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Thought this might be of interest to those who were discussing trading the
Rydex funds a week or so ago. Sorry it's late, simply wanted to get
permission from the author. This is from the Walker MarketEdge. This
publication is available on a paid basis, but they have others that are
free. The url is http://www.lowrisk.com .
begin quote
>We have had numerous inquiries about the Rydex family of mutual funds.
>Rydex has several funds that are designed for people who make frequent
>mutual fund switches. If you open an account directly with Rydex, there are
>no switching limits - you can switch funds every single day without
>penalty. Rydex offers a couple of rather unique funds for timing the stock
>market. The Rydex Nova fund is an SP500 index fund with a little extra
>boost. The funds objective is to have a beta of 1.5. In other words, it
>will provide 150% of the SP500 return both up and down. If the SP500 is up
>10%, Nova should be up 15%. If the SP500 is down 10%, Nova should be down
>15%. The Rydex Ursa fund is a bear market fund that is designed to have an
>inverse relationship with the SP500. So if the SP500 is up 10%, Ursa will
>be DOWN 10%. If the SP500 is down 10%, Ursa will be UP 10%.
>
>At the suggestion of a subscriber, we decided to do a bit of testing to see
>how well these funds met their objective. In this issue we will cover the
>Nova fund, and next issue we will look at the Ursa fund. We tested using
>the Vanguard Index Trust 500 as a benchmark. We used this benchmark instead
>to the SP500 index because the Vanguard fund includes the dividends earned
>by holding the 500 stocks and it also takes into account the effect of
>mutual fund management fees. In this case, the Vanguard index fund has very
>low fees. The Rydex funds have considerably higher fees. Taxes were not
>taken into account.
>
>First we looked at the performance since the Rydex funds inception (almost
>five years), and then for three years and one year. Since these were very
>bullish years, these performance figures primarily reflect performance in
>bullish periods.
>
>Performance since inception - 1/10/94
>Rydex Nova = 217.5%
>Vanguard Index Trust 500 = 165.6%
>
>Three year performance
>Rydex Nova = 170.0%
>Vanguard Index Trust 500 = 122.8%
>
>One year performance
>Rydex Nova = 34.8%
>Vanguard Index Trust 500 = 28.7%
>
>According to the above data the Nova fund does not quite meet its goal of a
>return 150% that of the SP500. The return appears to be closer to 130% of
>the SP500. There could be a number of reasons for this. Remember that we
>are comparing Nova to the Vanguard 500 Index fund. The expense ratio for
>the Rydex Nova fund is 1.16%, considerable higher than the Vanguard Index
>500 at .19%. Also, the Nova fund does not generally hold the stocks in the
>SP500, it primarily uses options and futures on the SP500. The options and
>futures mimic the SP500, but they do not pay dividends, so Nova does not
>accumulate dividends. Another possible reason is that Nova probably incurs
>higher transaction fees since it caters to investors who frequently switch
>funds.
>
>Even given the fact that Nova only returns 130% of the SP500 return instead
>of 150%, those returns still look pretty impressive. But in every
>investment decision you need to consider the risks as well as returns. So
>we next looked at the performance during periods with negative market
>performance. Since the Rydex funds have only been in existence since 1994,
>we could not look at any true bear markets. We selected three periods of
>short term market weakness. Here are the funds performance in those
>periods.
>
>10/8/97 - 10/27/97
>Rydex Nova = -15.9%
>Vanguard Index Trust 500 = -9.8%
>
>2/18/97 - 4/11/97
>Rydex Nova = -15.3%
>Vanguard Index Trust 500 = -9.4%
>
>7/1/96 - 7/24/96
>Rydex Nova = -10.7%
>
>Vanguard Index Trust 500 = -7.2%
>
>>From the above data, it looks like in market downdrafts the Nova fund
>drops
>at a rate of 160% of the Vanguard 500 Index fund. So it appears that the
>leverage on the downside is greater than that on the upside, which is
>troubling. In essence, this stacks the odds against investors in this fund.
>
>The contact number for Rydex is 800-820-0888. They have a minimum account
>size of $25,000.
>
>Good luck,
>Jeff Walker
>
>Copyright (c) 1998 by Jeff Walker, Lakewood, CO
>
>Disclaimer:
>The financial markets are risky. Investing is risky. Past
>performance does not guarantee future performance. The
>foregoing has been prepared solely for informational
>purposes and is not a solicitation, or an offer to buy or
>sell any security. Opinions are based on historical
>research and data believed reliable, but there is no
>guarantee that future results will be profitable.
>
>
> jwalker@xxxxxxxxxxx
>> http://www.lowrisk.com
>
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