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Leverage Magnifies Compounding

As leveraged investments magnify the impact of market movements, the results of compounding are also magnified. In an upward- or downward-trending market, a leveraged investment that is on the correct side of the trend will see magnified end results, while one on the wrong side of the trend will see magnified losses. When the underlying index is volatile, the leveraged fund or ETF will amplify this volatility.

An Example of Leveraged Compounding

For example, consider a hypothetical mutual fund or ETF that is designed to produce returns that correspond to 200% of an index. On the first day of a period, the index rises from a level of 100 to a level of 110, producing a 10% gain and an expectation that the fund will rise by 20% (10% x 2). On the same day, the value of the leveraged fund increases from $100.00 to $120.00 for a gain of 20%—in line with its benchmark.

On day two, assume the index falls from 110 to 99 for a loss of 10%. The fund, as expected, falls 20% to a price of $96.00. On each day, the fund performed exactly in line with its benchmark, but for the two-day period, the fund was down 4%, while the index was down only 1%.

Without taking into account the daily compounding of returns, one would expect the leveraged product to lose 2%. However, due to compounding, it actually lost 4%, thereby performing as was intended. This example is summarized in the chart and table below.

In order to isolate the impact of leverage, these hypothetical examples assume (i) no tracking error; (ii) no dividends paid by the companies included in the underlying index; (iii) no expenses; and (iv) borrowing and/or lending rates (required to obtain leverage) of 0% percent. If tracking error, fund expenses, and borrowing and lending rates of greater than 0% percent were included in the graphs, the fund’s performance would be lower than that shown.

Inverse and leveraged Funds are not suitable for all investors. •These Funds should be utilized only by investors who (a) understand the risks associated with the use of leverage, (b) understand the consequences of seeking daily leveraged investment results, (c) understand the risk of shorting, and (d) intend to actively monitor and manage their investments. •The more a Fund invests in leveraged instruments, the more the leverage will magnify any gains or losses on those investments. •Inverse Funds involve certain risks, which include increased volatility due to the Funds’ possible use of short sales of securities and derivatives, such as options and futures. •The Funds’ use of derivatives, such as futures, options and swap agreements, may expose the Funds’ shareholders to additional risks that they would not be subject to if they invested directly in the securities underlying those derivatives. •Short-selling involves increased risks and costs. You risk paying more for a security than you received from its sale. •Leveraged and inverse Funds seek to provide investment results that match the performance of a specific benchmark, before fees and expenses, on a daily basis. Because the Funds seek to track the performance of their benchmark on a daily basis, mathematical compounding, especially with respect to those Funds that use leverage as part of their investment strategy, may prevent a fund from correlating with the monthly, quarterly, annual or other period performance of its benchmark. Due to the compounding of daily returns, leveraged and inverse Funds’ returns over periods other than one day will likely differ in amount and possibly direction from the benchmark return for the same period. For those Funds that consistently apply leverage, the value of the fund’s shares will tend to increase or decrease more than the value of any increase or decrease in its benchmark index. The Funds rebalance their portfolios on a daily basis, increasing exposure in response to that day’s gains or reducing exposure in response to that day’s losses. Daily rebalancing will impair a fund’s performance if the benchmark experiences volatility. Investors should monitor their leveraged and inverse Funds’ holdings consistent with their strategies, as frequently as daily. •For more on these and other risks, please read the prospectus.

This piece is intended to be for information purposes only. Investors should discuss these concepts and their personal financial situation with their financial advisor or advisors prior to making any investment decisions.

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For more complete information regarding the funds click here for a prospectus. Investors should consider the investment objectives, risks, charges and expenses of a fund carefully before investing. The fund’s prospectus contains this and other information about the fund. Read the prospectus carefully before you invest or send money.

The funds are distributed by Rydex Distributors, Inc. (RDI). Security Global Investors^SM is the investment advisory arm of Security Benefit Corporation (Security Benefit). Security Global Investors consists of Security Global Investors, LLC, Security Investors, LLC and Rydex Investments. Rydex Investments is the primary business name for PADCO Advisors, Inc. and PADCO Advisors II, Inc. SGI and RDI are affiliates and are subsidiaries of Security Benefit.