Direxion's reverse split will reduce fees and refocus investors in the short term, but due to the nature of the funds, long-term problems will remain. The split will prop up the funds' price for now, but erosion could haunt investors once again. In the meantime, it is more important than ever for investors to focus on the true purpose of the funds: as an intraday hedge for sophisticated investors.

Regulatory Storm Brews for ETFs

Originally published 08/20/09 09:06 AM EDT

A regulatory storm is brewing on the horizon, and the first drops of doubt are beginning to fall on the ETF industry. Both brokers and issuers are running for cover before the skies open up. Lawsuits, like lightning, could strike at any time, singling out a firm from the herd and driving deep cracks into the industry floor.

Starting with a small firm called Edward Jones, brokers have bowed out of the leveraged ETF arena. Despite increasingly revealing warning labels, the wrong kinds of investors continue to get dragged into ultra-long or triple-down funds.

Like many medications, leveraged ETFs were designed to treat specific conditions. Daily leveraged funds like Direxion's Daily Financial Bull ( FAS) or ProShares UltraShort Financials ( SKF) are designed to be used with existing portfolios to provide hedging capabilities. Long real estate? Hedge your portfolio over a single trading day with the purchase of ProShares UltraShort Real Estate ETF ( SRS).

These useful remedies, however, can sometimes fall into the wrong hands or be taken for the wrong reasons. The heady rush of being ultra-long or ultra-short has proven to be a temptation too great for some investors who rushed to their brokers to get their fix. Once difficult to access, these strategies have been made available by the structure of ETF products.

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