As lawsuits continue to swirl around leveraged and inverse exchange traded funds (ETFs) even as the competition in the space intensifies, one major player in those offerings has decided to throw in the towel.

Rydex SGI has announced that it will be liquidating 12 of its 14 leveraged and inverse products between May 21 – 28. Investors still holding shares as of their liquidation date will receive cash payouts equal to the fund’s net asset value at the close of trading that day.

The move is due to the fact that Rydex has failed to gain much ground with its line of inverse and leveraged products; ProShares and Direxion dominate that territory. In terms of assets under management, Rydex just wasn’t able to catch up to more the other 700 offerings on the market.

On top of that, demand for leverage and inverse products has been failing among the retail crowd after individual investors were badly burned in the market downturn. The bulk of interest in these overly complex issues is coming from institutional investors who use them for hedging and arbitrage operations.

Another major wrench in the works, which I noted in ETFs, Derivatives and the Future, is the fact that the Securities and Exchange Commission (SEC) is beginning to take a closer look at the use of derivatives within ETFs.

With futures, swaps and other such instruments that are the primary tools of leveraged and inverse funds, if you’re not already well established in that space it’s going to be tough to grow while the SEC sorts out its issues.

My two cents: The move by Rydex to exit the sector makes perfect sense and I wouldn’t be surprised to see other managers take similar steps.

It also highlights the major reason why I always stress in Global ETF Profits that investors need to pay attention to the asset levels and trading activity in the ETFs they hold. In an environment where it’s relatively cheap and easy for asset managers to launch new issues, they’re prone to throwing some oddball ideas against the wall and liquidating whatever doesn’t stick.

If you’re holding shares in one of the funds that fail to catch on, you’ll find yourself scrambling to find another fund that fills that niche in your portfolio. You might also get stuck with an unexpected tax bill on any gains you might have, since liquidations count as taxable events.

While there are no hard and fast rules to picking ETFs that absolutely will not liquidate, for our Global ETF Profits portfolios we generally avoid funds that are too narrowly focused and trade on average less than 100,000 shares per day, unless they have assets of at least $100 million.

What’s New

ProShares launched two new banking ETFs on April 22: Ultra KBW Regional Banking (NYSE: KRU) which is intended to produce +200 percent of the performance of the KBW Regional Banking Index and Short KBW Regional Banking (NYSE: KRS), which is designed to provide the inverse performance of the same index. Both carry expense ratios of 0.95 percent.

I’m not a fan of leveraged ETFs, particularly if they’re calculated daily as these two are. But judging by the limited trading history currently available, they both seem to be tracking fairly well. I’m bullish on regional banks this year despite the reform effort afoot and strongly suggest avoiding the short offering.

Global X Management Company also launched two new offerings last week, both of which look more attractive than the former two. Global X Copper Miners (NYSE: COPX) and Global X Silver Miners (NYSE: SIL) both carry expense ratios of 0.65 percent and began trading last Tuesday.

The copper fund is particularly attractive as a leveraged play on the metal which, assuming the global recovery continues apace, I would expect to perform well. Copper has sold off as the news from Europe has remained fairly grim with S&P’s downgrade of Greece and Portugal yesterday triggering a sharp selloff.

I still expect a favorable resolution to the situation despite Germany’s reluctance to come up with the cash for a bailout. I suspect that’s a move more for political show than anything else.

My only criticism of Global X Copper Miners is the fact that the fund appears to be hedging at least some currency exposure, though a representative at the fund who said that wasn’t the case. The ETF has a fairly large short position on the Polish Zloty, which amounts to 4.76 percent of assets and a smaller 1.56 percent short the Canadian dollar.

The silver fund doesn’t appear to have any similar trades on, though I’m not a huge fan of silver as an investment. It isn’t a metal that most global central banks are keen on stockpiling — a major driver of gold prices — and while it has a number of industrial applications, there are more attractive metals if that’s the angle you’re trying to play.

Still, I very much like the fact that both funds closely reflect the distribution of the two metals around the globe and may be excellent plays if you’re bullish on either of the metals. But I would like more clarification on the currency positions in the copper fund.