Morgan, Lewis & Bockius LLP
1111 Pennsylvania Ave. N.W.
Washington, DC 20004
LAURA E. FLORES*
202.739.5684
lflores@morganlewis.com
* Admitted in Florida only
May 18, 2005
VIA EDGAR CORRESPONDENCE
Mr. Christian T. Sandoe
U.S. Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, DC 20549
Re: RYDEX ETF TRUST (THE "TRUST") - POST EFFECTIVE AMENDMENT NO. 3
(FILE NOS. 333-101625 AND 811-21261)
Dear Mr. Sandoe:
This letter responds to your comments to the Trust's Post-Effective Amendment
No. 3, filed on February 11, 2005 for the purpose of introducing the Rydex
Russell Top 50 ETF (the "Fund") into the Trust and incorporating disclosures
regarding (i) the Trust's policies and procedures with respect to frequent
purchases and redemptions of fund shares, (ii) the circumstances under which the
Trust may use fair value pricing and the effects of using fair value pricing,
and (iii) the Trust's policies and procedures with respect to the disclosure of
portfolio holdings information. The following summarizes your comments, and our
response to those comments. Unless otherwise noted, capitalized terms have the
same meaning as contained in the Fund's Prospectus and/or Statement of
Additional Information (SAI).
1. COMMENT. Please consider revising the statement that "Shares may trade
at, above or below their NAV," included in the second bullet point
under "Trading Risk," by deleting the reference to shares trading at
and above the NAV.
RESPONSE. We have revised the language accordingly.
Mr. Christian T. Sandoe
May 18, 2005
Page 2
2. COMMENT. Please disclose the duration of the Advisor's contractual
agreement to pay all operating expenses of the Fund in footnote (F)
following the "Fees and Expenses" table on page 3 of the Prospectus.
RESPONSE. We do not believe additional disclosure in footnote (F) is
necessary as the Advisor's obligation to bear all Fund expenses is a
term in the advisory contract between the Advisor and the Trust and is
currently disclosed on page 13 of the Prospectus. Because this unitary
fee is a core term of the advisory agreement, it will continue in
perpetuity for as long as the contract is renewed by the Trust's Board
in accordance with Section 15(c).
3. COMMENT. Please delete the use of "Additional" in the "Additional
Investment Strategies" and "Additional Risks" headings located on page
6 of the Prospectus as they are also considered to be principal
investment strategies and risks.
RESPONSE. We have revised the headings accordingly.
4. COMMENT. Please include disclosure concerning the 60-day shareholder
notice requirement specified in Rule 35d-1 under "Additional Investment
Strategies" on page 6 of the Prospectus.
RESPONSE. We have included the following sentence under "Principal
Investment Strategy":
"This is a non-fundamental policy that can be changed by the Fund upon
60 days' prior notice to shareholders."
5. COMMENT. Please clarify the Board of Trustees' reasons for not adopting
frequent trading policies and procedures.
RESPONSE. We have revised the "Market Timing" section as follows:
"Because the shares of the Fund are listed for trading on the Exchange,
which allows retail investors to purchase and sell individual shares
among themselves at market prices throughout the trading day similar to
other publicly traded securities, the Fund's Board of Trustees has not
adopted policies and procedures designed to prevent market timing or to
monitor for frequent purchases and redemptions of Fund shares. In
addition, the Fund sells and redeems its shares at NAV only in
block-size 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 the Fund's portfolio and a specified amount of cash. The
Fund also imposes a transaction fee on such Creation Unit transactions
that is designed to offset the Fund's transfer and other transaction
costs associated with the issuance and redemption of the Creation Unit
shares."
Mr. Christian T. Sandoe
May 18, 2005
Page 3
6. COMMENT. Please disclose the calculation of NAV with respect to the
NYSE schedule in accordance with Section 22 (e) and Rule 22c-1 in the
"Calculating NAV" section on page 9 of the Prospectus.
RESPONSE. The Fund's Advisor has confirmed that this Fund will not be
impacted by the early closings of markets other than the NYSE;
therefore, we have revised the "Calculating NAV" section by deleting
the second sentence as follows:
The Fund calculates 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).
7. COMMENT. With respect to the discussion of the Fund's use of fair
valuation in the second sentence of the second full paragraph under
"Calculating NAV" on page 9 of the Prospectus, please consider
replacing "may" with "will."
RESPONSE. We have revised the language accordingly.
8. COMMENT. Please incorporate disclosure concerning the applicability of
Section 18(f)(1) into the language included in the last paragraph
following "Non-Fundamental Policies" on page 11 of the SAI.
RESPONSE. We have revised the paragraph referenced as follows (new
language appears in bold for purposes of correspondence only):
"With respect to both the fundamental and non-fundamental policies of
the Fund, the foregoing percentages: (i) are based on total assets
(except for the limitation on illiquid securities, which is 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 FUND." 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,
THE 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."
9. COMMENT. Please revise the "Portfolio Holdings" section on page 36 of
the SAI to reflect the requirements of 11(f)(ii) with respect to
restrictions placed on the use of information disclosed and 11(f)(vi)
with respect to the Fund's procedures regarding portfolio holdings
disclosure.
RESPONSE. With respect to item 11(f)(ii), no conditions or restrictions
are placed on the use of Fund information disclosed to the Distributor
or other agent for dissemination through the facilities of the NSCC
and/or other fee-based subscription services or to
Mr. Christian T. Sandoe
May 18, 2005
Page 4
entities that publish and/or analyze such information in connection
with the process of purchasing or redeeming Creation Units or trading
shares of the Fund in the secondary market.
The success of the Fund depends, in part, on its ability to maintain a
high degree of transparency; therefore, the disclosure of portfolio
holdings information does not present the same potential for abuse for
the Fund as it does for other open-end investment companies. For
example, the consideration necessary to purchase a Creation Unit of the
Fund consists of a cash component as well as an in-kind deposit of a
designated portfolio of securities ("Deposit Securities"). The Deposit
Securities substantially replicate the stocks included in the Fund's
Underlying Index. The list of the names and required number of shares
of each Deposit Security is disclosed by the Custodian through NSCC
each Business Day. Moreover, the Fund's investment objective is to
replicate as closely as possible the performance of the Russell Top
50TM Index, the composition of which is publicized.
However, recipients permitted to receive Fund information based on an
exception determined by the Chief Compliance Officer would be subject
to a duty of confidentiality, including a duty not to trade on the
nonpublic information and would be required to execute an agreement to
that effect. No such exceptions currently exist.
With respect to item 11(f)(vi), we have revised the "Portfolio
Holdings" section on page 11 of the SAI as follows:
"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 Fund. 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 Fund's
Advisor, principal underwriter, or any affiliated person of the Fund,
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 the Fund
in the secondary market. This information typically reflects the Fund's
anticipated holdings on the following business day. Daily access to
information concerning the 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,
Mr. Christian T. Sandoe
May 18, 2005
Page 5
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 Fund
and/or the terms of the Fund's current registration statement. As of
May 1, 2005, the Fund had not yet commenced operations and therefore,
did not disclose portfolio holdings information to any individual or
entity. Once the Fund commences operations it expects to disclose
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 ("SIAC"), Goldman Sachs Execution and Clearing, LP,
Bloomberg, and Thomson Financial News.
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
Fund, 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 Fund
in the ordinary course of business after it has been disseminated to
the NSCC.
The Fund's Chief Compliance Officer, or his or her designee, 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) in instances where the 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 Fund, the Advisor, or any other party
receive any direct or indirect compensation in connection with the
disclosure of information about the Fund's portfolio holdings.
In addition to the permitted disclosures described above, the 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."
10. COMMENT. Please clearly identify which Trustees are interested under
"Management of the Trust" on page 15 of the SAI.
RESPONSE. We have included headings in the "Management of the Trust -
Members of the Board" section on page 15 of the SAI indicating which
Trustees are interested and which are independent.
11. COMMENT. Please disclose the duration of the Trustees' terms of
service.
RESPONSE. We have included the following sentence under "Management of
the Trust - Members of the Board" section on page 15 of the SAI
"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."
Mr. Christian T. Sandoe
May 18, 2005
Page 6
12. COMMENT. Please provide more specific disclosure with regard to the
information the Board of Trustees considered and their findings prior
to their approval of the investment advisory agreement.
RESPONSE. We have revised the fourth paragraph of the "Board
Considerations in Approving the Advisory Agreement" section located on
page 17 of the SAI as follows:
"Based on the Board's deliberations and its evaluation of the
information described above, the Board, including all of the
independent trustees, agreed that the Advisor had provided high quality
services to the Rydex family of Funds in respect to such matters as
managing the Funds' portfolios in a manner consistent with the Funds'
respective investment objectives, as well as providing transfer agency
services, fund accounting services and other services to Fund investors
in a manner that meets the needs of investors. In addition, the Board
found that the fees charged by the Advisor for the services to be
provided to the Fund were reasonable in light of the costs of the
services, the profitability of the Advisor, and the fees charged by
advisers to other comparable funds. As a result of these findings, the
Board unanimously: (a) concluded that terms of the investment advisory
agreement are fair and reasonable; (b) concluded that the Advisor's
fees are reasonable in light of the services that the Advisor provides
to the Trust; and (c) agreed to approve the investment advisory
agreement for the Fund."
***
I hereby acknowledge on behalf of the Rydex ETF Trust (the "Trust") that: (i)
the Trust is responsible for the adequacy and accuracy of the disclosure in its
registration statement; (ii) SEC staff comments or changes to disclosure in
response to staff comments in the registration statement reviewed by the staff
do not foreclose the SEC from taking any action with respect to the registration
statement; and (iii) the Trust may not assert SEC staff comments as a defense in
any proceeding initiated by the SEC or any person under the federal securities
laws of the United States.
If you have any additional questions or comments, please do not hesitate to
contact either John M. Ford at 202.739.5856 or me at 202.739.5684.
Sincerely,
/s/ Laura E. Flores
Laura E. Flores
c: John M. Ford, Esq.
Joanna Haigney