Rydex Registers New Funds Based on Exotic S&P Indexes By IndexFunds.com Staff January 30, 2003

Standard & Poor's Indexes recently developed two interesting benchmarks, and investors may soon have access to them through passive funds.

Rydex has registered a new exchange-traded fund based on the recently unveiled S&P 500 equal-weighted index (EWI).

"Among the widely accepted beliefs of investing are the long term out-performance of small cap stocks and the superiority of investing with indices," said David M. Blitzer, chairman of Standard & Poor's Index Committee. "The relatively higher exposure to smaller cap stocks in the S&P EWI sets it apart from the S&P 500. The S&P EWI is more volatile and has significantly higher turnover than the S&P 500. In addition, the sector exposure of the S&P EWI will differ from the S&P 500; the S&P EWI will tend to have larger weights in sectors with small companies than the S&P 500."

Since the S&P 500 index is market-capitalization weighted, large stocks at the top can end up becoming the main drivers of performance. The new S&P EWI may be an attractive tool for investors who want increased small-cap exposure, or a simplistic version of slice and dice with only one fund.

The S&P EWI fund will almost certainly have more turnover than an S&P 500 index fund because of all the trading required to maintain the equal weighting. However, Morningstar analyst Christopher Traulsen pointed out that the ETF format, which tends to reduce capital gains distributions, may insulate the fund somewhat from a tax efficiency standpoint.

Since Rydex has yet to release the expense ratio for the new fund, it's difficult to predict the potential popularity of an equal-weighted S&P 500 ETF. Many investors complement an S&P 500 index fund with small-cap index funds or ETFs to diversify their portfolios. Investors can also use sector index funds or ETFs to overweight sector exposures relative to the market-cap weighted S&P 500. Of course, more funds means more costs. It remains to be seen whether investors will embrace the neatly-packaged S&P EWI as an alternative strategy.

Rydex also filed with the SEC to introduce an investment product tied to the S&P Hedge Fund Index. The new fund, which is targeted for high-net worth individuals and will be sold through advisors, will require an initial minimum investment of $25,000.

Standard & Poor's collaborated with PlusFunds to develop the hedge fund index, for more on the index click here.