Top ETF Stories of 2009: Leveraged Funds

NEW YORK (TheStreet) -- Leveraged exchange-traded funds made for one of the most important stories in the ETF universe in 2009.

Following are three of my most popular 2009 articles on leveraged ETFs. (Here are my most popular articles on another hot ETF topic of the past year, natural gas.)

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Leveraged ETFs: Comprehension Is Key

Originally published 06/25/09 09:00 AM EDT

The controversy surrounding ultra long, ultra short and other leveraged ETFs has reached a fever pitch while the funds, particularly the Direxion Financial Bear 3x ETF (FAZ) and Direxion Financial Bull 3x ETF (FAS), continue to grow in trading volume.

While leveraged ETF funds are not a new phenomenon, they have hit the mainstream and have drawn the attention of regulatory agencies like FINRA and commentators asserting that investors should be protected against these products. Like all financial tools, the power of leveraged ETFs is truly in the hands of the investor, and the danger lies in an investor's unwillingness or inability to understand them.

Quite often investors don't get what they expect when investing in ultra long or ultra short ETFs and are confused when, over time, their fund fails to track the objective that is advertised. In a Wall Street Journal article, Paul Justice, an ETF specialist for Morningstar (MORN) recently noted that Since most leveraged ETFs "reset" each day, it is difficult to gauge long term returns; twice the daily return of an index is not twice the monthly return.

"When employing leverage and compounding returns, an investor would have to know how volatile and in which direction the daily price swings will be--which is nearly impossible--to know how he will fare beyond one day," Justice said.

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