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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON June 20, 2000
FILE NO. 333-57017
FILE NO. 811-08821
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (X)
POST-EFFECTIVE AMENDMENT NO. 5
and
REGISTRATION STATEMENT UNDER THE INVESTMENT ACT OF 1940 (X)
AMENDMENT NO. 6 (X)
RYDEX VARIABLE TRUST
(Exact Name of Registrant as Specified in Charter)
c/o 6116 Executive Boulevard, Suite 400
Rockville, Maryland 20852
(Address of Principal Executive Offices, Zip Code)
Registrant's Telephone Number, including Area Code (301) 468-8520
Albert P. Viragh, Jr.
Rydex
6116 Executive Boulevard, Suite 400
Rockville, Maryland 20852
(Name and Address of Agent for Service)
Copies to:
W. John McGuire John H. Grady, Jr., Esq.
Morgan, Lewis & Bockius LLP Morgan, Lewis & Bockius LLP
1800 M Street, N.W. 1701 Market Street
Washington, D.C. 20036 Philadelphia, PA 19103
It is proposed that this filing will become effective (check
appropriate box):
Immediately upon filing pursuant to paragraph (b)
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On April 30, 2000 pursuant to paragraph (b)
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60 days after filing pursuant to paragraph (a)(1)
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On (date) pursuant to paragraph (a)(1)
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X 75 days after filing pursuant to paragraph (a)(2)
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On (date) pursuant to paragraph (a)(2) of Rule 485.
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If appropriate, check the following box:
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This post-effective amendment designates a new effective date
----- for a previously filed post-effective amendment.
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PROSPECTUS
RYDEX VARIABLE TRUST
SMALL-CAP FUND
6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852
1-800-820-0888 301-468-8520
Rydex Variable Trust (the "Trust") is a no-load mutual fund complex with
thirty-one separate investment portfolios (the "Rydex Funds"), one of which is
described in this Prospectus (the "Fund"). Shares of the Fund are available
exclusively for variable annuity and variable life insurance products. Variable
life and variable annuity account investors should also review the separate
account prospectus prepared by their insurance company.
THE 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.
, 2000
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY
STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
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RISKS OF INVESTING IN THE FUND
The value of the Fund may fluctuate. In addition, Fund shares:
- MAY DECLINE IN VALUE, AND YOU MAY LOSE MONEY
- ARE NOT FEDERALLY INSURED
- ARE NOT BANK DEPOSITS
- ARE NOT GUARANTEED BY ANY GOVERNMENT AGENCY
- ARE NOT GUARANTEED TO ACHIEVE THEIR OBJECTIVES
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RISK/RETURN INFORMATION -- SMALL-CAP FUND
FUND OBJECTIVE
The Small-Cap Fund seeks to provide investment returns that correlate to
the performance of a specific benchmark. The Fund's current benchmark is
the Russell 2000-Registered Trademark- Index (the "Russell 2000 Index").
The INVESTMENT OBJECTIVE OF THE FUND IS NON-FUNDAMENTAL AND MAY BE
CHANGED WITHOUT SHAREHOLDER APPROVAL.
PORTFOLIO INVESTMENT STRATEGY
The Fund invests principally in securities of companies included on the
Russell 2000 Index and in leveraged instruments, such as swap agreements,
futures contracts and options on securities, futures contracts, and stock
indices. Swap Agreements and Futures and options contracts, if used
properly, may enable the Fund to meet its objective by increasing the
Fund's exposure to the securities included in its benchmark or to
securities whose performance is highly correlated to its benchmark. The
Fund's investment advisor will attempt to consistently apply leverage to
increase the Fund's exposure to ___% of the Russell 2000 Index. The Fund
holds U.S. Government securities or cash equivalents to collateralize
these futures and options contracts. The Fund also may enter into
repurchase agreements.
RISK CONSIDERATIONS
The Small-Cap Fund is subject to a number of risks that will affect the
value of its shares, including:
- TRACKING ERROR RISK -- The Advisor may not be able to cause the Fund's
performance to correlate to that of the Fund's benchmark, either on a
daily or an aggregate basis. The combined effects of leverage and high
portfolio turnover may prevent the Fund from achieving close
correlation to the Russell 2000 Index.
- LEVERAGING RISK -- The more the Fund invests in leveraged instruments,
the more this leverage will magnify any losses on those investments.
Since the Fund's investment strategy involves consistently applied
leverage, the value of the Fund's shares will tend to decrease by ___%
of the value of any decrease in the Russell 2000 Index. For example, if
the Russell 2000 Index goes down by ___%, the value of the Fund's
shares would be expected to go down by ___%.
- EQUITY RISK -- The equity markets are volatile, and the value of the
Fund's equity securities and any futures and options contracts may
fluctuate significantly from day to day. This volatility may cause the
value of your investment in the Fund to decrease.
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- SMALL-CAP RISK -- In comparison to securities of companies with 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 large-capitalization
companies.
- SWAPS COUNTERPARTY RISK -- A Swap Agreement's value is based on the
amount of money that the swap counterparty is expected to pay to the
Fund. The Fund bears the risk of loss of the amount expected to be
received if a swap agreement counterparty defaults.
FUND PERFORMANCE INFORMATION
SMALL-CAP FUND PERFORMANCE
The Small-Cap Fund is new and therefore does not have a performance history
for a full calendar year.
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MORE INFORMATION ABOUT FUND INVESTMENTS AND RISK
THE FUND'S INVESTMENT OBJECTIVE
The Fund's objective is to provide investment results that correlate to the
performance of a specific benchmark. The investment objective of the Fund is
non-fundamental and may be changed without shareholder approval. The current
benchmark used by the Fund is the Russell 2000 Index.
A BRIEF GUIDE TO THE BENCHMARK
RUSSELL 2000 INDEX. The Russell 2000 Index is composed of the 2,000 smallest
companies in the Russell 3000-Registered Trademark- Index, representing
approximately 11% of the Russell 3000 total market capitalization. The
Russell 3000-Registered Trademark- 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.
ADVISOR'S INVESTMENT METHODOLOGY
In managing the Fund, the Advisor uses a "quantitative" investment strategy
to manage the Fund's portfolio. The Advisor uses quantitative analysis
techniques to structure the Fund to obtain a high correlation to the Fund's
particular benchmark, but does not attempt to select securities based on
their individual potential to perform better than the market. The Advisor
does not engage in temporary defensive investing, keeping the Fund's assets
fully invested in all market environments. The Advisor monitors the Fund on
an ongoing basis, and makes adjustments to its portfolio, as necessary, to
minimize tracking error and to maximize liquidity. The Advisor will regularly
utilize futures and options contracts to leverage the Fund's investment
exposure.
RISKS OF INVESTING IN THE FUND
As indicated below, the Fund is subject to a number of risks that may affect
the value of Fund shares.
EQUITY RISK -- The Fund invests primarily in equity securities as well as
instruments that attempt to track the price movement of equity indices.
Investments in equity securities and equity derivatives are subject to market
risks that cause their prices to fluctuate over time. Fluctuations in the
value of equity securities in which the Fund invests will cause the net asset
value of the Fund to fluctuate. Historically, the equity markets have moved
in cycles, and the value of the Fund's securities may fluctuate considerably
from day to day. This price volatility is the principal risk of investing in
equity securities. Because of its link to the equity markets, an investment
in the Fund may be more suitable for long-term investors who can bear the
risk of short-term principal fluctuations.
FUTURES AND OPTIONS RISK -- The Fund will invest a percentage of their assets
in futures and options contracts. 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
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synthetic money market position or for certain other tax-related purposes.
The Fund may enter into futures contracts traded on a national futures
exchange or board of trade or in the over-the-counter market. Futures and
options contracts are described in more detail below:
FUTURES CONTRACTS -- Futures contracts and options on futures contracts
provide for the sale by one party and purchase by another party of a
specified amount of a security at a specified future time and 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 whose value is determined, in part, by the value of the
securities in the designated index. Index futures for various indices 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 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 selling call options on securities,
a Fund may cover its position by owning the underlying security or by
owning a call option on the underlying security. Alternatively, a Fund may
cover its position by maintaining in a segregated account cash or liquid
securities equal in value to the exercise price of the call option sold.
The risks associated with the Fund's use of futures and options contracts
include:
- 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.
- The Fund may experience losses over certain ranges in the market that
exceed losses experienced by a fund that does not use futures contracts
and options.
- 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 an advantageous time.
- Trading restrictions or limitations may be imposed by an exchange, and
government regulations may restrict trading in futures contracts and
options.
- 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.
SWAPS -- The Fund may enter into 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 Advisor believes that the other
party to the transaction is creditworthy. The use of equity swaps involves
risks that are different from
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those associated with ordinary portfolio securities transactions. Swap
agreements may be considered to be illiquid. 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.
PORTFOLIO TURNOVER RATE RISK -- The Trust anticipates that investors who are
part of a tactical or asset-allocation strategy will frequently redeem or
exchange shares, which will cause the Fund to experience high portfolio
turnover. A higher portfolio turnover rate may result in a Fund paying higher
levels of transaction costs and generating greater tax liabilities for
shareholders.
NON-DIVERSIFICATION RISK -- Since the Fund is non-diversified, the Fund 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.
TRACKING ERROR RISK -- While the Fund does not expect returns to deviate
significantly from its benchmark, factors such as Fund expenses, imperfect
correlation between the Fund's investments and those of its benchmark,
rounding of share prices, changes to the benchmark, regulatory policies, and
leverage may affect the ability to achieve close correlation on a daily
basis. The cumulative effect of these factors may over time cause the Fund's
returns to deviate from its respective benchmark on an aggregate basis. The
magnitude of any tracking error may be affected by a higher portfolio
turnover rate.
TRADING HALT AND EARLY CLOSING RISK -- The Fund typically will hold
short-term options and futures contracts. The major exchanges on which these
contracts are traded have established limits on how much an option or futures
contract may decline over various time periods within a day. If an option or
futures contract's price declines more than the established limits, trading
on the exchange is halted on that instrument. If a trading halt occurs, the
Fund may temporarily be unable to purchase or sell options or futures
contracts. Such a trading halt near the time the Fund prices its shares may
limit the Fund's ability to use leverage and may prevent the Fund from
achieving its investment objective. In such an event, a Fund also may be
required to use a "fair-value" method to price its outstanding contracts. In
addition, unanticipated early closings of the equity markets may result in a
Fund being unable to sell or buy securities on that day. If an exchange
closes early on a day when the Fund needs to execute a high volume of
securities trades late in a trading day, the Fund might incur substantial
trading losses.
SMALL ISSUER RISK -- Small and medium capitalization companies may be more
vulnerable than larger, more established organizations to adverse business or
economic developments. In particular, small capitalization companies may have
limited product lines, markets, and financial resources and may be dependent
upon a relatively small management group. These securities may trade
over-the-counter or be listed on an exchange and may or may not pay dividends.
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PURCHASING AND REDEEMING SHARES
Shares are offered continuously, and may be purchased on any day that both
the NYSE is open for business and the index underlying the Fund's benchmark
is published (a "Business Day"). The price per share (the offering price)
will be the net asset value ("NAV") next determined after your purchase order
is received by the Trust.
Shares of the Fund can be purchased only by insurance companies for their
separate accounts to fund variable life insurance and variable annuity
contracts. All orders for the purchase of shares are subject to acceptance or
rejection by the Trust. An insurance company purchases and redeems shares of
the Fund based on, among other things, the amount of net Contract premiums or
purchase payments allocated to a separate account investment division,
transfers to or from a separate account investment division, contract loans
and repayments, contract withdrawals and surrenders, and benefit payments, at
the Fund's NAV calculated as of that same day.
You may redeem all or any portion of your Fund shares at the next determined
NAV after receipt of the redemption request. All redemption requests will be
processed and payment with respect thereto will be made within seven days
after tender. With respect to the Fund, and as permitted by the SEC, the
right of redemption may be suspended, or the date of payment postponed: (1)
for any period during which the NYSE is closed (other than customary weekend
or holiday closings) or trading on the NYSE is restricted; (2) for any period
during which an emergency exists so that disposal of Fund investments or the
determination of net asset value per share ("NAV") is not reasonably
practicable; or (3) for such other periods as the Securities and Exchange
Commission (the "SEC"), by order, may permit for protection of fund
investors. In cases where NASDAQ, the CME, Chicago Board Options Exchange
("CBOE") or the CBOT, as appropriate, is closed or trading is restricted, a
Fund may ask the SEC to permit the right of redemption to be suspended.
NET ASSET VALUE
NAV is calculated by (1) taking the current market value of a Fund's total
assets, (2) subtracting the liabilities, and (3) dividing that amount by the
total number of shares owned by shareholders. For the Fund, the NAV is
calculated once each Business Day after the close of the NYSE (currently,
4:00 p.m., Eastern Time).
TO RECEIVE THE CURRENT BUSINESS DAY'S NAV, THE TRUST MUST RECEIVE
PURCHASE OR REDEMPTION ORDERS BEFORE 4:00 P.M., EASTERN TIME. HOWEVER, YOUR
INSURANCE COMPANY OR RETIREMENT PLAN SPONSOR MAY HAVE EARLIER CUTOFF TIMES.
VARIABLE LIFE AND VARIABLE ANNUITY ACCOUNT INVESTORS SHOULD CONSULT THEIR
SEPARATE ACCOUNT PROSPECTUS.
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MANAGEMENT OF THE FUNDS
THE INVESTMENT ADVISOR
Rydex Global Advisors (the "Advisor"), at 6116 Executive Boulevard, Suite
400, Rockville, Maryland 20852, serves as investment advisor and manager of
the Funds. Albert P. Viragh, Jr., the Chairman of the Board and the President
of the Advisor, owns a controlling interest in the Advisor. From 1985 until
the incorporation of the Advisor, Mr. Viragh was a Vice President of Money
Management Associates ("MMA"), a Maryland-based registered investment
advisor. From 1992 to June 1993, Mr. Viragh was the portfolio manager of The
Rushmore Nova Portfolio, a series of The Rushmore Fund, Inc., an investment
company managed by MMA.
The Advisor makes investment decisions for the assets of the Fund and
continuously reviews, supervises, and administers the Fund's investment
program. The Trustees of the Trust supervise the Advisor and establish
policies that the Advisor must follow in its day-to-day management
activities. Under an investment advisory agreement between the Trust and the
Advisor, the Fund pays the Advisor a fee at an annualized rate, based on the
average daily net assets for the Fund, as set forth below:
<TABLE>
<CAPTION>
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FUND ADVISORY FEE
----------------------------------------------------------- --------------------------------------------------------
<S> <C>
Small-Cap .90%
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</TABLE>
The Advisor bears all of its own costs associated with providing these
advisory services and the expenses of the 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.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Income dividends and capital gain distributions are paid at least annually
to the insurance company by the Fund. The Trust may declare a special capital
gains distribution if the Trustees believe that such a distribution would be
in the best interest of the shareholders of the Fund.
The Fund is treated as a separate entity for federal tax purposes, and
intends to qualify for the special tax treatment afforded regulated
investment companies. As long as the Fund qualifies as a regulated investment
company, it pays no federal income tax on the earnings it distributes to
Shareholders. The 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.
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BENCHMARK INFORMATION
THE SMALL-CAP FUND IS NOT SPONSORED, ENDORSED, SOLD, OR PROMOTED BY THE FRANK
RUSSELL COMPANY ("RUSSELL").
RUSSELL DOES NOT MAKE ANY REPRESENTATION OR WARRANTY, IMPLIED OR EXPRESS, TO
THE INVESTORS IN THE FUND, OR ANY MEMBER OF THE PUBLIC, REGARDING THE
ADVISABILITY OF INVESTING IN INDEX FUNDS OR THE ABILITY OF THE RUSELL
2000-REGISTERED TRADEMARK- INDEX TO TRACK GENERAL STOCK MARKET PERFORMANCE.
RUSSELL DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE
RUSSELL 2000-REGISTERED TRADEMARK- INDEX OR ANY DATA INCLUDED THEREIN.
RUSSELL DOES NOT MAKE ANY WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE
OBTAINED BY THE FUND, THE INVESTORS IN THE FUND, OR ANY PERSON OR ENTITY FROM
THE USE OF THE RUSSELL 2000-REGISTERED TRADEMARK- INDEX, OR ANY DATA INCLUDED
THEREIN.
RUSSELL DOES NOT MAKE ANY EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE FOR USE WITH RESPECT TO THE RUSSELL
2000-REGISTERED TRADEMARK- INDEX, OR ANY DATA INCLUDED THEREIN.
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Additional information about the Fund is included in a Statement of
Additional Information dated , 2000 (the "SAI"), which contains more
detailed information about the Fund. The SAI has been filed with the
Securities and Exchange Commission ("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 1-202-942-8090). You may
request documents by mail from the SEC, upon payment of a duplication fee,
by writing to: Securities and Exchange Commission, Public Reference
Section, Washington, D.C. 20549-0102. You may also obtain this
information, upon payment of a duplicating fee, by e-mailing the SEC at
the following address: [email protected].
You may obtain a copy of the SAI or the annual or semi-annual reports,
without charge, by calling 800-820-0888 or by writing to Rydex Variable
Trust at 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852.
Additional information about the Fund's investments and those of the
Trust's predecessor is available in the annual and semi-annual
reports. Also, in the Fund's annual report, you will find a discussion
of the market conditions and investment strategies that significantly
affected the Fund's performance during its 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 TRUST'S SAI IN
CONNECTION WITH THE OFFERING OF FUND SHARES. DO NOT RELY ON ANY SUCH
INFORMATION OR REPRESENTATIONS AS HAVING BEEN AUTHORIZED BY THE TRUST OR
RYDEX GLOBAL ADVISORS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY
THE TRUST IN ANY JURISDICTION WHERE SUCH AN OFFERING IS NOT LAWFUL.
The Fund's SEC registration number is 811-08821.
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STATEMENT OF ADDITIONAL INFORMATION
RYDEX VARIABLE TRUST
6116 EXECUTIVE BOULEVARD, SUITE 400
ROCKVILLE, MARYLAND 20852
1-800-820-0888
301-468-8520
www.rydexfunds.com
Rydex Variable Trust (the "Trust") is a no-load mutual fund complex with
thirty-one separate investment portfolios (the "Funds"). This Statement of
Additional Information ("SAI") relates to shares of the Small-Cap Fund (the
"Fund"):
SMALL-CAP FUND
This SAI is not a prospectus. It should be read in conjunction with the
Fund's Prospectus, dated , 2000. A copy of the Fund's Prospectus is
available, without charge, upon request to the Trust at the address above or
by telephoning the Trust at the telephone number above.
The date of this SAI is , 2000.
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STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
GENERAL INFORMATION ABOUT THE TRUST...........................................3
INVESTMENT POLICIES, TECHNIQUES AND RISK FACTORS..............................3
INVESTMENT RESTRICTIONS......................................................11
PORTFOLIO TRANSACTIONS AND BROKERAGE.........................................12
MANAGEMENT OF THE TRUST......................................................14
DETERMINATION OF NET ASSET VALUE.............................................19
PERFORMANCE INFORMATION......................................................19
CALCULATION OF RETURN QUOTATIONS.............................................20
PURCHASE AND REDEMPTION OF SHARES............................................21
DIVIDENDS, DISTRIBUTIONS, AND TAXES..........................................21
OTHER INFORMATION............................................................24
COUNSEL......................................................................24
AUDITORS.....................................................................24
CUSTODIAN ...................................................................25
</TABLE>
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GENERAL INFORMATION ABOUT THE TRUST
The Trust, an open-end management investment company, was organized as a
Delaware business trust on June 11, 1998. The Trust is permitted to offer
separate portfolios of shares. Shares of the Funds are available through
certain deferred variable annuity and variable insurance contracts
("Contracts") offered through insurance companies, as well as to certain
retirement plan investors. Additional Funds and/or classes may be created
from time to time.
Currently, the Trust has thirty-one separate series. All payments received by
the Trust for shares of any Fund belong to that Fund. Each Fund has its own
assets and liabilities. This SAI relates only to shares of the Small-Cap
Fund, which are offered without class designation.
The Trust is a successor to The Rydex Advisor Variable Annuity Account (the
"Separate Account"), and the subaccounts of the Separate Account (the "Rydex
Subaccounts"). The Rydex Subaccounts were divided into the Nova Subaccount,
the Ursa Subaccount, the Juno Subaccount, the OTC Subaccount, the Precious
Metals Subaccount, the U.S. Government Bond Subaccount and the Money Market
Subaccount. A substantial portion of the assets of each of the Rydex
Subaccounts was transferred to the respective Funds of the Trust in
connection with the commencement of operations of the Trust. To obtain
historical financial information about the Rydex Subaccounts, please call,
collect, 1-301-468-8520.
INVESTMENT POLICIES, TECHNIQUES AND RISK FACTORS
GENERAL
-------
The Fund's investment objective and principal investment strategies are
described in the Prospectus. The following information supplements, and
should be read in conjunction with, those sections of the Prospectus.
Portfolio management is provided to the Fund by the Trust's investment
adviser, PADCO Advisors II, Inc., a Maryland corporation with offices at 6116
Executive Boulevard, Suite 400, Rockville, Maryland 20852. PADCO Advisors II,
Inc. operates under the name Rydex Global Advisors (the "Advisor"). The
investment strategy of the Fund discussed below and in the Prospectus may be
used by the Fund if, in the opinion of the Advisor, the strategy will be
advantageous to the Fund. The Fund is free to reduce or eliminate its
activity in any of those areas without changing the Fund's fundamental
investment policies. There is no assurance that this strategy or any other
strategies and methods of investment available to the Fund will result in the
achievement of the Fund's objective.
BORROWING
---------
The Fund may borrow money, including borrowing for investment purposes.
Borrowing for investment is known as leveraging. Leveraging investments, by
purchasing securities with borrowed money, is a speculative technique which
increases investment risk, but also increases investment opportunity. Since
substantially all of the Fund's assets will fluctuate in value, whereas the
interest obligations on borrowings may be fixed, the net asset value per
share 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, the Fund might have to sell portfolio securities to meet interest
or principal payments at a time when investment
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considerations would not favor such sales. The Fund intends to use leverage
during periods when the Advisor believes that the Fund's investment objective
would be furthered.
The Fund may 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 Fund
promptly.
As required by the 1940 Act, the 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 the Fund's assets should fail to meet this 300%
coverage test, the Fund, within three days (not including Sundays and
holidays), will reduce the amount of the 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 Fund is authorized to borrow money as a
temporary measure for extraordinary or emergency purposes in amounts not in
excess of 5% of the value of the Fund's total assets. This borrowing is not
subject to the foregoing 300% asset coverage requirement. The Fund is
authorized to pledge portfolio securities as the Advisor deems appropriate in
connection with any borrowings.
ILLIQUID SECURITIES
-------------------
The Fund may purchase 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. The Fund will not invest more than 15% of the
Fund's net assets in illiquid securities. The Fund will adhere to a more
restrictive limitation on the Fund's investment in illiquid securities as
required by the securities laws of those jurisdictions where shares of the
Fund are registered for sale. 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 the Fund has valued
the securities. Under the current guidelines of the staff of the Securities
and Exchange Commission (the "Commission"), illiquid securities also are
considered to include, among other securities, purchased over-the-counter
options, certain cover for over-the-counter options, repurchase agreements
with maturities in excess of seven days, and certain securities whose
disposition is restricted under the federal securities laws. The 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 net asset value.
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 trustees
of the
4
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Trust (the "Trustees") have delegated the responsibility for determining the
liquidity of Rule 144A restricted securities which may be invested in by the
Fund to the Advisor.
INVESTMENTS IN OTHER INVESTMENT COMPANIES
-----------------------------------------
The Fund presently 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. The 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.
If the 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 Advisor and the other expenses that the
Fund bears directly in connection with the Fund's own operations.
LENDING OF PORTFOLIO SECURITIES
-------------------------------
Subject to the investment restrictions set forth below, the Fund may lend
portfolio securities to brokers, dealers, and financial institutions,
provided that cash equal to at least 100% of the market value of the
securities loaned is deposited by the borrower with the Fund and is
maintained each business day in a segregated account pursuant to applicable
regulations. While such securities are on loan, the borrower will pay the
lending Fund any income accruing thereon, and the Fund may invest the cash
collateral in portfolio securities, thereby earning additional income. The
Fund will not lend its portfolio securities if such loans are not permitted
by the laws or regulations of any state in which the Fund's shares are
qualified for sale, and the Fund will not lend more than 33 1/3% of the value
of the Fund's total assets. Loans would be subject to termination by the
lending Fund on four business days' notice, or by the borrower on one day's
notice. Borrowed securities must be returned when the loan is terminated. Any
gain or loss in the market price of the borrowed securities which occurs
during the term of the loan inures to the lending Fund and that Fund's
shareholders. A lending Fund may pay reasonable finders, borrowers,
administrative, and custodial fees in connection with a loan.
OPTIONS TRANSACTIONS
--------------------
OPTIONS ON SECURITIES. The Fund may buy call options and write (sell) put
options on securities for the purpose of realizing the Fund's investment
objective. By writing a call option on securities, the Fund becomes obligated
during the term of the option to sell the securities underlying the option at
the exercise price if the option is exercised. By writing a put option, the
Fund becomes obligated during the term of the option to purchase the
securities underlying the option at the exercise price if the option is
exercised.
During the term of the option, the writer may be assigned an exercise notice
by the broker-dealer through whom the option was sold. The exercise notice
would require the writer to deliver, in the case of a call, or take delivery
of, in the case of a put, the underlying security against payment of the
exercise price. This obligation terminates upon expiration of the option, or
at such earlier time that the writer effects a closing
5
<PAGE>
purchase transaction by purchasing an option covering the same underlying
security and having the same exercise price and expiration date as the one
previously sold. Once an option has been exercised, the writer may not
execute a closing purchase transaction. To secure the obligation to deliver
the underlying security in the case of a call option, the writer of a call
option is required to deposit in escrow the underlying security or other
assets in accordance with the rules of the Option Clearing Corporation (the
"OCC"), an institution created to interpose itself between buyers and sellers
of options. The OCC assumes the other side of every purchase and sale
transaction on an exchange and, by doing so, gives its guarantee to the
transaction.
OPTIONS ON SECURITY INDICES. The Fund may purchase call options and write put
options on stock indices listed on national securities exchanges or traded in
the over-the-counter market as an investment vehicle for the purpose of
realizing the Fund's investment objective.
Options on indices are settled in cash, not in delivery of securities. The
exercising holder of an index option receives, instead of a security, cash
equal to the difference between the closing price of the securities index and
the exercise price of the option. When the Fund writes a covered option on an
index, the Fund will be required to deposit and maintain with a custodian
cash or liquid securities equal in value to the aggregate exercise price of a
put or call option pursuant to the requirements and the rules of the
applicable exchange. If, at the close of business on any day, the market
value of the deposited securities falls below the contract price, the Fund
will deposit with the custodian cash or liquid securities equal in value to
the deficiency.
OPTIONS ON FUTURES CONTRACTS. Under Commodities Futures Trading Commission
("CFTC") Regulations, the Fund may engage in futures transactions, either for
"bona fide hedging" purposes, as this term is defined in the CFTC
Regulations, or for non-hedging purposes to the extent that the aggregate
initial margins and option premiums required to establish such non-hedging
positions do not exceed 5% of the liquidation value of the Fund's portfolio.
In the case of an option on futures contracts that is "in-the-money" at the
time of purchase (I.E., the amount by which the exercise price of the put
option exceeds the current market value of the underlying security, or the
amount by which the current market value of the underlying security exceeds
the exercise price of the call option), the in-the-money amount may be
excluded in calculating this 5% limitation.
When the Fund purchases or sells a stock index futures contract, or sells an
option thereon, the Fund "covers" its position. To cover its position, the
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. If the 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.
The Fund may 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, the 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. The Fund may also cover its
long position in a futures contract by taking a short position in the
instruments underlying the futures contract, or by taking positions
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<PAGE>
in instruments with prices which are expected to move relatively consistently
with the futures contract. The 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.
The 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 contracts is established at a price
greater than the strike price of the written (sold) call, the 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. The 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. The 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, the
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. The 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.
SWAPS
-----
The Fund may enter into equity index or interest rate swap agreements for
purpose of attempting 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 Fund calculate the obligations of
the parties to the agreement on a "net basis." Consequently, the 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").
The Fund's current obligations under a swap agreement will be accrued daily
(offset against any amounts owing to the Fund) and any accrued by 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 the 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 the Fund illiquid
investment limitations. The
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<PAGE>
Fund will not enter into any swap agreement unless the Advisor believes that
the other party to the transaction is creditworthy. 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.
The 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
the 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. The 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 the 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 the 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 the 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 such Fund is
contractually entitled to receive, if any. The net amounts of the excess, if
any, of the 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 net asset value 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 or liquid assets, as permitted by applicable law,
the Fund and the Advisor believe that transactions do not constitute senior
securities under the 1940 Act and, accordingly, will not treat them as being
subject to the 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 over-the-counter market. The Advisor,
under the supervision of the Board of Trustees, is responsible for
determining and monitoring the liquidity of Fund transactions in swap
agreements.
The use of equity swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions.
PORTFOLIO TURNOVER
------------------
As discussed in the prospectus, the Trust anticipates that investors in the
Fund, as part of an asset allocation investment strategy, will frequently
purchase and/or redeem shares of the Fund. The nature of the Fund as asset
allocation tools will cause the Fund to experience substantial portfolio
turnover. (See "More Information About Fund Investments and Risk" in the
Prospectus). Because the Fund's portfolio turnover
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<PAGE>
rate, to a great extent, will depend on the purchase, redemption, and
exchange activity of the Fund's investors, it is very difficult to estimate
what the Fund's actual turnover rate will be in the future. However, the
Trust expects that the portfolio turnover experienced by the Fund will be
substantial.
REPURCHASE AGREEMENTS
---------------------
As discussed in the Prospectus, the Fund may enter into repurchase agreements
with financial institutions. The 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, the
Fund will seek to liquidate such collateral. However, the exercising of the
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 the 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 total assets. The investments of the Fund in
repurchase agreements, at times, may be substantial when, in the view of the
Advisor, liquidity or other considerations so warrant.
STOCK INDEX FUTURES CONTRACTS
-----------------------------
The Fund may buy and sell stock index futures contracts with respect to any
stock index traded on a recognized stock exchange, board of trade, or in the
over-the-counter market. A stock index futures contract is a contract to buy
or sell units of an index at a specified future date at a price agreed upon
when the contract is made. The stock index futures contract specifies that no
delivery of the actual stocks making up the index will take place. 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.
At the time the Fund purchases a futures contract, an amount of cash, U.S.
Government securities or other liquid securities equal to the market value of
the futures contract will be deposited in a segregated account with the
Fund's custodian. When writing a futures contract, the Fund will maintain
with its custodian liquid assets that, when added to the amounts deposited
with a futures commission merchant or broker as margin, are equal to the
market value of the instruments underlying the contract. Alternatively, the
Fund may "cover" its position by owning the instruments underlying the
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 holding a call option permitting the Fund to purchase
the same futures contract at a price no higher than the price of the contract
written by the Fund (or at a higher price if the difference is maintained in
liquid assets with the Fund's custodian).
TRACKING ERROR
--------------
While the Fund, which seeks to closely correlate its performance to that of
its benchmark, does not expect that the aggregate returns over a year will
deviate significantly, several factors may affect its ability to achieve this
correlation. Among these are: (1) Fund expenses, including brokerage (which may
be increased by high portfolio turnover); (2) less than all of the securities
in the benchmark being held by the Fund and securities not included in the
benchmark being held by the Fund;
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<PAGE>
(3) an imperfect correlation between the performance of instruments held by
the 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) Fund share prices being rounded
to the nearest cent; (6) changes to the benchmark index that are not
disseminated in advance; (7) the need to conform the Fund's portfolio
holdings to comply with investment restrictions or policies or regulatory or
tax law requirements; (8) 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 uptrend 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 Fund's performance attempts to
correlate highly with the movement in its respective benchmark over time.
U.S. GOVERNMENT SECURITIES
--------------------------
The Fund may invest 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, 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. The Fund will invest in
such U.S. Government Securities only when the Advisor is satisfied that the
credit risk with respect to the issuer is minimal.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES
-------------------------------------------
The Fund, 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
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<PAGE>
purchaser during this period. At the time the 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, of such security in determining the Fund's net asset value. The
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. The 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 the Fund's net asset value or
income will be adversely affected by the Fund's purchase of securities on a
when-issued or delayed-delivery basis.
INVESTMENT RESTRICTIONS
FUNDAMENTAL POLICIES
--------------------
The following investment limitations (and those set forth in the Prospectus)
are fundamental policies of the Fund, which cannot be changed without the
consent of the holders of a majority of the Fund's outstanding shares. The
term "majority of the outstanding shares" means a 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.
The Small-Cap 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 the Fund to purchase
securities or require that Fund to segregate assets are not
considered to be borrowing. Asset coverage of a least 300% is
required for all borrowing, except where the Fund has borrowed
money for temporary purposes in amounts not exceeding 5% of its
total assets. The 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 the 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 the 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.
11
<PAGE>
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 the 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.
NON-FUNDAMENTAL POLICIES
------------------------
The following investment limitations are non-fundamental policies of the Fund
and may be changed by the Board of Trustees.
The Small-Cap Fund may not:
1. Pledge, mortgage or hypothecate assets except to secure borrowing
permitted by the Fund's fundamental limitation on borrowing.
2. Invest in companies for the purpose of exercising control.
3. Purchase securities on margin or effect short sales, except that a
Fund may (i) obtain short-term credits as necessary for the
clearance of security transactions; (ii) provide initial and
variation margin payments in connection with transactions involving
futures contracts and options on such contracts; and (iii) make
short sales "against the box" or in compliance with the SEC's
position regarding the asset segregation requirements imposed by
Section 18 of the 1940 Act.
4. Invest its assets in securities of any investment company, except
as permitted by the 1940 Act or any rule, regulation or order of
the SEC.
5. 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.
The foregoing percentages are: (i) 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.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the general supervision by the Trustees, the Advisor is
responsible for decisions to buy and sell securities for the Fund, the
selection of brokers and dealers to effect the transactions, and the
negotiation of brokerage commissions, if any. The Advisor expects that the
Fund may execute brokerage or other agency
12
<PAGE>
transactions through registered broker-dealers, for a commission, in
conformity with the 1940 Act, the Securities Exchange Act of 1934, as
amended, and the rules and regulations thereunder.
The Advisor may serve as an investment manager to a number of clients,
including other investment companies. It is the practice of the Advisor to
cause purchase and sale transactions to be allocated among the Fund and
others whose assets the Advisor manages in such manner as the Advisor deems
equitable. The main factors considered by the Advisor in making such
allocations among the Fund and other client accounts of the Advisor are the
respective investment objectives, the relative size of portfolio holdings of
the same or comparable securities, the availability of cash for investment,
the size of investment commitments generally held, and the opinions of the
person(s) responsible, if any, for managing the portfolio of the Fund and the
other client accounts.
The policy of the Fund regarding purchases and sales of securities for the
Fund's portfolio is that primary consideration will be given to obtaining the
most favorable prices and efficient executions of transactions. Consistent
with this policy, when securities transactions are effected on a stock
exchange, the Fund's policy is to pay commissions which are considered fair
and reasonable without necessarily determining that the lowest possible
commissions are paid in all circumstances. The Fund believes that a
requirement always to seek the lowest possible commission cost could impede
effective portfolio management and preclude the Fund and the Advisor from
obtaining a high quality of brokerage and research services. In seeking to
determine the reasonableness of brokerage commissions paid in any
transaction, the Advisor relies upon its experience and knowledge regarding
commissions generally charged by various brokers and on its judgment in
evaluating the brokerage and research services received from the broker
effecting the transaction. Such determinations are necessarily subjective and
imprecise, as in most cases an exact dollar value for those services is not
ascertainable.
Purchases and sales of U.S. Government securities are normally transacted
through issuers, underwriters or major dealers in U.S. Government securities
acting as principals. Such transactions are made on a net basis and do not
involve payment of brokerage commissions. The cost of securities purchased
from an underwriter usually includes a commission paid by the issuer to the
underwriters; transactions with dealers normally reflect the spread between
bid and asked prices.
In managing the investment portfolio of the Fund, the Advisor effects
transactions with those brokers and dealers who the Advisor believes provide
the most favorable prices and are capable of providing efficient executions.
If the Advisor believes such prices and executions are obtainable from more
than one broker or dealer, the Advisor may give consideration to placing
portfolio transactions with those brokers and dealers who also furnish
research and other services to the Fund or the Advisor. In addition, Section
28(e) of the Securities Exchange Act of 1934 permits the Advisor to cause the
Fund to pay commission rates in excess of those another dealer or broker
would have charged for effecting the same transaction, if the Advisor
determines, in good faith, that the commission paid is reasonable in relation
to the value of brokerage and research services provided. While the Advisor
currently does not intend to pay higher commissions to dealers and brokers
who supply it with brokerage and research services, in the event such higher
payments would be made or are deemed to have been made, such higher payments
would be in accordance with Section 28(e).
Such research services may include information on the economy, industries,
groups of securities, individual companies, statistical information,
accounting and tax law interpretations, political developments, legal
13
<PAGE>
developments affecting portfolio securities, technical market action, pricing
and appraisal services, credit analysis, risk measurement analysis,
performance analysis, analysis of corporate responsibility issues or in the
form of access to various computer-generated data, computer hardware and
software. Such research may be provided by brokers and dealers in the form of
written reports, telephone contacts and personal meetings with security
analysts, corporate and industry spokespersons, economists, academicians, and
government representatives. Brokerage services and equipment may facilitate
the execution and monitoring of securities transactions, for example, by
providing rapid communications with financial markets and brokers or dealers,
or by providing real-time tracking of orders, settlements, investment
positions and relevant investment criteria and restrictions applicable to the
execution of securities transactions. In some cases, brokerage and research
services are generated by third parties but are provided to the Advisor by or
through brokers and dealers. The Advisor may allocate brokerage for research
services that are also available for cash, where appropriate and permitted by
law. The Advisor may also pay cash for certain research services received
from external sources.
In addition, the information and services received by the Advisor from
brokers and dealers may not in all cases benefit the Fund directly. For
example, such information and services received by the Advisor as a result of
the brokerage allocation of the Fund may be of benefit to the Advisor in the
management of other accounts of the Advisor, including other Funds of the
Trust and other investment companies advised by the Advisor. While the
receipt of such information and services is useful in varying degrees and
would generally reduce the amount of research or services otherwise performed
by the Advisor and thereby reduce the Advisor's expenses, this information
and these services are of indeterminable value and the management fee paid to
the Advisor is not reduced by any amount that may be attributable to the
value of such information and services.
MANAGEMENT OF THE TRUST
The Trustees are responsible for the general supervision of the Trust's
business. The day-to-day operations of the Trust are the responsibilities of
the Trust's officers. The names and addresses (and ages) of the Trustees and
the officers of the Trust and the officers of the Advisor, together with
information as to their principal business occupations during the past five
years, are set forth below. Fees and expenses for non-interested Trustees
will be paid by the Trust.
TRUSTEES
--------
*ALBERT P. VIRAGH, JR. (59)
Chairman of the Board of Trustees and President of Rydex Series Funds, a
registered mutual fund, 1993 to present; Chairman of the Board of
Trustees and President of Rydex Variable Trust, a registered mutual
fund, 1998 to present; Chairman of the Board of Trustees and President
of Rydex Dynamic Funds, a registered mutual fund, 1999 to present;
Chairman of the Board of Directors, President, and Treasurer of PADCO
Advisors, Inc., investment adviser, 1993 to present; Chairman of the
Board of Directors, President, and Treasurer of PADCO Service
-----------------
*This trustee is deemed to be an "interested person" of the Trust, within
the meaning of Section 2(a)(19) of the 1940 Act, inasmuch as this person
is affiliated with the Advisor, as described herein.
14
<PAGE>
Company, Inc., shareholder and transfer agent servicer, 1993 to present;
Chairman of the Board of Directors, President, and Treasurer of PADCO
Advisors II, Inc., investment adviser, 1998 to present; Chairman of the
Board of Directors, President, and Treasurer of Rydex Distributors,
Inc., a registered broker-dealer firm, 1996 to present; Vice President
of Rushmore Investment Advisors Ltd., a registered investment adviser,
1985 to 1993. Address: 6116 Executive Boulevard, Suite 400, Rockville,
Maryland 20852.
COREY A. COLEHOUR (54)
Trustee of Rydex Series Funds, 1993 to present; Trustee of Rydex
Variable Trust, 1998 to present; Trustee of Rydex Dynamic Funds, 1999 to
present; Senior Vice President of Marketing of Schield Management
Company, a registered investment adviser, 1985 to present. Address: 6116
Executive Boulevard, Suite 400, Rockville, Maryland 20852.
J. KENNETH DALTON (58)
Trustee of Rydex Series Funds, 1995 to present; Trustee of Rydex
Variable Trust, 1998 to present; Trustee of Rydex Dynamic Funds, 1999 to
present; Mortgage Banking Consultant and Investor, The Dalton Group, a
real estate company, 1995 to present; President, CRAM Mortgage Group,
Inc., 1966 to 1995. Address: 6116 Executive Boulevard, Suite 400,
Rockville, Maryland 20852.
JOHN O. DEMARET (60)
Trustee of Rydex Series Funds, 1997 to present; Trustee of Rydex
Variable Trust, 1998 to present; Trustee of Rydex Dynamic Funds, 1999 to
present; Founder and Chief Executive Officer, Health Cost Controls
America, Chicago, Illinois, 1987 to 1996; sole practitioner, Chicago,
Illinois, 1984 to 1987; General Counsel for the Chicago Transit
Authority, 1981 to 1984; Senior Partner, O'Halloran, LaVarre & Demaret,
Northbrook, Illinois, 1978 to 1981. Address: 6116 Executive Boulevard,
Suite 400, Rockville, Maryland 20852.
PATRICK T. MCCARVILLE (57)
Trustee of Rydex Series Funds, 1997 to present; Trustee of Rydex
Variable Trust, 1998 to present; Trustee of Rydex Dynamic Funds, 1999 to
present; Founder and Chief Executive Officer, Par Industries, Inc.,
Northbrook, Illinois, 1977 to present; President and Chief Executive
Officer, American Health Resources, Northbrook, Illinois, 1984 to 1986.
Address: 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852.
ROGER SOMERS (55)
Trustee of Rydex Series Funds, 1993 to present; Trustee of Rydex
Variable Trust, 1998 to present; Trustee of Rydex Dynamic Funds, 1999 to
present; President, Arrow Limousine, 1963 to present. Address: 6116
Executive Boulevard, Suite 400, Rockville, Maryland 20852.
15
<PAGE>
OFFICERS
ROBERT M. STEELE (41)
Secretary and Vice President of Rydex Series Funds, 1994 to present;
Secretary and Vice President of Rydex Variable Trust, 1998 to present;
Secretary and Vice President of Rydex Dynamic Funds, 1999 to present;
Vice President of Rydex Distributors, Inc., 1996 to present; Vice
President of The Boston Company, Inc., an institutional money management
firm, 1987 to 1994. Address: 6116 Executive Boulevard, Suite 400,
Rockville, Maryland 20852.
CARL G. VERBONCOEUR (47)
Vice President and Treasurer of Rydex Series Funds, 1997 to present;
Vice President and Treasurer of the Rydex Variable Trust, 1998 to
present; Vice President and Treasurer of Rydex Dynamic Funds, 1999 to
present; Vice President of Rydex Distributors, Inc., 1997 to present;
Senior Vice President, Crestar Bank, 1995 to 1997; Senior Vice
President, Crestar Asset Management Company, a registered investment
adviser, 1993 to 1995; Vice President of Perpetual Savings Bank, 1987 to
1993. Address: 6116 Executive Boulevard, Suite 400, Rockville, Maryland
20852.
MICHAEL P. BYRUM (30)
Vice President and Assistant Secretary of Rydex Series Funds, 1997 to
present; Vice President and Assistant Secretary of the Rydex Variable
Trust, 1998 to present; Vice President and Assistant Secretary of the
Rydex Dynamic Funds, 1999 to present; Vice President and Senior
Portfolio Manager of PADCO Advisors, Inc., investment adviser, 1993 to
present; Vice President and Senior Portfolio Manager of PADCO Advisors
II Inc., investment adviser, 1996 to present; Secretary of Rydex
Distributors, Inc., 1996 to present; Investment Representative, Money
Management Associates, a registered investment adviser, 1992 to 1993.
Address: 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852.
The aggregate compensation paid by the Trust to each of its Trustees serving
during the fiscal year ended March 31, 2000, is set forth in the table below:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Aggregate Total Compensation from
Name of Person, Position Compensation From Fund Complex For Service
Trust on Three Boards**
------------------------------------------------------------------------------------
<S> <C> <C>
Albert P. Viragh, Jr.*, CHAIRMAN AND $0 $0
PRESIDENT
------------------------------------------------------------------------------------
Corey A. Colehour, TRUSTEE $8,000 $34,500
------------------------------------------------------------------------------------
J. Kenneth Dalton, $8,000 $34,500
TRUSTEE
------------------------------------------------------------------------------------
Roger Somers, $8,000 $34,500
TRUSTEE
------------------------------------------------------------------------------------
John O. Demaret, $8,000 $34,500
TRUSTEE
------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Aggregate Total Compensation from
Name of Person, Position Compensation From Fund Complex For Service
Trust on Three Boards**
------------------------------------------------------------------------------------
<S> <C> <C>
Patrick T. McCarville, $6,500 $34,500
TRUSTEE
------------------------------------------------------------------------------------
</TABLE>
* Denotes an "interested person" of the Trust.
** Each member of the Board of Trustees also serves as a Trustee to Rydex
Funds and to Rydex Dynamic Funds.
THE ADVISORY AGREEMENT
----------------------
Under an investment advisory agreement the Advisor serves as the investment
adviser for each series of the Trust and provides investment advice to the
Fund and oversees the day-to-day operations of the Fund, subject to direction
and control by the Trustees and the officers of the Trust. As of March 31,
2000, total assets under management of the Advisor were approximately $ 8.6
billion. Pursuant to the advisory agreement with the Advisor, the Fund pays
the Advisor the following fee at an annual rate based on the average daily
net assets for the Fund, as set forth below:
<TABLE>
<CAPTION>
FUND ADVISORY FEE
---- ------------
<S> <C>
Small-Cap Fund .90%
</TABLE>
The Advisor manages the investment and the reinvestment of the assets of the
Fund, in accordance with the investment objectives, policies, and limitations
of the Fund, subject to the general supervision and control of the Trustees
and the officers of the Trust. The Advisor bears all costs associated with
providing these advisory services and the expenses of the Trustees of the
Trust who are affiliated with or interested persons of the Advisor. The
Advisor, from its own resources, including profits from advisory fees
received from the Fund, 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's office is located at 6116 Executive Boulevard, Suite 400,
Rockville, Maryland 20852. PADCO Advisors II, Inc. was incorporated in the
State of Maryland on July 5, 1994. Albert P. Viragh, Jr., the Chairman of the
Board of Trustees and the President of the Advisor, owns a controlling
interest in the Advisor.
THE SERVICE AGREEMENT AND ACCOUNTING SERVICE AGREEMENT
------------------------------------------------------
General administrative, shareholder, dividend disbursement, transfer agent,
and registrar services are provided to the Trust by PADCO Service Company,
Inc., 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852 (the
"Servicer"), subject to the general supervision and control of the Trustees
and the officers of the Trust, pursuant to a service agreement between the
Trust and the Servicer. The Servicer is wholly-owned by Albert P. Viragh,
Jr., who is the Chairman of the Board and the President of the Trust and the
sole controlling person and majority owner of the Advisor.
Under the service agreement, the Servicer provides the Trust with all
required general administrative services, including, without limitation,
office space, equipment, and personnel; clerical and general back office
services; bookkeeping, internal accounting, and secretarial services; the
determination of net asset values; and the preparation and filing of all
reports, registration statements, proxy statements, and all other materials
required to be filed or furnished by the Trust under federal and state
securities laws. The Servicer
17
<PAGE>
also maintains the shareholder account records for the Fund, disburses
dividends and distributions payable by the Fund, and produces statements with
respect to account activity for the Fund and the Fund's shareholders. The
Servicer pays all fees and expenses that are directly related to the services
provided by the Servicer to the Fund; the Fund reimburses the Servicer for
all fees and expenses incurred by the Servicer which are not directly related
to the services the Servicer provides to the Fund under the service
agreement. Pursuant to an Accounting Service Agreement the Servicer serves as
Accounting Services Agent and performs certain record keeping and accounting
functions.
INVESTOR SERVICES PLAN
----------------------
Pursuant to an Investor Services Plan, Rydex Distributors, Inc. (the
"Distributor") directly, or indirectly through other service providers
determined by the Distributor ("Service Providers"), provides investor
services to owners of Contacts who, indirectly through insurance company
separate accounts, invest in shares of the Funds ("Investors"). Investor
services include some or all of the following: printing Fund prospectuses and
statements of additional information and mailing them to Investors or to
financial advisors who allocate funds for investments in Shares of the Funds
on behalf of Investors ("Financial Advisors"); forwarding communications from
the Funds to Investors or Financial Advisors, including proxy solicitation
material and annual and semiannual reports; assistance in facilitating and
processing transactions in Shares of the Funds in connection with strategic
or tactical asset allocation investing; assistance in providing the Fund with
advance information on strategic and tactical asset allocation trends and
anticipated investment activity in and among the Funds; assisting Investors
who wish or need to change Financial Advisors; and providing support services
to Financial Advisors, including, but not limited to: (a) providing Financial
Advisors with updates on policies and procedures; (b) answering questions of
Financial Advisors regarding the Funds' portfolio investments; (c) providing
performance information to Financial Advisors regarding the Funds; (d)
providing information to Financial Advisors regarding the Funds' investment
objectives; (e) providing investor account information to Financial Advisors;
and (f) redeeming Fund Shares, if necessary, for the payment of Financial
Advisor fees.
For these services, the Trust compensates the Distributor at an annual rate
not exceeding .25% of the Funds' average daily net assets. The Distributor is
authorized to use its fee to compensate Services Providers for providing
Investor services. The fee will be paid from the assets of the Fund and will
be calculated and accrued daily and paid within fifteen (15) days of the end
of each month.
COSTS AND EXPENSES
------------------
The Fund bears all expenses of its operations other than those assumed by the
Advisor or the Servicer. Fund expenses include: the management fee; the
servicing fee (including administrative, transfer agent, and shareholder
servicing fees); custodian and accounting fees and expenses; legal and
auditing fees; securities valuation expenses; fidelity bonds and other
insurance premiums; expenses of preparing and printing prospectuses,
confirmations, proxy statements, and shareholder reports and notices;
registration fees and expenses; proxy and annual meeting expenses, if any;
all federal, state, and local taxes (including, without limitation, stamp,
excise, income, and franchise taxes); organizational costs; non-interested
Trustees' fees and expenses; the costs and expenses of redeeming shares of
the Fund; fees and expenses paid to any securities pricing organization; dues
and expenses associated with membership in any mutual fund organization; and
costs for incoming telephone WATTS lines. In addition, the Fund pays an equal
portion of the Trustee fees and expenses for attendance at Trustee meetings for
the Trustees of the Trust who are not affiliated with or interested persons of
the Advisor.
18
<PAGE>
DETERMINATION OF NET ASSET VALUE
The net asset value of the Fund serves as the basis for the purchase and
redemption price of the Fund's shares. The net asset value per share of the
Fund is calculated by dividing the market value of the Fund's securities plus
the values of its other assets, less all liabilities, by the number of
outstanding shares of the Fund. If market quotations are not readily
available, a security will be valued at fair value by the Board of Trustees
or by the Advisor using methods established or ratified by the Board of
Trustees.
Options on securities and indices purchased by the Fund generally are valued
at their last bid price in the case of exchange-traded options or, in the
case of options traded in the over-the-counter ("OTC") market, the average of
the last bid price as obtained from two or more dealers unless there is only
one dealer, in which case that dealer's price is used. Futures contracts
generally are valued based upon the unrealized gain or loss on the contract
determined with reference to the first price reported by established futures
exchanges after the close of the Fund pricing cycle, or alternatively, with
reference to the average price at which futures are bought and sold by a
Fund. Options on futures contracts generally are valued with reference to the
underlying futures contract. If the market makes a limit move with respect to
a particular commodity, the commodity will be valued at fair value by the
Advisor using methods established or ratified by the Board of Trustees. OTC
securities held by the Fund shall be valued at the last sales price or, if no
sales price is reported, the mean of the last bid and asked price is used.
The portfolio securities of the Fund that are listed on national and
international exchanges are taken at the last sales price of such securities
on such exchange; if no sales price is reported, the mean of the last bid and
asked price is used.
For valuation purposes, all assets and liabilities initially expressed in
foreign currency values will be converted into U.S. dollar values at the mean
between the bid and the offered quotations of such currencies against U.S.
dollars as last quoted by any recognized dealer at the time NAV is
determined. If such quotations are not available, the rate of exchange will
be determined in good faith by the Advisor based on guidelines adopted by the
Trustees. Dividend income and other distributions are recorded on the
ex-dividend date, except for certain dividends from foreign securities which
are recorded as soon as the Trust is informed after the ex-dividend date.
Illiquid securities, securities for which reliable quotations or pricing
services are not readily available, and all other assets will be valued at
their respective fair value as determined in good faith by, or under
procedures established by, the Trustees, which procedures may include the
delegation of certain responsibilities regarding valuation to the Advisor or
the officers of the Trust. The officers of the Trust report, as necessary, to
the Trustees regarding portfolio valuation determination. The Trustees, from
time to time, will review these methods of valuation and will recommend
changes which may be necessary to assure that the investments of the Fund are
valued at fair value.
PERFORMANCE INFORMATION
From time to time, the Fund may include the Fund's total return in
advertisements or reports to shareholders or prospective shareholders.
Quotations of average annual total return for the Fund will be expressed in
terms of the average annual compounded rate of return on a hypothetical
investment in the Fund over a period of at least one, five, and ten years (up
to the life of the Fund) (the ending date of the period will be stated).
Total return of a Fund is calculated from two factors: the amount of
dividends earned by a Fund
19
<PAGE>
share and by the increase or decrease in value of a Fund's share price. See
"Calculation of Return Quotations."
Performance information for the Fund contained in reports to shareholders or
prospective shareholders, advertisements, and other promotional literature
may be compared to the record of various unmanaged indices. Performance
information for the Fund may be compared to various unmanaged indices.
Such unmanaged indices may assume the reinvestment of dividends, but
generally do not reflect deductions for operating costs and expenses. In
addition, the Fund's total return may be compared to the performance of broad
groups of comparable mutual funds with similar investment goals, as such
performance is tracked and published by such independent organizations as
Lipper Analytical Services, Inc. ("Lipper"), and CDA Investment Technologies,
Inc., among others. When Lipper's tracking results are used, the Fund will be
compared to Lipper's appropriate fund category, that is, by fund objective
and portfolio holdings. Performance figures are based on historical results
and are not intended to indicate future performance.
In addition, rankings, ratings, and comparisons of investment performance
and/or assessments of the quality of shareholder service appear in numerous
financial publications such as MONEY, FORBES, KIPLINGER'S MAGAZINE, PERSONAL
INVESTOR, MORNINGSTAR, INC., and similar sources.
CALCULATION OF RETURN QUOTATIONS
For purposes of quoting and comparing the performance of the Fund to that of
other mutual funds and to other relevant market indices in advertisements or
in reports to shareholders, performance for the Fund may be stated in terms
of total return. Under the rules of the Securities and Exchange Commission
("SEC Rules"), a Fund advertising performance must include total return
quotes calculated according to the following formula:
n
P(1+T) = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years (1, 5, or 10); and
ERV = ending redeemable value of a hypothetical $1,000
payment, made at the beginning of the 1, 5, or 10
year periods, at the end of the 1, 5, or 10 year
periods (or fractional portion thereof).
Under the foregoing formula, the time periods used in advertising will be
based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication, and
will cover 1, 5, and 10 year periods or a shorter period dating from the
effectiveness of the Registration Statement of the Trust. In calculating the
ending redeemable value, all dividends and distributions by a Fund are
assumed to have been reinvested at net asset value as described in the
Trust's Prospectus on the reinvestment dates during the period. Total return,
or 'T' in the formula above, is computed by finding the
20
<PAGE>
average annual compounded rates of return over the 1, 5, and 10 year periods
(or fractional portion thereof) that would equate the initial amount invested
to the ending redeemable value.
PURCHASE AND REDEMPTION OF SHARES
SUSPENSION OF THE RIGHT OF REDEMPTION
-------------------------------------
With respect to the Fund, and as permitted by the Securities and Exchange
Commission (the "Commission"), the right of redemption may be suspended, or
the date of payment postponed: (i) for any period during which the NYSE is
closed (other than customary weekend or holiday closings), or trading is
restricted; (ii) for any period during which an emergency exists so that
disposal of a Fund's investments or the determination of NAV is not
reasonably practicable; or (iii) for such other periods as the Commission, by
order, may permit for protection of Fund investors. In cases where NASDAQ,
the CME or Chicago Board Options Exchange, or any foreign market where the
Fund's securities trade is closed or trading is restricted, the Fund may ask
the Commission to permit the right of redemption to be suspended. On any day
that any of the securities exchanges on which the Fund's securities trade
close early (such as on days in advance of holidays generally observed by
participants in these markets), or as permitted by the Commission, the right
is reserved to advance the time on that day by which purchase and redemption
orders must be received.
HOLIDAYS
--------
The NYSE, the Federal Reserve Bank of New York, the NASDAQ, the CME, the
CBOT, and other U.S. exchanges are closed on weekends and on the following
holidays: (i) New Year's Day, Martin Luther King Jr.'s Birthday, President's
Day, Good Friday, Memorial Day, July Fourth, Labor Day, Columbus Day,
Thanksgiving Day, and Christmas Day; and (ii) the preceding Friday if any of
these holidays falls on a Saturday, or the subsequent Monday if any of these
holidays falls on a Sunday. Although the Trust expects the same holiday
schedules to be observed in the future, each of the aforementioned exchanges
may modify its holiday schedule at any time.
REDEMPTIONS IN-KIND
-------------------
The Trust intends to pay redemption proceeds in cash. However, under unusual
conditions that make the payment in cash unwise (and for the protection of
the remaining shareholders of the Fund) the Trust reserves the right to pay
all, or part, of your redemption proceeds in liquid securities with a market
value equal to the redemption price (redemption in-kind). Although it is
highly unlikely that your shares would ever actually be redeemed in kind, you
would probably have to pay brokerage costs to sell the securities distributed
to you.
DIVIDENDS, DISTRIBUTIONS, AND TAXES
DIVIDENDS AND DISTRIBUTIONS
---------------------------
Dividends from net investment income and any distributions of net realized
capital gains from the Fund will be distributed as described in the Trust's
Prospectus under "Dividends and Distributions." All such distributions of the
Fund normally will be reinvested without charge in additional shares of the
same Fund automatically.
21
<PAGE>
REGULATED INVESTMENT COMPANY ("RIC") STATUS
-------------------------------------------
As a RIC, the Fund would not be subject to federal income taxes on the net
investment income and capital gains that the Fund distributes to the Fund's
shareholders.
The Fund will seek to qualify for treatment as a RIC under the Code. Provided
that a Fund (i) is a RIC and (ii) distributes at least 90% of the Fund's net
investment income (including, for this purpose, net realized short-term
capital gains), 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
long- and short-term capital gains, if any, are distributed to the Fund's
shareholders. To avoid an excise tax on its undistributed income, each Fund
generally must distribute at least 98% of its income, including its net
long-term capital gains. One of several requirements for RIC qualification is
that the 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 securities or foreign currencies, or
other income derived with respect to the Fund's investments in stock,
securities, and foreign currencies (the "90% Test"). Income from investments
in precious metals and in precious minerals will not qualify as gross income
from "securities" for purposes of the 90% Test.
If the Fund were to fail to qualify as a RIC for one or more taxable years,
the Fund could then qualify (or requalify) as a RIC for a subsequent taxable
year only if the Fund had distributed to the Fund's shareholders a taxable
dividend equal to the full amount of any earnings or profits (less the
interest charge mentioned below, if applicable) attributable to such period.
The Fund might also be required to pay to the U.S. Internal Revenue Service
(the "IRS") interest on 50% of such accumulated earnings and profits. In
addition, pursuant to the Code and an interpretative notice issued by the
IRS, if the Fund should fail to qualify as a RIC and should thereafter seek
to requalify as a RIC, the Fund may be subject to tax on the excess (if any)
of the fair market of the Fund's assets over the Fund's basis in such assets,
as of the day immediately before the first taxable year for which the Fund
seeks to requalify as a RIC.
If the 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 net asset value.
SECTION 817(h) DIVERSIFICATION
------------------------------
Section 817(h) of the Code requires that the assets of the Fund be adequately
diversified so that insurance companies that invest in their shares, and not
variable annuity contract owners, are considered the owners of the shares for
federal income tax purposes. The Fund ordinarily must satisfy the
diversification requirements within one year after contract owner funds are
first allocated to the Fund. In order to meet the diversification
requirements of regulations issued under Section 817(h), the Fund will meet
the following test: no more than 55% of the assets will be invested in any
one investment; no more than 70% of the assets will be invested in any two
investments; no more than 80% of the assets will be invested in any three
investments; and no more than 90% will be invested in any four investments.
The Fund must meet the above diversification requirements within 30 days of
the end of each calendar quarter.
OPTIONS TRANSACTIONS BY THE FUND
--------------------------------
If a call option written by the Fund expires, the amount of the premium
received by the Fund for the option will be short-term capital gain to the
Fund. If such an option is closed by the Fund, any gain or loss realized by
the Fund as a result of the closing purchase transaction will be short-term
capital gain or
22
<PAGE>
loss. If the holder of a call option exercises the holder's right under the
option, any gain or loss realized by the Fund upon the sale of the underlying
security or underlying futures contract pursuant to such exercise will be
short-term or long-term capital gain or loss to the Fund depending on the
Fund's holding period for the underlying security or underlying futures
contract.
With respect to call options purchased by the Fund, the Fund will realize
short-term or long-term capital gain or loss if such option is sold and will
realize short-term or long-term capital loss if the option is allowed to
expire depending on the Fund's holding period for the call option. If such a
call option is exercised, the amount paid by the Fund for the option will be
added to the basis of the stock or futures contract so acquired.
The Fund will utilize options on stock indices in its operations. Options on
"broad based" stock indices are classified as "nonequity options" under the
Code. Gains and losses resulting from the expiration, exercise, or closing of
such nonequity options, as well as gains and losses resulting from futures
contract transactions, will be treated as long-term capital gain or loss to
the extent of 60% thereof and short-term capital gain or loss to the extent
of 40% thereof (hereinafter, "blended gain or loss"). In addition, any
nonequity option and futures contract held by the Fund on the last day of a
fiscal year will be treated as sold for market value on that date, and gain
or loss recognized as a result of such deemed sale will be blended gain or
loss.
The trading strategies of the Fund involving nonequity options on stock
indices may constitute "straddle" transactions. "Straddles" may affect the
taxation of such instruments and may cause the postponement of recognition of
losses incurred in certain closing transactions. The Fund will also have
available a number of elections under the Code concerning the treatment of
option transactions for tax purposes. The Fund will utilize the tax treatment
that, in the Fund's judgment, will be most favorable to a majority of
investors in the Fund. Taxation of these transactions will vary according to
the elections made by the Fund. These tax considerations may have an impact
on investment decisions made by the Fund.
The Fund's transactions in options, under some circumstances, could preclude
the Fund's qualification for the special tax treatment available to
investment companies meeting the requirements of Subchapter M of the Code.
However, it is the intention of the 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.
OTHER ISSUES
------------
The Fund may be subject to tax or taxes in certain states where the Fund does
business. Furthermore, in those states, which have income tax laws, the tax
treatment of the Fund and of Fund shareholders with respect to distributions
by the Fund may differ from federal tax treatment.
Shareholders are urged to consult their own tax advisors regarding the
application of the provisions of tax law described in this Statement of
Additional Information in light of the particular tax situations of the
shareholders and regarding specific questions as to federal, state, or local
taxes.
23
<PAGE>
OTHER INFORMATION
VOTING RIGHTS
-------------
You receive one vote for every full Fund share owned. The Fund will vote
separately on matters relating solely to the Fund. All shares of the Fund are
freely transferable.
As a Delaware business 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
1-800-820-0888 or 301-468-8520, or by writing to the Trust at 6116 Executive
Boulevard, Suite 400, Rockville, Maryland 20852.
CODE OF ETHICS
--------------
The Board of Trustees of the Trust has adopted a Combined Code of Ethics (the
"Code") pursuant to Rule 17j-1 under the Investment Company Act of 1940. The
Advisor, Servicer and Distributor are also covered by the Code. The Code
applies to the personal investing activities of trustees, directors, officers
and certain employees ("access persons"). Rule 17j-1 and the Code is designed
to prevent unlawful practices in connection with the purchase or sale of
securities by access persons. Under the Code, 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
initial public offerings or private placements. The Code is on file with the
Securities and Exchange Commission, and is available to the public.
REPORTING
---------
You will receive the Trust's unaudited financial information and audited
financial statements. In addition, the Trust will send you proxy statements
and other reports. If you are a customer of a financial institution that has
purchased shares of a Fund for your account, you may, depending upon the
nature of your account, receive all or a portion of this information directly
from your financial institution.
SHAREHOLDER INQUIRIES
---------------------
You may visit the Rydex Web site at www.rydexfunds.com or call 1-800-820-0888
or 301-468-8520 to obtain information on account statements, procedures, and
other related information.
COUNSEL
Morgan, Lewis & Bockius LLP serves as counsel to the Trust.
AUDITORS
Deloitte & Touche LLP, are the auditors and the independent certified public
accountants of the Trust and each of the Funds.
24
<PAGE>
CUSTODIAN
Firstar Bank, N.A. (the "Custodian"), Star Bank Center, 425 Walnut Street,
Cincinnati, Ohio 45202, serves as custodian for the Trust and the Funds under
a custody agreement between the Trust and the Custodian. Under the custody
agreement, the Custodian holds the portfolio securities of each Fund and
keeps all necessary related accounts and records.
25
<PAGE>
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS
------- --------
(a)(1) Certificate of Trust of Rydex Variable Trust is incorporated by
reference to Exhibit (a) of the Initial Registration Statement,
filed on June 17, 1998.
(a)(2) Declaration of Trust of Rydex Variable Trust is incorporated by
reference to Exhibit (a) of the Initial Registration Statement,
filed on June 17, 1998.
(b) By-Laws are incorporated by reference to Exhibit (b) of the Initial
Registration Statement, filed on June 17, 1998.
(c) Not Applicable.
(d)(1) Investment Advisory Agreement between the Registrant and PADCO
Advisors II, Inc. is incorporated herein by reference to Exhibit (d)
of the Post-Effective Amendment No. 1 to this Registration
Statement, filed on April 16, 1999.
(d)(2) Amendment to Investment Advisory Agreement between the Registrant
and PADCO Advisors II, Inc. dated February 25, 2000 is incorporated
herein by reference to Exhibit (d)(2) of the Post-Effective
Amendment No. 4 to this Registration Statement, filed on April 16,
2000.
(e)(1) Distribution Agreement between the Registrant and PADCO Financial
Services, Inc. is incorporated herein by reference to Exhibit (e)(1)
of the Post-Effective Amendment No. 1 to this Registration
Statement, filed on April 16, 1999.
(e)(2) Participation Agreement between the Registrant and PADCO Financial
Services, Inc. is herein incorporated by reference to Pre-Effective
Amendment No. 1 as filed on October 14, 1998.
(e)(3) Investor Service Agreement and Plan are incorporated herein by
reference to Exhibit (e)(3) of the Post-Effective Amendment No. 1 to
this Registration Statement, filed on April 16, 1999.
(e)(4) Amendments to Investor Services Agreement and Plan between
Registrant and PADCO Service Company, Inc. dated February 25, 2000
are incorporated
<PAGE>
herein by reference to Exhibit (e)(4) of the Post-Effective
Amendment No. 4 to this Registration Statement, filed on April 16,
2000.
(f) Not Applicable.
(g) Custodian Agreement between the Registrant and Star Bank, N.A. is
herein incorporated by reference to Pre-Effective Amendment No. 1 as
filed on October 14, 1998.
(h)(1) Service Agreement between the Registrant and PADCO Service Company,
Inc. is incorporated herein by reference to Exhibit (h)(1) of the
Post-Effective Amendment No. 1 to this Registration Statement, filed
on April 16, 1999.
(h)(2) Accounting Services Agreement between the Registrant and PADCO
Service Company, Inc. is incorporated herein by reference to
Exhibit (h)(2) of the Post-Effective Amendment No. 1 to this
Registration Statement, filed on April 16, 1999.
(h)(3) Amendment to Service Agreement between the Registrant and PADCO
Service Company, Inc. dated February 25, 2000 is incorporated herein
by reference to Exhibit (h)(3) of the Post-Effective Amendment No. 4
to this Registration Statement, filed on April 16, 2000.
(h)(4) Amendment to Accounting Services Agreement between the Registrant
and PADCO Service Company, Inc. dated February 25, 2000 is
incorporated herein by reference to Exhibit (h)(4) of the
Post-Effective Amendment No. 4 to this Registration Statement, filed
on April 16, 2000.
(i) Legal Opinion of Morgan, Lewis & Bockius LLP is incorporated herein
by reference to Exhibit (i) of the Post-Effective Amendment No. 4 to
this Registration Statement, filed on April 16, 2000.
(j) Not Applicable.
(k) Not Applicable.
(l) Not Applicable.
(m) Not Applicable.
(n) Not Applicable.
(o) Not Applicable.
iv
<PAGE>
(p) Combined Code of Ethics for Rydex Series Funds, Rydex Variable
Trust, Rydex Dynamic Funds, PADCO Advisors, Inc. d/b/a Rydex Global
Advisors, PADCO Advisors II, Inc. d/b/a Rydex Global Advisors, Rydex
Distributors, Inc., PADCO Service Company, Inc. is incorporated
herein by reference to exhibit (p) of the Post-Effective Amendment
No. 3 to this Registration Statement, filed on April 5, 2000.
(q) Powers of Attorney for Albert P. Viragh, Jr., Carl G. Verboncoeur,
Corey A. Colehour, J. Kenneth Dalton, John O. Demaret, Patrick T.
McCarville, and Roger Somers are incorporated herein by reference to
Exhibit (q) of the Post-Effective Amendment No. 4 to this
Registration Statement, filed on April 16, 2000.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND
Not Applicable.
ITEM 25. INDEMNIFICATION
The Registrant is organized as a Delaware business trust and is operated
pursuant to a Declaration of Trust, dated as of June 11, 1998 (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, as amended, and the
Investment Company Act of 1940, as amended. 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;
(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 of the Registrant provides that if indemnification is
not ordered by a court, indemnification may be authorized upon determination by
shareholders, or by a majority
v
<PAGE>
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
ADVISER
-------
PADCO Advisors II, Inc., d/b/a Rydex Global Advisors, (the"Advisor") is the
investment advisor for the Trust. The principal address of the Advisor is 6116
Executive Drive, Rockville, Maryland. The Advisor is an investment adviser
registered under the Advisers Act.
The officers and directors of the Advisor, including information as to any other
business profession, vocation or employment of substantial nature engaged in by
such officers and directors during the past two years, are as follows:
Name Position
---- --------
Albert P. Viragh, Jr. Chairman and President
Albert P. Viragh, Jr. Treasurer
Amanda C. Viragh Secretary
Amanda C. Viragh Assistant Treasurer
ITEM 27. PRINCIPAL UNDERWRITERS
(a) Rydex Distributors, Inc. (formerly, PADCO Financial Services, Inc.)
serves as the principal underwriter for shares of the Registrant, Advisor
Class Shares and International Funds Shares of Rydex Series Funds, and
shares of Rydex Dynamic Funds.
(b) The following information is furnished with respect to the directors and
officers of Rydex Distributors, Inc.
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITIONS AND OFFICES WITH POSITIONS AND OFFICES
BUSINESS ADDRESS* UNDERWRITER WITH REGISTRANT
------------------ -------------------------- ---------------------
<S> <C> <C>
Albert P. Viragh, Jr. Chairman of the Board of Directors, Chairman of the Board
President and Treasurer of Trustees and President
Amanda C. Viragh Director None
Carl G. Verboncoeur Vice President Vice President
</TABLE>
vi
<PAGE>
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
Books or other documents required to be maintained by Section 31(a) of the
Investment Company Act of 1940, and the rules promulgated thereunder, are
maintained as follows:
All accounts, books, and records required to be maintained and preserved by
Section 31(a) of the Investment Company Act of 1940, as amended, and Rules 31a-1
and 31a-2 thereunder, will be kept by the Registrant at 6116 Executive
Boulevard, Rockville, Maryland 20852.
ITEM 29. MANAGEMENT SERVICES
Not Applicable.
ITEM 30. UNDERTAKINGS
Not Applicable.
vii
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment No. 5 to the Registration Statement (File No.
811-08821) to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Rockville, State of Maryland on this 20th day of
June, 2000.
Rydex Variable Trust
By: /s/Albert P. Viragh, Jr.
-------------------------
Albert P. Viragh, Jr.,
President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 5 to the Registration Statement has been signed
below by the following persons in the capacity and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/Albert P. Viragh, Jr. Chairman of the Board of Trustees, June 20, 2000
-------------------------- Principal Executive Officer, and
Albert P. Viragh, Jr. President
* Member of the Board of Trustees June 20, 2000
--------------------------
Corey A. Colehour
* Member of the Board of Trustees June 20, 2000
--------------------------
J. Kenneth Dalton
* Member of the Board of Trustees June 20, 2000
--------------------------
John O. Demaret
* Member of the Board of Trustees June 20, 2000
--------------------------
Roger Somers
* Member of the Board of Trustees June 20, 2000
--------------------------
Patrick T. McCarville
/s/Carl G. Verboncoeur Vice President and Treasurer June 20, 2000
--------------------------
Carl G. Verboncoeur
/s/Albert P. Viragh, Jr.
---------------------------------------
Albert P. Viragh, Jr., Attorney in Fact
*Powers of Attorney previously filed
viii
<PAGE>
EXHIBIT INDEX
(a)(1) Certificate of Trust of Rydex Variable Trust is incorporated by
reference to Exhibit (a) of the Initial Registration Statement, filed
on June 17, 1998.
(a)(2) Declaration of Trust of Rydex Variable Trust is incorporated by
reference to Exhibit (a) of the Initial Registration Statement, filed
on June 17, 1998.
(b) By-Laws are incorporated by reference to Exhibit (b) of the Initial
Registration Statement, filed on June 17, 1998.
(c) Not Applicable.
(d)(1) Investment Advisory Agreement between the Registrant and PADCO
Advisors II, Inc. is incorporated herein by reference to Exhibit (d)
of the Post-Effective Amendment No. 1 to this Registration Statement,
filed on April 16, 1999.
(d)(2) Amendment to Investment Advisory Agreement between the Registrant and
PADCO Advisors II, Inc. dated February 25, 2000 is incorporated herein
by reference to Exhibit (d)(2) of the Post-Effective Amendment No. 4
to this Registration Statement, filed on April 16, 2000.
(e)(1) Distribution Agreement between the Registrant and PADCO Financial
Services, Inc. is incorporated herein by reference to Exhibit (e)(1)
of the Post-Effective Amendment No. 1 to this Registration Statement,
filed on April 16, 1999.
(e)(2) Participation Agreement between the Registrant and PADCO Financial
Services, Inc. is herein incorporated by reference to Pre-Effective
Amendment No. 1 as filed on October 14, 1998.
(e)(3) Investor Service Agreement and Plan are incorporated herein by
reference to Exhibit (e)(3) of the Post-Effective Amendment No. 1 to
this Registration Statement, filed on April 16, 1999.
(e)(4) Amendments to Investor Services Agreement and Plan between Registrant
and PADCO Service Company, Inc. dated February 25, 2000 are
incorporated herein by reference to Exhibit (e)(4) of the
Post-Effective Amendment No. 4 to this Registration Statement, filed
on April 16, 2000.
(f) Not Applicable.
ix
<PAGE>
(g) Custodian Agreement between the Registrant and Star Bank, N.A. is
herein incorporated by reference to Pre-Effective Amendment No. 1 as
filed on October 14, 1998.
(h)(1) Service Agreement between the Registrant and PADCO Service Company,
Inc. is incorporated herein by reference to Exhibit (h)(1) of the
Post-Effective Amendment No. 1 to this Registration Statement, filed
on April 16, 1999.
(h)(2) Accounting Services Agreement between the Registrant and PADCO Service
Company, Inc. is incorporated herein by reference to Exhibit (h)(2) of
the Post-Effective Amendment No. 1 to this Registration Statement,
filed on April 16, 1999.
(h)(3) Amendment to Service Agreement between the Registrant and PADCO
Service Company, Inc. dated February 25, 2000 is incorporated herein
by reference to Exhibit (h)(3) of the Post-Effective Amendment No. 4
to this Registration Statement, filed on April 16, 2000.
(h)(4) Amendment to Accounting Services Agreement between the Registrant and
PADCO Service Company, Inc. dated February 25, 2000 is incorporated
herein by reference to Exhibit (h)(4) of the Post-Effective Amendment
No. 4 to this Registration Statement, filed on April 16, 2000.
(i) Legal Opinion of Morgan, Lewis & Bockius LLP is incorporated herein by
reference to Exhibit (i) of the Post-Effective Amendment No. 4 to this
Registration Statement, filed on April 16, 2000.
(j) Not Applicable.
(k) Not Applicable.
(l) Not Applicable.
(m) Not Applicable.
(n) Not Applicable.
(o) Not Applicable.
(p) Combined Code of Ethics for Rydex Series Funds, Rydex Variable Trust,
Rydex Dynamic Funds, PADCO Advisors, Inc. d/b/a Rydex Global Advisors,
PADCO Advisors II, Inc. d/b/a Rydex Global Advisors, Rydex
Distributors, Inc., PADCO Service Company, Inc. is incorporated herein
by reference to exhibit (p) of the Post-Effective Amendment No. 3 to
this Registration Statement, filed on April 5, 2000.
x
<PAGE>
(q) Powers of Attorney for Albert P. Viragh, Jr., Carl G. Verboncoeur,
Corey A. Colehour, J. Kenneth Dalton, John O. Demaret, Patrick T.
McCarville, and Roger Somers are incorporated herein by reference to
Exhibit (q) of the Post-Effective Amendment No. 4 to this Registration
Statement, filed on April 16, 2000.
xi
