ProFunds Uses Words; Direxion Takes Action

Since they first hit the trading floor, leveraged exchange-traded instruments have come under considerable scrutiny from financial media regarding the dangers of carrying them in traditional buy-and-hold portfolios.

The fruit of this labor has come in the form of lawsuits, outflows and regulatory action taken against the companies on the part of the government and the average investor. Additionally, in response to this criticism, firms such as Direxion and ProShares have, themselves, appeared to be taking responsibility for their exchange-traded products.

While most of the controversy has surrounded their ETFs, both Direxion and ProFunds also have impressive families of mutual funds that provide the same leveraged exposure to the markets. Recently, both firms have taken bold action concerning their lines of less-popular-though-equally-dangerous mutual funds in hopes of killing the negative stigma associated with these instruments and the firms themselves.

On Monday, The Wall Street Journal reported that ProFunds, the largest provider of leveraged exchange-traded funds, was adding additional muscle to the language of its warnings to long-term investors. In an open letter published on the ProFunds Web site, the company outlines the dangers of using its mutual funds in a buy-and-hold scenario. They go on to explain that a number of their instruments may not be suitable for all investors and should, therefore, be used only by sophisticated investors who are fully aware of the risks associated.

Some of the leveraged mutual funds offered by ProFunds include: UltraBull ProFund(ULPIX Quote), UltraBear ProFund(URPIX Quote), UltraSmall-Cap(UAPIX Quote) and UltraShort Emerging Markets(UVPIX Quote).

While warnings are helpful, Direxion made headlines when it took even bolder actions toward its own leveraged mutual fund products. Traditionally, the company's mutual funds were designed to give leveraged exposure to the performance of the market or sector on a daily basis. However, the company announced it was restructuring its mutual funds' tracking methods from a daily to a monthly time frame.