the Distributor pursuant to procedures set
forth in the Participant Agreement, as described below (see "Placement of
Creation Orders Using Clearing Process" and "Placement of Creation Orders
Outside Clearing Process"). Severe economic or market disruptions or changes, or
telephone or other communication failure, may impede the ability to reach the
Distributor or an Authorized Participant.
Orders to create Creation Units of a Fund shall be placed with an Authorized
Participant, as applicable, in the form required by such Authorized Participant.
In addition, the Authorized Participant may request the investor to make certain
representations or enter into agreements with respect to the order, I.E., to
provide for payments of cash, when required. Investors should be aware that
their particular broker may not have executed a Participant Agreement, and that,
therefore, orders to create Creation Units of a Fund have to be placed by the
investor's broker through an Authorized Participant that has executed a
Participant Agreement. At any given time there may be only a limited number of
broker-dealers that have executed a Participant Agreement. Those placing orders
for Creation Units through the Clearing Process should afford sufficient time to
permit proper submission of the order to the Distributor prior to the Closing
Time on the Transmittal Date.
Orders for creation that are effected outside the Clearing Process are likely to
require transmittal by the DTC Participant earlier on the Transmittal Date than
orders effected using the Clearing Process. Those
38
persons placing orders outside the Clearing Process should ascertain the
deadlines applicable to DTC and the Federal Reserve Bank wire system by
contacting the operations department of the broker or depository institution
effectuating such transfer of Deposit Securities and Cash Component.
PLACEMENT OF CREATION ORDERS USING THE CLEARING PROCESS (LEVERAGED FUNDS ONLY).
The Clearing Process is the process of creating or redeeming Creation Units
through the Continuous Net Settlement System of the NSCC. Fund Deposits made
through the Clearing Process must be delivered through a Participating Party
that has executed a Participant Agreement. The Participant Agreement authorizes
the Distributor to transmit through the Transfer Agent to NSCC, on behalf of the
Participating Party, such trade instructions as are necessary to effect the
Participating Party's creation order. Pursuant to such trade instructions to
NSCC, the Participating Party agrees to deliver the requisite Deposit Securities
and the Cash Component to the Trust, together with such additional information
as may be required by the Distributor. An order to create Creation Units through
the Clearing Process is deemed received by the Distributor on the Transmittal
Date if (i) such order is received by the Distributor not later than the Closing
Time, if transmitted by mail, or 3:00 p.m. Eastern Time, if transmitted by other
means, on such Transmittal Date and (ii) all other procedures set forth in the
Participant Agreement are properly followed.
PLACEMENT OF CREATION ORDERS OUTSIDE OF THE CLEARING PROCESS. Fund Deposits made
outside the Clearing Process must be delivered through a DTC Participant that
has executed a Participant Agreement with the Trust, the Distributor and the
Transfer Agent. A DTC Participant who wishes to place an order creating Creation
Units to be effected outside the Clearing Process need not be a Participating
Party, but such orders must state that the DTC Participant is not using the
Clearing Process and that the creation of Creation Units will instead be
effected through a transfer of securities and cash directly through DTC. All
purchases of the Leveraged Inverse Funds will be settled outside the Clearing
Process. A Fund Deposit transfer must be ordered by the DTC Participant on the
Transmittal Date in a timely fashion so as to ensure the delivery of the
requisite number of Deposit Securities through DTC to the account of the Trust
by no later than 11:00 a.m., Eastern Time, of the next Business Day immediately
following the Transmittal Date (for the Leveraged Funds). All questions as to
the number of Deposit Securities to be delivered, and the validity, form and
eligibility (including time of receipt) for the deposit of any tendered
securities, will be determined by the Trust, whose determination shall be final
and binding. The cash equal to the Cash Component or the Cash Purchase Amount
(for the Leveraged Inverse Funds) must be transferred directly to the Custodian
through the Federal Reserve wire system in a timely manner so as to be received
by the Custodian no later than 2:00 p.m., Eastern Time, on the next Business Day
immediately following such Transmittal Date. An order to create Creation Units
outside the Clearing Process is deemed received by the Distributor on the
Transmittal Date if (i) such order is received by the Distributor not later than
the Closing Time if transmitted by mail, or by 3:00 p.m. Eastern Time, if
transmitted by other means on such Transmittal Date; and (ii) all other
procedures set forth in the Participant Agreement are properly followed.
However, if the Custodian does not receive both the requisite Deposit Securities
by 11:00 a.m. and the Cash Component or Cash Purchase Amount by 2:00 p.m.,
Eastern Time, on the next Business Day immediately following the Transmittal
Date, such order will be cancelled. Upon written notice to the Distributor, such
cancelled order may be resubmitted the following Business Day based on the then
current NAV of a Fund. The delivery of Creation Units of Funds so created will
occur no later than the third (3rd) Business Day following the day on which the
purchase order is deemed received by the Distributor.
For the Leveraged Funds, Creation Units may be created in advance of receipt by
the Trust of all or a portion of the applicable Deposit Securities as described
below. In these circumstances, the initial deposit will have a value greater
than the NAV of the Shares on the date the order is placed in proper form since
in addition to available Deposit Securities, cash must be deposited in an amount
equal to the sum of (i) the Cash Component, plus (ii) 115% of the market value
of the undelivered Deposit Securities (the
39
"Additional Cash Deposit"). The order shall be deemed to be received on the
Business Day on which the order is placed provided that the order is placed in
proper form prior to 3:00 p.m. or 4:00 p.m., Eastern Time, as applicable, on
such date and federal funds in the appropriate amount are deposited with the
Trust's Custodian by 11:00 a.m., Eastern Time, the following Business Day. If
the order is not placed in proper form by 3:00 p.m. or 4:00 p.m., Eastern Time,
or federal funds in the appropriate amount are not received by 11:00 a.m. the
next Business Day, then the order may be deemed to be rejected and the investor
shall be liable to the Trust for losses, if any, resulting therefrom. An
additional amount of cash shall be required to be deposited with the Trust,
pending delivery of the missing Deposit Securities to the extent necessary to
maintain the Additional Cash Deposit with the Trust in an amount at least equal
to 115% of the daily marked to market value of the missing Deposit Securities.
To the extent that missing Deposit Securities are not received by 1:00 p.m.,
Eastern Time, on the third Business Day following the day on which the purchase
order is deemed received by the Distributor or in the event a mark to market
payment is not made within one Business Day following notification by the
Distributor that such a payment is required, the Trust may use the cash on
deposit to purchase the missing Deposit Securities. Authorized Participants will
be liable to the Trust for the costs incurred by the Trust in connection with
any such purchases. These costs will be deemed to include the amount by which
the actual purchase price of the Deposit Securities exceeds the market value of
such Deposit Securities on the day the purchase order was deemed received by the
Distributor plus the brokerage and related transaction costs associated with
such purchases. The Trust will return any unused portion of the Additional Cash
Deposit once all of the missing Deposit Securities have been properly received
by the Custodian or purchased by the Trust and deposited into the Trust. In
addition, a transaction fee will be charged in all cases. The delivery of
Creation Units of Funds so created will occur no later than the third Business
Day following the day on which the purchase order is deemed received by the
Distributor.
ACCEPTANCE OF ORDERS FOR CREATION UNITS. The Trust reserves the absolute right
to reject a creation order transmitted to it by the Distributor in respect of
the Funds if (a) the order is not in proper form; (b) the investor(s), upon
obtaining the shares ordered, would own 80% or more of the currently outstanding
shares of any Fund; (c) the Deposit Securities delivered are not as disseminated
through the facilities of the Exchange for that date by the Custodian, as
described above; (d) acceptance of the Deposit Securities would have certain
adverse tax consequences to a Fund; (e) the acceptance of the Fund Deposit
would, in the opinion of counsel, be unlawful; (f) the acceptance of the Fund
Deposit would otherwise, in the discretion of the Trust or the Advisor, have an
adverse effect on the Trust or the rights of beneficial owners; or (g) in the
event that circumstances outside the control of the Trust, the Distributor and
the Advisor make it for all practical purposes impossible to process creation
orders. Examples of such circumstances include acts of God or public service or
utility problems such as fires, floods, extreme weather conditions and power
outages resulting in telephone, telecopy and computer failures; market
conditions or activities causing trading halts; systems failures involving
computer or other information systems affecting the Trust, the Advisor, the
Distributor, DTC, NSCC or any other participant in the creation process, and
similar extraordinary events. The Distributor shall notify a prospective creator
of a Creation Unit and/or the Authorized Participant acting on behalf of the
creator of a Creation Unit of its rejection of the order of such person. The
Trust, the Transfer Agent, the Custodian and the Distributor are under no duty,
however, to give notification of any defects or irregularities in the delivery
of Fund Deposits nor shall either of them incur any liability for the failure to
give any such notification.
All questions as to the number of shares of each security in the Deposit
Securities and the validity, form, eligibility and acceptance for deposit of any
securities to be delivered shall be determined by the Trust, and the Trust's
determination shall be final and binding.
CREATION TRANSACTION FEE. To compensate the Trust for transfer and other
transaction costs involved in creation transactions through the Clearing
Process, investors will be required to pay a fixed creation transaction fee
assessed per transaction, as follows:
40
--------------------------------------------------------------------------------
FUND CREATION TRANSACTION FEE
--------------------------------------------------------------------------------
Rydex 2x S&P 500 ETF $2,000
--------------------------------------------------------------------------------
Rydex Inverse 2x S&P 500 ETF $ 50
--------------------------------------------------------------------------------
Rydex 2x S&P MidCap 400 ETF $2,000
--------------------------------------------------------------------------------
Rydex Inverse 2x S&P MidCap 400 ETF $ 50
--------------------------------------------------------------------------------
Rydex 2x Russell 2000(R) ETF $3,000
--------------------------------------------------------------------------------
Rydex Inverse 2x Russell 2000(R) ETF $ 50
--------------------------------------------------------------------------------
|
For the Leveraged Funds, an additional charge of up to four (4) times the fixed
transaction fee (expressed as a percentage of the value of the Deposit
Securities) may be imposed for (i) creations effected outside the Clearing
Process; and (ii) cash creations or partial cash creations (when cash creations
are available) to offset the Trust's brokerage and other transaction costs
associated with using cash to purchase the requisite Deposit Securities.
Investors are responsible for the costs of transferring the securities
constituting the Deposit Securities to the account of the Trust.
The Funds, subject to approval by the Board, may adjust the fee from time to
time based upon actual experience. Investors who use the services of a broker or
other such intermediary in addition to an Authorized Participant to effect a
creation of a Creation Unit may be charged a fee for such services.
REDEMPTION
Shares may be redeemed only in Creation Units at their NAV next determined after
receipt of a redemption request in proper form by a Fund through the Transfer
Agent and only on a Business Day. The Trust will not redeem shares in amounts
less than Creation Units. Beneficial Owners must accumulate enough shares in the
secondary market to constitute a Creation Unit in order to have such shares
redeemed by the Trust. There can be no assurance, however, that there will be
sufficient liquidity in the public trading market at any time to permit assembly
of a Creation Unit. Investors should expect to incur brokerage and other costs
in connection with assembling a sufficient number of shares to constitute a
redeemable Creation Unit.
With respect to the Leveraged Funds, the Custodian, through the NSCC, makes
available immediately prior to the opening of business on the New York Stock
Exchange (currently 9:30 am, Eastern Time) on each Business Day, the Fund
Securities that will be applicable (subject to possible amendment or correction)
to redemption requests received in proper form (as defined below) on that day.
Fund Securities received on redemption may not be identical to Deposit
Securities which are applicable to creations of Creation Units.
Unless cash redemptions are available or specified for a Fund, the redemption
proceeds for a Creation Unit generally consist of Fund Securities - as announced
by the Custodian on the Business Day of the request for redemption received in
proper form -- plus cash in an amount equal to the difference between the NAV of
the shares being redeemed, as next determined after a receipt of a request in
proper form, and the value of the Fund Securities (the "Cash Redemption
Amount"), less a redemption transaction fee described below in the section
entitled "Redemption Transaction Fee." In the event that the Fund Securities
have a value greater than the NAV of the shares, a compensating cash payment
equal to the differential is required to be made by or through an Authorized
Participant by the redeeming shareholder.
The redemption proceeds for a Creation Unit of an Inverse Fund or a Leveraged
Inverse Fund will consist solely of cash in an amount equal to the NAV of the
shares being redeemed, as next determined after receipt of a request in proper
form, less a redemption transaction fee described below in the section entitled
"Redemption Transaction Fee."
41
PLACEMENT OF REDEMPTION ORDERS USING THE CLEARING PROCESS (LEVERAGED FUNDS
ONLY). Orders to redeem Creation Units through the Clearing Process must be
delivered through a Participating Party that has executed the Participant
Agreement. An order to redeem Creation Units using the Clearing Process is
deemed received on the Transmittal Date if (i) such order is received by the
Transfer Agent not later than 4:00 p.m., Eastern Time, on such Transmittal Date;
and (ii) all other procedures set forth in the Participant Agreement are
properly followed; such order will be effected based on the NAV of a Fund as
next determined. An order to redeem Creation Units using the Clearing Process
made in proper form but received by a Fund after 4:00 p.m., Eastern Time, will
be deemed received on the next Business Day immediately following the
Transmittal Date and will be effected at the NAV next determined on such
Business Day. The requisite Fund Securities and the Cash Redemption Amount will
be transferred by the third (3rd) NSCC Business Day following the date on which
such request for redemption is deemed received.
PLACEMENT OF REDEMPTION ORDERS OUTSIDE THE CLEARING PROCESS. Orders to redeem
Creation Units outside the Clearing Process must be delivered through a DTC
Participant that has executed the Participant Agreement. A DTC Participant who
wishes to place an order for redemption of Creation Units to be effected outside
the Clearing Process need not be a Participating Party, but such orders must
state that the DTC Participant is not using the Clearing Process and that
redemption of Creation Units will instead be effected through transfer of shares
directly through DTC. An order to redeem Creation Units outside the Clearing
Process is deemed received by the Transfer Agent on the Transmittal Date if (i)
such order is received by the Transfer Agent not later than 4:00 p.m., Eastern
Time, if transmitted by mail, or by 3:00 p.m. Eastern Time, if transmitted by
other means, on such Transmittal Date; (ii) such order is accompanied or
proceeded by the requisite number of shares of a Fund and the cash redemption
amount specified in such order, which delivery must be made through DTC to the
Custodian no later than 11:00 a.m. and 2:00 p.m., Eastern Time, respectively, on
the next Business Day following such Transmittal Date (the "DTC Cut-Off-Time");
and (iii) all other procedures set forth in the Participant Agreement are
properly followed.
After the Transfer Agent has deemed an order for redemption outside the Clearing
Process received, the Transfer Agent will initiate procedures to transfer the
requisite Fund Securities which are expected to be delivered within three
Business Days and the Cash Redemption Amount to the Authorized Participant on
behalf of the redeeming Beneficial Owner by the third Business Day following the
Transmittal Date on which such redemption order is deemed received by the
Transfer Agent.
The calculation of the value of the Fund Securities and the Cash Redemption
Amount to be delivered upon redemption will be made by the Custodian according
to the procedures set forth under "Determination of Net Asset Value" computed on
the Business Day on which a redemption order is deemed received by the Transfer
Agent. Therefore, if a redemption order in proper form is submitted to the
Transfer Agent by a DTC Participant not later than the Closing Time if
transmitted by mail, or by 3:00 p.m., Eastern Time, if transmitted by other
means on the Transmittal Date, and the requisite number of shares of the
relevant Fund are delivered to the Custodian prior to the DTC Cut-Off-Time, then
the value of the Fund Securities and the Cash Redemption Amount to be delivered
will be determined by the Custodian on such Transmittal Date. If, however, a
redemption order is submitted to the Transfer Agent by a DTC Participant not
later than the Closing Time on the Transmittal Date but either (1) the requisite
number of shares of the relevant Fund are not delivered by the DTC Cut-Off-Time
as described above on the next Business Day following the Transmittal Date or
(2) the redemption order is not submitted in proper form, then the redemption
order will not be deemed received as of the Transmittal Date. In such case, the
value of the Fund Securities and the Cash Redemption Amount to be delivered will
be computed on the Business Day that such order is deemed received by the
Transfer Agent, I.E., the Business Day on
42
which the shares of a Fund are delivered through DTC to the Custodian by the DTC
Cut-Off-Time on such Business Day pursuant to a properly submitted redemption
order.
For the Leveraged Funds, if it is not possible to effect deliveries of the Fund
Securities, the Trust may in its discretion exercise its option to redeem such
shares in cash, and the redeeming Beneficial Owner will be required to receive
its redemption proceeds in cash. In addition, an investor may request a
redemption in cash which the Funds may, in their sole discretion, permit. In
either case, the investor will receive a cash payment equal to the NAV of its
shares based on the NAV of shares of a Fund next determined after the redemption
request is received in proper form (minus a redemption transaction fee and
additional charge for requested cash redemptions specified above, to offset the
Trust's brokerage and other transaction costs associated with the disposition of
Fund Securities). Each Fund may also, in its sole discretion, upon request of a
shareholder, provide such redeemer a portfolio of securities which differs from
the exact composition of the Fund Securities but does not differ in NAV.
Redemptions of shares for Fund Securities will be subject to compliance with
applicable federal and state securities laws and the Funds (whether or not it
otherwise permits cash redemptions) reserves the right to redeem Creation Units
for cash to the extent that the Funds could not lawfully deliver specific Fund
Securities upon redemptions or could not do so without first registering the
Fund Securities under such laws. An Authorized Participant or an investor for
which it is acting subject to a legal restriction with respect to a particular
stock included in the Fund Securities applicable to the redemption of a Creation
Unit may be paid an equivalent amount of cash. The Authorized Participant may
request the redeeming Beneficial Owner of the shares to complete an order form
or to enter into agreements with respect to such matters as compensating cash
payment, beneficial ownership of shares or delivery instructions.
For the Leveraged Inverse Funds, all redemptions will be in cash.
The right of redemption may be suspended or the date of payment postponed with
respect to any Fund (1) for any period during which the NYSE is closed (other
than customary weekend and holiday closings); (2) for any period during which
trading on the NYSE is suspended or restricted; (3) for any period during which
an emergency exists as a result of which disposal of the shares of a Fund or
determination of the shares' NAV is not reasonably practicable; or (4) in such
other circumstance as is permitted by the SEC.
REDEMPTION TRANSACTION FEE. To compensate the Trust for transfer and other
transaction costs involved in redemption transactions through the Clearing
Process, investors will be required to pay a fixed redemption transaction fee
assessed per transaction, as follows:
--------------------------------------------------------------------------------
FUND REDEMPTION TRANSACTION FEE
--------------------------------------------------------------------------------
Rydex 2x S&P 500 ETF $2,000
--------------------------------------------------------------------------------
Rydex Inverse 2x S&P 500 ETF $ 50
--------------------------------------------------------------------------------
Rydex 2x S&P MidCap 400 ETF $2,000
--------------------------------------------------------------------------------
Rydex Inverse 2x S&P MidCap 400 ETF $ 50
--------------------------------------------------------------------------------
Rydex 2x Russell 2000(R) ETF $3,000
--------------------------------------------------------------------------------
Rydex Inverse 2x Russell 2000(R) ETF $ 50
--------------------------------------------------------------------------------
|
For the Leveraged Funds, an additional charge of up to four (4) times the fixed
transaction fee may be imposed for (i) redemptions effected outside the Clearing
Process; and (ii) cash redemptions or partial cash redemptions (when cash
redemptions are available).
43
The Funds, subject to approval by the Board, may adjust the fee from time to
time based upon actual experience. Investors who use the services of a broker or
other such intermediary in addition to an Authorized Participant to effect a
redemption of a Creation Unit may be charged a fee for such services.
DETERMINATION OF NET ASSET VALUE
The following information supplements and should be read in conjunction with the
section in the Prospectus entitled "Calculating NAV."
The NAV per share of a Fund is computed by dividing the value of the net assets
of the Fund (I.E., the value of its total assets less total liabilities) by the
total number of shares of the Fund outstanding, rounded to the nearest cent.
Expenses and fees, including without limitation, the management, administration
and distribution fees, are accrued daily and taken into account for purposes of
determining NAV. The NAV of per share for a Fund is calculated by the Custodian
and determined as of the close of the regular trading session on the NYSE
(ordinarily 4:00 p.m., Eastern Time) on each day that such exchange is open.
In computing a Fund's NAV, the Fund's securities holdings are valued based on
their last quoted current price. Price information on listed securities is taken
from the exchange where the security is primarily traded. Securities regularly
traded in an OTC market are valued at the latest quoted sales price on the
primary exchange or national securities market on which such securities are
traded. Securities not listed on an exchange or national securities market, or
securities in which there was no last reported sales price, are valued at the
most recent bid price. Other portfolio securities and assets for which market
quotations are not readily available are valued based on fair value as
determined in good faith by the Advisor in accordance with procedures adopted by
the Board.
DIVIDENDS, DISTRIBUTIONS, AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The following information supplements and should be read in conjunction with the
section in the Prospectus entitled "Shareholder Information."
GENERAL POLICIES. Dividends from net investment income, if any, are declared and
paid at least annually by the Funds. Distributions of net realized securities
gains, if any, generally are declared and paid once a year, but the Trust may
make distributions on a more frequent basis for the Funds. The Trust reserves
the right to declare special distributions if, in its reasonable discretion,
such action is necessary or advisable to preserve the status of a Fund as a
Regulated Investment Company (a "RIC") under the Internal Revenue Code of 1986,
as amended (the "Code"), or to avoid imposition of income or excise taxes on
undistributed income.
Dividends and other distributions on shares are distributed, as described below,
on a pro rata basis to Beneficial Owners of such shares. Dividend payments are
made through DTC Participants and Indirect Participants to Beneficial Owners
then of record with proceeds received from the Funds.
DIVIDEND REINVESTMENT SERVICE. No reinvestment service is provided by the Trust.
Broker-dealers may make available the DTC book-entry Dividend Reinvestment
Service for use by Beneficial Owners of the Funds for reinvestment of their
dividend distributions. Beneficial Owners should contact their broker to
determine the availability and costs of the service and the details of
participation therein. Brokers may require Beneficial Owners to adhere to
specific procedures and timetables. If this service is available and
44
used, dividend distributions of both income and realized gains will be
automatically reinvested in additional whole shares of a Fund purchased in the
secondary market.
FEDERAL INCOME TAXES
The following is only a summary of certain additional federal income tax
considerations generally affecting the Funds and their shareholders that are not
described in the Prospectus. No attempt is made to present a detailed
explanation of the federal, state, local or foreign tax treatment of the Funds
or their shareholders, and the discussion here and in the Prospectus is not
intended to be a substitute for careful tax planning.
The following general discussion of certain federal income tax consequences is
based on provisions of the Code and the regulations issued thereunder as in
effect on the date of this SAI. New legislation, as well as administrative
changes or court decisions, may significantly change the conclusions expressed
herein, and may have a retroactive effect with respect to the transactions
contemplated herein.
Shareholders are urged to consult their own tax advisers regarding the
application of the provisions of tax law described in this SAI in light of the
particular tax situations of the shareholders and regarding specific questions
as to federal, state, or local taxes.
REGULATED INVESTMENT COMPANY (RIC) STATUS
The Funds will seek to qualify for treatment as a RIC under the Code. Provided
that for each tax year each Fund: (i) meets the requirements to be treated as a
RIC (as discussed below); and (ii) distributes at least 90% of the Fund's net
investment income for such year (including, for this purpose, the excess of net
realized short-term capital gains over net long-term capital losses), the Fund
itself will not be subject to federal income taxes to the extent the Fund's net
investment income and the Fund's net realized capital gains, if any, are
distributed to the Fund's shareholders. One of several requirements for RIC
qualification is that a Fund must receive at least 90% of the Fund's gross
income each year from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of stock, securities or foreign
currencies, or other income derived with respect to the Fund's investments in
stock, securities, foreign currencies and net income from an interest in a
qualified publicly traded partnership (the "90% Test"). A second requirement for
qualification as a RIC is that a Fund must diversify its holdings so that, at
the end of each fiscal quarter of the Fund's taxable year: (a) at least 50% of
the market value of the Fund's total assets is represented by cash and cash
items, U.S. Government securities, securities of other RICs, and other
securities, with these other securities limited, in respect to any one issuer,
to an amount not greater than 5% of the value of the Fund's total assets or 10%
of the outstanding voting securities of such issuer; and (b) not more than 25%
of the value of its total assets are invested in the securities (other than U.S.
Government securities or securities of other RICs) of any one issuer or two or
more issuers which the Fund controls and which are engaged in the same, similar,
or related trades or businesses, or the securities of one or more qualified
publicly traded partnership (the "Asset Test").
In the event of a failure by a Fund to qualify as a RIC, the Fund's
distributions, to the extent such distributions are derived from the Fund's
current or accumulated earnings and profits, would constitute dividends that
would be taxable to the shareholders of the Fund as ordinary income and would be
eligible for the dividends received deduction for corporate shareholders and as
qualified dividend income for individual shareholders, subject to certain
limitations. This treatment would also apply to any portion of the distributions
that might have been treated in the shareholder's hands as long-term capital
gains, as discussed below, had a Fund qualified as a RIC. The Board reserves the
right not to maintain the qualification of a Fund as a RIC if it determines such
course of action to be beneficial to shareholders. If a Fund determines that it
will not qualify as a RIC under Subchapter M of the Code, the Fund will
establish procedures to reflect the anticipated tax liability in the Fund's NAV.
45
Each Fund will generally be subject to a nondeductible 4% federal excise tax to
the extent it fails to distribute by the end of any calendar year 98% of its
ordinary income for the year and 98% of its capital gain net income for the
one-year period ending on October 31 of that year, plus certain other amounts.
The Funds intend to make sufficient distributions, or deemed distributions, to
avoid imposition of the excise tax, but can make no assurances that all such tax
liability will be eliminated.
Each Fund intends to distribute substantially all its net investment income and
net realized capital gains to shareholders, at least annually. The distribution
of net investment income and net realized capital gains will be taxable to Fund
shareholders regardless of whether the shareholder elects to receive these
distributions in cash or in additional shares. All or a portion of the net
investment income distributions may be treated as qualified dividend income
(eligible for the reduced maximum rate to individuals of 15% (5% for individuals
in lower tax brackets)) to the extent that a Fund receives qualified dividend
income. Qualified dividend income is, in general, dividend income from taxable
domestic corporations and certain foreign corporations (I.E., foreign
corporations incorporated in a possession of the United States or in certain
countries with a comprehensive tax treaty with the United States, or the stock
of which is readily tradable on an established securities market in the United
States).
In order for some portion of the dividends received by a Fund shareholder to be
qualified dividend income, the Fund must meet holding period and other
requirements with respect to the dividend paying stocks in its portfolio, and
the shareholder must meet holding period and other requirements with respect to
the Fund's shares. Distributions reported to Fund shareholders as long-term
capital gains shall be taxable as such (currently at a maximum rate of 15%),
regardless of how long the shareholder has owned the shares. A Fund's
shareholders will be notified annually by the Fund as to the federal tax status
of all distributions made by the Fund. Distributions may be subject to state and
local taxes.
Absent further legislation, the maximum 15% tax rate on qualified dividend
income and long-term capital gains will cease to apply to taxable years
beginning after December 31, 2010.
Shareholders who have not held Fund shares for a full year should be aware that
the Funds may designate and distribute, as ordinary income or capital gain, a
percentage of income that is not equal to the actual amount of such income
earned during the period of investment in the Funds.
If a Fund's distributions exceed its taxable income and capital gains realized
during a taxable year, all or a portion of the distributions made in the same
taxable year may be recharacterized as a return of capital to shareholders. A
return of capital distribution will generally not be taxable, but will reduce
each shareholder's cost basis in a Fund and result in a higher reported capital
gain or lower reported capital loss when those shares on which the distribution
was received are sold.
Sales and redemptions of Fund shares are generally taxable transactions for
federal and state income tax purposes. In general, if you hold your shares as a
capital asset, gain or loss realized will be capital in nature and will be
classified as long-term or short-term, depending on the length of the time
shares have been held.
All or a portion of any loss realized upon the sale or redemption of Fund shares
will be disallowed to the extent that others shares in a Fund are purchased
(through reinvestment of dividends or otherwise) within 30 days before or after
a share redemption. Any loss disallowed under these rules will be added to the
tax basis in the newly purchased shares. In addition, any loss realized by a
shareholder on the disposition of shares held for six months or less is treated
as a long-term capital loss to the extent of any distributions of any net
long-term capital gains received by the shareholder with respect to such shares.
46
OPTIONS, SWAPS AND OTHER COMPLEX SECURITIES
The Funds may invest in complex securities such as equity options, index
options, repurchase agreements, foreign currency contracts, hedges and swaps,
and futures contracts. These investments may be subject to numerous special and
complex tax rules. These rules could affect whether gains and losses recognized
by a Fund are treated as ordinary income or capital gain, accelerate the
recognition of income to the Fund and/or defer the Fund's ability to recognize
losses. In turn, those rules may affect the amount, timing or character of the
income distributed by a Fund. The Funds may be subject to foreign withholding
taxes on income they may earn from investing in foreign securities, which may
reduce the return on such investments.
A Fund's transactions in swaps, under some circumstances, could preclude the
Fund's qualifying for the special tax treatment available to investment
companies meeting the requirements to be treated as a RIC under Subchapter M of
the Code. However, it is the intention of each Fund's portfolio management to
limit gains from such investments to less than 10% of the gross income of the
Fund during any fiscal year in order to maintain this qualification.
BACK-UP WITHHOLDING
In certain cases a Fund will be required to withhold and remit to the U.S.
Treasury an amount equal to the applicable back-up withholding rate applied to
reportable taxable dividends and distributions, as well as the proceeds of any
redemptions of Fund shares, paid to a shareholder who: (1) has failed to provide
a correct taxpayer identification number (usually the shareholder's social
security number); (2) is subject to back-up withholding by the Internal Revenue
Service ("IRS"); (3) has failed to provide the Fund with the certifications
required by the IRS to document that the shareholder is not subject to back-up
withholding; or (4) has failed to certify that he or she is a U.S. person
(including a U.S. resident alien).
OTHER ISSUES
The Funds may be subject to tax or taxes in certain states where the Funds do
business. Furthermore, in those states which have income tax laws, the tax
treatment of the Funds and of Fund shareholders with respect to distributions by
the Funds may differ from federal tax treatment.
Shareholders are urged to consult their own tax advisers regarding the
application of the provisions of tax law described in this SAI in light of the
particular tax situations of the shareholders and regarding specific questions
as to federal, state, or local taxes.
OTHER INFORMATION
The Trust currently consists of twenty-three (23) funds, including funds not
offered in this SAI. The Board may designate additional Funds. Each share issued
by a Fund has a pro rata interest in the assets of that Fund. Shares have no
preemptive, exchange, subscription or conversion rights and are freely
transferable. Each share is entitled to participate equally in dividends and
distributions declared by the Board with respect to the Funds, and in the net
distributable assets of the Funds on liquidation.
PORTFOLIO HOLDINGS
The Board has approved portfolio holdings disclosure policies that govern the
timing and circumstances of disclosure to shareholders and third parties of
information regarding the portfolio investments held by the Funds. These
policies and procedures, as described below, are designed to ensure that
disclosure of portfolio holdings is in the best interests of Fund shareholders,
and address conflicts of interest between the interests of Fund shareholders and
those of the Funds' Advisor, principal underwriter, or any affiliated person of
the Funds, the Advisor, or the principal underwriter.
47
Each business day, Fund portfolio holdings information will be provided to the
Distributor or other agent for dissemination through the facilities of the NSCC
and/or other fee-based subscription services to NSCC members and/or subscribers
to those other fee-based subscription services, including Authorized
Participants, and to entities that publish and/or analyze such information in
connection with the process of purchasing or redeeming Creation Units or trading
shares of a Fund in the secondary market. This information typically reflects a
Fund's anticipated holdings on the following business day. Daily access to
information concerning a Fund's portfolio holdings also is permitted (i) to
certain personnel of those service providers that are involved in portfolio
management and providing administrative, operational, risk management, or other
support to portfolio management, including affiliated broker-dealers and/or
Authorized Participants, and (ii) to other personnel of the Advisor and other
service providers, such as the Fund's administrator, custodian and fund
accountant, who deal directly with, or assist in, functions related to
investment management, administration, custody and fund accounting, as may be
necessary to conduct business in the ordinary course in a manner consistent with
agreements with the Funds and/or the terms of the Funds' current registration
statement. As of March 1, 2008, the Funds' portfolio holdings information is
disclosed to the following entities as part of ongoing arrangements that serve
legitimate business purposes: State Street Bank and Trust Company, Securities
Industry Automation Corporation, Goldman Sachs Execution and Clearing, LP,
Bloomberg, Thomson Financial News, ISS, and financial printers.
From time to time, information concerning Fund portfolio holdings, other than
portfolio holdings information made available in connection with the
creation/redemption process, as discussed above, may also be provided to other
entities that provide additional services to the Funds, including, among others,
rating or ranking organizations, in the ordinary course of business, no earlier
than one business day following the date of the information. Portfolio holdings
information made available in connection with the creation/redemption process
may be provided to other entities that provide additional services to the Funds
in the ordinary course of business after it has been disseminated to the NSCC.
The Funds' Chief Compliance Officer, or a Compliance Manager designated by the
Chief Compliance Officer, may also grant exceptions to permit additional
disclosure of Fund portfolio holdings information at differing times and with
different lag times (the period from the date of the information to the date the
information is made available), if any, in instances where a Fund has legitimate
business purposes for doing so, it is in the best interests of shareholders, and
the recipients are subject to a duty of confidentiality, including a duty not to
trade on the nonpublic information and are required to execute an agreement to
that effect. The Board will be informed of any such disclosures at its next
regularly scheduled meeting or as soon as is reasonably practicable thereafter.
In no event shall the Funds, the Advisor, or any other party receive any direct
or indirect compensation in connection with the disclosure of information about
a Fund's portfolio holdings.
The Board exercises continuing oversight of the disclosure of each Fund's
portfolio holdings by (1) overseeing the implementation and enforcement of
Portfolio Holdings Disclosure Policies and Procedures, the Code of Ethics, and
the Protection of Non-Public Information Policies and Procedures (collectively,
the portfolio holdings governing policies) by the Funds' Chief Compliance
Officer and the Fund, (2) considering reports and recommendations by the Chief
Compliance Officer concerning any material compliance matters (as defined in
Rule 38a-1 under the 1940 Act and Rule 206(4)-7 under the Investment Advisers
Act of 1940) that may arise in connection with any portfolio holdings governing
policies, and (3) considering whether to approve or ratify any amendment to any
portfolio holdings governing policies. The Board and the Funds reserve the right
to amend the Policies and Procedures at any time and from time to time without
prior notice in their sole discretion. For purposes of the Policies and
Procedures, the term "portfolio holdings" means the equity and debt securities
(E.G., stocks and bonds) held by a Fund and does not mean the cash investments,
derivatives, and other investment positions (collectively, other investment
positions) held by a Fund, which are not disclosed.
48
In addition to the permitted disclosures described above, each Fund must
disclose its complete holdings quarterly within 60 days of the end of each
fiscal quarter in the Annual Report and Semi-Annual Report to Fund shareholders
and in the quarterly holdings report on Form N-Q. These reports are available,
free of charge, on the EDGAR database on the SEC's web site at www.sec.gov.
VOTING RIGHTS
Each share has one vote with respect to matters upon which a shareholder vote is
required consistent with the requirements of the 1940 Act and the rules
promulgated thereunder. You receive one vote for every full Fund share owned.
Each Fund or class of a Fund, if applicable, will vote separately on matters
relating solely to that Fund or class. All shares of the Funds are freely
transferable.
As a Delaware statutory trust, the Trust is not required to hold annual
Shareholder meetings unless otherwise required by the 1940 Act. However, a
meeting may be called by Shareholders owning at least 10% of the outstanding
shares of the Trust. If a meeting is requested by Shareholders, the Trust will
provide appropriate assistance and information to the Shareholders who requested
the meeting. Shareholder inquiries can be made by calling 800.820.0888 or
301.296.5100, or by writing to the Trust at 9601 Blackwell Road, Suite 500,
Rockville, Maryland 20850.
SHAREHOLDER INQUIRIES
Shareholders may visit the Trust's web site at www.rydexinvestments.com or call
800.820.0888 or 301.296.5100 to obtain information on account statements,
procedures, and other related information.
INDEX PUBLISHERS INFORMATION
STANDARD & POOR'S
The Rydex 2x S&P 500 ETF, Rydex Inverse 2x S&P 500 ETF, Rydex 2x S&P MidCap 400
ETF, and Rydex Inverse 2x S&P 400 ETF (the "S&P Funds") are not sponsored,
endorsed, sold or promoted by Standard & Poor's ("S&P") or Citigroup Global
Markets Inc. ("Citigroup"). S&P makes no representation, condition, warranty,
express or implied, to the owners of the S&P Funds or any member of the public
regarding the advisability of investing in securities generally or in the S&P
Funds particularly or the ability of the S&P 400 Index or the S&P MidCap 400
Index (the "S&P Indices") to track general stock market performance. S&P's only
relationship to Rydex Investments (the "Licensee") is the licensing of certain
of their trademarks and of the S&P Indices which are determined, composed and
calculated by S&P without regard to Licensee or the S&P Funds. S&P has no
obligation to take the needs of Licensee or the owners of the S&P Funds into
consideration in determining, composing or calculating the S&P Indices. S&P is
not responsible for and has not participated in the determination of the prices
and amount of the S&P Funds or the timing of the issuance or sale of the S&P
Funds or in the determination or calculation of the equation by which the S&P
Funds are to be converted into cash. S&P has Citigroup no obligation or
liability in connection with the administration, marketing, or trading of the
S&P Funds.
S&P does not guarantee the accuracy and/or the completeness of the S&P Indices
or any data included therein and S&P shall have no liability for any errors,
omissions, or interruptions therein. S&P makes no warranty or condition, express
or implied, as to the results to be obtained by Licensee, owners of the S&P
Funds, or any other person or entity from the use of the S&P Indices or any data
included therein. S&P makes no express or implied warranties or conditions, and
expressly disclaims all warranties or conditions of merchantability or fitness
for a particular purpose or use with respect to the S&P Indices or any data
included therein. Without limiting any of the foregoing, in no event shall S&P
have any liability for any special, punitive, indirect, or consequential damages
(including lost profits) resulting from the use of the Indexes or any data
included therein, even if notified of the possibility of such damages.
49
"Standard & Poor's(R)," S&P(R)," "S&P 500(R)," "Standard & Poor's 500," "500,"
"Standard & Poor's MidCap 400," and "S&P MidCap 400" are trademarks of The
McGraw-Hill Companies, Inc. and Citigroup, Inc. and have been licensed for use
by Rydex Investments.
FRANK RUSSELL COMPANY ("RUSSELL")
The Rydex 2x Russell 2000(R) ETF and the Rydex Inverse 2x Russell 2000(R) ETF
(the "Russell Funds") are not sponsored, endorsed, sold or promoted by Russell.
Russell makes no representation or warranty, express or implied, to the owners
of the Russell Funds or any member of the public regarding the advisability of
investing in securities generally or in the Russell Funds particularly or the
ability of the Russell 2000(R) Index to track general stock market performance
or a segment of the same. Russell's publication of the Russell 2000(R) Index in
no way suggests or implies an opinion by Russell as to the advisability of
investment in any or all of the securities upon which the Russell 2000(R) Index
is based. Russell's only relationship to Rydex Investments (the "Licensee") is
the licensing of certain trademarks and trade names of Russell and of the
Russell 2000(R) Index which is determined, composed and calculated by Russell
without regard to the Licensee or the Russell Funds. Russell is not responsible
for and has not reviewed the Russell Funds nor any associated literature or
publications and Russell makes no representation or warranty express or implied
as to their accuracy or completeness, or otherwise. Russell reserves the right,
at any time and without notice, to alter, amend, terminate or in any way change
the Russell 2000(R) Index. Russell has no obligation or liability in connection
with the administration, marketing or trading of the Russell Funds.
Russell does not guarantee the accuracy and/or the completeness of the Russell
2000(R) Index or any data included therein and Russell shall have no liability
for any errors, omissions, or interruptions therein. Russell makes no warranty,
express or implied, as to results to be obtained by the Licensee, investors,
owners of the Russell Funds, or any other person or entity from the use of the
Russell 2000(R) Index or any data included therein. Russell makes no express or
implied warranties, and expressly disclaims all warranties of merchantability or
fitness for a particular purpose of use with respect to the Russell 2000(R)
Index or any data included therein. Without limiting any of the foregoing, in no
event shall Russell have any liability for any special, punitive, indirect, or
consequential damages (including lost profits), even if notified of the
possibility of such damages.
"Frank Russell(R)," "Russell(R)," and "Russell 2000(R)" are trademarks of
Russell and have been licensed for use by the Licensee.
COUNSEL
Morgan, Lewis & Bockius LLP serves as counsel to the Trust.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young LLP, 200 Clarendon Street, Boston, Massachusetts 02116-5072,
serves as the independent registered public accounting firm to the Trust and the
Funds and provides audit services, tax return review, and assistance and
consultation with respect to the preparation of filings with the SEC.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian"), P.O. Box 5049, Boston, MA
02206-5049, serves as custodian for the Fund under a custody agreement between
the Trust and the Custodian. Under the custody agreement, the Custodian holds
the portfolio securities of each Fund and maintains all necessary related
accounts and records.
50
APPENDIX A
RYDEX INVESTMENTS
PROXY VOTING POLICIES AND PROCEDURES
I. INTRODUCTION
PADCO Advisors, Inc. and PADCO Advisors II, Inc., together doing business
as Rydex Investments, generally are responsible for voting proxies with respect
to securities held in client accounts, including clients registered as
investment companies under the Investment Company Act of 1940 ("Funds") and
clients that are pension plans ("Plans") subject to the Employee Retirement
Income Security Act of 1974 ("ERISA"). This document sets forth Rydex
Investments' policies and guidelines with respect to proxy voting and its
procedures to comply with SEC Rule 206(4)-6 under the Investment Advisers Act of
1940. Specifically, Rule 206(4)-6 requires that we:
o Adopt and implement written policies and procedures reasonably
designed to ensure that we vote client securities in the best
interest of clients;
o Disclose to clients how they may obtain information from us about
how we voted proxies for their securities; and
o Describe our proxy voting policies and procedures to clients and
furnish them a copy of our policies and procedures on request.
II. PROXY VOTING POLICIES AND PROCEDURES
A. Proxy Voting Policies
Proxies may have economic value and, where Rydex Investments is given
responsibility for voting proxies, we must take reasonable steps under the
circumstances to ensure that proxies are received and voted in the best
long-term economic interests of our clients, which generally means voting
proxies with a view to enhancing the value of the shares of stock held in client
accounts, considering all relevant factors and without undue influence from
individuals or groups who may have an economic interest in the outcome of the
proxy vote. Our authority is initially established by our advisory contracts or
comparable documents. Clients, however, may change their proxy voting direction
at any time.
The financial interest of our clients is the primary consideration in
determining how proxies should be voted. Any material conflicts of interest
between Rydex Investments and our clients with respect to proxy voting are
resolved in the best interests of clients, in accordance with the procedures
described in Section III, below.
B. Proxy Voting Procedures
Rydex Investments utilizes the services of an outside proxy voting firm,
Institutional Shareholder Services ("ISS"), to act as agent for the proxy
process, to maintain records on proxy votes for our clients, and to provide
independent research on corporate governance, proxy and corporate responsibility
issues. In the absence of contrary instructions received from Rydex Investments,
ISS will vote proxies in accordance with the proxy voting guidelines (the
"Guidelines") attached as SCHEDULE A hereto, as such
A-1
Guidelines may be revised from time to time by Rydex Investments' portfolio
management group (the "Committee"). Under its arrangement with ISS, Rydex
Investments has agreed to:
o provide ISS with a copy of the Guidelines and to inform ISS promptly
of any changes to the Guidelines;
o deliver to ISS, on a timely basis, all documents, information and
materials necessary to enable ISS to provide the services
contemplated to be performed by it on a timely and efficient basis
(such as conveying to ISS a power of attorney with respect to the
services to be provided hereunder and providing ISS on a timely
basis with Rydex Investments' authorized stamp, proxy cards, special
voting instructions, authorization letters to custodian banks and
any other materials necessary for the performance by ISS of its
duties);
o provide ISS with a data file containing portfolio information (such
as account numbers, share amounts, and security identifiers such as
cusip and/or serial numbers) on a regular basis; and
o coordinate with ISS with respect to the classification of proxy
items and for the treatment of items not clearly defined under the
Guidelines.
III. RESOLVING POTENTIAL CONFLICTS OF INTEREST
The Committee is responsible for identifying potential conflicts of
interest in regard to the proxy voting process. Examples of potential conflicts
of interest include:
o managing a pension plan for a company whose management is soliciting
proxies;
o having a material business relationship with a proponent of a proxy
proposal in which this business relationship may influence how the
proxy vote is cast; and
o Rydex Investments, its employees or affiliates having a business or
personal relationship with participants in a proxy contest,
corporate directors or candidates for directorships.
To ensure that all proxies are voted in the best interests of clients and
are not the product of any potential conflict of interest, if a potential
conflict of interest exists Rydex Investments will instruct ISS to vote in
accordance with the established Guidelines. In the absence of established
Guidelines (I.E., in instances where the Guidelines provide for a "case-by-case"
review), Rydex Investments may vote a proxy regarding that proposal in any of
the following manners:
o REFER PROPOSAL TO THE CLIENT - Rydex Investments may refer the
proposal to the client and obtain instructions from the client on
how to vote the proxy relating to that proposal.
o OBTAIN CLIENT RATIFICATION - If Rydex Investments is in a position
to disclose the conflict to the client (I.E., such information is
not confidential), Rydex Investments may determine how it proposes
to vote the proposal on which it has a conflict, fully disclose the
nature of the conflict to the client, and obtain the client's
consent to how Rydex Investments will vote on the proposal (or
otherwise obtain instructions from the client on how the proxy on
the proposal should be voted).
A-2
o USE AN INDEPENDENT THIRD PARTY FOR ALL PROPOSALS - Subject to any
client imposed proxy voting policies, Rydex Investments may vote all
proposals in a proxy according to the policies of an independent
third party, such as ISS or a similar entity (or to have the third
party vote such proxies).
o USE AN INDEPENDENT THIRD PARTY TO VOTE THE SPECIFIC PROPOSALS THAT
INVOLVE A CONFLICT - Subject to any client imposed proxy voting
policies, Rydex Investments may use an independent third party (such
as ISS) to recommend how the proxy for specific proposals that
involve a conflict should be voted (or to have the third party vote
such proxies).
IV. SECURITIES SUBJECT TO LENDING ARRANGEMENTS
For various legal or administrative reasons, Rydex Investments is often
unable to vote securities that are, at the time of such vote, on loan pursuant
to a client's securities lending arrangement with the client's custodian. Rydex
Investments will refrain from voting such securities where the costs to the
client and/or administrative inconvenience of retrieving securities then on loan
outweighs the benefit of voting, assuming retrieval under such circumstances is
even feasible and/or possible. In certain extraordinary situations, Rydex
Investments may seek to have securities then on loan pursuant to such securities
lending arrangements retrieved by the client's custodian for voting purposes.
This decision will generally be made on a case-by-case basis depending on
whether, in Rydex Investments' judgment, the matter to be voted on has critical
significance to the potential value of the securities in question, the relative
cost and/or administrative inconvenience of retrieving the securities, the
significance of the holding and whether the stock is considered a long-term
holding. There can be no guarantee that any such securities can be retrieved for
such purpose.
V. SPECIAL ISSUES WITH VOTING FOREIGN PROXIES
Voting proxies with respect to shares of foreign stocks may involve
significantly greater effort and corresponding cost due to the variety of
regulatory schemes and corporate practices in foreign countries with respect to
proxy voting. Because the cost of voting on a particular proxy proposal could
exceed the expected benefit to a client (including an ERISA Plan), Rydex
Investments may weigh the costs and benefits of voting on proxy proposals
relating to foreign securities and make an informed decision on whether voting a
given proxy proposal is prudent.
VI. ASSISTANCE WITH FORM N-PX AND PROXY VOTING RECORD
Rydex Investments shall assist its Fund clients in disclosing the
following information on Form N-PX for each proxy matter relating to a portfolio
security considered at any shareholder meeting held during the period covered by
the report and with respect to which Rydex Investments, or ISS as its agent,
voted on the client's behalf by providing the following information to the Fund
on a regular quarterly basis within 30 days after the end of the quarter:
(i) The name of the issuer of the portfolio security;
(ii) The exchange ticker symbol of the portfolio security (if available
through reasonably practicable means);
(iii) The Council on Uniform Security Identification Procedures ("CUSIP")
number for the portfolio security (if available through reasonably
practicable means);
A-3
(iv) The shareholder meeting date;
(v) A brief identification of the matter voted on;
(vi) Whether the matter was proposed by the issuer or by a
security holder;
(vii) Whether Rydex Investments (or ISS as its agent) cast the
client's vote on the matter;
(viii) How Rydex Investments (or ISS as its agent) cast the client's vote
(I.E., for or against proposal, or abstain; for or
withhold regarding election of directors); and
(ix) Whether Rydex Investments (or ISS as its agent) cast the
client's vote for or against management.
VII. DISCLOSURE OF HOW TO OBTAIN VOTING INFORMATION
On or before August 6, 2003, Rule 206(4)-6 requires Rydex Investments to
disclose in response to any client request how the client can obtain information
from Rydex Investments on how its securities were voted. Rydex Investments will
disclose in Part II of its Form ADV that clients can obtain information on how
their securities were voted by making a written request to Rydex Investments.
Upon receiving a written request from a client, Rydex Investments will provide
the information requested by the client within a reasonable amount of time.
Rule 206(4)-6 also requires Rydex Investments to describe its proxy voting
policies and procedures to clients, and upon request, to provide clients with a
copy of those policies and procedures. Rydex Investments will provide such a
description in Part II of its Form ADV. Upon receiving a written request from a
client, Rydex Investments will provide a copy of this policy within a reasonable
amount of time.
If approved by the client, this policy and any requested records may be
provided electronically.
VIII. RECORDKEEPING
Rydex Investments shall keep the following records for a period of at least five
years, the first two in an easily accessible place:
(i) A copy of this Policy;
(ii) Proxy Statements received regarding client securities;
(iii) Records of votes cast on behalf of clients;
(iv) Any documents prepared by Rydex Investments that were material
to making a decision how to vote, or that memorialized the basis
for the decision; and
(v) Records of client requests for proxy voting information,
A-4
With respect to Rydex Investments' Fund clients, the Fund shall maintain a
copy of each of the records that is related to proxy votes on behalf of the Fund
by Rydex Investments. Additionally, Rydex Investments may keep Fund client
records as part of Rydex Investments' records.
Rydex Investments may rely on proxy statements filed on the SEC's EDGAR
system instead of keeping its own copies, and may rely on proxy statements and
records of proxy votes cast by Rydex Investments that are maintained with a
third party, such as ISS, provided that Rydex Investments has obtained an
undertaking from the third party to provide a copy of the documents promptly
upon request.
A-5
SCHEDULE A
TO
RYDEX INVESTMENTS
PROXY VOTING POLICIES AND PROCEDURES
PROXY VOTING GUIDELINES
Rydex Investments believes that management is generally in the best
position to make decisions that are essential to the ongoing operation of the
company and which are not expected to have a major impact on the corporation and
its shareholders. Accordingly, Rydex Investments will generally vote with
management on "routine items" of a corporate administrative nature. Rydex
Investments will generally review all "non-routine items" (I.E., those items
having the potential for major economic impact on the corporation and the
long-term value of its shares) on a case-by-case basis.
BOARD OF DIRECTORS
A. Director Nominees in Uncontested Elections Vote With Mgt.
B. Chairman and CEO is the Same Person Vote With Mgt.
C. Majority of Independent Directors Vote With Mgt.
D. Stock Ownership Requirements Vote With Mgt.
E. Limit Tenure of Outside Directors Vote With Mgt.
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F. Director and Officer Indemnification and Liability Protection Vote With Mgt.
G. Eliminate or Restrict Charitable Contributions Vote With Mgt.
PROXY CONTESTS
A. Voting for Director Nominees in Contested Election Vote With Mgt.
B. Reimburse Proxy Solicitation Vote With Mgt.
AUDITORS
A. Ratifying Auditors Vote With Mgt.
PROXY CONTEST DEFENSES
A. Board Structure - Classified Board Vote With Mgt.
B. Cumulative Voting Vote With Mgt.
C. Shareholder Ability to Call Special Meetings Vote With Mgt.
TENDER OFFER DEFENSES
A. Submit Poison Pill for shareholder ratification Case-by-Case
B. Fair Price Provisions Vote With Mgt.
C. Supermajority Shareholder Vote Requirement Vote With Mgt.
To Amend the Charter or Bylaws
D. Supermajority Shareholder Vote Requirement Vote With Mgt.
MISCELLANEOUS GOVERNANCE PROVISIONS
A. Confidential Voting Vote With Mgt.
B. Equal Access Vote With Mgt.
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A-1
C. Bundled Proposals Vote With Mgt.
CAPITAL STRUCTURE
A. Common Stock Authorization Vote With Mgt.
B. Stock Splits Vote With Mgt.
C. Reverse Stock Splits Vote With Mgt.
D. Preemptive Rights Vote With Mgt.
E. Share Repurchase Programs Vote With Mgt.
EXECUTIVE AND DIRECTOR COMPENSATION
A. Shareholder Proposals to Limit Executive and Case-by-Case
Directors Pay
B. Shareholder Ratification of Golden and Tin Parachutes Vote With Mgt.
C. Employee Stock Ownership Plans Vote With Mgt.
D. 401(k) Employee Benefit Plans Vote With Mgt.
STATE OF INCORPORATION
A. Voting on State Takeover Plans Vote With Mgt.
B. Voting on Reincorporation Proposals Vote With Mgt.
MERGERS AND CORPORATE RESTRUCTURINGS
A. Mergers and Acquisitions Case-by-Case
B. Corporate Restructuring Vote With Mgt.
C. Spin-Offs Vote With Mgt.
D. Liquidations Vote With Mgt.
SOCIAL AND ENVIRONMENTAL ISSUES
A. Issues with Social/Moral Implications Vote With Mgt.
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A-2
STATEMENT OF ADDITIONAL INFORMATION
RYDEX ETF TRUST
9601 BLACKWELL ROAD, SUITE 500
ROCKVILLE, MARYLAND 20850
800.820.0888 OR 301.296.5100
WWW.RYDEXINVESTMENTS.COM
Rydex ETF Trust (the "Trust") is an investment company offering professionally
managed investment portfolios. This Statement of Additional Information ("SAI")
relates to shares of the following portfolios (each a "Fund" and collectively,
the "Funds"):
BROAD MARKET ETFS
Rydex Inverse S&P 500 ETF
Rydex 2x S&P 500 Growth ETF
Rydex Inverse S&P 500 Growth ETF
Rydex Inverse 2x S&P 500 Growth ETF
Rydex 2x S&P 500 Value ETF
Rydex Inverse S&P 500 Value ETF
Rydex Inverse 2x S&P 500 Value ETF
Rydex Inverse S&P MidCap 400 ETF
Rydex 2x S&P MidCap 400 Growth ETF
Rydex Inverse S&P MidCap 400 Growth ETF
Rydex Inverse 2x S&P MidCap 400 Growth ETF
Rydex 2x S&P MidCap 400 Value ETF
Rydex Inverse S&P MidCap 400 Value ETF
Rydex Inverse 2x S&P MidCap 400 Value ETF
Rydex 2x S&P SmallCap 600 ETF
Rydex Inverse S&P SmallCap 600 ETF
Rydex Inverse 2x S&P SmallCap 600 ETF
Rydex 2x S&P SmallCap 600 Growth ETF
Rydex Inverse S&P SmallCap 600 Growth ETF
Rydex Inverse 2x S&P SmallCap 600 Growth ETF
Rydex 2x S&P SmallCap 600 Value ETF
Rydex Inverse S&P SmallCap 600 Value ETF
Rydex Inverse 2x S&P SmallCap 600 Value ETF
Rydex 2x NASDAQ 100 ETF
Rydex Inverse NASDAQ 100 ETF
Rydex Inverse 2x NASDAQ 100 ETF
Rydex 2x Russell 1000(R) ETF
Rydex Inverse Russell 1000(R) ETF
Rydex Inverse 2x Russell 1000(R) ETF
Rydex 2x Russell 1000(R) Growth ETF
Rydex Inverse Russell 1000(R) Growth ETF
Rydex Inverse 2x Russell 1000(R) Growth ETF
Rydex 2x Russell 1000(R) Value ETF
Rydex Inverse Russell 1000(R) Value ETF
Rydex Inverse 2x Russell 1000(R) Value ETF
Rydex 2x Russell 2000(R) Growth ETF
Rydex Inverse Russell 2000(R) Growth ETF
Rydex Inverse 2x Russell 2000(R) Growth ETF
Rydex 2x Russell 2000(R) Value ETF
Rydex Inverse Russell 2000(R) Value ETF
Rydex Inverse 2x Russell 2000(R) Value ETF
Rydex 2x Russell 3000(R) ETF
Rydex Inverse Russell 3000(R) ETF
Rydex Inverse 2x Russell 3000(R) ETF
Rydex 2x Russell 3000(R) Growth ETF
Rydex Inverse Russell 3000(R) Growth ETF
Rydex Inverse 2x Russell 3000(R) Growth ETF
Rydex 2x Russell 3000(R) Value ETF
Rydex Inverse Russell 3000(R) Value ETF
Rydex Inverse 2x Russell 3000 Value ETF
SECTOR ETFS
Rydex 2x NASDAQ Biotech ETF
Rydex Inverse NASDAQ Biotech ETF
Rydex Inverse 2x NASDAQ Biotech ETF
Rydex 2x Consumer Discretionary ETF
Rydex Inverse Consumer Discretionary ETF
Rydex Inverse 2x Consumer Discretionary ETF
Rydex 2x Consumer Staples ETF
Rydex Inverse Consumer Staples ETF
Rydex Inverse 2x Consumer Staples ETF
Rydex 2x Energy ETF
Rydex Inverse Energy ETF
Rydex Inverse 2x Energy ETF
Rydex 2x Financials ETF
Rydex Inverse Financials ETF
Rydex Inverse 2x Financials ETF
Rydex 2x Health Care ETF
Rydex Inverse Health Care ETF
Rydex Inverse 2x Health Care ETF
Rydex 2x Industrials ETF
Rydex Inverse Industrials ETF
Rydex 2x Russell MidCap(R) ETF
Rydex Inverse Russell MidCap(R) ETF
Rydex Inverse 2x Russell MidCap(R) ETF
Rydex 2x Russell MidCap(R) Growth ETF
Rydex Inverse Russell MidCap(R) Growth ETF
Rydex Inverse 2x Russell MidCap(R) Growth ETF
Rydex 2x Russell MidCap(R) Value ETF
Rydex Inverse Russell MidCap(R) Value ETF
Rydex Inverse 2x Russell MidCap(R) Value ETF
Rydex Inverse Russell 2000(R) ETF
Rydex Inverse 2x Industrials ETF
Rydex 2x Materials ETF
Rydex Inverse Materials ETF
Rydex Inverse 2x Materials ETF
Rydex 2x Technology ETF
Rydex Inverse Technology ETF
Rydex Inverse 2x Technology ETF
Rydex 2x Utilities ETF
Rydex Inverse Utilities ETF
Rydex Inverse 2x Utilities ETF
This SAI is not a prospectus. It should be read in conjunction with the Funds'
Prospectus, dated March 1, 2008. Capitalized terms not defined herein are
defined in the Prospectus. Copies of the Funds' Prospectus are available,
without charge, upon request to the Trust at the address above or by telephoning
the Trust at the telephone numbers above.
The date of this SAI is March 1, 2008
-i-
GENERAL INFORMATION ABOUT THE TRUST ..................................... 1
INVESTMENT POLICIES, TECHNIQUES AND RISK FACTORS ........................ 2
ADDITIONAL INFORMATION ABOUT THE SECTOR ETFS ............................ 14
SPECIAL CONSIDERATIONS REGARDING THE USE OF LEVERAGED
AND INVERSE INVESTMENT STRATEGIES .................................... 16
MORE INFORMATION ABOUT THE UNDERLYING INDICES ........................... 19
INVESTMENT RESTRICTIONS ................................................. 25
CONTINUOUS OFFERING ..................................................... 27
EXCHANGE LISTING AND TRADING ............................................ 27
PORTFOLIO TRANSACTIONS AND BROKERAGE .................................... 28
MANAGEMENT OF THE TRUST ................................................. 30
PRINCIPAL HOLDERS OF SECURITIES ......................................... 42
BOOK ENTRY ONLY SYSTEM .................................................. 42
CREATION AND REDEMPTION OF CREATION UNITS ............................... 43
DETERMINATION OF NET ASSET VALUE ........................................ 50
DIVIDENDS, DISTRIBUTIONS, AND TAXES ..................................... 50
OTHER INFORMATION ....................................................... 53
INDEX PUBLISHERS INFORMATION ............................................ 55
COUNSEL ................................................................. 57
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ........................... 57
CUSTODIAN ............................................................... 58
APPENDIX A - RYDEX INVESTMENTS PROXY VOTING POLICIES AND PROCEDURES ..... A-1
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-ii-
GENERAL INFORMATION ABOUT THE TRUST
The Trust, an open-end management investment company, was organized as a
Delaware statutory trust on November 22, 2002. While the Funds are not currently
available for purchase, the Trust currently offers twenty-two (22) investment
portfolios (I.E, funds): the Rydex S&P Equal Weight ETF, Rydex Russell Top 50(R)
ETF, Rydex S&P 500 Pure Value ETF, Rydex S&P 500 Pure Growth ETF, Rydex S&P
MidCap 400 Pure Value ETF, Rydex S&P MidCap 400 Pure Growth ETF, Rydex S&P
SmallCap 600 Pure Value ETF, Rydex S&P SmallCap 600 Pure Growth ETF, Rydex S&P
Equal Weight Consumer Discretionary ETF, Rydex S&P Equal Weight Consumer Staples
ETF, Rydex S&P Equal Weight Energy ETF, Rydex S&P Equal Weight Financials ETF,
Rydex S&P Equal Weight Health Care ETF, Rydex S&P Equal Weight Industrials ETF,
Rydex S&P Equal Weight Materials ETF, Rydex S&P Equal Weight Technology ETF,
Rydex S&P Equal Weight Utilities ETF, Rydex 2x S&P 500 ETF, Rydex Inverse 2x S&P
500 ETF, Rydex 2x S&P MidCap 400 ETF, Rydex Inverse 2x S&P MidCap 400 ETF, Rydex
2x Russell 2000(R) ETF, and Rydex Inverse 2x Russell 2000(R) ETF (which are
included in a separate SAI). All payments received by the Trust for shares of
any Fund belong to that Fund. Each Fund has its own assets and liabilities.
Additional series and/or classes may be created from time to time. This SAI
relates to shares of the following portfolios:
LEVERAGED FUNDS. Rydex 2x S&P 500 Growth ETF, Rydex 2x S&P 500 Pure Value ETF,
Rydex 2x S&P MidCap 400 Growth ETF, Rydex 2x S&P MidCap 400 Value ETF, Rydex 2x
S&P SmallCap 600 ETF, Rydex 2x S&P SmallCap 600 Growth ETF, Rydex 2x S&P
SmallCap 600 Value ETF, Rydex 2x NASDAQ 100 ETF, Rydex 2x Russell 1000(R) ETF,
Rydex 2x Russell 1000(R) Growth ETF, Rydex 2x Russell 1000(R) Value ETF, Rydex
2x Russell MidCap(R) ETF, Rydex 2x Russell MidCap(R) Growth ETF, Rydex 2x
Russell MidCap(R) Value ETF, Rydex 2x Russell 2000(R) Growth ETF, Rydex 2x
Russell 2000(R) Value ETF, Rydex Russell 3000(R) ETF, Rydex Russell 3000(R)
Growth ETF, Rydex Russell 3000(R) Value ETF, Rydex 2x NASDAQ Biotech ETF, Rydex
2x Consumer Discretionary ETF, Rydex 2x Consumer Staples ETF, Rydex 2x Energy
ETF, Rydex 2x Financials ETF, Rydex 2x Health Care ETF, Rydex 2x Industrials
ETF, Rydex 2x Materials ETF, Rydex 2x Technology ETF, and Rydex 2x Utilities ETF
(each, a "Leveraged Fund" and collectively, the "Leveraged Funds").
INVERSE FUNDS. Rydex Inverse S&P 500 ETF, Rydex Inverse S&P 500 Growth ETF,
Rydex Inverse S&P 500 Value ETF, Rydex Inverse S&P MidCap 400 ETF, Rydex Inverse
S&P MidCap 400 Growth ETF, Rydex Inverse S&P MidCap 400 Value ETF, Rydex Inverse
S&P SmallCap 600 ETF, Rydex Inverse S&P SmallCap 600 Growth ETF, Rydex Inverse
S&P SmallCap 600 Value ETF, Rydex Inverse NASDAQ 100 ETF, Rydex Inverse Russell
1000(R) ETF, Rydex Inverse Russell 1000(R) Growth ETF, Rydex Inverse Russell
1000(R) Value ETF, Rydex Inverse Russell MidCap(R) ETF, Rydex Inverse Russell
MidCap(R) Growth ETF, Rydex Inverse Russell MidCap(R) Value ETF, Rydex Inverse
Russell 2000(R) ETF, Rydex Inverse Russell 2000(R) Growth ETF, Rydex Inverse
Russell 2000(R) Value ETF, Rydex Inverse Russell 3000(R) ETF, Rydex Inverse
Russell 3000(R) Growth ETF, Rydex Inverse Russell 3000(R) Value ETF, Rydex
Inverse NASDAQ Biotech ETF, Rydex Inverse Consumer Discretionary ETF, Rydex
Inverse Consumer Staples ETF, Rydex Inverse Energy ETF, Rydex Inverse Financials
ETF, Rydex Inverse Health Care ETF, Rydex Inverse Industrials ETF, Rydex Inverse
Materials ETF, Rydex Inverse Technology ETF, and Rydex Inverse Utilities ETF
(each a "Inverse Fund" and collectively, the "Inverse Funds").
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LEVERAGED INVERSE FUNDS. Rydex Inverse 2x S&P 500 Growth ETF, Rydex Inverse 2x
S&P 500 Value ETF, Rydex Inverse 2x S&P MidCap 400 Growth ETF, Rydex Inverse 2x
S&P MidCap 400 Value ETF, Rydex Inverse 2x S&P SmallCap 600 ETF, Rydex Inverse
2x S&P SmallCap 600 Growth ETF, Rydex Inverse 2x S&P SmallCap 600 Value ETF,
Rydex Inverse 2x NASDAQ 100 ETF, Rydex Inverse 2x Russell 1000(R) ETF, Rydex
Inverse 2x Russell 1000(R) Growth ETF, Rydex Inverse 2x Russell 1000(R) Value
ETF, Rydex Inverse 2x Russell MidCap(R) ETF, Rydex Inverse 2x Russell MidCap(R)
Growth ETF, Rydex Inverse 2x Russell MidCap(R) Value ETF, Rydex Inverse 2x
Russell 2000(R) Growth ETF, Rydex Inverse 2x Russell 2000(R) Value ETF, Rydex
Inverse Russell 3000(R) ETF, Rydex Inverse Russell 3000(R) Growth ETF, Rydex
Inverse Russell 3000(R) Value ETF, Rydex Inverse 2x NASDAQ Biotech ETF, Rydex
Inverse 2x Consumer Discretionary ETF, Rydex Inverse 2x Consumer Staples ETF,
Rydex Inverse 2x Energy ETF, Rydex Inverse 2x Financials ETF, Rydex Inverse 2x
Health Care ETF, Rydex Inverse 2x Industrials ETF, Rydex Inverse 2x Materials
ETF, Rydex Inverse 2x Technology ETF, and Rydex Inverse 2x Utilities ETF (each a
"Leveraged Inverse Fund" and collectively, the "Leveraged Inverse Funds").
The shares of the Funds' have been approved for listing and secondary trading on
the [___________] (the "Exchange"), subject to notice of issuance. The shares of
each Fund will trade on the Exchange at market prices that may be below, at, or
above net asset value ("NAV") of such Fund.
Each Fund offers and issues shares at NAV only in aggregated lots of 50,000
shares (each a "Creation Unit" or a "Creation Unit Aggregation"). Generally each
Leveraged Fund issues Creation Units in exchange for: (i) a basket of equity
securities included in its Underlying Index, as defined below, (the "Deposit
Securities"); and (ii) an amount of cash (the "Cash Component"). Each Inverse
and Leveraged Inverse Fund issues and redeems Creation Units for cash.
The Trust reserves the right to offer an "all cash" option for creations and
redemptions of Creation Units for any Fund. In addition, Creation Units may be
issued in advance of receipt of Deposit Securities subject to various
conditions, including a requirement to maintain a cash deposit with the Trust at
least equal to 115% of the market value of the missing Deposit Securities. In
each instance, transaction fees may be imposed that will be higher than the
transaction fees associated with traditional in-kind creations or redemptions.
In all cases, such fees will be limited in accordance with U.S. Securities and
Exchange Commission ("SEC") requirements applicable to management investment
companies offering redeemable securities. See the "Creation and Redemption of
Creation Units" section for detailed information.
INVESTMENT POLICIES, TECHNIQUES AND RISK FACTORS
GENERAL
Each Fund's investment objective is to seek to provide investment results that
match, before fees and expenses, the performance of a specific benchmark on a
daily basis. Each Leveraged Fund's benchmark is 200% of the performance of its
Underlying Index. Each Inverse Leveraged Fund's benchmark is 200% of the inverse
(opposite) performance of its Underlying Index. Each Fund's investment objective
is non-fundamental and may be changed without the consent of the holders of a
majority of that Fund's outstanding shares. Additional information concerning
each Fund's investment objective and principal investment strategies is
contained in the Prospectus. Additional information concerning each Fund's
Underlying Index is included below under the heading "More Information About the
Underlying Indices." The following information supplements, and should be read
in conjunction with the Funds' Prospectus.
Portfolio management is provided to the Funds by the Trust's investment adviser,
PADCO Advisors II, Inc. (the "Advisor"). The Advisor, a Maryland corporation
with offices at 9601 Blackwell Road, Suite 500, Rockville, Maryland 20850,
operates under the name Rydex Investments. The investment strategies of the
Funds discussed below and in the Prospectus may be used by the Funds if, in the
opinion of the Advisor, these strategies will be advantageous to the Funds. The
Funds are free to modify or eliminate
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their activity with respect to any of the following investment strategies. There
is no assurance that any of these strategies or any other strategies and methods
of investment available to the Funds will result in the achievement of the
Funds' respective objectives.
BORROWING
While the Funds do not anticipate doing so, each Fund may borrow money for
investment purposes. Borrowing for investment is one form of leveraging.
Leveraging investments, by purchasing securities with borrowed money, is a
speculative technique that increases investment risk, but also increases
investment opportunity. Since substantially all of a Fund's assets will
fluctuate in value, whereas the interest obligations on borrowings may be fixed,
the NAV of the Fund will increase more when the Fund's portfolio assets increase
in value and decrease more when the Fund's portfolio assets decrease in value
than would otherwise be the case. Moreover, interest costs on borrowings may
fluctuate with changing market rates of interest and may partially offset or
exceed the returns on the borrowed funds. Under adverse conditions, a Fund might
have to sell portfolio securities to meet interest or principal payments at a
time when investment considerations would not favor such sales. The Funds intend
to use leverage during periods when the Advisor believes that the respective
Fund's investment objective would be furthered.
Each Fund may also borrow money to facilitate management of the Fund's portfolio
by enabling the Fund to meet redemption requests when the liquidation of
portfolio instruments would be inconvenient or disadvantageous. Such borrowing
is not for investment purposes and will be repaid by the borrowing Fund
promptly. As required by the Investment Company Act of 1940, as amended (the
"1940 Act"), a Fund must maintain continuous asset coverage (total assets,
including assets acquired with borrowed funds, less liabilities exclusive of
borrowings) of 300% of all amounts borrowed. If, at any time, the value of a
Fund's assets should fail to meet this 300% coverage test, a Fund, within three
days (not including Sundays and holidays), will reduce the amount of a Fund's
borrowings to the extent necessary to meet this 300% coverage. Maintenance of
this percentage limitation may result in the sale of portfolio securities at a
time when investment considerations otherwise indicate that it would be
disadvantageous to do so.
In addition to the foregoing, the Funds are authorized to borrow money as a
temporary measure for extraordinary or emergency purposes in amounts not in
excess of 5% of the value of a Fund's total assets. Borrowings for extraordinary
or emergency purposes are not subject to the foregoing 300% asset coverage
requirement. The Funds are authorized to pledge portfolio securities as the
Advisor deems appropriate in connection with any borrowings for extraordinary or
emergency purposes.
EQUITY SECURITIES
The Funds may invest in equity securities. Equity securities represent ownership
interests in a company or partnership and consist of common stocks, preferred
stocks, warrants to acquire common stock, securities convertible into common
stock, and investments in master limited partnerships. Investments in equity
securities in general are subject to market risks that may cause their prices to
fluctuate over time. Fluctuations in the value of equity securities in which a
Fund invests will cause the NAV of the Fund to fluctuate. The U.S. stock market
tends to be cyclical, with periods when stock prices generally rise and periods
when stock prices generally decline. The Funds may purchase equity securities
traded in the U.S. on registered exchanges or the over-the-counter market.
Equity securities are described in more detail below.
o COMMON STOCK. Common stock represents an equity or ownership interest in
an issuer. In the event an issuer is liquidated or declares bankruptcy,
the claims of owners of bonds and preferred stock take precedence over the
claims of those who own common stock.
3
o PREFERRED STOCK. Preferred stock represents an equity or ownership
interest in an issuer that pays dividends at a specified rate and that has
precedence over common stock in the payment of dividends. In the event an
issuer is liquidated or declares bankruptcy, the claims of owners of bonds
take precedence over the claims of those who own preferred and common
stock.
o WARRANTS. Warrants are instruments that entitle the holder to buy an
equity security at a specific price for a specific period of time. Changes
in the value of a warrant do not necessarily correspond to changes in the
value of its underlying security. The price of a warrant may be more
volatile than the price of its underlying security, and a warrant may
offer greater potential for capital appreciation as well as capital loss.
Warrants do not entitle a holder to dividends or voting rights with
respect to the underlying security and do not represent any rights in the
assets of the issuing company. A warrant ceases to have value if it is not
exercised prior to its expiration date. These factors can make warrants
more speculative than other types of investments.
o CONVERTIBLE SECURITIES. Convertible securities are bonds, debentures,
notes, preferred stocks or other securities that may be converted or
exchanged (by the holder or by the issuer) into shares of the underlying
common stock (or cash or securities of equivalent value) at a stated
exchange ratio. A convertible security may also be called for redemption
or conversion by the issuer after a particular date and under certain
circumstances (including a specified price) established upon issue. If a
convertible security held by a Fund is called for redemption or
conversion, the Fund could be required to tender it for redemption,
convert it into the underlying common stock, or sell it to a third party.
Convertible securities generally have less potential for gain or loss than
common stocks. Convertible securities generally provide yields higher than
the underlying common stocks, but generally lower than comparable
non-convertible securities. Because of this higher yield, convertible
securities generally sell at a price above their "conversion value," which
is the current market value of the stock to be received upon conversion.
The difference between this conversion value and the price of convertible
securities will vary over time depending on changes in the value of the
underlying common stocks and interest rates. When the underlying common
stocks decline in value, convertible securities will tend not to decline
to the same extent because of the interest or dividend payments and the
repayment of principal at maturity for certain types of convertible
securities. However, securities that are convertible other than at the
option of the holder generally do not limit the potential for loss to the
same extent as securities convertible at the option of the holder. When
the underlying common stocks rise in value, the value of convertible
securities may also be expected to increase. At the same time, however,
the difference between the market value of convertible securities and
their conversion value will narrow, which means that the value of
convertible securities will generally not increase to the same extent as
the value of the underlying common stocks. Because convertible securities
may also be interest-rate sensitive, their value may increase as interest
rates fall and decrease as interest rates rise. Convertible securities are
also subject to credit risk, and are often lower-quality securities.
o SMALL AND MEDIUM CAPITALIZATION ISSUERS. Investing in equity securities of
small and medium capitalization companies often involves greater risk than
is customarily associated with investments in larger capitalization
companies. This increased risk may be due to the greater business risks of
smaller size, limited markets and financial resources, narrow product
lines and frequent lack of depth of management. The securities of smaller
companies are often traded in the over-the-counter market and even if
listed on a national securities exchange may not be traded in volumes
typical for that exchange. Consequently, the securities of smaller
companies are less likely to be liquid, may have limited market stability,
and may be subject to more abrupt or erratic market movements than
securities of larger, more established growth companies or the market
averages in general.
4
o MASTER LIMITED PARTNERSHIPS ("MLPS"). MLPs are limited partnerships in
which the ownership units are publicly traded. MLP units are registered
with the SEC and are freely traded on a securities exchange or in the
over-the-counter market. MLPs often own several properties or businesses
(or own interests) that are related to real estate development and oil and
gas industries, but they also may finance motion pictures, research and
development and other projects. Generally, a MLP is operated under the
supervision of one or more managing general partners. Limited partners are
not involved in the day-to-day management of the partnership.
The risks of investing in a MLP are generally those involved in investing
in a partnership as opposed to a corporation. For example, state law
governing partnerships is often less restrictive than state law governing
corporations. Accordingly, there may be fewer protections afforded
investors in a MLP than investors in a corporation. Additional risks
involved with investing in a MLP are risks associated with the specific
industry or industries in which the partnership invests, such as the risks
of investing in real estate, or oil and gas industries.
FOREIGN ISSUERS
The Rydex 2x NASDAQ 100 ETF, Rydex Inverse NASDAQ 100 ETF, Rydex Inverse 2x
NASDAQ 100 ETF, Rydex 2x NASDAQ Biotech ETF, Rydex Inverse NASDAQ Biotech ETF
and Rydex Inverse 2x NASDAQ Biotech ETF may invest in issuers located outside
the United States through American Depositary Receipts ("ADRs"), "ordinary
shares," or "New York shares" issued and traded in the United States or through
securities denominated in foreign currencies and traded on foreign exchanges.
ADRs are dollar-denominated receipts representing interests in the securities of
a foreign issuer, which securities may not necessarily be denominated in the
same currency as the securities into which they may be converted. ADRs are
receipts typically issued by United States banks and trust companies which
evidence ownership of underlying securities issued by a foreign corporation.
Generally, ADRs in registered form are designed for use in domestic securities
markets and are traded on exchanges or over-the-counter in the United States.
Ordinary shares are shares of foreign issuers that are traded abroad and on a
United States exchange. New York shares are shares that a foreign issuer has
allocated for trading in the United States. ADRs, ordinary shares, and New York
shares all may be purchased with and sold for U.S. Dollars, which protect the
Funds from the foreign settlement risks described below.
Investing in foreign companies may involve risks not typically associated with
investing in United States companies. The value of securities denominated in
foreign currencies, and of dividends from such securities, can change
significantly when foreign currencies strengthen or weaken relative to the U.S.
Dollar. Foreign securities markets generally have less trading volume and less
liquidity than United States markets, and prices in some foreign markets can be
very volatile. Many foreign countries lack uniform accounting and disclosure
standards comparable to those that apply to United States companies, and it may
be more difficult to obtain reliable information regarding a foreign issuer's
financial condition and operations. In addition, the costs of foreign investing,
including withholding taxes, brokerage commissions, and custodial fees,
generally are higher than for United States investments.
Investing in companies located abroad carries political and economic risks
distinct from those associated with investing in the United States. Foreign
investment may be affected by actions of foreign governments adverse to the
interests of United States investors, including the possibility of expropriation
or nationalization of assets, confiscatory taxation, restrictions on United
States investment, or on the ability to repatriate assets or to convert currency
into U.S. Dollars. There may be a greater possibility of default by foreign
governments or foreign-government sponsored enterprises. Investments in foreign
countries also involve a risk of local political, economic, or social
instability, military action or unrest, or adverse diplomatic developments.
5
FUTURES AND OPTIONS TRANSACTIONS
FUTURES AND OPTIONS ON FUTURES. Futures contracts provide for the future sale by
one party and purchase by another party of a specified amount of a specific
security at a specified future time and at a specified price. An option on a
futures contract gives the purchaser the right, in exchange for a premium, to
assume a position in a futures contract at a specified exercise price during the
term of the option. A Fund will reduce the risk that it will be unable to close
out a futures contract by only entering into futures contracts that are traded
on a national futures exchange regulated by the Commodities Futures Trading
Commission ("CFTC"). The Funds may use futures contracts and related options for
BONA FIDE hedging; attempting to offset changes in the value of securities held
or expected to be acquired or be disposed of; attempting to gain exposure to a
particular market, index or instrument; or other risk management purposes. To
the extent a Fund uses futures and/or options on futures, it will do so in
accordance with Rule 4.5 under the Commodity Exchange Act ("CEA"). The Trust, on
behalf of all of its series, including the Funds, has filed a notice of
eligibility for exclusion from the definition of the term "commodity pool
operator" in accordance with Rule 4.5 and therefore, the Funds are not subject
to registration or regulation as a commodity pool operator under the CEA.
Each Fund may buy and sell index futures contracts with respect to any stock
index traded on a recognized stock exchange or board of trade. An index futures
contract is a bilateral agreement pursuant to which two parties agree to take or
make delivery of an amount of cash equal to a specified dollar amount times the
difference between the index value at the close of trading of the contract and
the price at which the futures contract is originally struck. No physical
delivery of the securities comprising the index is made. Instead, settlement in
cash must occur upon the termination of the contract, with the settlement being
the difference between the contract price and the actual level of the stock
index at the expiration of the contract. Generally, contracts are closed out
prior to the expiration date of the contract.
When a Fund purchases or sells a futures contract, or sells an option thereon,
the Fund is required to "cover" its position in order to limit leveraging and
related risks. To cover its position, a Fund may maintain with its custodian
bank (and marked-to-market on a daily basis), a segregated account consisting of
cash or liquid securities that, when added to any amounts deposited with a
futures commission merchant as margin, are equal to the market value of the
futures contract or otherwise "cover" its position in a manner consistent with
the 1940 Act or the rules and SEC interpretations thereunder. If a Fund
continues to engage in the described securities trading practices and properly
segregates assets, the segregated account will function as a practical limit on
the amount of leverage which the Fund may undertake and on the potential
increase in the speculative character of the Fund's outstanding portfolio
securities. Additionally, such segregated accounts will generally assure the
availability of adequate funds to meet the obligations of the fund arising from
such investment activities.
Each Fund may also cover its long position in a futures contract by purchasing a
put option on the same futures contract with a strike price (I.E., an exercise
price) as high or higher than the price of the futures contract. In the
alternative, if the strike price of the put is less than the price of the
futures contract, a Fund will maintain, in a segregated account, cash or liquid
securities equal in value to the difference between the strike price of the put
and the price of the futures contract. Each Fund may also cover its long
position in a futures contract by taking a short position in the instruments
underlying the futures contract (or, in the case of an index futures contract, a
portfolio with a volatility substantially similar to that of the index on which
the futures contract is based), or by taking positions in instruments with
prices which are expected to move relatively consistently with the futures
contract. Each Fund may cover its short position in a futures contract by taking
a long position in the instruments underlying the futures contracts, or by
taking positions in instruments with prices which are expected to move
relatively consistently with the futures contract.
6
Each Fund may cover its sale of a call option on a futures contract by taking a
long position in the underlying futures contract at a price less than or equal
to the strike price of the call option. In the alternative, if the long position
in the underlying futures contract is established at a price greater than the
strike price of the written (sold) call, a Fund will maintain, in a segregated
account, cash or liquid securities equal in value to the difference between the
strike price of the call and the price of the futures contract. Each Fund may
also cover its sale of a call option by taking positions in instruments with
prices which are expected to move relatively consistently with the call option.
Each Fund may cover its sale of a put option on a futures contract by taking a
short position in the underlying futures contract at a price greater than or
equal to the strike price of the put option, or, if the short position in the
underlying futures contract is established at a price less than the strike price
of the written put, a Fund will maintain, in a segregated account, cash or
liquid securities equal in value to the difference between the strike price of
the put and the price of the futures contract. Each Fund may also cover its sale
of a put option by taking positions in instruments with prices which are
expected to move relatively consistently with the put option.
There are significant risks associated with the Funds' use of futures contracts
and related options, including the following: (1) the success of a hedging
strategy may depend on the Advisor's ability to predict movements in the prices
of individual securities, fluctuations in markets and movements in interest
rates; (2) there may be an imperfect or no correlation between the changes in
market value of the securities held by a Fund and the prices of futures and
options on futures; (3) there may not be a liquid secondary market for a futures
contract or option; (4) trading restrictions or limitations may be imposed by an
exchange; and (5) government regulations may restrict trading in futures
contracts and options on futures. In addition, some strategies reduce a Fund's
exposure to price fluctuations, while others tend to increase its market
exposure.
OPTIONS. The Funds may purchase and write put and call options on securities and
stock indices and enter into related closing transactions. A put option on a
security gives the purchaser of the option the right to sell, and the writer of
the option the obligation to buy, the underlying security at any time during the
option period. A call option on a security gives the purchaser of the option the
right to buy, and the writer of the option the obligation to sell, the
underlying security at any time during the option period. The premium paid to
the writer is the consideration for undertaking the obligations under the option
contract.
Put and call options on indices are similar to options on securities except that
options on an index give the holder the right to receive, upon exercise of the
option, an amount of cash if the closing level of the Underlying Index is
greater than (or less than, in the case of puts) the exercise price of the
option. This amount of cash is equal to the difference between the closing price
of the index and the exercise price of the option, expressed in dollars
multiplied by a specified number. Thus, unlike options on individual securities,
all settlements are in cash, and gain or loss depends on price movements in the
particular market represented by the index generally, rather than the price
movements in individual securities.
All options written on indices or securities must be covered. When a Fund writes
an option on a security, an index or a foreign currency, it will establish a
segregated account containing cash or liquid securities in an amount at least
equal to the market value of the option and will maintain the account while the
option is open or will otherwise cover the transaction.
The Funds may trade put and call options on securities, securities indices and
currencies, as the investment adviser determines is appropriate in seeking a
Fund's investment objective, and except as restricted by a Fund's investment
limitations. See "Investment Restrictions."
The initial purchase (sale) of an option contract is an "opening transaction."
In order to close out an option position, a Fund may enter into a "closing
transaction," which is simply the sale (purchase) of an
7
option contract on the same security with the same exercise price and expiration
date as the option contract originally opened. If a Fund is unable to effect a
closing purchase transaction with respect to an option it has written, it will
not be able to sell the underlying security until the option expires or the Fund
delivers the security upon exercise.
Each Fund may purchase put and call options on securities to protect against a
decline in the market value of the securities in its portfolio or to anticipate
an increase in the market value of securities that a Fund may seek to purchase
in the future. A Fund purchasing put and call options pays a premium; therefore,
if price movements in the underlying securities are such that exercise of the
options would not be profitable for a Fund, loss of the premium paid may be
offset by an increase in the value of the Fund's securities or by a decrease in
the cost of acquisition of securities by the Fund.
A Fund may write covered call options on securities as a means of increasing the
yield on its assets and as a means of providing limited protection against
decreases in its market value. When a Fund writes an option, if the underlying
securities do not increase or decrease to a price level that would make the
exercise of the option profitable to the holder thereof, the option generally
will expire without being exercised and the Fund will realize as profit the
premium received for such option. When a call option of which a Fund is the
writer is exercised, the Fund will be required to sell the underlying securities
to the option holder at the strike price, and will not participate in any
increase in the price of such securities above the strike price. When a put
option of which a Fund is the writer is exercised, the Fund will be required to
purchase the underlying securities at a price in excess of the market value of
such securities.
The Funds may purchase and write options on an exchange or over-the-counter
("OTC"). OTC options differ from exchange-traded options in several respects.
They are transacted directly with dealers and not with a clearing corporation,
and therefore entail the risk of non-performance by the dealer. OTC options are
available for a greater variety of securities and for a wider range of
expiration dates and exercise prices than are available for exchange-traded
options. Because OTC options are not traded on an exchange, pricing is done
normally by reference to information from a market maker. It is the SEC's
position that OTC options are generally illiquid.
The market value of an option generally reflects the market price of an
underlying security. Other principal factors affecting market value include
supply and demand, interest rates, the pricing volatility of the underlying
security and the time remaining until the expiration date.
Risks associated with options transactions include: (1) the success of a hedging
strategy may depend on an ability to predict movements in the prices of
individual securities, fluctuations in markets and movements in interest rates;
(2) there may be an imperfect correlation between the movement in prices of
options and the securities underlying them; (3) there may not be a liquid
secondary market for options; and (4) while a Fund will receive a premium when
it writes covered call options, it may not participate fully in a rise in the
market value of the underlying security.
ILLIQUID SECURITIES
While none of the Funds anticipate doing so, each Fund may purchase or hold
illiquid securities, including securities that are not readily marketable and
securities that are not registered ("restricted securities") under the
Securities Act of 1933, as amended (the "1933 Act"), but which can be offered
and sold to "qualified institutional buyers" under Rule 144A under the 1933 Act.
A Fund will not invest more than 15% of the Fund's net assets in illiquid
securities. If the percentage of a Fund's net assets invested in illiquid
securities exceeds 15% due to market activity, the Fund will take appropriate
measures to reduce its holdings of illiquid securities. The term "illiquid
securities" for this purpose means securities that cannot be disposed of within
seven days in the ordinary course of business at approximately the amount at
which a Fund has valued the securities. Under the current guidelines of the
staff of the SEC,
8
illiquid securities also are considered to include, among other securities,
purchased OTC options, certain cover for OTC options, repurchase agreements with
maturities in excess of seven days, and certain securities whose disposition is
restricted under the federal securities laws. A Fund may not be able to sell
illiquid securities when the Advisor considers it desirable to do so or may have
to sell such securities at a price that is lower than the price that could be
obtained if the securities were more liquid. In addition, the sale of illiquid
securities also may require more time and may result in higher dealer discounts
and other selling expenses than does the sale of securities that are not
illiquid. Illiquid securities also may be more difficult to value due to the
unavailability of reliable market quotations for such securities, and investment
in illiquid securities may have an adverse impact on NAV.
Institutional markets for restricted securities have developed as a result of
the promulgation of Rule 144A under the 1933 Act, which provides a "safe harbor"
from 1933 Act registration requirements for qualifying sales to institutional
investors. When Rule 144A restricted securities present an attractive investment
opportunity and meet other selection criteria, a Fund may make such investments
whether or not such securities are "illiquid" depending on the market that
exists for the particular security. The board of trustees of the Trust (the
"Board") has delegated the responsibility for determining the liquidity of Rule
144A restricted securities, which may be invested in by a Fund, to the Advisor.
INVESTMENTS IN OTHER INVESTMENT COMPANIES
The Funds may invest in the securities of other investment companies to the
extent that such an investment would be consistent with the requirements of
Section 12(d)(1) of the 1940 Act, or any rule, regulation or order of the SEC. A
Fund, therefore, may invest in the securities of another investment company (the
"acquired company") provided that the Fund, immediately after such purchase or
acquisition, does not own in the aggregate: (i) more than 3% of the total
outstanding voting stock of the acquired company; (ii) securities issued by the
acquired company having an aggregate value in excess of 5% of the value of the
total assets of the Fund; or (iii) securities issued by the acquired company and
all other investment companies (other than Treasury stock of the Fund) having an
aggregate value in excess of 10% of the value of the total assets of the Fund. A
Fund may also invest in the securities of other investment companies if such
securities are the only investment securities held by the Fund.
If a Fund invests in, and thus, is a shareholder of, another investment company,
the Fund's shareholders will indirectly bear the Fund's proportionate share of
the fees and expenses paid by such other investment company, including advisory
fees, in addition to both the management fees payable directly by the Fund to
the Fund's own investment adviser and the other expenses that the Fund bears
directly in connection with the Fund's own operations.
Investment companies may include index-based investments, such as other ETFs
that hold substantially all of their assets in securities representing a
specific index. The main risk of investing in index-based investments is the
same as investing in a portfolio of equity securities comprising the index. The
market prices of ETFs will fluctuate in accordance with both changes in the
market value of their underlying portfolio securities and due to supply and
demand for the instruments on the exchanges on which they are traded (which may
result in their trading at a discount or premium to their NAVs). ETFs may not
replicate exactly the performance of their specific index because of transaction
costs and because of the temporary unavailability of certain component
securities of the index.
LENDING OF PORTFOLIO SECURITIES
Each Fund may lend portfolio securities to brokers, dealers and other financial
organizations that meet capital and other credit requirements or other criteria
established by the Funds' Board. These loans, if and when made, may not exceed
331/3% of the total asset value of a Fund (including the loan collateral). No
Fund will lend portfolio securities to the Advisor or its affiliates unless it
has applied for and received specific authority to do so from the SEC. Loans of
portfolio securities will be fully collateralized by cash,
9
letters of credit or U.S. Government securities, and the collateral will be
maintained in an amount equal to at least 100% of the current market value of
the loaned securities by marking to market daily. Any gain or loss in the market
price of the securities loaned that might occur during the term of the loan
would be for the account of the Funds. The Funds may pay a part of the interest
earned from the investment of collateral, or other fee, to an unaffiliated third
party for acting as the Funds' securities lending agent. By lending its
securities, a Fund may increase its income by receiving payments from the
borrower that reflect the amount of any interest or any dividends payable on the
loaned securities as well as by either investing cash collateral received from
the borrower in short-term instruments or obtaining a fee from the borrower when
U.S. Government securities or letters of credit are used as collateral.
Each Fund will adhere to the following conditions whenever its portfolio
securities are loaned: (i) the Fund must receive at least 100% cash collateral
or equivalent securities of the type discussed in the preceding paragraph from
the borrower; (ii) the borrower must increase such collateral whenever the
market value of the securities rises above the level of such collateral; (iii)
the Fund must be able to terminate the loan on demand; (iv) the Fund must
receive reasonable interest on the loan, as well as any dividends, interest or
other distributions on the loaned securities and any increase in market value;
(v) the Fund may pay only reasonable fees in connection with the loan (which
fees may include fees payable to the lending agent, the borrower, the Fund's
administrator and the custodian); and (vi) voting rights on the loaned
securities may pass to the borrower, provided, however, that if a material event
adversely affecting the investment occurs, the Fund must terminate the loan and
regain the right to vote the securities. The Board has adopted procedures
reasonably designed to ensure that the foregoing criteria will be met. Loan
agreements involve certain risks in the event of default or insolvency of the
borrower, including possible delays or restrictions upon a Fund's ability to
recover the loaned securities or dispose of the collateral for the loan, which
could give rise to loss because of adverse market action, expenses and/or delays
in connection with the disposition of the underlying securities.
PORTFOLIO TURNOVER
Portfolio turnover may vary from year to year, as well as within a year. A
higher portfolio turnover rate would likely involve correspondingly greater
brokerage commissions and transaction and other expenses which would be borne by
the Funds. In addition, a Fund's portfolio turnover level may adversely affect
the ability of the Fund to achieve its investment objective. Because each Fund's
portfolio turnover rate, to a great extent, will depend on the creation and
redemption activity of investors, it is difficult to estimate what the Fund's
actual portfolio turnover rate will be in the future. However, the Trust expects
that the portfolio turnover experienced by the Funds will be substantial.
"Portfolio Turnover Rate" is defined under the rules of the SEC as the lesser of
the value of the securities purchased or of the securities sold, excluding all
securities whose maturities at the time of acquisition were one-year or less,
divided by the average monthly value of such securities owned during the year.
Based on this definition, instruments with a remaining maturity of less than
one-year are excluded from the calculation of the portfolio turnover rate.
Instruments excluded from the calculation of portfolio turnover generally would
include the futures contracts and option contracts in which the Funds invest
since such contracts generally have a remaining maturity of less than one-year.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with financial institutions. Each
Fund follows certain procedures designed to minimize the risks inherent in such
agreements. These procedures include effecting repurchase transactions only with
large, well-capitalized and well-established financial institutions whose
condition will be continually monitored by the Advisor. In addition, the value
of the collateral underlying the repurchase agreement will always be at least
equal to the repurchase price, including any accrued interest earned on the
repurchase agreement. In the event of a default or bankruptcy by a selling
financial institution, a Fund will seek to liquidate such collateral. However,
the exercising of
10
a Fund's right to liquidate such collateral could involve certain costs or
delays and, to the extent that proceeds from any sale upon a default of the
obligation to repurchase were less than the repurchase price, the Fund could
suffer a loss. It is the current policy of each Fund not to invest in repurchase
agreements that do not mature within seven days if any such investment, together
with any other illiquid assets held by the Fund, amounts to more than 15% of the
Fund's net assets. The investments of a Fund in repurchase agreements, at times,
may be substantial when, in the view of the Advisor, liquidity or other
considerations so warrant.
REVERSE REPURCHASE AGREEMENTS
Each Fund may use reverse repurchase agreements as part of the Fund's investment
strategy. Reverse repurchase agreements involve sales by a Fund of portfolio
assets concurrently with an agreement by the Fund to repurchase the same assets
at a later date at a fixed price. Generally, the effect of such a transaction is
that the Fund can recover all or most of the cash invested in the portfolio
securities involved during the term of the reverse repurchase agreement, while
the Fund will be able to keep the interest income associated with those
portfolio securities. Such transactions are advantageous only if the interest
cost to the Fund of the reverse repurchase transaction is less than the cost of
obtaining the cash otherwise. Opportunities to achieve this advantage may not
always be available, and each Fund intends to use the reverse repurchase
technique only when it will be advantageous to the Fund. Each Fund will
establish a segregated account with the Trust's custodian bank in which the Fund
will maintain cash or cash equivalents or other portfolio securities equal in
value to the Fund's obligations in respect of reverse repurchase agreements.
SHORT SALES
The Inverse and Leveraged Inverse Funds may engage in short sales transactions
under which a Fund sells a security it does not own. To complete such a
transaction, a Fund must borrow or otherwise obtain the security to make
delivery to the buyer. The Fund then is obligated to replace the security
borrowed by purchasing the security at the market price at the time of
replacement. The price at such time may be more or less than the price at which
the security was sold by the Fund. Until the security is replaced, the Fund is
required to pay to the lender amounts equal to any dividends or interest, which
accrue during the period of the loan. To borrow the security, the Fund also may
be required to pay a premium, which would increase the cost of the security
sold. The Fund may also use repurchase agreements to satisfy delivery
obligations in short sales transactions. The proceeds of the short sale will be
retained by the broker, to the extent necessary to meet the margin requirements,
until the short position is closed out.
Until a Fund closes its short position or replaces the borrowed security, the
Fund will: (a) maintain a segregated account containing cash or liquid
securities at such a level that: (i) the amount deposited in the account plus
the amount deposited with the broker as collateral will equal the current value
of the security sold short; and (ii) the amount deposited in the segregated
account plus the amount deposited with the broker as collateral will not be less
than the market value of the security at the time the security was sold short;
or (b) otherwise cover the Fund's short position. Each of the Funds may use up
to 100% of its portfolio to engage in short sales transactions and collateralize
its open short positions.
SWAP AGREEMENTS
The Funds may enter into swap agreements, including, but not limited to, equity
index swaps and interest rate swap agreements. A Fund may utilize swap
agreements in an attempt to gain exposure to the stocks making up an index of
securities in a market without actually purchasing those stocks, or to hedge a
position. Swap agreements are two-party contracts entered into primarily by
institutional investors for periods ranging from a day to more than one year. In
a standard "swap" transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on particular predetermined
investments or instruments. The gross returns to be exchanged or "swapped"
between the parties are calculated with respect to a "notional amount," I.E.,
the return on or increase in value of a particular dollar
11
amount invested in a "basket" of securities representing a particular index.
Forms of swap agreements include interest rate caps, under which, in return for
a premium, one party agrees to make payments to the other to the extent that
interest rates exceed a specified rate, or "cap," interest rate floors, under
which, in return for a premium, one party agrees to make payments to the other
to the extent that interest rates fall below a specified level, or "floor;" and
interest rate dollars, under which a party sells a cap and purchases a floor or
vice versa in an attempt to protect itself against interest rate movements
exceeding given minimum or maximum levels.
Most swap agreements entered into by the Funds calculate the obligations of the
parties to the agreement on a "net basis." Consequently, a Fund's current
obligations (or rights) under a swap agreement will generally be equal only to
the net amount to be paid or received under the agreement based on the relative
values of the positions held by each party to the agreement (the "net amount").
A Fund's current obligations under a swap agreement will be accrued daily
(offset against any amounts owing to the Fund) and any accrued but unpaid net
amounts owed to a swap counterparty will be covered by segregating assets
determined to be liquid. Obligations under swap agreements so covered will not
be construed to be "senior securities" for purposes of a Fund's investment
restriction concerning senior securities. Because they are two party contracts
and because they may have terms of greater than seven days, swap agreements may
be considered to be illiquid for a Fund's illiquid investment limitations. No
Fund will enter into any swap agreement unless the Advisor believes that the
other party to the transaction is creditworthy. A Fund bears the risk of loss of
the amount expected to be received under a swap agreement in the event of the
default or bankruptcy of a swap agreement counterparty.
Each Fund may enter into swap agreements to invest in a market without owning or
taking physical custody of securities in circumstances in which direct
investment is restricted for legal reasons or is otherwise impracticable. The
counterparty to any swap agreement will typically be a bank, investment banking
firm or broker/dealer. The counterparty will generally agree to pay a Fund the
amount, if any, by which the notional amount of the swap agreement would have
increased in value had it been invested in the particular stocks, plus the
dividends that would have been received on those stocks. A Fund will agree to
pay to the counterparty a floating rate of interest on the notional amount of
the swap agreement plus the amount, if any, by which the notional amount would
have decreased in value had it been invested in such stocks. Therefore, the
return to a Fund on any swap agreement should be the gain or loss on the
notional amount plus dividends on the stocks less the interest paid by the Fund
on the notional amount.
Swap agreements typically are settled on a net basis, which means that the two
payment streams are netted out, with a Fund receiving or paying, as the case may
be, only the net amount of the two payments. Payments may be made at the
conclusion of a swap agreement or periodically during its term.
Swap agreements do not involve the delivery of securities or other underlying
assets. Accordingly, the risk of loss with respect to swap agreements is limited
to the net amount of payments that a Fund is contractually obligated to make. If
the other party to a swap agreement defaults, a Fund's risk of loss consists of
the net amount of payments that the Fund is contractually entitled to receive,
if any. The net amount of the excess, if any, of a Fund's obligations over its
entitlements with respect to each equity swap will be accrued on a daily basis
and an amount of cash or liquid assets, having an aggregate NAV at least equal
to such accrued excess will be maintained in a segregated account by the Fund's
custodian. Inasmuch as these transactions are entered into for hedging purposes
or are offset by segregated cash of liquid assets, as permitted by applicable
law, the Funds and the Advisor believe that these transactions do not constitute
senior securities under the 1940 Act and, accordingly, will not treat them as
being subject to a Fund's borrowing restrictions.
12
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become relatively liquid in comparison with the markets for other similar
instruments which are traded in the OTC market. The Advisor, under the
supervision of the Board, is responsible for determining and monitoring the
liquidity of Fund transactions in swap agreements.
The use of swap agreements is a highly specialized activity that involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions.
TRACKING ERROR
The following factors may affect the ability of the Funds to achieve correlation
with the performance of their respective benchmarks: (1) Fund expenses,
including brokerage (which may be increased by high portfolio turnover); (2) a
Fund holding less than all of the securities in the Underlying Index and/or
securities not included in the Underlying Index being held by a Fund; (3) an
imperfect correlation between the performance of instruments held by a Fund,
such as futures contracts and options, and the performance of the underlying
securities in the market; (4) bid-ask spreads (the effect of which may be
increased by portfolio turnover); (5) a Fund holding instruments traded in a
market that has become illiquid or disrupted; (6) Fund share prices being
rounded to the nearest cent; (7) changes to the Underlying Index that are not
disseminated in advance; (8) the need to conform a Fund's portfolio holdings to
comply with investment restrictions or policies or regulatory or tax law
requirements; (9) early or unanticipated closings of the markets on which the
holdings of a Fund trade, resulting in the inability of the Fund to execute
intended portfolio transactions; or (10) market movements that run counter to a
leveraged Fund's investments. Market movements that run counter to a leveraged
Fund's investments will cause some divergence between the Fund and its benchmark
over time due to the mathematical effects of leveraging. The magnitude of the
divergence is dependent upon the magnitude of the market movement, its duration,
and the degree to which the Fund is leveraged. The tracking error of a leveraged
Fund is generally small during a well-defined up trend or downtrend in the
market when measured from price peak to price peak, absent a market decline and
subsequent recovery, however, the deviation of the Fund from its benchmark may
be significant. The Funds' performance attempts to correlate highly with the
movement in their respective benchmarks over time.
U.S. GOVERNMENT SECURITIES
The Funds may make short-term investments in U.S. Government securities.
Securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities include U.S. Treasury securities, which are backed by the full
faith and credit of the U.S. Treasury and which differ only in their interest
rates, maturities, and times of issuance. U.S. Treasury bills have initial
maturities of one year or less; U.S. Treasury notes have initial maturities of
one to ten years; and U.S. Treasury bonds generally have initial maturities of
greater than ten years. Certain U.S. Government securities are issued or
guaranteed by agencies or instrumentalities of the U.S. Government including,
but not limited to, obligations of U.S. Government agencies or instrumentalities
such as Fannie Mae, the Government National Mortgage Association, the Small
Business Administration, the Federal Farm Credit Administration, the Federal
Home Loan Banks, Banks for Cooperatives (including the Central Bank for
Cooperatives), the Federal Land Banks, the Federal Intermediate Credit Banks,
the Tennessee Valley Authority, the Export-Import Bank of the United States, the
Commodity Credit Corporation, the Federal Financing Bank, the Student Loan
Marketing Association, and the National Credit Union Administration.
Some obligations issued or guaranteed by U.S. Government agencies and
instrumentalities, including, for example, the Government National Mortgage
Association pass-through certificates, are supported by the full faith and
credit of the U.S. Treasury. Other obligations issued by or guaranteed by
federal agencies, such as those securities issued by Fannie Mae, are supported
by the discretionary authority of the U.S. Government to purchase certain
obligations of the federal agency, while other obligations issued by or
13
guaranteed by federal agencies, such as those of the Federal Home Loan Banks,
are supported by the right of the issuer to borrow from the U.S. Treasury, while
the U.S. Government provides financial support to such U.S. Government-sponsored
federal agencies, no assurance can be given that the U.S. Government will always
do so, since the U.S. Government is not so obligated by law. U.S. Treasury notes
and bonds typically pay coupon interest semi-annually and repay the principal at
maturity.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES
The Funds, from time to time, in the ordinary course of business, may purchase
securities on a when-issued or delayed-delivery basis (I.E., delivery and
payment can take place between a month and 120 days after the date of the
transaction). These securities are subject to market fluctuation and no interest
accrues to the purchaser during this period. At the time a Fund makes the
commitment to purchase securities on a when-issued or delayed-delivery basis,
the Fund will record the transaction and thereafter reflect the value of the
securities, each day, in determining the Fund's NAV. A Fund will not purchase
securities on a when-issued or delayed-delivery basis if, as a result, more than
15% of the Fund's net assets would be so invested. At the time of delivery of
the securities, the value of the securities may be more or less than the
purchase price. Each Fund will also establish a segregated account with the
Fund's custodian bank in which the Fund will maintain cash or liquid securities
equal to or greater in value than the Fund's purchase commitments for such
when-issued or delayed-delivery securities. The Trust does not believe that a
Fund's NAV or income will be adversely affected by the Fund's purchase of
securities on a when-issued or delayed-delivery basis.
ADDITIONAL INFORMATION ABOUT THE SECTOR ETFS
BIOTECHNOLOGY SECTOR - RYDEX 2X NASDAQ BIOTECH ETF, RYDEX INVERSE NASDAQ BIOTECH
ETF AND RYDEX INVERSE 2X NASDAQ BIOTECH ETF
The Funds may invest in companies engaged in the research, development, sale,
and manufacture of various biotechnological products, services and processes.
These include companies involved with developing or experimental technologies
such as generic engineering, hybridoma and recombinant DNA techniques and
monoclonal antibodies. The Funds may also invest in companies that manufacture
and/or distribute biotechnological and biomedical products, including devices
and instruments, and that provide or benefit significantly from scientific and
technological advances in biotechnology. Some biotechnology companies may
provide processes or services instead of, or in addition to, products.
The description of the biotechnology sector may be interpreted broadly to
include applications and developments in such areas as human health care
(cancer, infectious disease, diagnostics and therapeutics); pharmaceuticals (new
drug development and production); agricultural and veterinary applications
(improved seed varieties, animal growth hormones); chemicals (enzymes, toxic
waste treatment); medical/surgical (epidermal growth factor, in vivo
imaging/therapeutics); and industry (biochips, fermentation, enhanced mineral
recovery).
CONSUMER DISCRETIONARY SECTOR - RYDEX 2X CONSUMER DISCRETIONARY ETF, RYDEX
INVERSE CONSUMER DISCRETIONARY ETF AND RYDEX INVERSE 2X CONSUMER DISCRETIONARY
ETF
The Funds may invest in companies engaged in the manufacture of goods to
consumers, both domestically and internationally. The Funds may invest in
companies from the following industries: automobiles and components, household
durables (E.G., furniture), apparel, hotels, restaurants, leisure and retailing.
14
CONSUMER STAPLES SECTOR - RYDEX 2X CONSUMER STAPLES ETF, RYDEX INVERSE CONSUMER
STAPLES ETF AND RYDEX INVERSE 2X CONSUMER STAPLES ETF
The Funds may invest in companies engaged in the manufacture of goods to
consumers, both domestically and internationally. The Funds may invest in
companies from the following industries: food and staples retailing, beverages,
food products, tobacco, household products and personal products.
ENERGY SECTOR - RYDEX 2X ENERGY ETF, RYDEX INVERSE ENERGY ETF AND RYDEX INVERSE
2X ENERGY ETF
The Funds may invest in companies in the energy field, including oil, gas and
consumable fuels and energy equipment and services.
FINANCIALS SECTOR - RYDEX 2X FINANCIALS ETF, RYDEX INVERSE FINANCIALS ETF AND
RYDEX INVERSE 2X FINANCIALS ETF
The Funds may invest in companies that are involved in the financial services
sector, including commercial banks, capital markets, diversified financial
services, a variety of firms in all segments of the insurance industry such as
multi-line, property and casualty, and life insurance and real estate related
companies.
The financial services sector is currently undergoing relatively rapid change as
existing distinctions between financial service segments become less clear. For
example, recent business combinations have included insurance, finance, and
securities brokerage under single ownership. Some primarily retail corporations
have expanded into securities and insurance industries. Moreover, the federal
laws generally separating commercial and investment banking are currently being
studied by Congress.
SEC regulations provide that each Fund may not invest more than 5% of its total
assets in the securities of any one company that derives more than 15% of its
revenues from brokerage or investment management activities. These companies, as
well as those deriving more than 15% of profits from brokerage and investment
management activities, will be considered to be "principally engaged" in the
Fund's business activity. Rule 12d3-1 under the 1940 Act, allows investment
portfolios such as the Funds, to invest in companies engaged in
securities-related activities subject to certain conditions. Purchases of
securities of a company that derived 15% or less of gross revenues during its
most recent fiscal year from securities-related activities (I.E., broker/dealer,
underwriting, or investment advisory activities) are subject only to the same
percentage limitations as would apply to any other security the Funds may
purchase. The Funds may purchase securities of an issuer that derived more than
15% of it gross revenues in its most recent fiscal year from securities-related
activities, subject to the following conditions:
a. the purchase cannot cause more than 5% of a Fund's total assets to
be invested in securities of that issuer;
b. for any equity security, the purchase cannot result in a Fund owning
more than 5% of the issuer's outstanding securities in that class;
c. for a debt security, the purchase cannot result in a Fund owning
more than 10% of the outstanding principal amount of the issuer's
debt securities.
In applying the gross revenue test, an issuer's own securities-related
activities must be combined with its ratable share of securities-related
revenues from enterprises in which it owns a 20% or greater voting or equity
interest. All of the above percentage limitations, as well as the issuer's gross
revenue test, are applicable at the time of purchase. With respect to warrants,
rights, and convertible securities, a determination of compliance with the above
limitations shall be made as though such warrant, right, or conversion privilege
had been exercised. The Funds will not be required to divest their holdings of a
15
particular issuer when circumstances subsequent to the purchase cause one of the
above conditions to not be met. The purchase of a general partnership interest
in a securities-related business is prohibited.
HEALTH CARE SECTOR - RYDEX 2X HEALTH CARE FUND, RYDEX INVERSE HEALTH CARE FUND
AND RYDEX INVERSE 2X HEALTH CARE FUND
The Funds may invest in companies that are involved in the health care industry
including companies from the following industries: health care equipment and
supplies, health care providers and services, biotechnology and pharmaceuticals.
INDUSTRIALS SECTOR - RYDEX 2X INDUSTRIALS ETF, RYDEX INVERSE INDUSTRIALS ETF AND
RYDEX INVERSE 2X INDUSTRIALS ETF
The Funds may invest in companies that are involved in the industrials industry
including companies from the following industries: aerospace and defense,
building products, construction and engineering, electrical equipment,
industrial conglomerates, machinery, commercial services and supplies, air
freight and logistics, airlines, road and rail and transportation
infrastructure.
MATERIALS SECTOR - RYDEX 2X MATERIALS ETF, RYDEX INVERSE MATERIALS ETF AND RYDEX
INVERSE 2X MATERIALS ETF
The Funds may invest in companies that are involved in the materials industry
including companies from the following industries: chemicals, construction
materials, containers and packaging, metals and mining and paper and forest
products.
TECHNOLOGY SECTOR - RYDEX 2X TECHNOLOGY ETF, RYDEX INVERSE TECHNOLOGY ETF AND
RYDEX INVERSE 2X TECHNOLOGY ETF
The Funds may invest in companies that are involved in the technology sector
including companies that the Advisor believes have, or will develop, products,
processes or services that will provide or will benefit significantly from
technological advances and improvements. These may include companies from the
following industries: internet software and services, IT services, software,
communications equipment, computers and peripherals, electronic equipment and
instruments, office electronics, semiconductors and semiconductor equipment,
diversified telecommunication services and wireless telecommunication services.
UTILITIES SECTOR - RYDEX 2X UTILITIES ETF, RYDEX INVERSE UTILITIES ETF AND RYDEX
INVERSE 2X UTILITIES ETF
The Funds will invest primarily in companies in the public utilities industry
and companies deriving a majority of their revenues from their public utility
operations as described in the Funds' Prospectus. Such companies may include
companies from the following industries: electric utilities, gas utilities,
multi-utilities and independent power producers and energy traders.
SPECIAL CONSIDERATIONS REGARDING THE USE OF LEVERAGED AND INVERSE INVESTMENT
STRATEGIES
To the extent discussed above and in the Prospectus, the Leveraged Funds and
Leveraged Inverse Funds present certain risks, some of which are further
described below.
LEVERAGE. The Leveraged Funds and Leveraged Inverse Funds employ leverage as a
principal investment strategy and all of the Leveraged Funds and Leveraged
Inverse Funds may borrow or use other forms of leverage for investment purposes.
Utilization of leverage involves special risks and should be considered to be
speculative. Leverage exists when a Leveraged Fund or Leveraged Inverse Fund
achieves the right to a return on a capital base that exceeds the amount the
Leveraged Fund or Leveraged Inverse Fund has invested. Leverage creates the
potential for greater gains to shareholders of the Leveraged Funds and
16
Leveraged Inverse Funds during favorable market conditions and the risk of
magnified losses during adverse market conditions. Leverage should cause higher
volatility of the NAVs of the shares of the Leveraged Funds and Leveraged
Inverse Funds. Leverage may involve the creation of a liability that does not
entail any interest costs or the creation of a liability that requires the
Leveraged Funds and Leveraged Inverse Funds to pay interest, which would
decrease the Leveraged Funds' and Leveraged Inverse Funds' total return to
shareholders. If the Leveraged Funds and Leveraged Inverse Funds achieve their
investment objectives, during adverse market conditions, shareholders should
experience a loss greater than they would have incurred had the Leveraged Funds
and Leveraged Inverse Funds not been leveraged.
SPECIAL NOTE REGARDING THE CORRELATION RISKS OF THE LEVERAGED FUNDS AND
LEVERAGED INVERSE FUNDS. As discussed in the Prospectus, each of the Leveraged
Funds and Leveraged Inverse Funds are "leveraged" funds in the sense that each
has an investment objective to match a multiple of the performance of an index
on a given day. The Leveraged Funds and Leveraged Inverse Funds are subject to
all of the risks described in the Prospectus. In addition, there is a special
form of correlation risk that derives from the Leveraged Funds and Leveraged
Inverse Funds use of leverage. For periods greater than one day, the use of
leverage tends to cause the performance of a Leveraged Fund or Leveraged Inverse
Fund to be either greater than, or less than, the Underlying Index performance
times the stated multiple in the fund objective.
A Leveraged Fund's or Leveraged Inverse Fund's return for periods longer than
one day is primarily a function of the following: (a) index performance; (b)
index volatility; (c) financing rates associated with leverage; (d) other fund
expenses; (e) dividends paid by companies in the index; and (f) period of time.
A leveraged fund's performance can be estimated given any set of assumptions for
the factors described above. The tables below illustrate the impact of two
factors, index volatility and index performance, on a leveraged fund. Index
volatility is a statistical measure of the magnitude of fluctuations in the
returns of an index and is calculated as the standard deviation of the natural
logarithms of one plus the index return (calculated daily), multiplied by the
square root of the number of trading days per year (assumed to be 252). The
tables show estimated fund returns for a number of combinations of index
performance and index volatility over a one year period. Assumptions used in the
tables include: a) no dividends paid by the companies included in the index; b)
no fund expenses; and c) borrowing/lending rates (to obtain leverage) of zero
percent. If fund expenses were included, the fund's performance would be lower
than shown.
The first table below shows the estimated fund return over a one-year period for
a leveraged fund that has an investment objective to correspond to twice (200%
of) the daily performance of an index. The leveraged fund could be expected to
achieve a 30% return on a yearly basis if the index performance was 15%, absent
any costs or the correlation risk or other factors described above and in the
Prospectus under "Understanding Compounding & the Effect of Leverage." However,
as the table shows, with an index volatility of 20%, such a fund would return
27%, again absent any costs or other factors described above and in the
Prospectus under "Understanding Compounding & the Effect of Leverage." In the
charts below, unshaded areas represent those scenarios where a leveraged fund
with the investment objective described will outperform (I.E., return more than)
the index performance times the stated multiple in the leveraged fund's
investment objective; conversely, shaded areas represent those scenarios where
the leveraged fund will underperform (I.E., return less than) the index
performance times the stated multiple in the fund's investment objective.
17
LEVERAGED FUND MEDIAN ANNUAL RETURNS
-----------------------------------------------------------------------------------------
INDEX PERFORMANCE MARKET VOLATILITY
-----------------------------------------------------------------------------------------
200% OF
ONE YEAR ONE YEAR
INDEX INDEX
PERFORMANCE PERFORMANCE 10% 15% 20% 25% 30% 35% 40% 45% 50%
-----------------------------------------------------------------------------------------
-40% -80% -64% -64% -65% -65% -67% -68% -69% -70% -71%
-----------------------------------------------------------------------------------------
-35% -70% -58% -59% -59% -60% -62% -63% -64% -65% -66%
-----------------------------------------------------------------------------------------
-30% -60% -52% -53% -52% -53% -55% -56% -58% -60% -61%
-----------------------------------------------------------------------------------------
-25% -50% -45% -46% -46% -47% -48% -50% -52% -53% -55%
-----------------------------------------------------------------------------------------
-20% -40% -36% -37% -39% -40% -41% -43% -44% -47% -50%
-----------------------------------------------------------------------------------------
-15% -30% -29% -29% -30% -32% -33% -36% -38% -40% -43%
-----------------------------------------------------------------------------------------
-10% -20% -20% -21% -23% -23% -26% -28% -31% -32% -36%
-----------------------------------------------------------------------------------------
-5% -10% -11% -12% -13% -16% -18% -20% -23% -25% -29%
-----------------------------------------------------------------------------------------
0% 0% -1% -2% -4% -6% -8% -11% -14% -17% -20%
-----------------------------------------------------------------------------------------
5% 10% 9% 8% 6% 3% 2% -3% -5% -8% -12%
-----------------------------------------------------------------------------------------
10% 20% 19% 19% 16% 15% 10% 9% 4% 0% -5%
-----------------------------------------------------------------------------------------
15% 30% 31% 29% 27% 25% 21% 19% 15% 11% 6%
-----------------------------------------------------------------------------------------
20% 40% 43% 41% 38% 35% 32% 27% 23% 18% 13%
-----------------------------------------------------------------------------------------
25% 50% 54% 52% 50% 48% 43% 39% 34% 29% 22%
-----------------------------------------------------------------------------------------
30% 60% 69% 64% 62% 58% 56% 49% 43% 39% 34%
-----------------------------------------------------------------------------------------
35% 70% 79% 77% 75% 70% 68% 61% 57% 50% 43%
-----------------------------------------------------------------------------------------
40% 80% 92% 91% 88% 82% 81% 73% 67% 62% 54%
-----------------------------------------------------------------------------------------
|
The second table below shows the estimated fund return over a one-year period
for a leveraged inverse fund that has an investment objective to correspond to
twice (200% of) the opposite of the daily performance of an index. The leveraged
inverse fund could be expected to achieve a -30% return on a yearly basis if the
index performance was 15%, absent any costs or the correlation risk or other
factors described above and in the Prospectus under "Understanding Compounding &
the Effect of Leverage." However, as the table shows, with an index volatility
of 20%, such a fund would return -33%, again absent any costs or other factors
described above and in the Prospectus under "Understanding Compounding & the
Effect of Leverage." In the charts below, unshaded areas represent those
scenarios where a leveraged fund with the investment objective described will
outperform (I.E., return more than) the index performance times the stated
multiple in the leveraged fund's investment objective; conversely, shaded areas
represent those scenarios where the leveraged fund will underperform (I.E.,
return less than) the index performance times the stated multiple in the fund's
investment objective.
18
LEVERAGED INVERSE FUND MEDIAN ANNUAL RETURNS
-----------------------------------------------------------------------------------------
INDEX PERFORMANCE MARKET VOLATILITY
-----------------------------------------------------------------------------------------
200%
INVERSE OF
ONE YEAR ONE YEAR
INDEX INDEX
PERFORMANCE PERFORMANCE 10% 15% 20% 25% 30% 35% 40% 45% 50%
-----------------------------------------------------------------------------------------
-40% 80% 165% 153% 145% 127% 114% 99% 74% 57% 35%
-----------------------------------------------------------------------------------------
-35% 70% 130% 122% 109% 96% 84% 68% 51% 32% 17%
-----------------------------------------------------------------------------------------
-30% 60% 98% 93% 79% 68% 58% 46% 29% 16% 1%
-----------------------------------------------------------------------------------------
-25% 50% 73% 68% 58% 49% 36% 26% 13% 2% -13%
-----------------------------------------------------------------------------------------
-20% 40% 51% 45% 39% 31% 20% 12% -2% -11% -23%
-----------------------------------------------------------------------------------------
-15% 30% 35% 29% 23% 16% 6% -2% -12% -22% -30%
-----------------------------------------------------------------------------------------
-10% 20% 20% 16% 9% 3% -5% -13% -21% -30% -39%
-----------------------------------------------------------------------------------------
-5% 10% 8% 5% -2% -8% -14% -21% -30% -38% -46%
-----------------------------------------------------------------------------------------
0% 0% -3% -7% -12% -17% -23% -28% -37% -44% -51%
-----------------------------------------------------------------------------------------
5% -10% -12% -15% -19% -25% -31% -35% -43% -47% -55%
-----------------------------------------------------------------------------------------
10% -20% -19% -23% -27% -32% -36% -43% -47% -53% -59%
-----------------------------------------------------------------------------------------
15% -30% -27% -29% -32% -37% -42% -46% -53% -58% -63%
-----------------------------------------------------------------------------------------
20% -40% -33% -35% -38% -42% -46% -50% -56% -60% -66%
-----------------------------------------------------------------------------------------
25% -50% -38% -40% -43% -47% -51% -55% -59% -64% -68%
-----------------------------------------------------------------------------------------
30% -60% -43% -44% -47% -51% -55% -59% -62% -66% -71%
-----------------------------------------------------------------------------------------
35% -70% -46% -49% -52% -53% -58% -61% -66% -68% -73%
-----------------------------------------------------------------------------------------
40% -80% -50% -52% -55% -57% -61% -64% -68% -71% -75%
-----------------------------------------------------------------------------------------
|
The foregoing tables are intended to isolate the effect of index volatility and
index performance on the return of a leveraged fund. The Leveraged Fund's or
Leveraged Inverse Fund's actual returns may be significantly greater or less
than the returns shown above as a result of any of the factors discussed above
or under "Understanding Compounding & the Effect of Leverage" in the Prospectus.
MORE INFORMATION ABOUT THE UNDERLYING INDICES
INDEX DESCRIPTIONS. The Funds seek to provide investment results that match the
performance of a specific benchmark on a daily basis. The current benchmark for
each Fund and a description of each Fund's Underlying Index (each an "Underlying
Index" and collectively, the "Underlying Indices") is set forth in the Funds'
Prospectus under "More Information About the Funds - Benchmarks and Investment
Methodology."
INDEX PROVIDER. The Rydex Inverse S&P 500 ETF, The Rydex 2x S&P 500 Growth ETF,
Rydex Inverse S&P 500 Growth ETF, Rydex Inverse 2x S&P 500 Growth ETF, The Rydex
2x S&P 500 Value ETF, Rydex Inverse S&P 500 Value ETF, Rydex Inverse 2x S&P 500
Value ETF, The Rydex Inverse S&P MidCap 400 ETF, The Rydex 2x S&P MidCap 400
Growth ETF, Rydex Inverse S&P MidCap 400 Growth ETF, Rydex Inverse 2x S&P MidCap
400 Growth ETF, The Rydex 2x S&P MidCap 400 Value ETF, Rydex Inverse S&P MidCap
400 Value ETF, Rydex Inverse 2x S&P MidCap 400 Value ETF, The Rydex 2x S&P
SmallCap 600 ETF, Rydex Inverse S&P SmallCap 600 ETF, Rydex Inverse 2x S&P
SmallCap 600 ETF, The Rydex 2x S&P SmallCap 600 Growth ETF, Rydex Inverse S&P
SmallCap 600 Growth ETF, Rydex Inverse 2x S&P SmallCap 600 Growth ETF, The Rydex
2x S&P SmallCap 600 Value ETF, Rydex Inverse S&P SmallCap 600 Value ETF, and
Rydex Inverse 2x S&P SmallCap 600 Value ETF will be based upon the S&P 500(R)
Index, S&P 500(R) Growth Index, S&P 500(R) Value Index, S&P MidCap 400(R) Index,
S&P MidCap 400(R) Growth Index, S&P MidCap 400(R) Value Index, S&P
19
SmallCap 600(R) Index, S&P SmallCap 600(R) Growth Index and S&P SmallCap 600(R)
Value ETF, respectively, compiled by Standard & Poor's, which is not affiliated
with the Funds or with the Advisor or its affiliates. The Funds are entitled to
use the applicable Underlying Index pursuant to a sub-licensing agreement with
the Advisor, which in turn has a licensing agreement with the index provider.
The Advisor has provided the sub-license without charge to the Funds.
The Rydex 2x NASDAQ 100 ETF, Rydex Inverse NASDAQ 100 ETF, Rydex Inverse 2x
NASDAQ 100 ETF, and The Rydex 2x NASDAQ Biotech ETF, Rydex Inverse NASDAQ
Biotech ETF, and Rydex Inverse 2x NASDAQ Biotech ETF will be based upon the
NASDAQ 100 Index(R) and the NASDAQ Biotechnology Index(R), respectively,
compiled by NASDAQ, which is not affiliated with the Funds or with the Advisor
or its affiliates. The Funds are entitled to use the applicable Underlying Index
pursuant to a sub-licensing agreement with the Advisor, which in turn has a
licensing agreement with the index provider. The Advisor has provided the
sub-license without charge to the Funds.
The Rydex 2x Russell 1000(R) ETF, Rydex Inverse Russell 1000(R) ETF, Rydex
Inverse 2x Russell 1000(R) ETF, The Rydex 2x Russell 1000(R) Growth ETF, Rydex
Inverse Russell 1000(R) Growth ETF, Rydex Inverse 2x Russell 1000(R) Growth ETF,
The Rydex 2x Russell 1000(R) Value ETF, Rydex Inverse Russell 1000(R) Value ETF,
Rydex Inverse 2x Russell 1000(R) Value ETF, The Rydex 2x Russell MidCap(R) ETF,
Rydex Inverse MidCap(R) ETF, Rydex Inverse 2x MidCap(R) ETF, The Rydex 2x
Russell MidCap(R) Growth ETF, Rydex Inverse Russell MidCap(R) Growth ETF, Rydex
Inverse 2x Russell MidCap(R) Growth ETF, The Rydex 2x Russell MidCap(R) Value
ETF, Rydex Inverse Russell MidCap(R) Value ETF, Rydex Inverse 2x Russell
MidCap(R) Value ETF, The Rydex Inverse Russell 2000(R) ETF, The Rydex 2x Russell
2000(R) Growth ETF, Rydex Inverse Russell 2000(R) Growth ETF, Rydex Inverse 2x
Russell 2000(R) Growth ETF, The Rydex 2x Russell 2000(R) Value ETF, Rydex
Inverse Russell 2000(R) Value ETF, Rydex Inverse 2x Russell 2000(R) Value ETF,
The Rydex 2x Russell 3000(R) ETF, Rydex Inverse Russell 3000(R) ETF, Rydex
Inverse 2x Russell 3000(R) ETF, and The Rydex 2x Russell 3000(R) Growth ETF,
Rydex Inverse Russell 3000(R) Growth ETF, Rydex Inverse 2x Russell 3000(R)
Growth ETF, The Rydex 2x Russell 3000(R) Value ETF, Rydex Inverse Russell
3000(R) Value ETF, and Rydex Inverse 2x Russell 3000(R) Value ETF will be based
upon the Russell 1000(R) Index, Russell 1000(R) Growth Index, Russell 1000(R)
Value Index, Russell MidCap(R) Index, Russell MidCap(R) Growth Index, Russell
MidCap(R) Value Index, Russell 2000(R) Index, Russell 2000(R) Growth Index,
Russell 2000(R) Value Index, Russell 3000(R) Index, Russell 3000(R) Growth
Index, and Russell 3000(R) Value Index, respectively, compiled by Frank Russell
Company, which is not affiliated with the Funds or with the Advisor or its
affiliates. The Funds are entitled to use the applicable Underlying Index
pursuant to a sub-licensing agreement with the Advisor, which in turn has a
licensing agreement with the index provider. The Advisor has provided the
sub-license without charge to the Funds.
The Rydex 2x Consumer Discretionary ETF, Rydex Inverse Consumer Discretionary
ETF, Rydex Inverse 2x Consumer Discretionary ETF, The Rydex 2x Consumer Staples
ETF, Rydex Inverse Consumer Staples ETF, Rydex Inverse 2x Consumer Staples ETF,
The Rydex 2x Energy ETF, Rydex Inverse Energy ETF, Rydex Inverse 2x Energy ETF,
The Rydex 2x Financials ETF, Rydex Inverse Financials ETF, Rydex Inverse 2x
Financials ETF, The Rydex 2x Health Care ETF, Rydex Inverse Health Care
Discretionary ETF, Rydex Inverse 2x Health Care ETF, The Rydex 2x Industrials
ETF, Rydex Inverse Industrials ETF, Rydex Inverse 2x Industrials ETF, The Rydex
2x Materials ETF, Rydex Inverse Materials ETF, Rydex Inverse 2x Materials ETF,
The Rydex 2x Technology ETF, Rydex Inverse Technology ETF, Rydex Inverse 2x
Technology ETF, and The Rydex 2x Utilities ETF, Rydex Inverse Utilities ETF, and
Rydex Inverse 2x Utilities ETF will be based upon the S&P Consumer Discretionary
Index, S&P Consumer Staples Index, S&P Energy Index, S&P Financials Index, S&P
Health Care Index, S&P Industrials Index, S&P Materials Index, S&P Technology
Index and S&P Utilities Index, respectively, compiled Standard & Poor's, which
is not affiliated with the Funds or with the Advisor or its affiliates. The
Funds are entitled to use the applicable Underlying Index pursuant to a
sub-licensing
20
agreement with the Advisor, which in turn has a licensing agreement with the
index provider. The Advisor has provided the sub-license without charge to the
Funds.
The following sections provide additional information about the maintenance and
operation of the S&P, NASDAQ, and Russell Indices included in the Funds'
benchmarks.
S&P INDEX CALCULATION
S&P U.S. INDICES. On any given day, the index value is the quotient of the total
float-adjusted market capitalization of the index's constituents and its
divisor. Continuity in index values is maintained by adjusting the divisor for
all changes in the constituents' share capital after the base date. This
includes additions and deletions to the index, rights issues, share buybacks and
issuances, and spin-offs. The divisor's time series is, in effect, a
chronological summary of all changes affecting the base capital of the index.
The divisor is adjusted such that the index value at an instant just prior to a
change in base capital equals the index value at an instant immediately
following that change.
S&P/CITIGROUP GROWTH AND VALUE INDEX SERIES. The S&P/Citigroup Style Index
Series include all parent index stocks and measure growth and value in separate
dimensions across seven risk factors (listed below) at the stock level. Raw
values for each of the factors listed below are calculated for each company in
the S&P/Citigroup Broad Market Index (BMI) universe, which has approximately
twice as many stocks as the S&P Composite 1500. These raw values are then
standardized by dividing the difference between each stock's raw score and the
mean of the entire set by the standard deviation of the entire set. A Growth
Score for each company is computed as the average of the standardized values of
the three growth factors. Similarly, a Value Score for each company is computed
as the average of the standardized values of the four value factors. The style
scores are recalculated and indices rebalanced each December.
--------------------------------------------------------------------------------
GROWTH FACTORS VALUE FACTORS
--------------------------------------------------------------------------------
o 5-Year Earnings per Share Growth Rate o Book Value to Price Ratio
--------------------------------------------------------------------------------
o 5-Year Sales per Share Growth Rate o Cash Flow to Price Ratio
--------------------------------------------------------------------------------
o 5-Year Internal Growth Rate o Sales to Price Ratio
--------------------------------------------------------------------------------
o Dividend Yield
--------------------------------------------------------------------------------
|
The S&P/Citigroup Growth and Value Indices are calculated following Standard &
Poor's market capitalization-weighted, divisor-based index methodology. For
example, for the S&P SmallCap 600/Citigroup Value Index:
INDEX VALUE(t) = Index Market Value(t)/Index Divisor(t)
INDEX MARKET VALUE(t) = NSummationx->1(IWF(x,t))(Index Shares(x,t))(W(v,x))(Price(x,t))
Where,
IWF(x,t) = Investable Weight Factor of Stock X on date(t)
Index Shares(x,t) = Shares used for Stock X in the S&P SmallCap 600 on date(t)
W(v,x) = Percent of market capitalization of Stock X in the S&P
SmallCap 600/Citigroup Value index, calculated as per the
previous section. This is calculated only once a year on
the rebalancing date, or is specified when a new stock is
added between rebalancing dates.
Price(x,t) = Price used for stock X in the S&P SmallCap 600 index
computation on date(t)
N = Number of stocks in the S&P SmallCap 600/Citigroup Value
Index on date(t) (note that N < 600)
|
21
S&P INDEX MAINTENANCE
Maintaining the S&P Indices includes monitoring and completing the adjustments
for company additions and deletions, share changes, stock splits, stock
dividends and stock price adjustments due to restructuring and spin-offs. Share
changes of less than 5% are only updated on quarterly basis on the Friday near
the end of the calendar year.
A company will be removed from the S&P Indices as a result of
mergers/acquisitions, bankruptcy, restructuring, or if it no longer
representative of its industry group. A company is removed from the relevant
index as close as possible to the actual date on which the event occurred. A
company can be removed from an index because it no longer meets current criteria
for inclusion and/or is no longer representative of its industry group.
When calculating index weights, individual constituents' shares held by
governments, corporations, strategic partners, or other control groups are
excluded from the company's shares outstanding. Shares owned by other companies
are also excluded regardless of whether they are index constituents.
Once a year, the float adjustments will be reviewed. Each company's financial
statements will be used to update the major shareholders' ownership. However,
any Investable Weight Factor (IWF) changes, equal to or greater than 5% will be
implemented as soon as reasonably possible when it results from a major
corporate action (i.e. privatization, merger, takeover, or share offering.)
Changes in the number of shares outstanding driven by corporate events, such as
stock dividends, splits, and rights issues will be adjusted on the ex-date.
Share changes of 5% or greater are implemented when they occur. All share
changes of less than 5% are updated on a quarterly basis (third Friday of March,
June, September, and December or at the close of the expiration of futures
contracts). Implementations of new additions, deletions, and changes to the
float adjustment, due to corporate actions, will be made available at the close
of the third Friday in March, June, September, and December. Generally, index
changes due to rebalancing are announced two days before the effective date by
way of a news release posted on WWW.SPGLOBAL.COM.
NASDAQ INDEX CALCULATION
NASDAQ-100 INDEX. The NASDAQ-100 Index is calculated under a modified
capitalization-weighted methodology. The methodology is expected to retain in
general the economic attributes of capitalization-weighting while providing
enhanced diversification. To accomplish this, NASDAQ will review the composition
of the NASDAQ-100 Index on a quarterly basis and adjust the weightings of Index
components using a proprietary algorithm, if certain pre-established weight
distribution requirements are not met.
NASDAQ BIOTECHNOLOGY INDEX. The NASDAQ Biotechnology Index contains securities
of NASDAQ-listed companies classified according to the Industry Classification
Benchmark as either Biotechnology or Pharmaceuticals which also meet other
eligibility criteria. The NASDAQ Biotechnology Index is calculated under a
modified capitalization-weighted methodology.
NASDAQ INDEX MAINTENANCE
NASDAQ-100 INDEX. Except under extraordinary circumstances that may result in an
interim evaluation, Index composition is reviewed on an annual basis as follows
(the "Ranking Review"). Securities listed on The NASDAQ Stock Market which meet
applicable eligibility criteria are ranked by
22
market value. Index-eligible securities which are already in the Index and which
are ranked in the top 100 eligible securities (based on market value) are
retained in the Index. A security that is ranked 101 to 125 is also retained,
provided that such security was ranked in the top 100 eligible securities as of
the previous Ranking Review. Securities not meeting such criteria are replaced.
The replacement securities chosen are those Index-eligible securities not
currently in the Index that have the largest market capitalizations. The data
used in the ranking includes end of October NASDAQ market data and is updated
for total shares outstanding submitted in a publicly filed SEC document via
EDGAR through the end of November.
In addition to the Ranking Review, the securities in the Index are monitored
every day by NASDAQ with respect to changes in total shares outstanding arising
from secondary offerings, stock repurchases, conversions, or other corporate
actions. NASDAQ has adopted the following weight adjustment procedures with
respect to such changes. Changes in total shares outstanding arising from stock
splits, stock dividends, or spin-offs are generally made to the Index on the
evening prior to the effective date of such corporate action. If the change in
total shares outstanding arising from other corporate actions is greater than or
equal to 5.0%, the change will be made as soon as practicable, normally within
ten (10) days of such action. Otherwise, if the change in total shares
outstanding is less than 5%, then all such changes are accumulated and made
effective at one time on a quarterly basis after the close of trading on the
third Friday in each of March, June, September, and December. In either case,
the Index share weights for such Index securities are adjusted by the same
percentage amount by which the total shares outstanding have changed in such
Index securities.
NASDAQ BIOTECHNOLOGY INDEX. Index securities are evaluated semi-annually as
follows: Securities currently within the Index must meet the maintenance
criteria of $100 million in market capitalization and 50,000 shares average
daily trading volume. Index securities not meeting the maintenance criteria are
retained in the Index provided that such securities met the maintenance criteria
in the previous semi-annual ranking. Securities not meeting the maintenance
criteria for two consecutive rankings are removed and Index-eligible securities
not currently in the Index are added. Changes will occur after the close of
trading on the third Friday in May and November. The data used in the ranking
includes end of March and September NASDAQ market data and is updated for total
shares outstanding submitted in a publicly filed SEC document via EDGAR through
the end of April and October.
In addition to the Ranking Review, the securities in the Index are monitored
every day by NASDAQ with respect to changes in total shares outstanding arising
from secondary offerings, stock repurchases, conversions, or other corporate
actions. NASDAQ has adopted the following weight adjustment procedures with
respect to such changes. Changes in total shares outstanding arising from stock
splits, stock dividends, or spin-offs are generally made to the Index on the
evening prior to the effective date of such corporate action. If the change in
total shares outstanding arising from other corporate actions is greater than or
equal to 5.0%, the change will be made as soon as practicable, normally within
ten (10) days of such action. Otherwise, if the change in total shares
outstanding is less than 5%, then all such changes are accumulated and made
effective at one time on a quarterly basis after the close of trading on the
third Friday in each of March, June, September, and December. In either case,
the Index share weights for such Index securities are adjusted by the same
percentage amount by which the total shares outstanding have changed in such
Index securities.
RUSSELL INDEX CALCULATION
The securities in the Russell Indices (sometimes referred to as the
"components") are reconstituted annually after the close on the last Friday in
June to reflect changes in the marketplace. The Russell 3000(R) Index, includes
the largest 3000 securities listed on any U.S. exchange ranked by decreasing
total market capitalization. All U.S. incorporated companies listed on a U.S.
exchange are considered for inclusion with the following rules and exceptions.
Stocks must trade at or above $1.00 on May 31 to be eligible for inclusion.
Although only one class of security is allowed into the indices, all common
classes
23
are combined to determine total market capitalization and available float.
Tracking stocks are considered individually for membership. Also excluded are
preferred and convertible preferred stock, participating preferred stock,
redeemable shares, warrants and rights, trust receipts, royalty trusts, limited
liability companies, OTC bulletin boards and pink sheet stocks, closed-end
investment companies, limited partnerships, and foreign stocks including
American Depositary Receipts (ADRs). After component selection, stocks are
weighted by their available market capitalization.
RUSSELL INDEX MAINTENANCE
The Russell Indices will be reconstituted annually. Securities that leave the
Russell Indices, between reconstitution dates, for any reason (I.E., mergers,
acquisitions, or other similar corporate activity) are not replaced. Thus, the
number of securities in each Russell Index over the year will fluctuate
according to corporate activity.
When a stock is acquired, delisted, reincorporated outside of the U.S. or moves
to the pink sheets on OTC bulletin boards, the stock is deleted from the
relevant indices. When acquisitions or mergers take place within a Russell
Index, the stock's capitalization moves to the acquiring stock, hence, mergers
have no effect on index total capitalization if the acquiring stock is part of
the Russell Index. The only additions between reconstitution dates are as a
result of spin-offs and eligible initial public offerings (IPOs).
Maintaining the Russell Indices includes monitoring and completing the
adjustments for company additions and deletions, share changes, stock splits,
stock dividends, and stock price adjustments due to restructuring and spin-offs.
In addition, significant changes to outstanding share capital changes are made
at month-end. The divisor is adjusted for all changes in company market value to
leave the value of the investments unaffected. All divisor adjustments will be
made at the open of the ex-date using previous day closing prices.
COMMENCEMENT DATES OF THE UNDERLYING INDICES
The inception date of each Underlying Index is as follows:
--------------------------------------------------------------------------------
BENCHMARK INCEPTION DATE
--------------------------------------------------------------------------------
S&P 500(R) Index March 4, 1957
--------------------------------------------------------------------------------
S&P 500(R) Growth Index May 30, 1992
--------------------------------------------------------------------------------
S&P 500(R) Value Index May 30, 1992
--------------------------------------------------------------------------------
S&P MidCap 400(R) Index June 19, 1991
--------------------------------------------------------------------------------
S&P MidCap 400(R) Growth Index May 10, 1994
--------------------------------------------------------------------------------
S&P MidCap 400(R) Value Index May 10, 1994
--------------------------------------------------------------------------------
S&P SmallCap 600(R) Index October 28, 1994
--------------------------------------------------------------------------------
S&P SmallCap 600(R) Growth Index September 30, 1996
--------------------------------------------------------------------------------
S&P SmallCap 600(R) Value Index September 30, 1996
--------------------------------------------------------------------------------
NASDAQ 100 Index(R) January 31, 1985
--------------------------------------------------------------------------------
Russell 1000(R) Index December 31, 1986
--------------------------------------------------------------------------------
Russell 1000(R) Growth Index January 1987
--------------------------------------------------------------------------------
Russell 1000(R) Value Index January 1987
--------------------------------------------------------------------------------
Russell MidCap(R) Index November 1, 1991
--------------------------------------------------------------------------------
Russell MidCap(R) Growth Index 1995
--------------------------------------------------------------------------------
Russell MidCap(R) Value Index 1995
--------------------------------------------------------------------------------
Russell 2000(R) Index December 31, 1986
--------------------------------------------------------------------------------
Russell 2000(R) Growth Index June 1993
--------------------------------------------------------------------------------
Russell 2000(R) Value Index June 1993
--------------------------------------------------------------------------------
|
24
--------------------------------------------------------------------------------
BENCHMARK INCEPTION DATE
--------------------------------------------------------------------------------
Russell 3000(R) Index January 1984
--------------------------------------------------------------------------------
Russell 3000(R) Growth Index 1995
--------------------------------------------------------------------------------
Russell 3000(R) Value Index 1995
--------------------------------------------------------------------------------
NASDAQ Biotechnology Index(R) November 1, 1993
--------------------------------------------------------------------------------
S&P Consumer Discretionary Index December 30, 1994
--------------------------------------------------------------------------------
S&P Consumer Staples Index December 30, 1994
--------------------------------------------------------------------------------
S&P Energy Index December 30, 1994
--------------------------------------------------------------------------------
S&P Financials Index December 30, 1994
--------------------------------------------------------------------------------
S&P Health Care Index December 30, 1994
--------------------------------------------------------------------------------
S&P Industrials Index December 30, 1994
--------------------------------------------------------------------------------
S&P Materials Index December 30, 1994
--------------------------------------------------------------------------------
S&P Technology Index December 30, 1994
--------------------------------------------------------------------------------
S&P Utilities Index December 30, 1994
--------------------------------------------------------------------------------
|
INDEX AVAILABILITY
Each Underlying Index is calculated continuously and widely disseminated to
major data vendors.
INVESTMENT RESTRICTIONS
FUNDAMENTAL POLICIES
The following investment limitations (and those set forth in the Prospectus) are
fundamental policies of the Funds, which cannot be changed with respect to a
Fund without the consent of the holders of a majority of that Fund's outstanding
shares. The term "majority of the outstanding shares" means the vote of (i) 67%
or more of a Fund's shares present at a meeting, if more than 50% of the
outstanding shares of that Fund are present or represented by proxy, or (ii)
more than 50% of that Fund's outstanding shares, whichever is less.
FUNDAMENTAL POLICIES OF THE FUNDS
Each Fund shall not:
1. Borrow money in an amount exceeding 33 1/3% of the value of its total
assets, provided that, for purposes of this limitation, investment
strategies which either obligate a Fund to purchase securities or require
a Fund to segregate assets are not considered to be borrowing. Asset
coverage of a least 300% is required for all borrowing, except where a
Fund has borrowed money for temporary purposes in amounts not exceeding 5%
of its total assets. A Fund will not purchase securities while its
borrowing exceeds 5% of its total assets.
2. Make loans if, as a result, more than 33 1/3% of its total assets would be
lent to other parties, except that a Fund may: (i) purchase or hold debt
instruments in accordance with its investment objective and policies; (ii)
enter into repurchase agreements; and (iii) lend its securities.
3. Purchase or sell real estate, physical commodities, or commodities
contracts, except that a Fund may purchase: (i) marketable securities
issued by companies which own or invest in real estate (including real
estate investment trusts), commodities, or commodities contracts; and (ii)
commodities contracts relating to financial instruments, such as financial
futures contracts and options on such contracts.
25
4. Issue senior securities (as defined in the 1940 Act) except as permitted
by rule, regulation or order of the SEC.
5. Act as an underwriter of securities of other issuers except as it may be
deemed an underwriter in selling a portfolio security.
6. Invest in interests in oil, gas, or other mineral exploration or
development programs and oil, gas or mineral leases.
7. Invest 25% or more of the value of a Fund's total assets in the securities
of one or more issuers conducting their principal business activities in
the same industry; except that, to the extent the benchmark selected for a
particular Fund is concentrated in a particular industry, the Fund will
necessarily be concentrated in that industry. This limitation does not
apply to investments or obligations of the U.S. Government or any of its
agencies or instrumentalities, or shares of investment companies.
NON-FUNDAMENTAL POLICIES
The following investment limitations are non-fundamental policies of the Funds
and may be changed with respect to any Fund by the Board.
Each Fund may not:
1. Invest in warrants.
2. Invest in real estate limited partnerships.
3. Invest in mineral leases.
4. Purchase or hold illiquid securities, I.E., securities that cannot be
disposed of for their approximate carrying value in seven days or less
(which term includes repurchase agreements and time deposits maturing in
more than seven days) if, in the aggregate, more than 15% of its net
assets would be invested in illiquid securities.
5. Change its investment strategy to invest at least 80% of its net assets,
plus any borrowings for investment purposes, in financial instruments with
economic characteristics similar to those of its benchmark without 60
days' prior notice to shareholders.
With respect to both the fundamental and non-fundamental policies of the Funds,
the foregoing percentages: (i) are based on total assets (except for the
limitations in 4 and 5 above that are specifically based on net assets); (ii)
will apply at the time of the purchase of a security; and (iii) shall not be
considered violated unless an excess or deficiency occurs or exists immediately
after and as a result of a purchase of such security, except for the fundamental
limitation on borrowing described in paragraph 1 above, under the heading
"Fundamental Policies of the Funds." With respect to borrowings in accordance
with the limitations set forth in paragraph 1, in the event that such asset
coverage shall at any time fall below 300 per centum, a Fund must reduce the
amount of its borrowings to an extent that the asset coverage of such borrowings
shall be at least 300 per centum within three days thereafter.
26
CONTINUOUS OFFERING
The method by which Creation Units are created and traded may raise certain
issues under applicable securities laws. Because new Creation Unit of shares are
issued and sold by the Funds on an ongoing basis, at any point a "distribution",
as such term is used in the 1933 Act, may occur. Broker-dealers and other
persons are cautioned that some activities on their part may, depending on the
circumstances, result in their being deemed participants in a distribution in a
manner which could render them statutory underwriters and subject them to the
prospectus delivery requirement and liability provisions of the 1933 Act.
For example, a broker-dealer firm or its client may be deemed a statutory
underwriter if it takes Creation Units after placing an order with the
Distributor (as defined below), breaks them down into constituent shares, and
sells such shares directly to customers, or if it chooses to couple the creation
of a supply of new shares with an active selling effort involving solicitation
of secondary market demand for shares. A determination of whether one is an
underwriter for purposes of the 1933 Act must take into account all the facts
and circumstances pertaining to the activities of the broker-dealer or its
client in the particular case, and the examples mentioned above should not be
considered a complete description of all the activities that could lead to a
categorization as an underwriter.
Broker-dealer firms should also note that dealers who are not "underwriters,"
but are effecting transactions in shares, whether or not participating in the
distribution of shares, are generally required to deliver a prospectus. This is
because the prospectus delivery exemption in Section 4(3) of the 1933 Act is not
available with respect to such transactions as a result of Section 24(d) of the
1940 Act. Firms that incur a prospectus-delivery obligation with respect to
shares are reminded that, under Rule 153 of the 1933 Act, a prospectus-delivery
obligation under Section 5(b)(2) of the 1933 Act owed to an exchange member in
connection with a sale on an exchange is satisfied by the fact that the
prospectus is available at the exchange upon request. The prospectus delivery
mechanism provided in Rule 153 is only available with respect to transactions on
an exchange.
EXCHANGE LISTING AND TRADING
A discussion of exchange listing and trading matters associated with an
investment in the Funds is contained in the Prospectus. The discussion below
supplements, and should be read in conjunction with, such sections of the
Prospectus.
The shares of the Funds are listed and traded on the Exchange. The shares of
each Fund will trade on the Exchange at prices that may differ to some degree
from a Fund's NAV. There can be no assurance that the requirements of the
Exchange necessary to maintain the listing of shares will continue to be met.
The Exchange may, but is not required to, remove the shares of a Fund from
listing if (i) following the initial 12-month period beginning at the
commencement of trading of the Fund, there are fewer than 50 beneficial owners
of the shares of the Fund for 30 or more consecutive trading days; (ii) the
value of the Underlying Index is no longer calculated or available; or (iii)
such other event shall occur or condition exist that, in the opinion of the
Exchange, makes further dealings on the Exchange inadvisable. The Exchange will
remove the shares of a Fund from listing and trading upon termination of the
Fund.
As in the case of other stocks traded on the Exchange, broker's commissions on
purchases or sales of shares in market transactions will be based on negotiated
commission rates at customary levels.
27
The Trust reserves the right to adjust the price levels of shares in the future
to help maintain convenient trading ranges for investors. Any adjustments would
be accomplished through stock splits or reverse stock splits, which would have
no effect on the net assets of a Fund.
PORTFOLIO TRANSACTIONS AND BROKERAGE
BROKERAGE TRANSACTIONS. Generally, equity securities are bought and sold through
brokerage transactions for which commissions are payable. Purchases from
underwriters will include the underwriting commission or concession, and
purchases from dealers serving as market makers will include a dealer's mark-up
or reflect a dealer's mark-down. Money market securities and other debt
securities are usually bought and sold directly from the issuer or an
underwriter or market maker for the securities. Generally, a Fund will not pay
brokerage commissions for such purchases. When a debt security is bought from an
underwriter, the purchase price will usually include an underwriting commission
or concession. The purchase price for securities bought from dealers serving as
market makers will similarly include the dealer's mark up or reflect a dealer's
mark down. When a Fund executes transactions in the over-the-counter market, it
will generally deal with primary market makers unless prices that are more
favorable are otherwise obtainable.
In addition, the Advisor may place a combined order, often referred to as
"bunching," for two or more accounts it manages, including any of the Funds,
engaged in the purchase or sale of the same security or other instrument if, in
its judgment, joint execution is in the best interest of each participant and
will result in best price and execution. Transactions involving commingled
orders are allocated in a manner deemed equitable to each account or Fund.
Although it is recognized that, in some cases, the joint execution of orders
could adversely affect the price or volume of the security that a particular
account or a Fund may obtain, it is the opinion of the Advisor and the Trust's
Board that the advantages of combined orders outweigh the possible disadvantages
of separate transactions. In addition, in some instances a Fund effecting the
larger portion of a combined order may not benefit to the same extent as
participants effecting smaller portions of the combined order. Nonetheless, the
Advisor believes that the ability of a Fund to participate in higher volume
transactions will generally be beneficial to the Fund.
Because as of October 31, 2007, none of the Funds had commenced operations, none
of the Funds paid any aggregate brokerage commissions for the most recently
completed Trust fiscal year.
BROKERAGE SELECTION. The Trust does not expect to use one particular broker or
dealer, and when one or more brokers is believed capable of providing the best
combination of price and execution, the Funds' Advisor may select a broker based
upon brokerage or research services provided to the Advisor. The Advisor may pay
a higher commission than otherwise obtainable from other brokers in return for
such services only if a good faith determination is made that the commission is
reasonable in relation to the services provided.
Section 28(e) of the Securities Exchange Act of 1934, as amended, permits the
Advisor, under certain circumstances, to cause each Fund to pay a broker or
dealer a commission for effecting a transaction in excess of the amount of
commission another broker or dealer would have charged for effecting the
transaction in recognition of the value of brokerage and research services
provided by the broker or dealer. In addition to agency transactions, the
Advisor may receive brokerage and research services in connection with certain
riskless principal transactions, in accordance with applicable SEC guidance.
Brokerage and research services include: (1) furnishing advice as to the value
of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities; (2) furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy, and the performance
of accounts; and (3) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement, and
28
custody). In the case of research services, the Advisor believes that access to
independent investment research is beneficial to their investment
decision-making processes and, therefore, to each Fund.
To the extent research services may be a factor in selecting brokers, such
services may be in written form or through direct contact with individuals and
may include information as to particular companies and securities as well as
market, economic, or institutional areas and information which assists in the
valuation and pricing of investments. Examples of research-oriented services for
which the Advisor might utilize Fund commissions include research reports and
other information on the economy, industries, sectors, groups of securities,
individual companies, statistical information, political developments, technical
market action, pricing and appraisal services, credit analysis, risk measurement
analysis, performance and other analysis. The Advisor may use research services
furnished by brokers in servicing all client accounts and not all services may
necessarily be used in connection with the account that paid commissions to the
broker providing such services. Information so received by the Advisor will be
in addition to and not in lieu of the services required to be performed by the
Funds' Advisor under the Advisory Agreement. Any advisory or other fees paid to
the Advisor are not reduced as a result of the receipt of research services.
In some cases the Advisor may receive a service from a broker that has both a
"research" and a "non-research" use. When this occurs, the Advisor makes a good
faith allocation, under all the circumstances, between the research and
non-research uses of the service. The percentage of the service that is used for
research purposes may be paid for with client commissions, while the Advisor
will use its own funds to pay for the percentage of the service that is used for
non-research purposes. In making this good faith allocation, the Advisor faces a
potential conflict of interest, but the Advisor believes that its allocation
procedures are reasonably designed to ensure that it appropriately allocates the
anticipated use of such services to their research and non-research uses.
From time to time, a Fund may purchase new issues of securities for clients in a
fixed price offering. In these situations, the seller may be a member of the
selling group that will, in addition to selling securities, provide the Advisor
with research services. The NASD has adopted rules expressly permitting these
types of arrangements under certain circumstances. Generally, the seller will
provide research "credits" in these situations at a rate that is higher than
that which is available for typical secondary market transactions. These
arrangements may not fall within the safe harbor of Section 28(e).
Because as of October 31, 2007, none of the Funds had commenced operations, none
of the Funds paid any commissions on brokerage transactions directed to brokers
pursuant to an agreement or understanding whereby the broker provides research
or other brokerage services to the Advisor for the most recently completed Trust
fiscal year.
BROKERAGE WITH FUND AFFILIATES. The Funds may execute brokerage or other agency
transactions through registered broker-dealer affiliates of the Funds, the
Advisor or the Distributor for a commission in conformity with the 1940 Act, the
Exchange Act and rules promulgated by the SEC. Under the 1940 Act and the
Exchange Act, affiliated broker-dealers are permitted to receive and retain
compensation for effecting portfolio transactions for the Funds on an exchange
if a written contract is in effect between the affiliate and the Funds expressly
permitting the affiliate to receive and retain such compensation. These rules
further require that commissions paid to the affiliate by the Funds for exchange
transactions not exceed "usual and customary" brokerage commissions. The rules
define "usual and customary" commissions to include amounts which are
"reasonable and fair compared to the commission, fee or other remuneration
received or to be received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time." The Board, including
those who are not "interested persons" of the Funds, has adopted
29
procedures for evaluating the reasonableness of commissions paid to affiliates
and reviews these procedures periodically.
Because, as of October 31, 2007, none of the Funds had commenced operations,
none of the Funds paid any brokerage commissions to the Distributor for the most
recently completed Trust fiscal year.
SECURITIES OF "REGULAR BROKER-DEALERS." Each Fund is required to identify any
securities of its "regular brokers and dealers" (as such term is defined in the
1940 Act) which the Fund may hold at the close of its most recent fiscal year.
"Regular brokers or dealers" of the Trust are the ten brokers or dealers that,
during the most recent fiscal year: (i) received the greatest dollar amounts of
brokerage commissions from the Trust's portfolio transactions; (ii) engaged as
principal in the largest dollar amounts of portfolio transactions of the Trust;
or (iii) sold the largest dollar amounts of the Trust's shares. Because, as of
October 31, 2007, none of the Funds had commenced operations, none of the Funds
held securities of the Trust's "regular brokers or dealers" as of the most
recently completed fiscal year.
PORTFOLIO TURNOVER. Portfolio turnover may vary from year to year, as well as
within a year. High turnover rates are likely to result in comparatively greater
brokerage expenses. Because, as of October 31, 2007, none of the Funds had
commenced operations, the Funds do not have a portfolio turnover rate to report
for the most recently completed Trust fiscal year.
MANAGEMENT OF THE TRUST
BOARD RESPONSIBILITIES. The management and affairs of the Trust are supervised
by the Board under the laws of the State of Delaware and the 1940 Act. The Board
has approved contracts, as described below, under which certain companies
provide essential management services to the Trust.
MEMBERS OF THE BOARD AND OFFICERS OF THE TRUST. Set forth below are the names,
ages, position with the Trust, term of office, and the principal occupations for
a minimum of the last five years of each of the persons currently serving as
members of the Board and as Executive Officers of the Trust. Also included below
is the term of office for each of the Executive Officers of the Trust. The
members of the Board serve as Trustees for the life of the Trust or until
retirement, removal, or their office is terminated pursuant to the Trust's
Declaration of Trust. Unless otherwise noted, the business address of each
Trustee and Officer is 9601 Blackwell Road, Suite 500, Rockville, Maryland
20850.
-----------------------------------------------------------------------------------------------------------------------------
NUMBER OF
POSITION(S) HELD PORTFOLIOS IN
WITH FUND
THE TRUST, COMPLEX
NAME, ADDRESS TERM OF OFFICE OVERSEEN
AND AGE OF AND LENGTH OF PRINCIPAL OCCUPATION(S) BY TRUSTEE/ OTHER DIRECTORSHIPS
TRUSTEE/OFFICER TIME SERVED DURING PAST 5 YEARS OFFICER HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES*
-----------------------------------------------------------------------------------------------------------------------------
Michael P. Trustee from 2005 PADCO ADVISORS, INC.: 138 None
Byrum (37) to present.
Chief Investment Officer from August 2006
to present; Chief Operating Officer of
PADCO Advisors, Inc. from October 2003 to
May 2004; Executive Vice President from
December 2002 to May 2004; President from
May 2004 to present; and Secretary from
December 2002 to present
-----------------------------------------------------------------------------------------------------------------------------
|
30
-----------------------------------------------------------------------------------------------------------------------------
NUMBER OF
POSITION(S) HELD PORTFOLIOS IN
WITH FUND
THE TRUST, COMPLEX
NAME, ADDRESS TERM OF OFFICE OVERSEEN
AND AGE OF AND LENGTH OF PRINCIPAL OCCUPATION(S) BY TRUSTEE/ OTHER DIRECTORSHIPS
TRUSTEE/OFFICER TIME SERVED DURING PAST 5 YEARS OFFICER HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------------
PADCO ADVISORS II, INC.:
Chief Investment Officer from August 2006
to present; Chief Operating Officer of
PADCO Advisors II, Inc. from December 2003
to May 2004; Executive Vice President from
December 2002 to May 2004; President from
May 2004 to present; and Secretary from
December 2002 to present
RYDEX ADVISORY SERVICES:
President from August 2004 to present
RYDEX CAPITAL PARTNERS I, LLC:
President and Secretary from October 2003
to April 2007
RYDEX CAPITAL PARTNERS II, LLC:
President and Secretary from October 2003
to April 2007
RYDEX DISTRIBUTORS, INC.:
Secretary from December 2001 to May 2004;
Executive Vice President from December
2002 to May 2004; and Chief Operating
Officer from December 2003 to May 2004
RYDEX FUND SERVICES, INC.:
Secretary from December 2002 to present;
Executive Vice President from December
2002 to August 2006; and Chief Operating
Officer from December 2003 to May 2004
RYDEX HOLDINGS, INC.:
Secretary from December 2005 to present
and Executive Vice President from December
2005 to August 2006
-----------------------------------------------------------------------------------------------------------------------------
|
31
-----------------------------------------------------------------------------------------------------------------------------
NUMBER OF
POSITION(S) HELD PORTFOLIOS IN
WITH FUND
THE TRUST, COMPLEX
NAME, ADDRESS TERM OF OFFICE OVERSEEN
AND AGE OF AND LENGTH OF PRINCIPAL OCCUPATION(S) BY TRUSTEE/ OTHER DIRECTORSHIPS
TRUSTEE/OFFICER TIME SERVED DURING PAST 5 YEARS OFFICER HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------------
ADVISOR RESEARCH CENTER, INC.:
Secretary from May 2006 to present and
Executive Vice President from May 2006 to
August 2006
RYDEX SPECIALIZED PRODUCTS, LLC:
Director and Secretary from September 2005
to present
-----------------------------------------------------------------------------------------------------------------------------
Carl G. Trustee from 2004 PADCO ADVISORS, INC.: 138 None
Verboncoeur (55) to present;
President from Chief Executive Officer from October 2003
2003 to present; to present; Executive Vice President of
Vice President PADCO Advisors, Inc. from December 2002 to
from 1997 to October 2003; President of PADCO Advisors,
present; and Inc. from October 2003 to May 2004; and
Treasurer from Treasurer from December 2002 to present
1997 to 2003.
PADCO ADVISORS II, INC.:
Chief Executive Officer from December 2003
to present; Executive Vice President of
PADCO Advisors II, Inc. from December 2002
to December 2003; President of PADCO
Advisors II, Inc. from December 2002 to
May 2004 and Treasurer from December 2003
to present
RYDEX CAPITAL PARTNERS I, LLC:
Treasurer from October 2003 to April 2007,
and Executive Vice President from October
2003 to August 2006
RYDEX CAPITAL PARTNERS II, LLC:
Treasurer from October 2003 to April 2007,
and Executive Vice President from October
2003 to August 2006
RYDEX ADVISORY SERVICES:
Chief Executive Officer from August 2004
to present
-----------------------------------------------------------------------------------------------------------------------------
|
32
-----------------------------------------------------------------------------------------------------------------------------
NUMBER OF
POSITION(S) HELD PORTFOLIOS IN
WITH FUND
THE TRUST, COMPLEX
NAME, ADDRESS TERM OF OFFICE OVERSEEN
AND AGE OF AND LENGTH OF PRINCIPAL OCCUPATION(S) BY TRUSTEE/ OTHER DIRECTORSHIPS
TRUSTEE/OFFICER TIME SERVED DURING PAST 5 YEARS OFFICER HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------------
RYDEX DISTRIBUTORS, INC.:
President and Chief Executive Officer from
December 2003 to present; Treasurer from
December 2002 to present; Executive Vice
President from December 2002 to December
2003; and Vice President from December
2001 to December 2002
RYDEX FUND SERVICES, INC.:
Chief Executive Officer from December 2003
to present; President and Treasurer from
December 2002 to present; and Executive
Vice President from December 2001 to
December 2002
RYDEX HOLDINGS, INC.:
Chief Executive Officer, President and
Treasurer from December 2005 to present
ADVISOR RESEARCH CENTER, INC.:
Chief Executive Officer, President and
Treasurer from May 2006 to present
RYDEX SPECIALIZED PRODUCTS, LLC:
Chief Executive Officer, Director and
Treasurer from September 2005 to present
-----------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
-----------------------------------------------------------------------------------------------------------------------------
Corey A. Trustee and Retired from August 2006 to present. 138 None
Colehour (62) Member of the President and Senior Vice President of
Audit and Schield Management Company (registered
Governance and investment adviser) from 2003 to 2006
Nominating
Committees
from 2003 to
present.
-----------------------------------------------------------------------------------------------------------------------------
J. Kenneth Trustee and Retired 138 None
Dalton (67) Member of the
Governance and
Nominating
Committee from
2003 to present;
and Chairman of
the Audit
Committee from
2006 to present.
-----------------------------------------------------------------------------------------------------------------------------
|
33
-----------------------------------------------------------------------------------------------------------------------------
NUMBER OF
POSITION(S) HELD PORTFOLIOS IN
WITH FUND
THE TRUST, COMPLEX
NAME, ADDRESS TERM OF OFFICE OVERSEEN
AND AGE OF AND LENGTH OF PRINCIPAL OCCUPATION(S) BY TRUSTEE/ OTHER DIRECTORSHIPS
TRUSTEE/OFFICER TIME SERVED DURING PAST 5 YEARS OFFICER HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------------
John O. Demaret Chairman of the Retired 138 None
(68) Board from
2006 to present;
and Trustee and
Member of the
Audit and
Governance and
Nominating
Committees
from 2003 to
present.
-----------------------------------------------------------------------------------------------------------------------------
Werner E. Keller Trustee and Founder and President of Keller Partners, 138 None
(67) Member of the LLC (registered investment adviser) from
Audit and 2005 to present; and Retired from 2001 to
Governance and 2005
Nominating
Committees
from 2005 to
present.
-----------------------------------------------------------------------------------------------------------------------------
Thomas F. Lydon Trustee and President of Global Trends Investments 138 None
(48) Member of the (registered investment adviser) from 1996
Audit and to present
Governance and
Nominating
Committees
from 2005 to
present.
-----------------------------------------------------------------------------------------------------------------------------
Patrick T. Trustee, Chief Executive Officer of Par Industries, 138 None
McCarville (64) Chairman of the Inc., d/b/a Par Leasing from 1977 to
Governance and present
Nominating
Committee and
Member of the
Audit
Committee from
2003 to present.
-----------------------------------------------------------------------------------------------------------------------------
Roger Somers Trustee and Founder and Chief Executive Officer of 138 None
(63) Member of the Arrow Limousine from 1965 to present
Audit and
Governance and
Nominating
Committees
from 2003 to
present.
-----------------------------------------------------------------------------------------------------------------------------
|
34
-----------------------------------------------------------------------------------------------------------------------------
NUMBER OF
POSITION(S) HELD PORTFOLIOS IN
WITH FUND
THE TRUST, COMPLEX
NAME, ADDRESS TERM OF OFFICE OVERSEEN
AND AGE OF AND LENGTH OF PRINCIPAL OCCUPATION(S) BY TRUSTEE/ OTHER DIRECTORSHIPS
TRUSTEE/OFFICER TIME SERVED DURING PAST 5 YEARS OFFICER HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------------
OFFICERS
-----------------------------------------------------------------------------------------------------------------------------
Nick Bonos (44) Vice President Senior Vice President of Fund Services of 138 Not Applicable
and Treasurer PADCO Advisors, Inc. from August 2006 to
from 2003 to present; Senior Vice President of Rydex
present. Fund Services, Inc. from December 2003 to
August 2006; Vice President of Accounting,
Rydex Fund Services, Inc. from 2001 to
2003; and Chief Financial Officer and
Manager of Rydex Specialized Products, LLC
from September 2005 to present
-----------------------------------------------------------------------------------------------------------------------------
Joanna M. Chief Chief Compliance Officer of PADCO 138 Not Applicable
Haigney (41) Compliance Advisors, Inc. and PADCO Advisors II, Inc.
Officer from from May 2005 to present and Rydex Capital
2004 to present; Partners I, LLC and Rydex Capital Partners
and Secretary II, LLC from August 2006 to April 2007;
from 2000 to Vice President of Compliance of PADCO
present. Advisors, Inc. from August 2006 to
present; Assistant Secretary of Rydex
Distributors, Inc. from December 2001 to
December 2003; and Vice President of Rydex
Distributors, Inc. from December 2003 to
May 2004 and Rydex Fund Services, Inc.
from December 2001 to August 2006
-----------------------------------------------------------------------------------------------------------------------------
Joseph Arruda Assistant Vice President of PADCO Advisors, Inc. and 138 Not Applicable
(41) Treasurer from PADCO Advisors II, Inc. from 2004 to
2006 to present. present; Director of Accounting of PADCO
Advisors, Inc. and PADCO Advisors II, Inc.
from 2003 to 2004; Vice President of
Mutual Funds, State Street Bank & Trust
from 2000 to 2003
-----------------------------------------------------------------------------------------------------------------------------
|
35
-----------------------------------------------------------------------------------------------------------------------------
NUMBER OF
POSITION(S) HELD PORTFOLIOS IN
WITH FUND
THE TRUST, COMPLEX
NAME, ADDRESS TERM OF OFFICE OVERSEEN
AND AGE OF AND LENGTH OF PRINCIPAL OCCUPATION(S) BY TRUSTEE/ OTHER DIRECTORSHIPS
TRUSTEE/OFFICER TIME SERVED DURING PAST 5 YEARS OFFICER HELD BY TRUSTEE
-----------------------------------------------------------------------------------------------------------------------------
Paula Billos (33) Controller from Director of Fund Administration of PADCO 138 Not Applicable
2006 to present. Advisors, Inc. and PADCO Advisors II, Inc.
from 2001 to present
-----------------------------------------------------------------------------------------------------------------------------
|
* Messrs. Verboncoeur and Byrum are "interested" persons of the Trust, as
that term is defined in the 1940 Act by virtue of their affiliation with
the Funds' Advisor.
BOARD STANDING COMMITTEES. The Board has established the following standing
committees:
AUDIT COMMITTEE. The Board has a standing Audit Committee that is composed of
each of the independent Board members of the Trust. The Audit Committee operates
pursuant to a written charter approved by the Board. The principal
responsibilities of the Audit Committee include: recommending which firm to
engage as the Trust's independent registered public accounting firm and whether
to terminate this relationship; reviewing the independent registered public
accounting firm's compensation, the proposed scope and terms of its engagement,
and the firm's independence; serving as a channel of communication between the
independent registered public accounting firm and the Board; reviewing the
results of each external audit, including any qualifications in the independent
registered public accounting firm's opinion, any related management letter,
management's responses to recommendations made by the independent registered
public accounting firm in connection with the audit, if any, reports submitted
to the Committee by the Trust's service providers that are material to the Trust
as a whole, and management's responses to any such reports; reviewing the
Trust's audited financial statements and considering any significant disputes
between the Trust's management and the independent registered public accounting
firm that arose in connection with the preparation of those financial
statements; considering, in consultation with the independent registered public
accounting firm and the Trust's senior internal accounting executive, the
independent registered public accounting firm's report on the adequacy of the
Trust's internal financial controls; reviewing, in consultation with the Trust's
independent registered public accounting firm, major changes regarding auditing
and accounting principles and practices to be followed when preparing the
Trust's financial statements; and other audit related matters. Messrs. Colehour,
Dalton, Demaret, Keller, Lydon, McCarville and Somers serve as members of the
Audit Committee. The Audit Committee met four (4) times during the most recently
completed fiscal year.
GOVERNANCE AND NOMINATING COMMITTEE. The Board has a standing Governance and
Nominating Committee that is composed of each of the independent trustees of the
Trust. The Governance and Nominating Committee operates under a written charter
approved by the Board. The principal responsibility of the Governance and
Nominating Committee is to identify, recommend and nominate candidates to fill
vacancies, if any, on the Trust's Board. The Governance and Nominating Committee
does not currently have specific procedures in place to consider nominees
recommended by shareholders, but would consider such nominees if submitted in
accordance with Rule 14a-8 of the Exchange Act in conjunction with a shareholder
meeting to consider the election of Board members. The Governance and Nominating
Committee also reviews the compensation for the Board members. Messrs. Colehour,
Dalton, Demaret, Keller, Lydon, McCarville and Somers serve as members of the
Governance and Nominating Committee. The Governance and Nominating Committee met
twice during the most recently completed fiscal year.
36
FUND SHARES OWNED BY BOARD MEMBERS. The following table shows the dollar amount
range of each Trustee's "beneficial ownership" of shares of the Funds and all
Rydex Funds as of the end of the most recently completed calendar year. Because
as of December 31, 2007, none of the Funds had commenced operations, none of the
Trustees beneficially own shares of the Funds as of December 31, 2007. Dollar
amount ranges disclosed are established by the SEC. "Beneficial ownership" is
determined in accordance with Rule 16a-1(a)(2) under the Exchange Act. The
Trustees and officers of the Trust own less than 1% of the outstanding shares of
the Trust.
--------------------------------------------------------------------------------
AGGREGATE DOLLAR RANGE OF
DOLLAR RANGE SHARES IN ALL RYDEX FUNDS
NAME FUND NAME OF FUND SHARES OVERSEEN BY TRUSTEE*
--------------------------------------------------------------------------------
INTERESTED TRUSTEES
--------------------------------------------------------------------------------
Michael P. Byrum None None Over $100,000
--------------------------------------------------------------------------------
Carl G. Verboncoeur None None Over $100,000
--------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
--------------------------------------------------------------------------------
Corey A. Colehour None None $50,001-$100,000
--------------------------------------------------------------------------------
J. Kenneth Dalton None None $10,001-$50,000
--------------------------------------------------------------------------------
John O. Demaret None None Over $100,000
--------------------------------------------------------------------------------
Thomas F. Lydon None None None
--------------------------------------------------------------------------------
Werner E. Keller None None Over $100,000
--------------------------------------------------------------------------------
Patrick T. McCarville None None $50,001-$100,000
--------------------------------------------------------------------------------
Roger J. Somers None None Over $100,000
--------------------------------------------------------------------------------
|
* Includes shares held in series of the Trust, Rydex Series Funds, Rydex
Dynamic Funds and Rydex Variable Trust.
BOARD COMPENSATION. - The following table sets forth compensation paid by the
Trust for the fiscal year ended October 31, 2007:
---------------------------------------------------------------------------------------
PENSION OR
RETIREMENT
BENEFITS ESTIMATED TOTAL
AGGREGATE ACCRUED AS ANNUAL COMPENSATION
COMPENSATION PART OF TRUST'S BENEFITS UPON FROM FUND
NAME OF TRUSTEE FROM TRUST EXPENSES RETIREMENT COMPLEX *
---------------------------------------------------------------------------------------
INTERESTED TRUSTEES**
---------------------------------------------------------------------------------------
Carl Verboncoeur $ 0 $0 $0 $ 0
---------------------------------------------------------------------------------------
Michael P. Byrum $ 0 $0 $0 $ 0
---------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
---------------------------------------------------------------------------------------
Corey A. Colehour $19,200 $0 $0 $100,000
---------------------------------------------------------------------------------------
J. Kenneth Dalton $20,300 $0 $0 $105,000
---------------------------------------------------------------------------------------
|
37
---------------------------------------------------------------------------------------
PENSION OR
RETIREMENT
BENEFITS ESTIMATED TOTAL
AGGREGATE ACCRUED AS ANNUAL COMPENSATION
COMPENSATION PART OF TRUST'S BENEFITS UPON FROM FUND
NAME OF TRUSTEE FROM TRUST EXPENSES RETIREMENT COMPLEX *
---------------------------------------------------------------------------------------
John O. Demaret $23,200 $0 $0 $120,000
---------------------------------------------------------------------------------------
Patrick T. McCarville $19,800 $0 $0 $102,500
---------------------------------------------------------------------------------------
Roger J. Somers $19,200 $0 $0 $100,000
---------------------------------------------------------------------------------------
Werner E. Keller $19,200 $0 $0 $100,000
---------------------------------------------------------------------------------------
Thomas F. Lydon $19,200 $0 $0 $100,000
---------------------------------------------------------------------------------------
|
* Represents total compensation for service as Trustee of the Trust, Rydex
Dynamic Funds, Rydex Variable Trust, and Rydex Series Funds.
** Messrs. Verboncoeur and Byrum are Interested Trustees, as defined above.
As officers of the Advisor, they do not receive compensation from the
Trust.
CODE OF ETHICS
The Board has adopted a Combined Code of Ethics (the "Code of Ethics") pursuant
to Rule 17j-1 under the 1940 Act. The Advisor and Distributor are also covered
by the Code of Ethics. The Code of Ethics applies to the personal investing
activities of trustees, directors, officers and certain employees ("access
persons"). Rule 17j-1 and the Code of Ethics are designed to prevent unlawful
practices in connection with the purchase or sale of securities by access
persons. Under the Code of Ethics, access persons are permitted to engage in
personal securities transactions, but are required to report their personal
securities transactions for monitoring purposes. In addition, certain access
persons are required to obtain approval before investing in private placements
and are prohibited from investing in IPOs. The Code of Ethics is on file with
the SEC, and is available to the public.
PROXY VOTING
The Board has delegated responsibility for decisions regarding proxy voting for
securities held by the Funds to the Advisor. The Advisor will vote such proxies
in accordance with its proxy policies and procedures, which are included in
Appendix A to this SAI. The Board will periodically review each Fund's proxy
voting record.
The Trust annually discloses its complete proxy voting record on Form N-PX. The
Trust's most recent Form N-PX is available without charge, upon request by
calling 800.820.0888 or 301.296.5100 or by writing to the Trust at 9601
Blackwell Road, Suite 500, Rockville, Maryland 20850. The Trust's Form N-PX is
also available on the SEC's web site at WWW.SEC.GOV.
THE ADVISORY AGREEMENT
PADCO Advisors II, Inc., 9601 Blackwell Road, Suite 500, Rockville, Maryland
20850, is a registered investment adviser and provides portfolio management
services to each Fund pursuant to an advisory contract with the Trust. PADCO
Advisors II, Inc. was incorporated in the State of Maryland on July 5, 1994 and,
together with PADCO Advisors, Inc., a registered investment adviser under common
control,
38
does business under the name Rydex Investments.
On January 18, 2008, Security Benefit Corporation and Security Benefit Life
Insurance Company (together, "Security Benefit") acquired Rydex Holdings, Inc.,
the Advisor's parent company, together with several other Rydex entities. As a
result, the Advisor has undergone a change of control and is now a subsidiary of
Security Benefit. Security Benefit is a financial services firm that provides a
broad variety of retirement plan and other financial products to customers in
the advisor, banking, education, government, institutional, and qualified plan
markets.
Under an investment advisory agreement with the Advisor, dated January 18, 2008
(the "Advisory Agreement"), the Advisor serves as the investment adviser for the
Trust and provides investment advice to the Funds, in accordance with the
investment objectives, policies, and limitations of the Funds, and oversees the
day-to-day operations of the Funds, subject to the general supervision and
control of the Board and the officers of the Trust. As of February 1, 2008, net
assets under management of the Advisor and its affiliates were approximately
$15.9 billion. Pursuant to the Advisory Agreement, the Advisor is responsible
for all expenses of the Funds, including the cost of transfer agency, custody,
fund administration, legal, audit and other services, except interest, taxes,
brokerage commissions and other expenses connected with the execution of
portfolio transactions, distribution fees, expenses of the Independent Trustees
(including any Independent Trustees' counsel fees) and extraordinary expenses.
For its investment management services, the Funds pay the Advisor the following
fees at an annual rate based on the average daily net assets for the Funds. The
Advisor, from its own resources, including profits from advisory fees received
from the Funds, provided such fees are legitimate and not excessive, may make
payments to broker-dealers and other financial institutions for their expenses
in connection with the distribution of Fund shares, and otherwise currently pay
all distribution costs for Fund shares.
Because as of October 31, 2007, none of the Funds had commenced operations, the
Advisor did not receive any investment advisory fees from the Funds for the most
recently completed Trust fiscal year.
PORTFOLIO MANAGERS
This section includes information about each Fund's portfolio managers,
including information about other accounts they manage, the dollar range of Fund
shares they own and how they are compensated.
ACCOUNTS MANAGED BY PORTFOLIO MANAGERS. Including the Funds, the portfolio
managers are responsible for the day-to-day management of certain other
accounts, as follows:
---------------------------------------------------------------------------------------------------
REGISTERED INVESTMENT OTHER POOLED INVESTMENT
COMPANIES 1,2 VEHICLES 1 OTHER ACCOUNTS 1
--------------------------------------------------------------------------------
NUMBER OF NUMBER OF NUMBER OF
NAME ACCOUNTS TOTAL ASSETS ACCOUNTS TOTAL ASSETS ACCOUNTS TOTAL ASSETS
---------------------------------------------------------------------------------------------------
Michael P. Byrum 142 $16.9 Billion 0 N/A 1 < $5 Million
---------------------------------------------------------------------------------------------------
Michael Dellapa 142 $16.9 Billion 0 N/A 7 < $5 Million
---------------------------------------------------------------------------------------------------
James R. King 142 $16.9 Billion 0 N/A 3 < $5 Million
---------------------------------------------------------------------------------------------------
|
1 Information provided is as of October 31, 2007.
2 The portfolio managers manage two registered investment companies, the
Rydex Series Funds Multi-Cap Core Equity Fund and Rydex Variable Trust
Multi-Cap Core Equity Fund, that are subject to a performance based
advisory fee. The two Funds had $47.2 million in assets under management
as of December 31, 2007.
39
CONFLICTS OF INTEREST. The portfolio managers' management of "other accounts"
may give rise to potential conflicts of interest in connection with their
management of a Fund's investments, on the one hand, and the investments of the
other accounts, on the other. The other accounts may have the same investment
objective as one of the Funds. Therefore, a potential conflict of interest may
arise as a result of the identical investment objectives, whereby the portfolio
managers could favor one account over another. Another potential conflict could
include the portfolio managers' knowledge about the size, timing and possible
market impact of Fund trades, whereby a portfolio manager could use this
information to the advantage of other accounts and to the disadvantage of a
Fund. However, the Advisor has established policies and procedures to ensure
that the purchase and sale of securities among all accounts it manages are
fairly and equitably allocated.
PORTFOLIO MANAGER COMPENSATION. The Advisor compensates each portfolio manager
for his management of the Funds. The portfolio managers' compensation consists
of a fixed annual salary and a discretionary bonus. The amount of the
discretionary bonus is determined by three components. The first component is a
comparison of the portfolio manager's Fund performance, calculated on a pre-tax
basis, relative to a mutual fund peer's performance and/or to the performance of
applicable internal or external benchmarks as measured over a one-year period.
Mutual fund peers are those funds with similar investment objectives to the Fund
managed by the portfolio managers. Mutual fund peers do not exist for all Rydex
Funds. Rydex Funds that do not have a mutual fund peer available for comparison
purposes will instead be compared to applicable internal or external benchmarks.
An external benchmark, such as the S&P 500 (R) Index, will be used for each
Rydex Fund that seeks to track the performance of a published index. For a
complete list and description of the external benchmarks used by the Funds, see
"More Information About the Funds - Benchmarks and Investment Methodology" in
the Funds' Prospectuses. An internal benchmark, such as the inverse of the S&P
500 (R) Index, will be used when an external benchmark is not available. The
second component used to determine the discretionary bonus is based on the
Advisor's overall profitability as measured by its profit margin and assets
under management. The third component used to determine the discretionary bonus
is based on a number of more subjective, but equally important, factors,
including a portfolio manager's enhancements to existing products, creation of
new products and concepts, support of sales, marketing, and client service, and
contributions to the advancement of the organization as a whole.
FUND SHARES OWNED BY PORTFOLIO MANAGERS. The following table shows the dollar
amount range of each portfolio manager's "beneficial ownership" of shares of
each Fund as of October 31, 2007. Dollar amount ranges disclosed are established
by the SEC. "Beneficial ownership" is determined in accordance with Rule
16a-1(a)(2) under the Exchange Act. Because as of October 31, 2007, none of the
Funds had commenced operations, none of the portfolio managers beneficially
owned shares of the Funds as of the most recently completed Trust fiscal year.
--------------------------------------------------------------------------------
DOLLAR RANGE OF
PORTFOLIO MANAGER FUND NAME FUND SHARES
--------------------------------------------------------------------------------
Michael P. Byrum None None
--------------------------------------------------------------------------------
Michael Dellapa None None
--------------------------------------------------------------------------------
Jim King None None
--------------------------------------------------------------------------------
|
ADMINISTRATION, CUSTODY AND TRANSFER AGENCY AGREEMENTS
State Street Bank and Trust Company (the "Administrator") serves as
Administrator, Custodian and Transfer Agent for the Funds. Its principal address
is P.O. Box 5049, Boston, Massachusetts 02206-5049. Under an Administration
Agreement with the Trust, the Administrator provides necessary administrative
and accounting services for the maintenance and operations of the Trust and the
Funds. In addition, the
40
Administrator makes available the office space, equipment, personnel and
facilities required to provide such services. Under a Custodian Agreement with
the Trust, the Administrator maintains in separate accounts cash, securities and
other assets of the Trust and the Funds, keeps all necessary accounts and
records, and provides other services. The Administrator is required, upon the
order of the Trust, to deliver securities held by the Custodian and to make
payments for securities purchased by the Trust for the Funds. Pursuant to a
Transfer Agency and Service Agreement with the Trust, the Administrator acts as
a transfer agent for the Trust's authorized and issued shares of beneficial
interest, and as dividend disbursing agent of the Trust. The Advisor compensates
the Administrator directly for the foregoing services. Because as of October 31,
2007, none of the Funds had commenced operations, the Funds did not pay any
custody, administration and transfer agency expenses for the most recently
completed Trust fiscal year.
DISTRIBUTION
Pursuant to the Distribution Agreement adopted by the Trust, Rydex Distributors,
Inc. (the "Distributor"), 9601 Blackwell Road, Suite 500, Rockville, Maryland
20850, acts as distributor for the shares of each Fund under the general
supervision and control of the Board and the officers of the Trust. The
Distributor is a subsidiary of Security Benefit and an affiliate of the Advisor.
The Distribution Agreement grants the Distributor the exclusive right to
distribute the shares of each Fund. In addition, the Distribution Agreement
permits the Distributor to receive as compensation any front-end sales load or
other asset-based sales charges collected pursuant to any distribution or
shareholder services plans adopted by a Fund. Each Fund's current distribution
and shareholder services plan, as well as a description of the services
performed under the plan, is described below.
DISTRIBUTION PLAN. Each Fund has adopted a Distribution Plan applicable to the
shares. Under the Distribution Plan, the Distributor, or designated Service
Providers, may receive up to 0.25% of a Fund's assets attributable to shares as
compensation for distribution services pursuant to Rule 12b-1 of the 1940 Act.
Distribution services may include: (i) services in connection with distribution
assistance, or (ii) payments to financial institutions and other financial
intermediaries, such as broker-dealers, mutual fund "supermarkets" and the
Distributor's affiliates and subsidiaries, as compensation for services or
reimbursement of expenses incurred in connection with distribution assistance.
The Distributor may, at its discretion, retain a portion of such payments to
compensate itself for distribution services and distribution related expenses
such as the costs of preparation, printing, mailing or otherwise disseminating
sales literature, advertising, and prospectuses (other than those furnished to
current shareholders of the Funds), promotional and incentive programs, and such
other marketing expenses that the Distributor may incur.
No distribution fees are currently charged to the Funds; there are no plans to
impose these fees, and no such fees will be charged prior to March 1, 2009.
However, in the event that 12b-1 fees are charged in the future, because the
Funds pay these fees out of assets on an ongoing basis, over time these fees may
cost you more than other types of sales charges and will increase the cost of
your investment.
Because as of October 31, 2007, none of the Funds had commenced operations, the
Funds did not pay the Distributor any fees for services provided pursuant to the
terms of the Distribution Plan including: advertising, printing and mailing of
prospectuses to other than current shareholders; compensation to underwriters;
compensation to broker-dealers; compensation to sales personnel; interest,
carrying, or other financing charges, for the most recently completed Trust
fiscal year.
COSTS AND EXPENSES. Each Fund bears all expenses of its operation other than
those assumed by the Advisor. Fund expenses include: interest, taxes, brokerage
commissions and other expenses connected with the execution of portfolio
transactions, distribution fees and extraordinary expenses.
41
BUSINESS CONTINUITY AND DISASTER RECOVERY. The Advisor and the Distributor
(collectively, the "Service Providers") have developed a joint Business
Continuity and Disaster Recovery Program that is designed to minimize the
disruption of normal business operations in the event of a disaster. While the
Service Providers believe that the Program is comprehensive and should enable
them to survive a disaster and reestablish normal business operations in a
timely manner, under certain unusual or unexpected circumstances the Service
Providers could be prevented or hindered from providing services to the Funds
for extended periods of time. These circumstances may include, without
limitation, acts of God, acts of government in its sovereign or contractual
capacity, any act of declared or undeclared war or of a public enemy (including
acts of terrorism), power shortages or failures, utility or communication
failure or delays, labor disputes, strikes, shortages, supply shortages, system
failures or malfunctions. Under each Service Provider's agreement with the
Trust, absent willful misfeasance, bad faith or gross negligence on the part of
the Service Provider, or the reckless disregard of their respective obligations,
the Service Provider generally will not be liable for any related losses to the
Funds or to the Funds' shareholders as a result of such an occurrence.
PRINCIPAL HOLDERS OF SECURITIES
Because the Funds have not yet commenced operations, none of the Funds were
beneficially owned as of January 1, 2008.
BOOK ENTRY ONLY SYSTEM
The following information supplements and should be read in conjunction with the
section in the Prospectus entitled "Shareholder Information."
DTC Acts as securities depository for each Fund's shares. Shares of each Fund
are represented by securities registered in the name of DTC or its nominee, Cede
& Co., and deposited with, or on behalf of, DTC.
DTC, a limited-purpose trust company, was created to hold securities of its
participants (the "DTC Participants") and to facilitate the clearance and
settlement of securities transactions among the DTC Participants in such
securities through electronic book-entry changes in accounts of the DTC
Participants, thereby eliminating the need for physical movement of securities'
certificates. DTC Participants include securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations, some of
whom (and/or their representatives) own DTC. More specifically, DTC is owned by
a number of its DTC Participants and by the NYSE, the AMEX and the NASD. Access
to the DTC system is also available to others such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a DTC Participant, either directly or indirectly (the "Indirect Participants").
Beneficial ownership of shares is limited to DTC Participants, Indirect
Participants and persons holding interests through DTC Participants and Indirect
Participants. Ownership of beneficial interests in shares (owners of such
beneficial interests are referred to herein as "Beneficial Owners") is shown on,
and the transfer of ownership is effected only through, records maintained by
DTC (with respect to DTC Participants) and on the records of DTC Participants
(with respect to Indirect Participants and Beneficial Owners that are not DTC
Participants). Beneficial Owners will receive from or through the DTC
Participant a written confirmation relating to their purchase of shares.
Conveyance of all notices, statements and other communications to Beneficial
Owners is effected as follows. Pursuant to the Depositary Agreement between the
Trust and DTC, DTC is required to make available to the Trust upon request and
for a fee to be charged to the Trust a listing of the shares of any
42
Fund held by each DTC Participant. The Trust shall inquire of each such DTC
Participant as to the number of Beneficial Owners holding shares, directly or
indirectly, through such DTC Participant. The Trust shall provide each such DTC
Participant with copies of such notice, statement or other communication, in
such form, number and at such place as such DTC Participant may reasonably
request, in order that such notice, statement or communication may be
transmitted by such DTC Participant, directly or indirectly, to such Beneficial
Owners. In addition, the Trust shall pay to each such DTC Participant a fair and
reasonable amount as reimbursement for the expenses attendant to such
transmittal, all subject to applicable statutory and regulatory requirements.
Share distributions shall be made to DTC or its nominee, Cede & Co., as the
registered holder of all shares. DTC or its nominee, upon receipt of any such
distributions, shall credit immediately DTC Participants' accounts with payments
in amounts proportionate to their respective beneficial interests in shares of a
Fund as shown on the records of DTC or its nominee. Payments by DTC Participants
to Indirect Participants and Beneficial Owners of shares held through such DTC
Participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers in bearer
form or registered in a "street name," and will be the responsibility of such
DTC Participants.
The Trust has no responsibility or liability for any aspect of the records
relating to or notices to Beneficial Owners, or payments made on account of
beneficial ownership interests in such shares, or for maintaining, supervising
or reviewing any records relating to such beneficial ownership interests, or for
any other aspect of the relationship between DTC and the DTC Participants or the
relationship between such DTC Participants and the Indirect Participants and
Beneficial Owners owning through such DTC Participants.
DTC may decide to discontinue providing its service with respect to shares at
any time by giving reasonable notice to the Trust and discharging its
responsibilities with respect thereto under applicable law. Under such
circumstances, the Trust shall take action to find a replacement for DTC to
perform its functions at a comparable cost.
CREATION AND REDEMPTION OF CREATION UNITS
CREATION
The Trust issues and sells shares of a Fund only in Creation Units on a
continuous basis through the Distributor, without a sales load, at their NAV
next determined after receipt, on any Business Day (as defined below), for an
order received in proper form.
A "Business Day" with respect to the Funds is any day on which the NYSE is open
for business. As of the date of the Prospectus, the NYSE observes the following
holidays: New Year's Day, Martin Luther King, Jr. Day, President's Day
(Washington's Birthday), Good Friday, Memorial Day (observed), Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.
FUND DEPOSIT (Leveraged Funds Only). The consideration for purchase of a
Creation Unit of a Fund generally consists of an in-kind deposit of a designated
portfolio of equity securities - the "Deposit Securities" -- per each Creation
Unit constituting a substantial replication, or a representation, of the stocks
included in the Fund's Underlying Index and an amount of cash -- the "Cash
Component" -- computed as described below. Together, the Deposit Securities and
the Cash Component constitute the "Fund Deposit," which represents the minimum
initial and subsequent investment amount for a Creation Unit of a Fund. The Cash
Component is an amount equal to the difference between the NAV of the shares
(per Creation Unit) and the market value of the Deposit Securities. If the Cash
Component is a positive number (I.E., the NAV per Creation Unit exceeds the
market value of the Deposit Securities), the Cash
43
Component shall be such positive amount. If the Cash Component is a negative
number (I.E., the NAV per Creation Unit is less than the market value of the
Deposit Securities), the Cash Component shall be such negative amount and the
creator will be entitled to receive cash from a Fund in an amount equal to the
Cash Component. The Cash Component serves the function of compensating for any
differences between the NAV per Creation Unit and the market value of the
Deposit Securities.
The Custodian, through the National Securities Clearing Corporation ("NSCC")
(discussed below), makes available on each Business Day, immediately prior to
the opening of business on the New York Stock Exchange (currently, 9:30 a.m.,
Eastern Time), the list of the names and the required number of shares of each
Deposit Security to be included in the current Fund Deposit (based on
information at the end of the previous Business Day) for a Fund. Such Fund
Deposit is applicable, subject to any adjustments as described below, in order
to effect creations of Creation Units of a Fund until such time as the
next-announced composition of the Deposit Securities is made available.
The identity and number of shares of the Deposit Securities required for a Fund
Deposit for a Fund changes as rebalancing adjustments and corporate action
events are reflected from time to time by the Advisor with a view to the
investment objective of a Fund. The composition of the Deposit Securities may
also change in response to adjustments to the weighting or composition of the
Component Stocks of the Index. In addition, the Trust reserves the right to
permit or require the substitution of an amount of cash, I.E., a "cash in lieu"
amount, to be added to the Cash Component to replace any Deposit Security which
may not be available in sufficient quantity for delivery or which may not be
eligible for transfer through the Clearing Process (discussed below), or which
may not be eligible for trading by an authorized Participant (as defined below)
or the investor for which it is acting. Brokerage commissions incurred in
connection with acquisition of Deposit Securities not eligible for transfer
through the systems of DTC and hence not eligible for transfer through the
Clearing Process (discussed below) will be at the expense of a Fund and will
affect the value of the shares; but the Advisor, subject to the approval of the
Board, may adjust the transaction fee within the parameters described above to
protect ongoing shareholders. The adjustments described above will reflect
changes, known to the Advisor on the date of announcement to be in effect by the
time of delivery of the Fund Deposit, in the composition of the Index being
tracked by a Fund or resulting from certain corporate actions.
In addition to the list of names and numbers of securities constituting the
current Deposit Securities of a Fund Deposit, the Custodian, through the NSCC,
also makes available on each Business Day, the estimated Cash Component,
effective through and including the previous Business Day, per outstanding share
of a Fund.
CASH PURCHASE (INVERSE FUNDS AND LEVERAGED INVERSE FUNDS ONLY). Creation Units
of the Inverse Funds and Leveraged Inverse Funds are sold only for cash ("Cash
Purchase Amount"). Creation Units are sold at the net asset value next computed,
plus a transaction fee, as described below.
PROCEDURES FOR CREATION OF CREATION UNITS. To be eligible to place orders with
the Distributor to create a Creation Unit of a Fund, an entity must be (i) a
"Participating Party", I.E., a broker-dealer or other participant in the
clearing process through the Continuous Net Settlement System of the NSCC (the
"Clearing Process"), a clearing agency that is registered with the SEC; or (ii)
a DTC Participant (see "Book Entry Only System"), and, in each case, must have
executed an agreement with the Trust, the Distributor and the Transfer Agent
with respect to creations and redemptions of Creation Units ("Participant
Agreement") (discussed below). A Participating Party and DTC Participant are
collectively referred to as an "Authorized Participant." Investors should
contact the Distributor for the names of Authorized Participants that have
signed a Participant Agreement with the Funds. All shares of a Fund, however
created, will be entered on the records of DTC in the name of Cede & Co. for the
account of a DTC Participant.
44
All orders to create Creation Units must be placed for one or more Creation Unit
size aggregations of shares (50,000 in the case of the Funds). All orders to
create Creation Units, whether through the Clearing Process (through a
Participating Party) or outside the Clearing Process (through a DTC
Participant), must be received by the Distributor no later than the close of the
regular trading session on the NYSE (ordinarily 4:00 p.m. Eastern Time)
("Closing Time"), if transmitted by mail, or 3:00 p.m. Eastern Time, if
transmitted by telephone, facsimile or other transmission method permitted under
the Participant Agreement, on the date such order is placed in order for the
creation of Creation Units to be effected based on the NAV of shares of a Fund
as next determined on such date after receipt of the order in proper form. The
date on which an order to create Creation Units (or an order to redeem Creation
Units as discussed below) is placed is referred to as the "Transmittal Date".
Orders must be transmitted by an Authorized Participant by telephone or other
transmission method acceptable to the Distributor pursuant to procedures set
forth in the Participant Agreement, as described below (see "Placement of
Creation Orders Using Clearing Process" and "Placement of Creation Orders
Outside Clearing Process"). Severe economic or market disruptions or changes, or
telephone or other communication failure, may impede the ability to reach the
Distributor or an Authorized Participant.
Orders to create Creation Units of a Fund shall be placed with an Authorized
Participant, as applicable, in the form required by such Authorized Participant.
In addition, the Authorized Participant may request the investor to make certain
representations or enter into agreements with respect to the order, I.E., to
provide for payments of cash, when required. Investors should be aware that
their particular broker may not have executed a Participant Agreement, and that,
therefore, orders to create Creation Units of a Fund have to be placed by the
investor's broker through an Authorized Participant that has executed a
Participant Agreement. At any given time there may be only a limited number of
broker-dealers that have executed a Participant Agreement. Those placing orders
for Creation Units through the Clearing Process should afford sufficient time to
permit proper submission of the order to the Distributor prior to the Closing
Time on the Transmittal Date.
Orders for creation that are effected outside the Clearing Process are likely to
require transmittal by the DTC Participant earlier on the Transmittal Date than
orders effected using the Clearing Process. Those persons placing orders outside
the Clearing Process should ascertain the deadlines applicable to DTC and the
Federal Reserve Bank wire system by contacting the operations department of the
broker or depository institution effectuating such transfer of Deposit
Securities and Cash Component.
PLACEMENT OF CREATION ORDERS USING THE CLEARING PROCESS (LEVERAGED FUNDS ONLY).
The Clearing Process is the process of creating or redeeming Creation Units
through the Continuous Net Settlement System of the NSCC. Fund Deposits made
through the Clearing Process must be delivered through a Participating Party
that has executed a Participant Agreement. The Participant Agreement authorizes
the Distributor to transmit through the Transfer Agent to NSCC, on behalf of the
Participating Party, such trade instructions as are necessary to effect the
Participating Party's creation order. Pursuant to such trade instructions to
NSCC, the Participating Party agrees to deliver the requisite Deposit Securities
and the Cash Component to the Trust, together with such additional information
as may be required by the Distributor. An order to create Creation Units through
the Clearing Process is deemed received by the Distributor on the Transmittal
Date if (i) such order is received by the Distributor not later than the Closing
Time, if transmitted by mail, or 3:00 p.m. Eastern Time, if transmitted by other
means, on such Transmittal Date and (ii) all other procedures set forth in the
Participant Agreement are properly followed.
PLACEMENT OF CREATION ORDERS OUTSIDE OF THE CLEARING PROCESS. Fund Deposits made
outside the Clearing Process must be delivered through a DTC Participant that
has executed a Participant Agreement with the Trust, the Distributor and the
Transfer Agent. A DTC Participant who wishes to place an order
45
creating Creation Units to be effected outside the Clearing Process need not be
a Participating Party, but such orders must state that the DTC Participant is
not using the Clearing Process and that the creation of Creation Units will
instead be effected through a transfer of securities and cash directly through
DTC. All purchases of the Inverse Funds and Leveraged Inverse Funds will be
settled outside the Clearing Process. A Fund Deposit transfer must be ordered by
the DTC Participant on the Transmittal Date in a timely fashion so as to ensure
the delivery of the requisite number of Deposit Securities through DTC to the
account of the Trust by no later than 11:00 a.m., Eastern Time, of the next
Business Day immediately following the Transmittal Date (for the Leveraged
Funds). All questions as to the number of Deposit Securities to be delivered,
and the validity, form and eligibility (including time of receipt) for the
deposit of any tendered securities, will be determined by the Trust, whose
determination shall be final and binding. The cash equal to the Cash Component
or the Cash Purchase Amount (for the Inverse Funds and Leveraged Inverse Funds)
must be transferred directly to the Custodian through the Federal Reserve wire
system in a timely manner so as to be received by the Custodian no later than
2:00 p.m., Eastern Time, on the next Business Day immediately following such
Transmittal Date. An order to create Creation Units outside the Clearing Process
is deemed received by the Distributor on the Transmittal Date if (i) such order
is received by the Distributor not later than the Closing Time if transmitted by
mail, or by 3:00 p.m., Eastern Time, if transmitted by other means on such
Transmittal Date; and (ii) all other procedures set forth in the Participant
Agreement are properly followed. However, if the Custodian does not receive both
the requisite Deposit Securities by 11:00 a.m. and the Cash Component or Cash
Purchase Amount by 2:00 p.m., on the next Business Day immediately following the
Transmittal Date, such order will be cancelled. Upon written notice to the
Distributor, such cancelled order may be resubmitted the following Business Day
based on the then current NAV of a Fund. The delivery of Creation Units of Funds
so created will occur no later than the third (3rd) Business Day following the
day on which the purchase order is deemed received by the Distributor.
For the Leveraged Funds, Creation Units may be created in advance of receipt by
the Trust of all or a portion of the applicable Deposit Securities as described
below. In these circumstances, the initial deposit will have a value greater
than the NAV of the Shares on the date the order is placed in proper form since
in addition to available Deposit Securities, cash must be deposited in an amount
equal to the sum of (i) the Cash Component, plus (ii) 115% of the market value
of the undelivered Deposit Securities (the "Additional Cash Deposit"). The order
shall be deemed to be received on the Business Day on which the order is placed
provided that the order is placed in proper form prior to 3:00 p.m. or 4:00
p.m., Eastern Time, as applicable, on such date and federal funds in the
appropriate amount are deposited with the Trust's Custodian by 11:00 a.m.,
Eastern Time, the following Business Day. If the order is not placed in proper
form by 3:00 p.m. or 4:00 p.m., Eastern Time, or federal funds in the
appropriate amount are not received by 11:00 a.m., Eastern Time, the next
Business Day, then the order may be deemed to be rejected and the investor shall
be liable to the Trust for losses, if any, resulting therefrom. An additional
amount of cash shall be required to be deposited with the Trust, pending
delivery of the missing Deposit Securities to the extent necessary to maintain
the Additional Cash Deposit with the Trust in an amount at least equal to 115%
of the daily marked to market value of the missing Deposit Securities. To the
extent that missing Deposit Securities are not received by 1:00 p.m., Eastern
Time, on the third Business Day following the day on which the purchase order is
deemed received by the Distributor or in the event a mark to market payment is
not made within one Business Day following notification by the Distributor that
such a payment is required, the Trust may use the cash on deposit to purchase
the missing Deposit Securities. Authorized Participants will be liable to the
Trust for the costs incurred by the Trust in connection with any such purchases.
These costs will be deemed to include the amount by which the actual purchase
price of the Deposit Securities exceeds the market value of such Deposit
Securities on the day the purchase order was deemed received by the Distributor
plus the brokerage and related transaction costs associated with such purchases.
The Trust will return any unused portion of the Additional Cash Deposit once all
of the missing Deposit Securities have been properly received by the Custodian
or purchased by the Trust and deposited into the Trust. In addition, a
transaction fee will be charged in all
46
cases. The delivery of Creation Units of Funds so created will occur no later
than the third Business Day following the day on which the purchase order is
deemed received by the Distributor.
ACCEPTANCE OF ORDERS FOR CREATION UNITS. The Trust reserves the absolute right
to reject a creation order transmitted to it by the Distributor in respect of
the Funds if (a) the order is not in proper form; (b) the investor(s), upon
obtaining the shares ordered, would own 80% or more of the currently outstanding
shares of any Fund; (c) the Deposit Securities delivered are not as disseminated
through the facilities of the Exchange for that date by the Custodian, as
described above; (d) acceptance of the Deposit Securities would have certain
adverse tax consequences to a Fund; (e) the acceptance of the Fund Deposit
would, in the opinion of counsel, be unlawful; (f) the acceptance of the Fund
Deposit would otherwise, in the discretion of the Trust or the Advisor, have an
adverse effect on the Trust or the rights of beneficial owners; or (g) in the
event that circumstances outside the control of the Trust, the Distributor and
the Advisor make it for all practical purposes impossible to process creation
orders. Examples of such circumstances include acts of God or public service or
utility problems such as fires, floods, extreme weather conditions and power
outages resulting in telephone, telecopy and computer failures; market
conditions or activities causing trading halts; systems failures involving
computer or other information systems affecting the Trust, the Advisor, the
Distributor, DTC, NSCC or any other participant in the creation process, and
similar extraordinary events. The Distributor shall notify a prospective creator
of a Creation Unit and/or the Authorized Participant acting on behalf of the
creator of a Creation Unit of its rejection of the order of such person. The
Trust, the Transfer Agent, the Custodian and the Distributor are under no duty,
however, to give notification of any defects or irregularities in the delivery
of Fund Deposits nor shall either of them incur any liability for the failure to
give any such notification.
All questions as to the number of shares of each security in the Deposit
Securities and the validity, form, eligibility and acceptance for deposit of any
securities to be delivered shall be determined by the Trust, and the Trust's
determination shall be final and binding.
CREATION TRANSACTION FEE. To compensate the Trust for transfer and other
transaction costs involved in creation transactions through the Clearing
Process, investors will be required to pay a fixed creation transaction fee of
$XXX, assessed per transaction.
For the Leveraged Funds, an additional charge of up to four (4) times the fixed
transaction fee (expressed as a percentage of the value of the Deposit
Securities) may be imposed for (i) creations effected outside the Clearing
Process; and (ii) cash creations or partial cash creations (when cash creations
are available) to offset the Trust's brokerage and other transaction costs
associated with using cash to purchase the requisite Deposit Securities.
Investors are responsible for the costs of transferring the securities
constituting the Deposit Securities to the account of the Trust.
The Funds, subject to approval by the Board, may adjust the fee from time to
time based upon actual experience. Investors who use the services of a broker or
other such intermediary in addition to an Authorized Participant to effect a
creation of a Creation Unit may be charged a fee for such services.
REDEMPTION
Shares may be redeemed only in Creation Units at their NAV next determined after
receipt of a redemption request in proper form by a Fund through the Transfer
Agent and only on a Business Day. The Trust will not redeem shares in amounts
less than Creation Units. Beneficial Owners must accumulate enough shares in the
secondary market to constitute a Creation Unit in order to have such shares
redeemed by the Trust. There can be no assurance, however, that there will be
sufficient liquidity in the public trading market at any time to permit assembly
of a Creation Unit. Investors should expect to incur brokerage and other costs
in connection with assembling a sufficient number of shares to constitute a
redeemable Creation Unit.
47
With respect to the Leveraged Funds, the Custodian, through the NSCC, makes
available immediately prior to the opening of business on the New York Stock
Exchange (currently 9:30 am, Eastern Time) on each Business Day, the Fund
Securities that will be applicable (subject to possible amendment or correction)
to redemption requests received in proper form (as defined below) on that day.
Fund Securities received on redemption may not be identical to Deposit
Securities which are applicable to creations of Creation Units.
Unless cash redemptions are available or specified for a Fund, the redemption
proceeds for a Creation Unit generally consist of Fund Securities - as announced
by the Custodian on the Business Day of the request for redemption received in
proper form -- plus cash in an amount equal to the difference between the NAV of
the shares being redeemed, as next determined after a receipt of a request in
proper form, and the value of the Fund Securities (the "Cash Redemption
Amount"), less a redemption transaction fee described below in the section
entitled "Redemption Transaction Fee." In the event that the Fund Securities
have a value greater than the NAV of the shares, a compensating cash payment
equal to the differential is required to be made by or through an Authorized
Participant by the redeeming shareholder.
The redemption proceeds for a Creation Unit of an Inverse Fund or a Leveraged
Inverse Fund will consist solely of cash in an amount equal to the NAV of the
shares being redeemed, as next determined after receipt of a request in proper
form, less a redemption transaction fee described below in the section entitled
"Redemption Transaction Fee."
PLACEMENT OF REDEMPTION ORDERS USING THE CLEARING PROCESS (LEVERAGED FUNDS
ONLY). Orders to redeem Creation Units through the Clearing Process must be
delivered through a Participating Party that has executed the Participant
Agreement. An order to redeem Creation Units using the Clearing Process is
deemed received on the Transmittal Date if (i) such order is received by the
Transfer Agent not later than 4:00 p.m., Eastern Time, on such Transmittal Date;
and (ii) all other procedures set forth in the Participant Agreement are
properly followed; such order will be effected based on the NAV of a Fund as
next determined. An order to redeem Creation Units using the Clearing Process
made in proper form but received by a Fund after 4:00 p.m., Eastern Time, will
be deemed received on the next Business Day immediately following the
Transmittal Date and will be effected at the NAV next determined on such
Business Day. The requisite Fund Securities and the Cash Redemption Amount will
be transferred by the third (3rd) NSCC Business Day following the date on which
such request for redemption is deemed received.
PLACEMENT OF REDEMPTION ORDERS OUTSIDE THE CLEARING PROCESS. Orders to redeem
Creation Units outside the Clearing Process must be delivered through a DTC
Participant that has executed the Participant Agreement. A DTC Participant who
wishes to place an order for redemption of Creation Units to be effected outside
the Clearing Process need not be a Participating Party, but such orders must
state that the DTC Participant is not using the Clearing Process and that
redemption of Creation Units will instead be effected through transfer of shares
directly through DTC. An order to redeem Creation Units outside the Clearing
Process is deemed received by the Transfer Agent on the Transmittal Date if (i)
such order is received by the Transfer Agent not later than 4:00 p.m., Eastern
Time, if transmitted by mail, or by 3:00 p.m. Eastern Time, if transmitted by
other means, on such Transmittal Date; (ii) such order is accompanied or
proceeded by the requisite number of shares of a Fund and the cash redemption
amount specified in such order, which delivery must be made through DTC to the
Custodian no later than 11:00 a.m. and 2:00 p.m., respectively, Eastern Time, on
the next Business Day following such Transmittal Date (the "DTC Cut-Off-Time");
and (iii) all other procedures set forth in the Participant Agreement are
properly followed.
48
After the Transfer Agent has deemed an order for redemption outside the Clearing
Process received, the Transfer Agent will initiate procedures to transfer the
requisite Fund Securities which are expected to be delivered within three
Business Days and the Cash Redemption Amount to the Authorized Participant on
behalf of the redeeming Beneficial Owner by the third Business Day following the
Transmittal Date on which such redemption order is deemed received by the
Transfer Agent.
The calculation of the value of the Fund Securities and the Cash Redemption
Amount to be delivered upon redemption will be made by the Custodian according
to the procedures set forth under "Determination of Net Asset Value" computed on
the Business Day on which a redemption order is deemed received by the Transfer
Agent. Therefore, if a redemption order in proper form is submitted to the
Transfer Agent by a DTC Participant not later than the Closing Time if
transmitted by mail, or by 3:00 p.m. if transmitted by other means on the
Transmittal Date, and the requisite number of shares of the relevant Fund are
delivered to the Custodian prior to the DTC Cut-Off-Time, then the value of the
Fund Securities and the Cash Redemption Amount to be delivered will be
determined by the Custodian on such Transmittal Date. If, however, a redemption
order is submitted to the Transfer Agent by a DTC Participant not later than the
Closing Time on the Transmittal Date but either (1) the requisite number of
shares of the relevant Fund are not delivered by the DTC Cut-Off-Time as
described above on the next Business Day following the Transmittal Date or (2)
the redemption order is not submitted in proper form, then the redemption order
will not be deemed received as of the Transmittal Date. In such case, the value
of the Fund Securities and the Cash Redemption Amount to be delivered will be
computed on the Business Day that such order is deemed received by the Transfer
Agent, I.E., the Business Day on which the shares of a Fund are delivered
through DTC to the Custodian by the DTC Cut-Off-Time on such Business Day
pursuant to a properly submitted redemption order.
For the Leveraged Funds, if it is not possible to effect deliveries of the Fund
Securities, the Trust may in its discretion exercise its option to redeem such
shares in cash, and the redeeming Beneficial Owner will be required to receive
its redemption proceeds in cash. In addition, an investor may request a
redemption in cash which the Funds may, in their sole discretion, permit. In
either case, the investor will receive a cash payment equal to the NAV of its
shares based on the NAV of shares of a Fund next determined after the redemption
request is received in proper form (minus a redemption transaction fee and
additional charge for requested cash redemptions specified above, to offset the
Trust's brokerage and other transaction costs associated with the disposition of
Fund Securities). Each Fund may also, in its sole discretion, upon request of a
shareholder, provide such redeemer a portfolio of securities which differs from
the exact composition of the Fund Securities but does not differ in NAV.
Redemptions of shares for Fund Securities will be subject to compliance with
applicable federal and state securities laws and the Funds (whether or not it
otherwise permits cash redemptions) reserves the right to redeem Creation Units
for cash to the extent that the Funds could not lawfully deliver specific Fund
Securities upon redemptions or could not do so without first registering the
Fund Securities under such laws. An Authorized Participant or an investor for
which it is acting subject to a legal restriction with respect to a particular
stock included in the Fund Securities applicable to the redemption of a Creation
Unit may be paid an equivalent amount of cash. The Authorized Participant may
request the redeeming Beneficial Owner of the shares to complete an order form
or to enter into agreements with respect to such matters as compensating cash
payment, beneficial ownership of shares or delivery instructions.
For the Inverse Funds and the Leveraged Inverse Funds, all redemptions will be
in cash.
The right of redemption may be suspended or the date of payment postponed with
respect to any Fund (1) for any period during which the NYSE is closed (other
than customary weekend and holiday closings); (2) for any period during which
trading on the NYSE is suspended or restricted; (3) for any period during
49
which an emergency exists as a result of which disposal of the shares of a Fund
or determination of the shares' NAV is not reasonably practicable; or (4) in
such other circumstance as is permitted by the SEC.
REDEMPTION TRANSACTION FEE. To compensate the Trust for transfer and other
transaction costs involved in redemption transactions through the Clearing
Process, investors will be required to pay a fixed redemption transaction fee of
$XXX, assessed per transaction. For the Leveraged Funds, an additional charge of
up to four (4) times the fixed transaction fee may be imposed for (i)
redemptions effected outside the Clearing Process; and (ii) cash redemptions or
partial cash redemptions (when cash redemptions are available).
The Funds, subject to approval by the Board, may adjust the fee from time to
time based upon actual experience. Investors who use the services of a broker or
other such intermediary in addition to an Authorized Participant to effect a
redemption of a Creation Unit may be charged a fee for such services.
DETERMINATION OF NET ASSET VALUE
The following information supplements and should be read in conjunction with the
section in the Prospectus entitled "Calculating NAV."
The NAV per share of a Fund is computed by dividing the value of the net assets
of the Fund (I.E., the value of its total assets less total liabilities) by the
total number of shares of the Fund outstanding, rounded to the nearest cent.
Expenses and fees, including without limitation, the management, administration
and distribution fees, are accrued daily and taken into account for purposes of
determining NAV. The NAV of per share for a Fund is calculated by the Custodian
and determined as of the close of the regular trading session on the NYSE
(ordinarily 4:00 p.m., Eastern Time) on each day that such exchange is open.
In computing a Fund's NAV, the Fund's securities holdings are valued based on
their last quoted current price. Price information on listed securities is taken
from the exchange where the security is primarily traded. Securities regularly
traded in an OTC market are valued at the latest quoted sales price on the
primary exchange or national securities market on which such securities are
traded. Securities not listed on an exchange or national securities market, or
securities in which there was no last reported sales price, are valued at the
most recent bid price. Other portfolio securities and assets for which market
quotations are not readily available are valued based on fair value as
determined in good faith by the Advisor in accordance with procedures adopted by
the Board.
DIVIDENDS, DISTRIBUTIONS, AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The following information supplements and should be read in conjunction with the
section in the Prospectus entitled "Shareholder Information."
GENERAL POLICIES. Dividends from net investment income, if any, are declared and
paid at least annually by the Funds. Distributions of net realized securities
gains, if any, generally are declared and paid once a year, but the Trust may
make distributions on a more frequent basis for the Funds. The Trust reserves
the right to declare special distributions if, in its reasonable discretion,
such action is necessary or advisable to preserve the status of a Fund as a
Regulated Investment Company (a "RIC") under the Internal Revenue Code of 1986,
as amended (the "Code"), or to avoid imposition of income or excise taxes on
undistributed income.
50
Dividends and other distributions on shares are distributed, as described below,
on a pro rata basis to Beneficial Owners of such shares. Dividend payments are
made through DTC Participants and Indirect Participants to Beneficial Owners
then of record with proceeds received from the Funds.
DIVIDEND REINVESTMENT SERVICE. No reinvestment service is provided by the Trust.
Broker-dealers may make available the DTC book-entry Dividend Reinvestment
Service for use by Beneficial Owners of the Funds for reinvestment of their
dividend distributions. Beneficial Owners should contact their broker to
determine the availability and costs of the service and the details of
participation therein. Brokers may require Beneficial Owners to adhere to
specific procedures and timetables. If this service is available and used,
dividend distributions of both income and realized gains will be automatically
reinvested in additional whole shares of a Fund purchased in the secondary
market.
FEDERAL INCOME TAXES
The following is only a summary of certain additional federal income tax
considerations generally affecting the Funds and their shareholders that are not
described in the Prospectus. No attempt is made to present a detailed
explanation of the federal, state, local or foreign tax treatment of the Funds
or their shareholders, and the discussion here and in the Prospectus is not
intended to be a substitute for careful tax planning.
The following general discussion of certain federal income tax consequences is
based on provisions of the Code and the regulations issued thereunder as in
effect on the date of this SAI. New legislation, as well as administrative
changes or court decisions, may significantly change the conclusions expressed
herein, and may have a retroactive effect with respect to the transactions
contemplated herein.
Shareholders are urged to consult their own tax advisers regarding the
application of the provisions of tax law described in this SAI in light of the
particular tax situations of the shareholders and regarding specific questions
as to federal, state, or local taxes.
REGULATED INVESTMENT COMPANY (RIC) STATUS
The Funds will seek to qualify for treatment as a RIC under the Code. Provided
that for each tax year each Fund: (i) meets the requirements to be treated as a
RIC (as discussed below); and (ii) distributes at least 90% of the Fund's net
investment income for such year (including, for this purpose, the excess of net
realized short-term capital gains over net long-term capital losses), the Fund
itself will not be subject to federal income taxes to the extent the Fund's net
investment income and the Fund's net realized capital gains, if any, are
distributed to the Fund's shareholders. One of several requirements for RIC
qualification is that a Fund must receive at least 90% of the Fund's gross
income each year from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of stock, securities or foreign
currencies, or other income derived with respect to the Fund's investments in
stock, securities, foreign currencies and net income from an interest in a
qualified publicly traded partnership (the "90% Test"). A second requirement for
qualification as a RIC is that a Fund must diversify its holdings so that, at
the end of each fiscal quarter of the Fund's taxable year: (a) at least 50% of
the market value of the Fund's total assets is represented by cash and cash
items, U.S. Government securities, securities of other RICs, and other
securities, with these other securities limited, in respect to any one issuer,
to an amount not greater than 5% of the value of the Fund's total assets or 10%
of the outstanding voting securities of such issuer; and (b) not more than 25%
of the value of its total assets are invested in the securities (other than U.S.
Government securities or securities of other RICs) of any one issuer or two or
more issuers which the Fund controls and which are engaged in the same, similar,
or related trades or businesses, or the securities of one or more qualified
publicly traded partnership (the "Asset Test").
In the event of a failure by a Fund to qualify as a RIC, the Fund's
distributions, to the extent such distributions are derived from the Fund's
current or accumulated earnings and profits, would constitute
51
dividends that would be taxable to the shareholders of the Fund as ordinary
income and would be eligible for the dividends received deduction for corporate
shareholders and as qualified dividend income for individual shareholders,
subject to certain limitations. This treatment would also apply to any portion
of the distributions that might have been treated in the shareholder's hands as
long-term capital gains, as discussed below, had a Fund qualified as a RIC. The
Board reserves the right not to maintain the qualification of a Fund as a RIC if
it determines such course of action to be beneficial to shareholders. If a Fund
determines that it will not qualify as a RIC under Subchapter M of the Code, the
Fund will establish procedures to reflect the anticipated tax liability in the
Fund's NAV.
Each Fund will generally be subject to a nondeductible 4% federal excise tax to
the extent it fails to distribute by the end of any calendar year 98% of its
ordinary income for the year and 98% of its capital gain net income for the
one-year period ending on October 31 of that year, plus certain other amounts.
The Funds intend to make sufficient distributions, or deemed distributions, to
avoid imposition of the excise tax, but can make no assurances that all such tax
liability will be eliminated.
Each Fund intends to distribute substantially all its net investment income and
net realized capital gains to shareholders, at least annually. The distribution
of net investment income and net realized capital gains will be taxable to Fund
shareholders regardless of whether the shareholder elects to receive these
distributions in cash or in additional shares. All or a portion of the net
investment income distributions may be treated as qualified dividend income
(eligible for the reduced maximum rate to individuals of 15% (5% for individuals
in lower tax brackets)) to the extent that a Fund receives qualified dividend
income. Qualified dividend income is, in general, dividend income from taxable
domestic corporations and certain foreign corporations (i.e., foreign
corporations incorporated in a possession of the United States or in certain
countries with a comprehensive tax treaty with the United States, or the stock
of which is readily tradable on an established securities market in the United
States).
In order for some portion of the dividends received by a Fund shareholder to be
qualified dividend income, the Fund must meet holding period and other
requirements with respect to the dividend paying stocks in its portfolio, and
the shareholder must meet holding period and other requirements with respect to
the Fund's shares. Distributions reported to Fund shareholders as long-term
capital gains shall be taxable as such (currently at a maximum rate of 15%),
regardless of how long the shareholder has owned the shares. A Fund's
shareholders will be notified annually by the Fund as to the federal tax status
of all distributions made by the Fund. Distributions may be subject to state and
local taxes.
Absent further legislation, the maximum 15% tax rate on qualified dividend
income and long-term capital gains will cease to apply to taxable years
beginning after December 31, 2010.
Shareholders who have not held Fund shares for a full year should be aware that
the Funds may designate and distribute, as ordinary income or capital gain, a
percentage of income that is not equal to the actual amount of such income
earned during the period of investment in the Funds.
If a Fund's distributions exceed its taxable income and capital gains realized
during a taxable year, all or a portion of the distributions made in the same
taxable year may be recharacterized as a return of capital to shareholders. A
return of capital distribution will generally not be taxable, but will reduce
each shareholder's cost basis in a Fund and result in a higher reported capital
gain or lower reported capital loss when those shares on which the distribution
was received are sold.
Sales and redemptions of Fund shares are generally taxable transactions for
federal and state income tax purposes. In general, if you hold your shares as a
capital asset, gain or loss realized will be capital in nature and will be
classified as long-term or short-term, depending on the length of the time
shares have been held.
52
All or a portion of any loss realized upon the sale or redemption of Fund shares
will be disallowed to the extent that others shares in a Fund are purchased
(through reinvestment of dividends or otherwise) within 30 days before or after
a share redemption. Any loss disallowed under these rules will be added to the
tax basis in the newly purchased shares. In addition, any loss realized by a
shareholder on the disposition of shares held for six months or less is treated
as a long-term capital loss to the extent of any distributions of any net
long-term capital gains received by the shareholder with respect to such shares.
OPTIONS, SWAPS AND OTHER COMPLEX SECURITIES
The Funds may invest in complex securities such as equity options, index
options, repurchase agreements, foreign currency contracts, hedges and swaps,
and futures contracts. These investments may be subject to numerous special and
complex tax rules. These rules could affect whether gains and losses recognized
by a Fund are treated as ordinary income or capital gain, accelerate the
recognition of income to the Fund and/or defer the Fund's ability to recognize
losses. In turn, those rules may affect the amount, timing or character of the
income distributed by a Fund. The Funds may be subject to foreign withholding
taxes on income they may earn from investing in foreign securities, which may
reduce the return on such investments.
A Fund's transactions in swaps, under some circumstances, could preclude the
Fund's qualifying for the special tax treatment available to investment
companies meeting the requirements to be treated as a RIC under Subchapter M of
the Code. However, it is the intention of each Fund's portfolio management to
limit gains from such investments to less than 10% of the gross income of the
Fund during any fiscal year in order to maintain this qualification.
BACK-UP WITHHOLDING
In certain cases a Fund will be required to withhold and remit to the U.S.
Treasury an amount equal to the applicable back-up withholding rate applied to
reportable taxable dividends and distributions, as well as the proceeds of any
redemptions of Fund shares, paid to a shareholder who: (1) has failed to provide
a correct taxpayer identification number (usually the shareholder's social
security number); (2) is subject to back-up withholding by the Internal Revenue
Service ("IRS"); (3) has failed to provide the Fund with the certifications
required by the IRS to document that the shareholder is not subject to back-up
withholding; or (4) has failed to certify that he or she is a U.S. person
(including a U.S. resident alien).
OTHER ISSUES
The Funds may be subject to tax or taxes in certain states where the Funds do
business. Furthermore, in those states which have income tax laws, the tax
treatment of the Funds and of Fund shareholders with respect to distributions by
the Funds may differ from federal tax treatment.
Shareholders are urged to consult their own tax advisers regarding the
application of the provisions of tax law described in this SAI in light of the
particular tax situations of the shareholders and regarding specific questions
as to federal, state, or local taxes.
OTHER INFORMATION
The Trust currently offers twenty-two (22) funds, all of which are offered in a
separate SAI. The Board may designate additional Funds. Each share issued by a
Fund has a pro rata interest in the assets of that Fund. Shares have no
preemptive, exchange, subscription or conversion rights and are freely
transferable. Each share is entitled to participate equally in dividends and
distributions declared by the Board with respect to the Funds, and in the net
distributable assets of the Funds on liquidation.
53
PORTFOLIO HOLDINGS
The Board has approved portfolio holdings disclosure policies that govern the
timing and circumstances of disclosure to shareholders and third parties of
information regarding the portfolio investments held by the Funds. These
policies and procedures, as described below, are designed to ensure that
disclosure of portfolio holdings is in the best interests of Fund shareholders,
and address conflicts of interest between the interests of Fund shareholders and
those of the Funds' Advisor, principal underwriter, or any affiliated person of
the Funds, the Advisor, or the principal underwriter.
Each business day, Fund portfolio holdings information will be provided to the
Distributor or other agent for dissemination through the facilities of the NSCC
and/or other fee-based subscription services to NSCC members and/or subscribers
to those other fee-based subscription services, including Authorized
Participants, and to entities that publish and/or analyze such information in
connection with the process of purchasing or redeeming Creation Units or trading
shares of a Fund in the secondary market. This information typically reflects a
Fund's anticipated holdings on the following business day. Daily access to
information concerning a Fund's portfolio holdings also is permitted (i) to
certain personnel of those service providers that are involved in portfolio
management and providing administrative, operational, risk management, or other
support to portfolio management, including affiliated broker-dealers and/or
Authorized Participants, and (ii) to other personnel of the Advisor and other
service providers, such as the Fund's administrator, custodian and fund
accountant, who deal directly with, or assist in, functions related to
investment management, administration, custody and fund accounting, as may be
necessary to conduct business in the ordinary course in a manner consistent with
agreements with the Funds and/or the terms of the Funds' current registration
statement. Because as of March 1, 2008, none of the Funds had commenced
operations, the Funds do not disclose any portfolio holdings information. After
the Funds have commenced operations, it is expected that the Funds will disclose
their portfolio holdings information to the following entities as part of
ongoing arrangements that serve legitimate business purposes: State Street Bank
and Trust Company, Securities Industry Automation Corporation, Goldman Sachs
Execution and Clearing, LP, Bloomberg, Thomson Financial News, ISS, and
financial printers.
From time to time, information concerning Fund portfolio holdings, other than
portfolio holdings information made available in connection with the
creation/redemption process, as discussed above, may also be provided to other
entities that provide additional services to the Funds, including, among others,
rating or ranking organizations, in the ordinary course of business, no earlier
than one business day following the date of the information. Portfolio holdings
information made available in connection with the creation/redemption process
may be provided to other entities that provide additional services to the Funds
in the ordinary course of business after it has been disseminated to the NSCC.
The Funds' Chief Compliance Officer, or a Compliance Manager designated by the
Chief Compliance Officer, may also grant exceptions to permit additional
disclosure of Fund portfolio holdings information at differing times and with
different lag times (the period from the date of the information to the date the
information is made available), if any, in instances where a Fund has legitimate
business purposes for doing so, it is in the best interests of shareholders, and
the recipients are subject to a duty of confidentiality, including a duty not to
trade on the nonpublic information and are required to execute an agreement to
that effect. The Board will be informed of any such disclosures at its next
regularly scheduled meeting or as soon as is reasonably practicable thereafter.
In no event shall the Funds, the Advisor, or any other party receive any direct
or indirect compensation in connection with the disclosure of information about
a Fund's portfolio holdings.
The Board exercises continuing oversight of the disclosure of each Fund's
portfolio holdings by (1) overseeing the implementation and enforcement of
Portfolio Holdings Disclosure Policies and Procedures, the Code of Ethics, and
the Protection of Non-Public Information Policies and Procedures (collectively,
the portfolio holdings governing policies) by the Funds' Chief Compliance
Officer and the Fund, (2) considering reports and recommendations by the Chief
Compliance Officer concerning any
54
material compliance matters (as defined in Rule 38a-1 under the 1940 Act and
Rule 206(4)-7 under the Investment Advisers Act of 1940) that may arise in
connection with any portfolio holdings governing policies, and (3) considering
whether to approve or ratify any amendment to any portfolio holdings governing
policies. The Board and the Funds reserve the right to amend the Policies and
Procedures at any time and from time to time without prior notice in their sole
discretion. For purposes of the Policies and Procedures, the term "portfolio
holdings" means the equity and debt securities (E.G., stocks and bonds) held by
a Fund and does not mean the cash investments, derivatives, and other investment
positions (collectively, other investment positions) held by a Fund, which are
not disclosed.
In addition to the permitted disclosures described above, each Fund must
disclose its complete holdings quarterly within 60 days of the end of each
fiscal quarter in the Annual Report and Semi-Annual Report to Fund shareholders
and in the quarterly holdings report on Form N-Q. These reports are available,
free of charge, on the EDGAR database on the SEC's web site at www.sec.gov.
VOTING RIGHTS
Each share has one vote with respect to matters upon which a shareholder vote is
required consistent with the requirements of the 1940 Act and the rules
promulgated thereunder. You receive one vote for every full Fund share owned.
Each Fund or class of a Fund, if applicable, will vote separately on matters
relating solely to that Fund or class. All shares of the Funds are freely
transferable.
As a Delaware statutory trust, the Trust is not required to hold annual
Shareholder meetings unless otherwise required by the 1940 Act. However, a
meeting may be called by Shareholders owning at least 10% of the outstanding
shares of the Trust. If a meeting is requested by Shareholders, the Trust will
provide appropriate assistance and information to the Shareholders who requested
the meeting. Shareholder inquiries can be made by calling 800.820.0888 or
301.296.5100, or by writing to the Trust at 9601 Blackwell Road, Suite 500,
Rockville, Maryland 20850.
SHAREHOLDER INQUIRIES
Shareholders may visit the Trust's web site at www.rydexinvestments.com or call
800.820.0888 or 301.296.5100 to obtain information on account statements,
procedures, and other related information.
INDEX PUBLISHERS INFORMATION
STANDARD & POOR'S ("S&P")
The Rydex Inverse S&P 500 ETF, Rydex 2x S&P 500 Growth ETF, Rydex Inverse S&P
500 Growth ETF, Rydex Inverse 2x S&P 500 Growth ETF, Rydex 2x S&P 500 Value ETF,
Rydex Inverse S&P 500 Value ETF, Rydex Inverse 2x S&P 500 Value ETF, Rydex
Inverse S&P MidCap 400 ETF, Rydex 2x S&P MidCap 400 Growth ETF, Rydex Inverse
S&P MidCap 400 Growth ETF, Rydex Inverse 2x S&P MidCap 400 Growth ETF, Rydex 2x
S&P MidCap 400 Value ETF, Rydex Inverse S&P MidCap 400 Value ETF, Rydex Inverse
2x S&P MidCap 400 Value ETF, Rydex 2x S&P SmallCap 600 ETF, Rydex Inverse S&P
SmallCap 600 ETF, Rydex Invers 2x S&P SmallCap 600 ETF, Rydex 2x S&P SmallCap
600 Growth ETF, Rydex Inverse S&P SmallCap 600 Growth ETF, Rydex Invers 2x S&P
SmallCap 600 Growth ETF, Rydex 2x S&P SmallCap 600 Value ETF, Rydex Inverse S&P
SmallCap 600 Value ETF, and Rydex Inverse 2x S&P SmallCap 600 Value ETF are not
sponsored, endorsed, sold or promoted by Standard & Poor's. Standard & Poor's
makes no representation, condition, warranty, express or implied, to the owners
of the Funds or any member of the public regarding the advisability of investing
in securities generally or in the Funds particularly or the ability of ANY Index
to track general stock market performance. Standard & Poor's only relationship
to Rydex INVESTMENTS is the licensing of certain trademarks and trade names of
Standard & Poor's and of the Indices which are determined, composed and
calculated by Standard & Poor's without regard to Rydex INVESTMENTS or the
Funds. Standard & Poor's has no obligation to take the needs of Rydex
INVESTMENTS or the owners of the Funds into
55
consideration in determining, composing or calculating the Indices. Standard &
Poor's is not responsible for and has not participated in the determination of
the prices and amount of the Funds or the timing of the issuance or sale of the
Funds or in the determination or calculation of the NAV of the Funds. Standard &
Poor's has no obligation or liability in connection with the administration,
marketing or trading of the Funds.
Standard & Poor's does not guarantee the accuracy and/or the completeness of any
Index or any data included therein and Standard & Poor's shall have no liability
for any errors, omissions, or interruptions therein. Standard & Poor's makes no
warranty, express or implied, as to results to be obtained by Rydex Investments,
owners of the Funds, or any other person or entity from the use of any Index or
any data included therein. Standard & Poor's makes no express or implied
warranties, and expressly disclaims all warranties of merchantability or fitness
for a particular purpose or use with respect to any Index or data included
therein. Without limiting any of the foregoing, in no event shall Standard &
Poor's have any liability for any special, punitive, indirect or consequential
damages (including lost profits, resulting from the use of any Index or any data
included therein), even if notified of the possibility of such damages.
NASDAQ
The Rydex 2x NASDAQ 100 ETF, Rydex Inverse NASDAQ 100 ETF, Rydex Inverse 2x
NASDAQ 100 ETF, Rydex 2x NASDAQ Biotechnology ETF, Rydex Inverse NASDAQ
Biotechnology ETF and the Rydex Inverse 2x NASDAQ Biotechnology ETF are not
sponsored, endorsed, sold or promoted by The Nasdaq Stock Market, Inc. or its
affiliates (Nasdaq, with its affiliates, are referred to as the "Corporations").
The Corporations have not passed on the legality or suitability of, or the
accuracy or adequacy of descriptions and disclosures relating to, the Funds. The
Corporations make no representation or warranty, expressed or implied to the
owners of the Funds or any member of the public regarding the advisability of
investing in securities generally or in the Funds particularly, or the ability
of the NASDAQ-100 Index(R) or the NASDAQ Biotechnology Index(R) to track general
stock market performance. The Corporations' only relationship to Rydex
Investments ("Licensee") is in the licensing of the NASDAQ(R), NASDAQ-100(R),
NASDAQ-100 Index(R) and Nasdaq Biotechnology Index(R) trademarks, and certain
trade names of the Corporations and the use of the NASDAQ-100 Index(R) and the
NASDAQ Biotechnology Index(R) which are determined, composed and calculated by
Nasdaq without regard to Licensee or the Funds. Nasdaq has no obligation to take
the needs of the Licensee or the owners of the Funds into consideration in
determining, composing or calculating the Nasdaq-100 Index(R) or the NASDAQ
Biotechnology Index(R). The Corporations are not responsible for and have not
participated in the determiniation of the timing of, prices at, or quantities of
the Funds to be issued or in the determination or calculation of the equation by
which the Funds are to be converted into cash. The Corporations have no
liability in connection with the administration, marketing or trading of the
Funds.
The Corporations do not guarantee the accuracy and/or uninterrupted calculation
of the NASDAQ-100 Index(R), the NASDAQ Biotechnology Index(R) or any data
included therein. The Corporations make no warranty, express or implied, as to
results to be obtained by Licensse, owners of the Funds, or any other person or
entity from the use of the NASDAQ-100 Index(R), NASDAQ Biotechnology Index(R) or
any data included therein. The Corporations make no express or implied
warranties, and expressly disclaim all warranties of merchantability or fitness
for a particular purpose or use with respect to the NASDAQ-100 Index(R), the
NASDAQ Biotechnology Index(R) or any data included therein. Without limiting any
of the foregoing, in no event shall the Corporations have any liability for any
lost profits or special, incidental, punitive, indirect, or consequential
damages, even if notifed of such damages.
56
FRANK RUSSELL COMPANY ("RUSSELL")
The Rydex 2x Russell 1000(R) ETF, Rydex Inverse Russell 1000(R) ETF, Rydex
Inverse 2x Russell 1000(R) ETF, Rydex 2x Russell 1000(R) Growth ETF, Rydex
Inverse Russell 1000(R) Growth ETF, Rydex Inverse 2x Russell 1000(R) Growth ETF,
Rydex 2x Russell 1000(R) Value ETF, Rydex Inverse Russell 1000(R) Value ETF,
Rydex Inverse 2x Russell 1000(R) Value ETF, Rydex 2x Russell MidCap(R) ETF,
Rydex Inverse Russell MidCap(R) ETF, Rydex Inverse 2x Russell MidCap(R) ETF,
Rydex 2x Russell MidCap(R) Growth ETF, Rydex Inverse Russell MidCap(R) Growth
ETF, Rydex Inverse 2x Russell MidCap(R) Growth ETF, Rydex 2x Russell MidCap(R)
Value ETF, Rydex Inverse Russell MidCap(R) Value ETF, Rydex Inverse 2x Russell
MidCap(R) Value ETF, Rydex Inverse Russell 2000(R) ETF, Rydex 2x Russell 2000(R)
Growth ETF, Rydex Inverse Russell 2000(R) Growth ETF, Rydex Inverse 2x Russell
2000(R) Growth ETF, Rydex 2x Russell 2000(R) Value ETF, Rydex Inverse Russell
2000(R) Value ETF, Rydex Inverse 2x Russell 2000(R) Value ETF, Rydex 2x Russell
3000(R) ETF, Rydex Inverse Russell 3000(R) ETF, Rydex Inverse 2x Russell 3000(R)
ETF, Rydex 2x Russell 3000(R) Growth ETF, Rydex Inverse Russell 3000(R) Growth
ETF, Rydex Inverse 2x Russell 3000(R) Growth ETF, Rydex 2x Russell 3000(R) Value
ETF, Rydex Inverse Russell 3000(R) Value ETF, and Rydex Inverse 2x Russell
3000(R) Value ETF are not sponsored, endorsed, sold or promoted by Russell.
Russell makes no representation or warranty, express or implied, to the owners
of the Funds or any member of the public regarding the advisability of investing
in securities generally or in the Funds particularly or the ability of the
applicable Russell Index to track general stock market performance or a segment
of the same. Russell's publication of the Russell Indices in no way suggests or
implies an opinion by Russell as to the advisability of investment in any or all
of the securities upon which the applicable Russell Index is based. Russell's
only relationship to the Trust is the licensing of certain trademarks and trade
names of Russell and of the Russell Indices which is determined, composed and
calculated by Russell without regard to the Trust or the Funds. Russell is not
responsible for and has not reviewed the Funds nor any associated literature or
publications and Russell makes no representation or warranty express or implied
as to their accuracy or completeness, or otherwise. Russell reserves the right,
at any time and without notice, to alter, amend, terminate or in any way change
the Russell Indices. Russell has no obligation or liability in connection with
the administration, marketing or trading of the Funds.
Russell does not guarantee the accuracy and/or the completeness of the Russell
Indices or any data included therein and Russell shall have no liability for any
errors, omissions, or interruptions therein. Russell makes no warranty, express
or implied, as to results to be obtained by the Trust, investors, owners of the
Funds, or any other person or entity from the use of the Russell Indices or any
data included therein. Russell makes no express or implied warranties, and
expressly disclaims all warranties of merchantability or fitness for a
particular purpose or use with respect to the Russell Indices or any data
included therein. Without limiting any of the foregoing, in no event shall
Russell have any liability for any special, punitive, indirect, or consequential
damages (including lost profits), even if notified of the possibility of such
damages.
COUNSEL
Morgan, Lewis & Bockius LLP serves as counsel to the Trust.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young LLP, 200 Clarendon Street, Boston, Massachusetts 02116-5072,
serves as the independent registered public accounting firm to the Trust and the
Funds and provides audit services, tax return review, and assistance and
consultation with respect to the preparation of filings with the SEC.
57
CUSTODIAN
State Street Bank and Trust Company (the "Custodian"), P.O. Box 5049, Boston, MA
02206-5049, serves as custodian for the Fund under a custody agreement between
the Trust and the Custodian. Under the custody agreement, the Custodian holds
the portfolio securities of each Fund and maintains all necessary related
accounts and records.
58
APPENDIX A
RYDEX INVESTMENTS
PROXY VOTING POLICIES AND PROCEDURES
I. INTRODUCTION
PADCO Advisors, Inc. and PADCO Advisors II, Inc., together doing business
as Rydex Investments, generally are responsible for voting proxies with respect
to securities held in client accounts, including clients registered as
investment companies under the Investment Company Act of 1940 ("Funds") and
clients that are pension plans ("Plans") subject to the Employee Retirement
Income Security Act of 1974 ("ERISA"). This document sets forth Rydex
Investments' policies and guidelines with respect to proxy voting and its
procedures to comply with SEC Rule 206(4)-6 under the Investment Advisers Act of
1940. Specifically, Rule 206(4)-6 requires that we:
o Adopt and implement written policies and procedures reasonably
designed to ensure that we vote client securities in the best
interest of clients;
o Disclose to clients how they may obtain information from us about
how we voted proxies for their securities; and
o Describe our proxy voting policies and procedures to clients and
furnish them a copy of our policies and procedures on request.
II. PROXY VOTING POLICIES AND PROCEDURES
A. Proxy Voting Policies
Proxies may have economic value and, where Rydex Investments is given
responsibility for voting proxies, we must take reasonable steps under the
circumstances to ensure that proxies are received and voted in the best
long-term economic interests of our clients, which generally means voting
proxies with a view to enhancing the value of the shares of stock held in client
accounts, considering all relevant factors and without undue influence from
individuals or groups who may have an economic interest in the outcome of the
proxy vote. Our authority is initially established by our advisory contracts or
comparable documents. Clients, however, may change their proxy voting direction
at any time.
The financial interest of our clients is the primary consideration in
determining how proxies should be voted. Any material conflicts of interest
between Rydex Investments and our clients with respect to proxy voting are
resolved in the best interests of clients, in accordance with the procedures
described in Section III, below.
B. Proxy Voting Procedures
Rydex Investments utilizes the services of an outside proxy voting firm,
Institutional Shareholder Services ("ISS"), to act as agent for the proxy
process, to maintain records on proxy votes for our clients, and to provide
independent research on corporate governance, proxy and corporate responsibility
issues. In the absence of contrary instructions received from Rydex Investments,
ISS will vote proxies in accordance with the proxy voting guidelines (the
"Guidelines") attached as SCHEDULE A hereto, as such
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Guidelines may be revised from time to time by Rydex Investments' portfolio
management group (the "Committee"). Under its arrangement with ISS, Rydex
Investments has agreed to:
o provide ISS with a copy of the Guidelines and to inform ISS promptly
of any changes to the Guidelines;
o deliver to ISS, on a timely basis, all documents, information and
materials necessary to enable ISS to provide the services
contemplated to be performed by it on a timely and efficient basis
(such as conveying to ISS a power of attorney with respect to the
services to be provided hereunder and providing ISS on a timely
basis with Rydex Investments' authorized stamp, proxy cards, special
voting instructions, authorization letters to custodian banks and
any other materials necessary for the performance by ISS of its
duties);
o provide ISS with a data file containing portfolio information (such
as account numbers, share amounts, and security identifiers such as
cusip and/or serial numbers) on a regular basis; and
o coordinate with ISS with respect to the classification of proxy
items and for the treatment of items not clearly defined under the
Guidelines.
III. RESOLVING POTENTIAL CONFLICTS OF INTEREST
The Committee is responsible for identifying potential conflicts of
interest in regard to the proxy voting process. Examples of potential conflicts
of interest include:
o managing a pension plan for a company whose management is soliciting
proxies;
o having a material business relationship with a proponent of a proxy
proposal in which this business relationship may influence how the
proxy vote is cast; and
o Rydex Investments, its employees or affiliates having a business or
personal relationship with participants in a o proxy contest,
corporate directors or candidates for directorships.
To ensure that all proxies are voted in the best interests of clients and
are not the product of any potential conflict of interest, if a potential
conflict of interest exists Rydex Investments will instruct ISS to vote in
accordance with the established Guidelines. In the absence of established
Guidelines (I.E., in instances where the Guidelines provide for a "case-by-case"
review), Rydex Investments may vote a proxy regarding that proposal in any of
the following manners:
o REFER PROPOSAL TO THE CLIENT - Rydex Investments may refer the
proposal to the client and obtain instructions from the client on
how to vote the proxy relating to that proposal.
o OBTAIN CLIENT RATIFICATION - If Rydex Investments is in a position
to disclose the conflict to the client (I.E., such information is
not confidential), Rydex Investments may determine how it proposes
to vote the proposal on which it has a conflict, fully disclose the
nature of the conflict to the client, and obtain the client's
consent to how Rydex Investments will vote on the proposal (or
otherwise obtain instructions from the client on how the proxy on
the proposal should be voted).
o USE AN INDEPENDENT THIRD PARTY FOR ALL PROPOSALS - Subject to any
client imposed proxy
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voting policies, Rydex Investments may vote all proposals in a proxy
according to the policies of an independent third party, such as ISS
or a similar entity (or to have the third party vote such proxies).
o USE AN INDEPENDENT THIRD PARTY TO VOTE THE SPECIFIC PROPOSALS THAT
INVOLVE A CONFLICT - Subject to any client imposed proxy voting
policies, Rydex Investments may use an independent third party (such
as ISS) to recommend how the proxy for specific proposals that
involve a conflict should be voted (or to have the third party vote
such proxies).
IV. SECURITIES SUBJECT TO LENDING ARRANGEMENTS
For various legal or administrative reasons, Rydex Investments is often
unable to vote securities that are, at the time of such vote, on loan pursuant
to a client's securities lending arrangement with the client's custodian. Rydex
Investments will refrain from voting such securities where the costs to the
client and/or administrative inconvenience of retrieving securities then on loan
outweighs the benefit of voting, assuming retrieval under such circumstances is
even feasible and/or possible. In certain extraordinary situations, Rydex
Investments may seek to have securities then on loan pursuant to such securities
lending arrangements retrieved by the client's custodian for voting purposes.
This decision will generally be made on a case-by-case basis depending on
whether, in Rydex Investments' judgment, the matter to be voted on has critical
significance to the potential value of the securities in question, the relative
cost and/or administrative inconvenience of retrieving the securities, the
significance of the holding and whether the stock is considered a long-term
holding. There can be no guarantee that any such securities can be retrieved for
such purpose.
V. SPECIAL ISSUES WITH VOTING FOREIGN PROXIES
Voting proxies with respect to shares of foreign stocks may involve
significantly greater effort and corresponding cost due to the variety of
regulatory schemes and corporate practices in foreign countries with respect to
proxy voting. Because the cost of voting on a particular proxy proposal could
exceed the expected benefit to a client (including an ERISA Plan), Rydex
Investments may weigh the costs and benefits of voting on proxy proposals
relating to foreign securities and make an informed decision on whether voting a
given proxy proposal is prudent.
VI. ASSISTANCE WITH FORM N-PX AND PROXY VOTING RECORD
Rydex Investments shall assist its Fund clients in disclosing the
following information on Form N-PX for each proxy matter relating to a portfolio
security considered at any shareholder meeting held during the period covered by
the report and with respect to which Rydex Investments, or ISS as its agent,
voted on the client's behalf by providing the following information to the Fund
on a regular quarterly basis within 30 days after the end of the quarter:
(i) The name of the issuer of the portfolio security;
(ii) The exchange ticker symbol of the portfolio security (if available
through reasonably practicable means);
(iii) The Council on Uniform Security Identification Procedures ("CUSIP")
number for the portfolio security (if available through reasonably
practicable means);
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(iv) The shareholder meeting date;
(v) A brief identification of the matter voted on;
(vi) Whether the matter was proposed by the issuer or by a security
holder;
(vii) Whether Rydex Investments (or ISS as its agent) cast the client's
vote on the matter;
(viii) How Rydex Investments (or ISS as its agent) cast the client's vote
(I.E., for or against proposal, or abstain; for or withhold
regarding election of directors); and
(ix) Whether Rydex Investments (or ISS as its agent) cast the client's
vote for or against management.
VII. DISCLOSURE OF HOW TO OBTAIN VOTING INFORMATION
On or before August 6, 2003, Rule 206(4)-6 requires Rydex Investments to
disclose in response to any client request how the client can obtain information
from Rydex Investments on how its securities were voted. Rydex Investments will
disclose in Part II of its Form ADV that clients can obtain information on how
their securities were voted by making a written request to Rydex Investments.
Upon receiving a written request from a client, Rydex Investments will provide
the information requested by the client within a reasonable amount of time.
Rule 206(4)-6 also requires Rydex Investments to describe its proxy voting
policies and procedures to clients, and upon request, to provide clients with a
copy of those policies and procedures. Rydex Investments will provide such a
description in Part II of its Form ADV. Upon receiving a written request from a
client, Rydex Investments will provide a copy of this policy within a reasonable
amount of time.
If approved by the client, this policy and any requested records may be
provided electronically.
VIII. RECORDKEEPING
Rydex Investments shall keep the following records for a period of at least five
years, the first two in an easily accessible place:
(i) A copy of this Policy;
(ii) Proxy Statements received regarding client securities;
(iii) Records of votes cast on behalf of clients;
(iv) Any documents prepared by Rydex Investments that were material to
making a decision how to vote, or that memorialized the basis for
the decision; and
(v) Records of client requests for proxy voting information,
With respect to Rydex Investments' Fund clients, the Fund shall maintain a
copy of each of the records that is related to proxy votes on behalf of the Fund
by Rydex Investments. Additionally, Rydex
A-4
Investments may keep Fund client records as part of Rydex Investments' records.
Rydex Investments may rely on proxy statements filed on the SEC's EDGAR
system instead of keeping its own copies, and may rely on proxy statements and
records of proxy votes cast by Rydex Investments that are maintained with a
third party, such as ISS, provided that Rydex Investments has obtained an
undertaking from the third party to provide a copy of the documents promptly
upon request.
A-5
SCHEDULE A
TO
RYDEX INVESTMENTS
PROXY VOTING POLICIES AND PROCEDURES
PROXY VOTING GUIDELINES
Rydex Investments believes that management is generally in the best
position to make decisions that are essential to the ongoing operation of the
company and which are not expected to have a major impact on the corporation and
its shareholders. Accordingly, Rydex Investments will generally vote with
management on "routine items" of a corporate administrative nature. Rydex
Investments will generally review all "non-routine items" (I.E., those items
having the potential for major economic impact on the corporation and the
long-term value of its shares) on a case-by-case basis.
BOARD OF DIRECTORS
A. Director Nominees in Uncontested Elections Vote With Mgt.
B. Chairman and CEO is the Same Person Vote With Mgt.
C. Majority of Independent Directors Vote With Mgt.
D. Stock Ownership Requirements Vote With Mgt.
E. Limit Tenure of Outside Directors Vote With Mgt.
F. Director and Officer Indemnification and Liability
Protection Vote With Mgt.
G. Eliminate or Restrict Charitable Contributions Vote With Mgt.
PROXY CONTESTS
A. Voting for Director Nominees in Contested Election Vote With Mgt.
B. Reimburse Proxy Solicitation Vote With Mgt.
AUDITORS
A. Ratifying Auditors Vote With Mgt.
PROXY CONTEST DEFENSES
A. Board Structure - Classified Board Vote With Mgt.
B. Cumulative Voting Vote With Mgt.
C. Shareholder Ability to Call Special Meetings Vote With Mgt.
TENDER OFFER DEFENSES
A. Submit Poison Pill for shareholder ratification Case-by-Case
B. Fair Price Provisions Vote With Mgt.
C. Supermajority Shareholder Vote Requirement
To Amend the Charter or Bylaws Vote With Mgt.
D. Supermajority Shareholder Vote Requirement Vote With Mgt.
MISCELLANEOUS GOVERNANCE PROVISIONS
A. Confidential Voting Vote With Mgt.
B. Equal Access Vote With Mgt.
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A-1
C. Bundled Proposals Vote With Mgt.
CAPITAL STRUCTURE
A. Common Stock Authorization Vote With Mgt.
B. Stock Splits Vote With Mgt.
C. Reverse Stock Splits Vote With Mgt.
D. Preemptive Rights Vote With Mgt.
E. Share Repurchase Programs Vote With Mgt.
EXECUTIVE AND DIRECTOR COMPENSATION
A. Shareholder Proposals to Limit Executive and
Directors Pay Case-by-Case
B. Shareholder Ratification of Golden and Tin Parachutes Vote With Mgt.
C. Employee Stock Ownership Plans Vote With Mgt.
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D. 401(k) Employee Benefit Plans Vote With Mgt.
STATE OF INCORPORATION
A. Voting on State Takeover Plans Vote With Mgt.
B. Voting on Reincorporation Proposals Vote With Mgt.
MERGERS AND CORPORATE RESTRUCTURINGS
A. Mergers and Acquisitions Case-by-Case
B. Corporate Restructuring Vote With Mgt.
C. Spin-Offs Vote With Mgt.
D. Liquidations Vote With Mgt.
SOCIAL AND ENVIRONMENTAL ISSUES
A. Issues with Social/Moral Implications Vote With Mgt.
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PART C: OTHER INFORMATION
ITEM 23. EXHIBITS
(a)(1) Certificate of Trust dated November 22, 2002 of Rydex ETF Trust (the
"Registrant" or the "Trust") is incorporated herein by reference to
Exhibit (a)(2) of the Registrant's Initial Registration Statement on
Form N-1A (File No. 333-101625), as filed with the U.S. Securities
and Exchange Commission (the "SEC") via EDGAR Accession No.
0001047469-02-005491 on December 3, 2002.
(a)(2) Registrant's Agreement and Declaration of Trust dated November 22,
2002 is incorporated herein by reference to Exhibit (a)(1) of the
Registrant's Initial Registration Statement on Form N-1A (File No.
333-101625), as filed with the SEC via EDGAR Accession No.
0001047469-02-005491 on December 3, 2002.
(a)(3) Amendment dated November 21, 2005 to the Registrant's Agreement and
Declaration of Trust dated November 22, 2002 is incorporated herein
by reference to Exhibit (a)(3) of Post-Effective Amendment No. 6 to
the Registrant's Registration Statement on Form N-1A (File No.
333-101625), as filed with the SEC via EDGAR Accession No.
0000935069-06-000534 on March 1, 2006.
(b) Registrant's Amended and Restated By-Laws are incorporated herein by
reference to Exhibit (b) of Post-Effective Amendment No. 6 to the
Registrant's Registration Statement on Form N-1A (File No.
333-101625), as filed with the SEC via EDGAR Accession No.
0000935069-06-000534 on March 1, 2006.
(c) Not applicable.
(d) Advisory Agreement dated January 18, 2008 between the Registrant and
PADCO Advisors II, Inc. is filed herewith.
(e)(1) Distribution Agreement dated January 18, 2008 between the Registrant
and Rydex Distributors, Inc. is filed herewith.
(e)(2) Participant Agreement dated May 2, 2005 between Rydex Distributors,
Inc., State Street Bank and Trust Company, and Goldman Sachs
Execution & Clearing, L.P. is incorporated herein by reference to
Exhibit (e)(4) of Post-Effective Amendment No. 9 to the Registrant's
Registration Statement on Form N-1A (File No. 333-101625), as filed
with the SEC via EDGAR Accession No. 0000935069-07-000379 on
February 28, 2007.
(e)(3) Participant Agreement dated May 2, 2005 between Rydex Distributors,
Inc., State Street Bank and Trust Company, and Goldman Sachs & Co.
is incorporated herein by reference to Exhibit (e)(5) of
Post-Effective Amendment No. 9 to the Registrant's Registration
Statement on Form N-1A (File No. 333-101625), as filed with the SEC
via EDGAR Accession No. 0000935069-07-000379 on February 28, 2007.
1
(e)(4) Participation Agreement dated July 17, 2006 between the Registrant
and WT Mutual Fund is incorporated herein by reference to Exhibit
(e)(7) of Post-Effective Amendment No. 8 to the Registrant's
Registration Statement on Form N-1A (File No. 333-101625), as filed
with the SEC via EDGAR Accession No. 0000935069-06-003020 on
November 8, 2006.
(f) Not applicable.
(g)(1) Custodian Agreement dated May 3, 2005 between the Registrant and
State Street Bank and Trust Company is incorporated herein by
reference to Exhibit (g)(1) of Post-Effective Amendment No. 9 to the
Registrant's Registration Statement on Form N-1A (File No.
333-101625), as filed with the SEC via EDGAR Accession No.
0000935069-07-000379 on February 28, 2007.
(g)(2) First Amendment dated May 3, 2005 to the Custodian Agreement dated
May 3, 2005 between the Registrant and State Street Bank and Trust
Company is incorporated herein by reference to Exhibit (g)(2) of
Post-Effective Amendment No. 6 to the Registrant's Registration
Statement on Form N-1A (File No. 333-101625), as filed with the SEC
via EDGAR Accession No. 0000935069-06-000534 on March 1, 2006.
(g)(3) Amendment and revised Appendix A dated March 1, 2006 to the
Custodian Agreement dated May 3, 2005 between the Registrant and
State Street Bank and Trust Company is incorporated herein by
reference to Exhibit (g)(3) of Post- Effective Amendment No. 7 to
the Registrant's Registration Statement on Form N-1A (File No.
333-101625), as filed with the SEC via EDGAR Accession No.
0000935069-06-002166 on August 18, 2006.
(g)(4) Amendment and revised Appendix A dated November 1, 2006 to the
Custodian Agreement dated May 3, 2005 between the Registrant and
State Street Bank and Trust Company is incorporated herein by
reference to Exhibit (g)(4) of Post- Effective Amendment No. 9 to
the Registrant's Registration Statement on Form N-1A (File No.
333-101625), as filed with the SEC via EDGAR Accession No.
0000935069-07-000379 on February 28, 2007.
(g)(5) Amendment and revised Appendix A dated September 13, 2007 to the
Custodian Agreement dated May 3, 2005 between the Registrant and
State Street Bank and Trust Company is filed herewith.
(g)(6) Custody Agreement dated February 15, 2006 between U.S. Bank National
Association, Rydex Fund Services and the Registrant, Rydex Series
Funds, Rydex Dynamic Funds and Rydex Variable Trust is incorporated
herein by reference to Exhibit (g)(6) of Post-Effective Amendment
No. 8 to the Registrant's Registration Statement on Form N-1A (File
No. 333-101625), as filed with the SEC via EDGAR Accession No.
0000935069-06-003020 on November 8, 2006.
(h)(1) Sublicense Agreement dated April 11, 2003, between the Registrant
and PADCO Advisors, Inc. is incorporated herein by reference to
Exhibit (h)(3) of Pre-Effective Amendment No. 1 to the Registrant's
Registration Statement on Form
2
N-1A (File No. 333-101625), as filed with the SEC via EDGAR
Accession No. 0001047469-03-013773 on April 17, 2003.
(h)(2) Administration Agreement dated April 29, 2005 between the Registrant
and State Street Bank and Trust Company is incorporated herein by
reference to Exhibit (h)(2) of Post-Effective Amendment No. 6 to the
Registrant's Registration Statement on Form N-1A (File No.
333-101625), as filed with the SEC via EDGAR Accession No.
0000935069-06-000534 on March 1, 2006.
(h)(3) Amendment dated November 1, 2006 to the Administration Agreement
dated April 29, 2005 between the Registrant and State Street Bank
and Trust Company is incorporated herein by reference to Exhibit
(h)(3) of Post-Effective Amendment No. 9 to the Registrant's
Registration Statement on Form N-1A (File No. 333-101625), as filed
with the SEC via EDGAR Accession No. 0000935069-07-000379 on
February 28, 2007.
(h)(4) Amendment dated September 13, 2007 to the Administration Agreement
dated April 29, 2005 between the Registrant and State Street Bank
and Trust Company is filed herewith.
(h)(5) Transfer Agency and Service Agreement dated May 3, 2005 between the
Registrant and State Street Bank and Trust Company is incorporated
herein by reference to Exhibit (h)(5) of Post-Effective Amendment
No. 6 to the Registrant's Registration Statement on Form N-1A (File
No. 333-101625), as filed with the SEC via EDGAR Accession No.
0000935069-06-000534 on March 1, 2006.
(h)(6) Amendment dated November 1, 2006 to the Transfer Agency and Services
Agreement dated May 3, 2005, including revised Schedule A, between
the Registrant and State Street Bank and Trust Company is
incorporated by reference to Exhibit (h)(6) of Post-Effective
Amendment No. 9 to the Registrant's Registration Statement on Form
N-1A (File No. 333-101625), as filed with the SEC via EDGAR
Accession No. 0000935069-07-000379 on February 28, 2007.
(h)(7) Amendment dated September 13, 2007 to the Transfer Agency and
Services Agreement dated May 3, 2005, including revised Schedule A,
between the Registrant and State Street Bank and Trust Company is
filed herewith.
(i) Opinion and Consent of Counsel, Morgan, Lewis & Bockius LLP, is
filed herewith.
(j) Consent of independent registered public accounting firm, Ernst &
Young LLP, is filed herewith.
(k) Not applicable.
(l)(1) Subscription Agreement dated April 11, 2003 between the Registrant
and PADCO Advisors II, Inc., is incorporated herein by reference to
Exhibit (l)(1) of Pre-Effective Amendment No. 1 to the Registrant's
Registration Statement on Form N-1A (File No. 333-101625), as filed
with the SEC via EDGAR Accession No. 0001047469-03-013773 on April
17, 2003.
3
(l)(2) Form of Letter of Representations between the Registrant and
Depository Trust Company is incorporated herein by reference to
Exhibit (l)(2) of Pre-Effective Amendment No. 1 to the Registrant's
Registration Statement on Form N-1A (File No. 333-101625), as filed
with the SEC via EDGAR Accession No. 0001047469-03-013773 on April
17, 2003.
(m)(1) Distribution Plan dated April 11, 2003 is filed herewith.
(m)(2) Amendment dated November 15, 2007 to the Distribution Plan dated
April 11, 2003 is filed herewith.
(n) Not applicable.
(o) Not applicable.
(p) Combined Code of Ethics for the Registrant, Rydex Series Funds,
Rydex Dynamic Funds, Rydex Variable Trust, PADCO Advisors, Inc.
d/b/a Rydex Investments, PADCO Advisors II, Inc. d/b/a Rydex
Investments, Rydex Capital Partners I, LLC, Rydex Capital Partners
II, LLC, and Rydex Distributors, Inc. is incorporated herein by
reference to Exhibit (p)(1) of Post-Effective Amendment No. 30 to
Rydex Variable Trust's Registration Statement on Form N-1A (File No.
333-57017), as filed with the SEC via EDGAR Accession No.
0001104659- 08-009438 on February 12, 2008.
(q) Powers of Attorney for Werner E. Keller, Thomas F. Lydon, Corey A.
Colehour, J. Kenneth Dalton, John O. Demaret, Patrick T. McCarville,
and Roger Somers are incorporated herein by reference to Exhibit (q)
of Post-Effective Amendment No. 13 to the Registration Statement of
Rydex Dynamic Funds (File No. 333-84797), as filed with the SEC via
EDGAR Accession No. 0000935069-07-000278 on February 14, 2007.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND
Not Applicable.
ITEM 25. INDEMNIFICATION
The Registrant is organized as a Delaware statutory trust and is operated
pursuant to an Agreement and Declaration of Trust dated November 22, 2002, as
amended (the "Declaration of Trust"), that permits the Registrant to indemnify
its trustees and officers under certain circumstances. Such indemnification,
however, is subject to the limitations imposed by the Securities Act of 1933,
and the Investment Company Act of 1940. The Declaration of Trust of the
Registrant provides that officers and trustees of the Trust shall be indemnified
by the Trust against liabilities and expenses of defense in proceedings against
them by reason of the fact that they each serve as an officer or trustee of the
Trust or as an officer or trustee of another entity at the request of the
entity. This indemnification is subject to the following conditions:
(a) no trustee or officer of the Trust is indemnified against any
liability to the Trust or its security holders which was the result
of any willful misfeasance, bad faith, gross negligence, or reckless
disregard of his duties;
4
(b) officers and trustees of the Trust are indemnified only for actions
taken in good faith which the officers and trustees believed were in
or not opposed to the best interests of the Trust; and
(c) expenses of any suit or proceeding will be paid in advance only if
the persons who will benefit by such advance undertake to repay the
expenses unless it subsequently is determined that such persons are
entitled to indemnification.
The Declaration of Trust provides that if indemnification is not ordered by a
court, indemnification may be authorized upon determination by shareholders, or
by a majority vote of a quorum of the trustees who were not parties to the
proceedings or, if this quorum is not obtainable, if directed by a quorum of
disinterested trustees, or by independent legal counsel in a written opinion,
that the persons to be indemnified have met the applicable standard.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
Any other business, profession, vocation or employment of a substantial nature
in which each director or principal officer of the Advisor is or has been, at
any time during the last two fiscal years, engaged for his or her own account or
in the capacity of director, officer, employee, partner or trustee are as
follows:
PADCO Advisors II, Inc., d/b/a Rydex Investments, (the "Advisor") is the
investment adviser for the Trust. The Advisor also serves as investment adviser
to a number of other investment companies. The principal address of the Advisor
is 9601 Blackwell Road, Suite 500, Rockville, Maryland 20850. The Advisor is an
investment adviser registered under the Investment Advisers Act of 1940.
----------------------------------------------------------------------------------------------------------------
NAME POSITION WITH ADVISOR OTHER BUSINESS
----------------------------------------------------------------------------------------------------------------
Carl G. Verboncoeur Chief Executive Director of ICI Mutual Insurance Company
Officer (CEO) and ----------------------------------------------------------------
Director President, CEO and Treasurer of Rydex Fund Services, Inc.
----------------------------------------------------------------
CEO and Treasurer of PADCO Advisors, Inc.
----------------------------------------------------------------
CEO and Treasurer of PADCO Advisors II, Inc.
----------------------------------------------------------------
Executive Vice President and Treasurer of Rydex Capital Partners
I, LLC
----------------------------------------------------------------
Executive Vice President and Treasurer of Rydex Capital Partners
II, LLC
----------------------------------------------------------------
President and Trustee of Rydex Series Funds
----------------------------------------------------------------
President and Trustee of Rydex Dynamic Funds
----------------------------------------------------------------
President and Trustee of Rydex Variable Trust
----------------------------------------------------------------
President and Trustee of Rydex ETF Trust
----------------------------------------------------------------
Vice President and Trustee of Rydex Capital Partners SPhinX
Fund
----------------------------------------------------------------
President, CEO and Treasurer of Rydex Distributors, Inc.
----------------------------------------------------------------------------------------------------------------
Michael P. Byrum President, Chief Executive Vice President and Secretary of Rydex Fund Services,
Investment Officer, Inc.
Director, and Secretary ----------------------------------------------------------------
President and Secretary of PADCO Advisors, Inc.
----------------------------------------------------------------
President and Secretary of PADCO Advisors II, Inc.
----------------------------------------------------------------
|
5
----------------------------------------------------------------------------------------------------------------
NAME POSITION WITH ADVISOR OTHER BUSINESS
----------------------------------------------------------------------------------------------------------------
President and Secretary of Rydex Capital Partners I, LLC
----------------------------------------------------------------
President and Secretary of Rydex Capital Partners II, LLC
----------------------------------------------------------------
Trustee and Vice President of Rydex Series Funds
----------------------------------------------------------------
Trustee and Vice President of Rydex Dynamic Funds
----------------------------------------------------------------
Trustee and Vice President of Rydex Variable Trust
----------------------------------------------------------------
Trustee and Vice President of Rydex ETF Trust
----------------------------------------------------------------
Trustee and President of Rydex Capital Partners SPhinX Fund
----------------------------------------------------------------------------------------------------------------
Joanna M. Haigney Chief Compliance Vice President of Compliance of PADCO Advisors, Inc.
Officer ----------------------------------------------------------------
Vice President of Compliance of PADCO Advisors II, Inc.
----------------------------------------------------------------
Chief Compliance Officer and Secretary of Rydex Series Funds
----------------------------------------------------------------
Chief Compliance Officer and Secretary of Rydex Dynamic
Funds
----------------------------------------------------------------
Chief Compliance Officer and Secretary of Rydex ETF Trust
----------------------------------------------------------------
Chief Compliance Officer and Secretary of Rydex Variable Trust
----------------------------------------------------------------
Chief Compliance Officer and Secretary of Rydex Capital
Partners SPhinX Fund
----------------------------------------------------------------
Vice President of Rydex Fund Services, Inc.
----------------------------------------------------------------------------------------------------------------
|
ITEM 27. PRINCIPAL UNDERWRITERS
(a) Rydex Distributors, Inc. (formerly, PADCO Financial Services, Inc.)
serves as the principal underwriter for the Registrant, Rydex Series
Funds, Rydex Dynamic Funds and Rydex Variable Trust.
(b) The following information is furnished with respect to the directors
and officers of Rydex Distributors, Inc.
-----------------------------------------------------------------------------------------------
NAME AND POSITIONS AND POSITIONS AND OFFICES WITH
PRINCIPAL BUSINESS ADDRESS OFFICES WITH UNDERWRITER REGISTRANT
-----------------------------------------------------------------------------------------------
Carl G. Verboncoeur CEO, President, Treasurer, and President and Trustee
Director
-----------------------------------------------------------------------------------------------
Kevin Farragher Senior Vice President, Secretary, and None
Director
-----------------------------------------------------------------------------------------------
Gregg Ruvoli Director
-----------------------------------------------------------------------------------------------
Thomas Swank Director
-----------------------------------------------------------------------------------------------
Peter Brophy Chief Financial Officer None
-----------------------------------------------------------------------------------------------
Mark Murphy (pending S27 Chief Financial Officer None
registration)
-----------------------------------------------------------------------------------------------
Allison Charley Chief Compliance Officer None
-----------------------------------------------------------------------------------------------
|
6
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books, and records required to be maintained and preserved by
Section 31(a) of the Investment Company Act of 1940 and Rules 31a-1 and 31a-2
thereunder, will be kept by the Registrant at 9601 Blackwell Road, Suite 500,
Rockville, Maryland 20850 and by the State Street Bank and Trust Company at 150
Newport Avenue, 4th Floor, Quincy, Massachusetts 02171 and Two Avenue de
Lafayette, Boston, Massachusetts 02111.
ITEM 29. MANAGEMENT SERVICES
Not Applicable.
ITEM 30. UNDERTAKINGS
Not Applicable.
7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 (the "Securities
Act") and the Investment Company Act of 1940, the Registrant certifies that it
meets all of the requirements for effectiveness of this Registration Statement
under Rule 485(b) under the Securities Act and has duly caused this
Post-Effective Amendment No. 10 to Registration Statement 333-101625 to be
signed on its behalf by the undersigned, duly authorized, in the City of
Rockville, State of Maryland on the 28th day of February, 2008.
RYDEX ETF TRUST
/S/Carl G. Verboncoeur
----------------------
Carl G. Verboncoeur
President
|
Pursuant to the requirements of the Securities Act, this Post-Effective
Amendment No. 10 to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Carl G. Verboncoeur President and Chief Executive Officer February 28, 2008
----------------------
Carl G. Verboncoeur
* Member of the Board of Trustees February 28, 2008
----------------------
J.Kenneth Dalton
* Member of the Board of Trustees February 28, 2008
----------------------
John O. Demaret
* Member of the Board of Trustees February 28, 2008
----------------------
Patrick T. McCarville
* Member of the Board of Trustees February 28, 2008
----------------------
Roger Somers
* Member of the Board of Trustees February 28, 2008
----------------------
Corey A. Colehour
/S/ Michael P. Byrum Member of the Board of Trustees February 28, 2008
----------------------
Michael P. Byrum
|
8
* Member of the Board of Trustees February 28, 2008
----------------------
Werner E. Keller
* Member of the Board of Trustees February 28, 2008
----------------------
Thomas F. Lydon
/s/ Nick Bonos Vice President and Treasurer February 28, 2008
----------------------
Nick Bonos
* /s/ Carl G. Verboncoeur
-----------------------
Carl G. Verboncoeur, Attorney-in-Fact
|
* Pursuant to powers of attorney are incorporated herein by reference to
Exhibit (q) of Post-Effective Amendment No. 13 to the Registration
Statement of Rydex Dynamic Funds (File No. 333-84797), as filed with the
SEC on February 14, 2007.
9
EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT:
-------------- --------
EX-99.D Advisory Agreement dated January 18, 2008 between the Registrant and PADCO Advisors
II, Inc.
EX-99.E1 Distribution Agreement dated January 18, 2008 between the Registrant and Rydex
Distributors, Inc.
EX-99.G5 Amendment and revised Appendix A dated September 13, 2007 to the Custodian Agreement
dated May 3, 2005 between the Registrant and State Street Bank and Trust Company
EX-99.H4 Amendment dated September 13, 2007 to the Administration Agreement dated April 29,
2005 between the Registrant and State Street Bank and Trust Company
EX-99.H7 Amendment dated September 13, 2007 to the Transfer Agency and Services Agreement
dated May 3, 2005, including revised Schedule A, between the Registrant and State
Street Bank and Trust Company
EX-99.I Opinion and Consent of Counsel, Morgan, Lewis & Bockius LLP
EX-99.J Consent of independent registered public accounting firm, Ernst & Young LLP
EX-99.M1 Distribution Plan dated April 11, 2003
EX-99.M2 Amendment dated November 15, 2007 to the Distribution Plan dated April 11, 2003
|
10
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