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Rydex Funds Rydex Variable Trust Annual Report

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Rydex Funds Rydex Variable Trust Annual Report VIT DECEMBER 31, 2013 RYDEX FUNDS RYDEX VARIABLE TRUST ANNUAL REPORT DOMESTIC EQUITY FUND NASDAQ-100® FUND RVAOTC-2-1213x1214 This report and the financial statements contained herein are submitted for the general information of our shareholders. The report is not authorized for distribution to prospective investors unless preceded or accompanied by an effective prospectus. Distributed by Guggenheim Distributors, LLC. TABLE OF CONTENTS DeAR SHAReHOLDeR .......................................................................................................................................................................................................... 2 eCONOMIC AND MARKeT OVeRVIeW ................................................................................................................................................................................ 3 ABOUT SHAReHOLDeRS’ FUND eXPeNSeS ....................................................................................................................................................................... 5 NASDAQ-100® FUND ............................................................................................................................................................................................................ 8 NOTeS TO FINANCIAL STATeMeNTS ................................................................................................................................................................................. 15 RePORT OF INDePeNDeNT ReGISTeReD PUBLIC ACCOUNTING FIRM ........................................................................................................................... 24 OTHeR INFORMATION ........................................................................................................................................................................................................ 25 INFORMATION ON BOARD OF TRUSTeeS AND OFFICeRS ............................................................................................................................................... 26 GUGGeNHeIM INVeSTMeNTS PRIVACY POLICIeS ............................................................................................................................................................ 29 THe RYDeX FUNDS ANNUAL RePORT | 1 December 31, 2013 Dear Shareholder: Security Investors, LLC (the “Investment Adviser”) is pleased to present the annual shareholder report for one of our Funds (the “Fund”) that is part of the Rydex Variable Trust. This report covers performance of the Fund for the annual period ended December 31, 2013. The Investment Adviser is a part of Guggenheim Investments, which represents the investment management businesses of Guggenheim Partners, LLC, a global, diversified financial services firm. Guggenheim Distributors, LLC is the distributor of the Fund. Guggenheim Distributors, LLC is affiliated with Guggenheim Partners, LLC and Security Investors, LLC. We encourage you to read the economic and Market Overview section of the report, which follows this letter, and then the Performance Report and Fund Profile for the Fund. We are committed to providing innovative investment solutions and appreciate the trust you place in us. Sincerely, Donald C. Cacciapaglia President January 31, 2014 Read a prospectus and summary prospectus (if available) carefully before investing. It contains the investment objectives, risks, charges, expenses and other information, which should be considered carefully before investing. Obtain a prospectus and summary prospectus (if available) at guggenheiminvestments.com or call 800.820.0888. The NASDAQ-100 Fund may not be suitable for all investors. • Investing in Rydex NASDAQ-100® Fund involves certain risks, which may include increased volatility due to the use of futures and the possibility that companies in which the Fund invests may not be commercially successful or may become obsolete more quickly. • There are no assurances that any Rydex Fund will achieve its objective and/or strategy. This Fund is subject to active trading and tracking error risks, which may increase volatility, impact the Fund’s ability to achieve its investment objective and may decrease the Fund’s performance. • This Fund is considered non-diversified and can invest a greater portion of its assets in securities of individual issuers than a diversified fund. As a result, changes in the market value of a single security could cause greater fluctuations in the value of Fund shares than would occur in a more diversified fund. • For more on these and other risks, please read the prospectus. 2 | the RYDeX FUNDS ANNUAL RePORT ECONOMIC AND MARKET OVERVIEW (Unaudited) December 31, 2013 The year ended December 31, 2013 wound down with a series of stronger-than-expected economic data releases. ISM manufacturing data (historically indicative of expansion or contraction) rose to its highest levels in over two years, consumer confidence rebounded following the government shutdown, housing starts surged, and the job market strengthened. Citing improved labor market conditions and a sustainable economic expansion, the U.S. Federal Reserve (the “Fed”) announced in December that it would reduce its monthly bond purchases by $10 billion, to $75 billion, starting in January 2014. Yet, at the same time, the Fed lengthened the time frame before which it will raise rates by promising to keep the Fed funds target rate at 0-0.25% at least as long as the unemployment rate remains above 6.5% and perhaps “well past” the time this target is reached. For the first time, the Fed also added a lower-bound target for inflation of 2%–lengthening the expected time frame before rates rise. As the U.S. economy slowly strengthens, we may return to an environment where taking credit risk is not just a consequence of staying within duration targets or reaching for yield, but rather a proactive choice driven by a positive outlook on the economy. To sustain optimism, the Fed will need to monitor the unintended consequences of tapering and avoid negative economic repercussions, as happened in the summer of 2013 when a spike in 10-year Treasury yields dampened home sales. For markets, the Fed must convince investors that the economy is strong enough to withstand steady reductions of its asset purchases. These will likely be Janet Yellen’s top priorities as she takes over the helm of the Fed. Last January, the global economy faced myriad headwinds, choppiness lay ahead, and we expected plenty of volatility in 2013. Nevertheless, we believed at that point that risk assets were the best choice for investors. Now, the headwinds of 2013 have largely dissipated, and the out- look appears benign for risk assets for the first three to six months of 2014, if not longer. Many pundits may have underestimated the strength of the U.S. economy, with both third quarter and fourth quarter economic growth beating expectations. The final three months of 2013 were exceptionally good for U.S. equities, which produced a wealth effect that probably boosted holiday sales. All of this bodes well for the first quarter of 2014. Market conditions could be even stronger in europe. economic data from the euro area’s periphery is improving faster than from the core, where inflation is also rising at a faster pace, giving the peripheral nations a competitive advantage. In Asia, markets have priced for a more negative scenario that now appears less likely. With the U.S. and europe now out of recession, they are ready to underpin a recovery in export growth in the Asian region. As a synchronous global expansion gets under way, investors may become more comfortable with taking risk, and this should be reflected in asset prices in many regions around the globe. For 2014, investors should bear in mind that the Fed will continue injecting liquidity into financial markets even as it tapers its asset purchases. Assuming that the Fed continues the same pace of reductions at each Federal Open Market Committee meeting, it would still purchase more than $500 billion of bonds in 2014–nearly the size of the Fed’s Qe2 from November 2010 to June 2011. This should help support credit spreads. An accelerated pace of tapering from the Fed would signal faster-than-expected economic growth and spark higher demand for risk assets. On balance, we expect the impact of tapering to be neutral. Barring economic weakness, we expect relatively benign market conditions with no major spike in volatility. For the year ended December 31, 2013, the Standard & Poor’s 500® (“S&P 500”) Index* returned 32.39%. Foreign markets were also strong: the Morgan Stanley Capital International (“MSCI”) europe-Australasia-Far east (“eAFe”) Index* returned 22.78%. The return of the MSCI emerging Markets Index* was -2.60%. In the bond market, the Barclays U.S. Aggregate Bond Index* posted a -2.02% return for the period, while the Barclays U.S. Corporate High Yield Index* returned 7.44%. The return of the Bank of America Merrill Lynch 3-Month U.S. Treasury Bill Index* was 0.07% for the 12-month period. The opinions and forecasts expressed may not actually come to pass. This information is subject to change at any time, based on market and other conditions, and should not be construed as a recommendation of any specific security or strategy. THe RYDeX FUNDS ANNUAL RePORT | 3 ECONOMIC AND MARKET OVERVIEW (Unaudited) (concluded) December 31, 2013 *Index Definitions: The following indices are referenced throughout this report. Indices are unmanaged and not available
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