ETF trading volume jumped from $142 billion in 2004 to $3 trillion in 2008, and settling around $1.4 trillion in June 2009, write Yan Zilbering and Donald Bennyhoff for IndexUniverse. Since 2008, nost of the ETF trading volume has been centered around a narrow selection of ETFs from the 850 or so available as of June 2009.

The top 20 most heavily traded ETFs by dollar volume amount to around 80% of total ETF trades. At the forefront are the most established ETFs with the most assets that are popular among investors of all types. The included ETFs account for about 50% of all ETF trading volume and they track the most common, broad-based domestic indexes:

• SPDRs S&P 500 (SPY): avg. daily turnover since Jan. 2008 is 43%
• PowerShares QQQ (QQQQ): avg. daily turnover since Jan. 2008 is 43%
• iShares Russell 2000 Index (IWM): avg. daily turnover since Jan. 2008 is 54%
• DIAMONDS Trust, Series 1 (DIA): avg. daily turnover since Jan. 2008 is 28%

There are also a group of nine narrowly focused sector and sub-sector ETFs, which represent around 16% of ETF trades, used to implement various strategies through the easy access of specific areas of the market.

• Financial Select Sector SPDR (XLF): avg. daily turnover since Jan. 2008 is 45%
• Energy Select Sector SPDR (XLE): avg. daily turnover since Jan. 2008 is 40%
• Oil Services HOLDRs (OIH): avg. daily turnover since Jan. 2008 is 54%
• SPDR Gold Shares (GLD): avg. daily turnover since Jan. 2008 is 6%
• iShares Dow Jones US Real Estate (IYR): avg. daily turnover since Jan. 2008 is 58%
• iShares MSCI EAFE Index (EFA): avg. daily turnover since Jan. 2008 is 4%
• iShares MSCI Emerging Markets Index (EEM): avg. daily turnover since Jan. 2008 is 12%
• iShares FTSE/Xinhua China 25 Index (FXI): avg. daily turnover since Jan. 2008 is 20%
• iShares MSCI Brazil Index (EWZ): avg. daily turnover since Jan. 2008 is 18%

The last set includes seven leveraged ETFs, which produce the multiple or inverse returns of the broad market or sector. This group is usually used for capitalizing on the short-term movements in the markets.

• Ultra S&P500 ProShares (SSO): avg. daily turnover since Jan. 2008 is 61%
• UltraShort S&P500 ProShares (SDS): avg. daily turnover since Jan. 2008 is 109%
• Ultra QQQ ProShares (QLD): avg. daily turnover since Jan. 2008 is 90%
• UltraShort QQQ ProShares (QID): avg. daily turnover since Jan. 2008 is 178%
• UltraShort Financials ProShares (SKF): avg. daily turnover since Jan. 2008 is 242%
• Direxion Daily Financial Bull 3X Shares (FAS): avg. daily turnover since Jan. 2008 is 128%
• Direxion Daily Financial Bear 3X Shares (FAZ): avg. daily turnover since Jan. 2008 is 241%

By looking at the data, it is noticeable that the more heavily traded ETFs traded at a higher turnover rate. ETFs tracking volatile sectors have been traded at even higher levels.

Max Chen contributed to this article.

As more and more investors flock to leveraged ETFs because of their ability to enable one to earn bigger and bigger gains, ETF providers have said that they will not be upping the ante.  Some reasons for this include design hurdles, extra costs and higher volatility, states Ian Salisbury of The Wall Street Journal.

Currently, the most leverage anyone can get is three times.  This can be gained through exposure in ETFs such as the Direxion Daily Financial Bull 3x Shares (FAS), which enables one to gain triple the exposure to the financial sector.  Another possibility is the Direxion Daily Energy Bull 3X Shares (ERX), which enables one to gain triple the exposure to the energy sector.

Although one has the potential to win big by utilizing these ETFs, they aren’t made for everyone and they do come with risks to be aware of. Two things to keep in mind: they are made to track their indexes on a daily basis, and they rebalance daily, which leads to tracking error over time; they are unsuitable for buy-and-hold investors, as well. The providers of these ETFs have been very transparent in explaining how these funds work and who they’re meant for. There’s no shortage of education out there, so do your research before you buy.

These ETFs do work exactly as they should, and function best as short-term hedging strategies.

Kevin Grewal contributed to this article.

Since March 9, the Russell 1000 Financial Services Index has gained nearly 62% on positive news from analysts and improving economic data.  Now compare that to a more concentrated fund that tracks the financials, the Direxion Financial Bull 3X (FAS), which has returned a whopping 260% over the same period.  This fund is designed to return three times what a financial index would return, which it has done and thus makes it attractive to riskeir investors.

On the contrary, the inverse version of the aforementioned index, the Direxion Financial Bear 3X (FAZ), has plummeted close to 90% over the same period.  It is fairly obvious how compounding works and volatility can influence the returns of these levered ETFs, states David Gaffen of The Wall Street Journal.

Despite the continuous volatility in levered ETFs, they are still becoming more popular.  Perhaps it is because these ETFs enable investors an easy way to take leveraged long or short bets on a sector.  There are, however, plenty of opponents of these volatile investing tools.  The truth is that these tools work exactly as they’re supposed to.

As with everything else, the more concentrated the ETF is, the more volatile it is.  It’s the same concept of keeping all your eggs in one basket.  For this reason, we recommend that you remain diversified and have a strategy, such as the 200-day moving average strategy.

Share your thoughts about leveraged ETFs in our forums.

Kevin Grewal contributed to this article.

“We must have a strategy that regulates the financial system as a whole … not just its individual components,” Bernanke said in a speech to the Council on Foreign Relations. Jeannine Aversa for the Associated Press reports that he also stressed the need for regulators to make sure financial companies have a sufficient capital cushion against potential losses.

Meanwhile, Rep. Barney Frank said he expected the SEC’s uptick rule to be restored in about a month. The rule only allowed stocks to be sold short when the last sale price was higher than the previous price. It had been repealed in 2007.

Citigroup (C) had great news for Wall Street which led to a large stock rally. Citigroup Inc. said it had operated at a profit during the first two months of the year; all the major indexes soared more than 4.5%, and the Dow Jones Industrial Average shot up more than 300 points, reports Sara Lepro for the Associated Press.

This is great news among a stream of bad news, however, analysts do not dare say the markets are at a turning point.

• Direxion Financial Bull 3X Shares (FAS): down 90.2% over 3 months, but it’s trading more than 30% higher at midday today

The International Monetary Fund warned on Tuesday that the world economy will likely contract this year in a “Great Recession”. Growth will slow to zero or below this year, and African leaders are woeful this will undo hard-won social-economic gains.

Lesley Wroughton and George Obulutsa for Yahoo Finance report that IMF Managing Director Dominique Strauss-Kahn said in a speech that deleveraging by financial institutions and a collapse in consumer and business confidence is depressing domestic demand across the globe.

Companies are shoring up and cutting production in an effort to reduce inventory to cope with the recession. The Associated Press reports that wholesale inventories fell 0.7% in January, which was slightly smaller than the 1% fall economists had expected.

This is the fifth month in a row that businesses have cut inventory and sales at the wholesale level dropped 2.9% in January, the seventh consecutive decline.

Direxion Shares exchange traded funds (ETFs) are a new tool offering forward thinking investors innovative options and market exposure, and they’ve just expanded their family a little more.

The first-of-its-kind ETF provider has added six more funds to its family, and they now offer a total of 14 triple leveraged ETFs. The new offerings focus on developed markets, emerging markets and the technology sector.

The new funds are:

• Developed Markets Bull 3x Shares (DZK)
• Developed Markets Bear 3x Shares (DPK)
• Emerging Markets Bull 3X Shares (EDC)
• Emerging Markets Bear 3x Shares (EDZ)
• Technology Bull 3x Shares (TYH)
• Technology Bear 3x Shares (TYP)

These ETFs enable an investor to navigate through the market  with bull and bear fund flexibility, and effectively allocate capital to seek improved risk adjusted returns, advertises Direxion Shares. In layman’s terms, they are designed to seek 300% of the daily performance, or 300% of the inverse of the daily performance of the four indexes that they track, and are intended to be used as a supplement in a portfolio.

The Direxion funds have been seen tremendous success, being utilized by hedge fund managers, institutional investors, and other active investors, who have pushed the 3x funds over $800 million in assets.  Additionally, Direxion plans to continue their ongoing liquidation of seven of their traditional funds to focus on more international fund offerings, states in an interview between Eric Rosenbaum of Index Universe and Andy O’Rourke of Direxion Funds.

In addition to the new launches, the company also has filed for bull/bear India and China ETFs.

The other eight funds currently being offered are:

• Direxion Large Cap Bull 3X Shares (BGU)
• Direxion Small Cap Bull 3x Shares (TNA)
• Direxion Energy Bull 3x Shares (ERX)
• Direxion Financial Bull 3x Shares (FAS)
• Direxion Large Cap Bear 3x Shares (BGZ)
• Direxion Small Cap Bear 3x Shares (TZA)
• Direxion Energy Bear 3x Shares (ERY)
• Direxion Financial Bear 3x Shares (FAZ)

Direxion has launched eight ETFs that are leveraged bull and bear funds designed to seek 300% of the daily performance, or 300% of the inverse of the daily performance, of the four indexes they track.

Among the reasons that Direxion went with triple leverage is that they’d be first on the market with a new and different product, instead of getting lost in a sea of similar products.

“ETFs that are first-movers tend to have an enormous advantage. We didn’t want to come out with products similar to what was already out there,” says Dan O’Neill, president and chief investment strategist. “We believe that that’s what’s going to distinguish them and that will hopefully be a point of attraction for clients. We’ve gone with high leverage because we think it’s attractive.”

When these funds first appeared in registration, there was a bit of chatter about whether triple leverage was a great idea for investors. After all, someone who isn’t careful or mindful of the risks could land themselves in hot water with the standard long and short funds, let alone one that offers triple leverage.

But O’Neill cautions against viewing these or any other leveraged fund in a vacuum.

“The question we have is how you’re going to use them. What matters is how you use them in a broader portfolio. If you use them to hedge, it may lower your risk profile,” he says.

The funds aren’t meant to be the centerpiece of any investors’ portfolio, but as part of an overall strategy. Putting all of your eggs in one basket is never a good idea.

“When someone hears ‘three beta,’ the assumption might be that someone would put 100% of their assets in that fund. They’re meant to be complementary or supplements. They can be used wisely.”

O’Neill says that most of the criticism has come from those who see ETFs as something where every fund needs to be suitable for every investor, but that simply isn’t the case.

“There are lots of investment tools used at the margins or only used by certain players. This is a suite of products that can be used very wisely by certain investors,” says O’Neill.

The early appearance is that professional investors will find these funds of particular interest, including hedge funds, registered investment advisors and proprietary trading desks on Wall Street, says Bill Franca, Direxion’s head of sales.

“I don’t think they’re going to be used by passive investors who are checking their portfolio once every six months. That’s not what these products are for,” Franca points out.

“They’re meant to be used by people who are managing their portfolios very actively, by professional, sophisticated investors,” O’Neill adds.

Overall, these funds are just another tool in the shed for investors who want more leverage. Franca says, “”We believe that leveraged ETFs have already proven their versatility in the marketplace. We feel that there’s definitely a place for leverage because of the ability of different firms to achieve leverage because of what’s going on in the market today.”

The new funds are:

• Direxion Large Cap Bull 3X Shares (BGU)
• Direxion Small Cap Bull 3x Shares (TNA)
• Direxion Energy Bull 3x Shares (ERX)
  
• Direxion Financial Bull 3x Shares (FAS)
• Direxion Large Cap Bear 3x Shares (BGZ)
• Direxion Small Cap Bear 3x Shares (TZA)
• Direxion Energy Bear 3x Shares (ERY)
• Direxion Financial Bear 3x Shares (FAZ)