Here’s an example of how this would work. A trader learns material information about a company that will drive its share price higher. The trader then engages in a practice known as ETF stripping; the trader finds an ETF which owns shares of that company, goes long the ETF and then shorts all of the ETFs other components. The trader profits when the target company’s shares rise, without having direct exposure to the company on the books, thus eluding regulators.

Despite the uproar over ETF stripping, the practice isn’t widespread. Most ETFs are broadly diversified–some hold hundreds of securities in their portfolios. Stripping would be prohibitively expensive unless the trader expects an exponential gain in the share price of the target company. Furthermore, after all of the short positions are unwound, the trader is unlikely to have booked a significant profit.

The only ETFs that are truly at risk of stripping are less-diversified sector-specific funds, some of which hold about 25 positions.

Still, individual investors shouldn’t lose much sleep over ETF stripping. Aside from the market distorting effects inherent in insider trading–markets work best when everyone’s on a level playing field–stripping has little impact on the individual investor. These bad actors aren’t taking advantage of a flaw in the ETF structure, nor are fund managers complicit. Your favorite ETF won’t suddenly face regulatory or legal danger.

The SEC has yet to make specific allegations of ETF stripping, though media has speculated about a suspicious volume spike in B2B Internet HOLDR (NYSE: BHH). This ETF holds only two positions, making it a prime target for ETF stripping. But its narrow portfolio is the exception rather than the rule.

We’re likely to see more headlines about nefarious activity in ETFs. But it’s not something to fret over. Those who may be engaged in ETF stripping have been given fair warning that Big Brother is watching.

What’s New

State Street, keeper of the venerable SPDRs brand, launched two new emerging market-focused funds with an eye toward income.

SPDR S&P Emerging Markets Dividend (NYSE: EDIV) tracks a benchmark composed of dividend-paying emerging-market companies with a strong focus on Brazil, Taiwan and South Africa. These three countries collectively account for about half of the fund’s geographic exposure. The fund’s benchmark is dividend-weighted, meaning that companies that offer the highest yields are the most heavily represented. Brazil has long offered attractive opportunities for income investors, which accounts for its prominence in the fund’s portfolio. Utilities, telecoms and financials are the largest sector allocations, which comes as no surprise given the benchmark’s structure.

SPDR Barclays Capital Emerging Markets Local Bond (NYSE: EBND) is a fairly straightforward fund, offering exposure to a basket of non-dollar denominated emerging-market bonds, primarily government issues.

With interest rates in the Western world still hovering near record lows, it’s logical that State Street would jump into emerging market-focused income funds. The bond fund current yields 6.5 percent while the dividend fund offers a 5.8 percent yield. But both funds suffer from the me-too syndrome and will face stiff competition from a number of extremely similar–if not almost identical–offerings already on the market.

A newcomer to the ETF market, FactorShares launched a line of five leveraged funds that allow investors to play spreads between five asset classes.

FactorShares 2X S&P 500 Bull/T-Bond Bear (NYSE: FSE) provides 200 percent leveraged exposure to the daily spread between a long position in e-mini S&P 500 futures and a leveraged short position in US Treasury Bond futures. FactorShares 2X T-Bond Bull/S&P 500 Bear (NYSE: FSA) will offer the opposite exposure with a long position in US Treasury Bond futures and a short position in e-mini S&P 500 futures.

FactorShares 2X S&P 500 Bull/USD Bear (NYSE: FSU) enables investors to bet that large-cap stocks will appreciate while the US dollar loses value. The fund will achieve that exposure though a long e-mini contract and a short position in US Dollar Index futures.

FactorShares 2X Oil Bull/S&P 500 Bear (NYSE: FOL) will benefit from an appreciation in oil prices and a decline in the S&P 500 by holding a long position in oil futures and a short position in e-mini contracts.

FactorShares 2X Gold Bull/S&P 500 Bear (NYSE: FSG) will play the spread between a long position in gold futures and a short position in e-minis.

As protests in North Africa and the Middle East create volatility in the oil and equity markets, S&P 500 Bull/USD Bear and Oil Bull/S&P 500 Bear are attractive trading tools. I reiterate that these funds should be viewed as trading tools because their leverage requires daily resets. None of these funds should be held for more than a single trading session.