Rydex deal puts Guggenheim squarely in the ETF frame

After months of speculation, RydexSGI is being absorbed by Guggenheim Partners LLC, creating a $119 billion asset management firm and the 10th largest exchange-traded fund shop at nearly $19 billion. The deal, scheduled to be announced Wednesday morning, follows Guggenheim's September 2010 rebranding of Claymore Group Inc. to become Guggenheim Investments. The newly combined entity, which will operate under that name as well, will be headquartered in New York and Santa Monica, Calif. The combined asset management shops will gradually bring together a variety of products, including 77 mutual funds, but it is the new family of 104 ETFs that is expected to see the greatest level of development and innovation. “We're certainly looking to expand the [ETF] product line, and we think we could move up the ranks [beyond tenth largest] rather quickly,” said Tony Davidow, managing director and portfolio strategist at Rydex. “We're definitely in growth mode and there's quite a bit more we can do from here,” he added. Financial advisers familiar with the Rydex ETF lineup said the combined entity is a positive, but that the changes will likely come slowly. “Out of all the groups that have controlled Rydex none is more powerful or has more money than Guggenheim,” said Paul Schatz, president of Heritage Capital LLC, a $110 million advisory firm. “I don’t think we’ll immediately see hundreds of new ETFs come out of this, but they will be able to build out the product lineup,” he added. “Guggenheim’s push should help to increase liquidity to some of the thinner ETFs, and you can only think of those ETFs will start to get more traction under the rebranding.” The rebranding effort will help to establish Guggenheim as “one of the ETF providers with a diversified product line,” said Tom Lydon, president of Global Trends Investments. Mr. Lydon, who also serves on the fund board at Rydex, added that “as the whole thing gets fully integrated the picture will be clear that investor education is a big part of the plan.” While the ETF space has experienced tremendous growth over the past several years, there is still room for fine-tuning the way of more specialized and specific strategies, according to David Elliott, president and owner of DG Elliott Financial Services Inc., a $15 million advisory shop that relies heavily on ETFs in building client portfolios. “I think mutual funds could go away entirely over the next five or 10 years, because of the high operating cost,” he said. “If I was an ETF manager I would want to be where the action is, and that’s something that is constantly changing.” The consolidation and product rebranding, which will take place gradually over the next several months, brings together in one ETF family product lines and thematic series including RydexShares and CurrencyShares from Rydex, and BulletShares from Guggenheim. The ETF family will also include about 30 products from Claymore Canada. “We view the product lines as being completely complimentary and we feel like we're in the sweet spot of financial adviser and client needs,” said Marc Zeitoun, head of intermediary distribution at Rydex. Part of what is expected to make the transition a smooth one is the fact that Guggenheim and Rydex have already been working collaboratively for the past few years. In 2009, Guggenheim took over management of Rydex parent Security Benefit Corp.'s $4 billion general account. And in February 2010, Guggenheim was the lead investor in buying a controlling interest in Security Benefit Corp. Through the deal announced today, Guggenheim, which continues to hold a controlling interest in Security Benefit Corp., will essentially acquire Rydex in exchange for making Security Benefit Corp. the largest institutional shareholder in Guggenheim. Specific dollar value terms of the deal are not being made public. “In many ways this is a different kind of transaction,” said Richard Goldman, who is coming from Rydex and will be chief operating office of the combined firm. “This is an expansion of the Guggenheim asset management capabilities, and we're excited about the complimentary nature of the businesses,” he added. “Over the past few years of working together we have collaborated on product development, marketing and sales, and now we're taking the expansion to the next level.” Even though the combined entity will be ranked tenth in the world (and seventh largest in the U.S.), a $19 billion ETF business could still be considered fledgling by some measures, according to Paul Justice, ETF analyst at Morningstar Inc. By way of comparison, the top spot is held by BlackRock Inc., which holds a 42% market share with $446 billion in ETF assets. State Street Global Advisors is number two with a 25% share and $267 billion under management, followed by The Vanguard Group, which has a 16% share of the market and $167 billion under management. According to Mr. Justice, one upside of not being a gigantic ETF provider is that the rebranding strategy will be easier to execute. “Neither Rydex nor Claymore have names that pack a lot of punch with consumers, and there's also not substantial product overlap, which means there will be a broad product line offering,” he said. “The bigger footprint can help to rationalize the marketing and distribution efforts, and brand recognition can beget success.” Bill Belden, managing director and head of product development from Guggenheim, confirmed that nobody is expecting to see a lot of consolidation among the ETFs that are being brought together under the Guggenheim banner. “We've been looking at the Rydex ETF product line and there is not a lot of redundancy or overlap,” he said. “Going forward ETFs will become one of our core capabilities, and there will be new areas that will be developed.” Mr. Davidow concurred, saying, “We've all been eagerly awaiting this because there's so much we can do together, and scale really does help.” The Rydex deal brings Guggenheim's assets under management figure to more than three times what it was in 2007, and creates a company with more than 800 employees. In addition to Mr. Goldman as COO, the top-level management team will include Todd Boehly, president, Scott Minerd, chief investment officer, and Don Cacciapaglia, chief administrative officer.