In fact, there is typically little or no cash exchanged at the start of a swap. The risk in a counterparty failure is that the counterparty will fail to pay for the change in the value of the index that occurred after the swap was put in place, not for the core value of the position itself.

As of its last semiannual report, ProShares ETFs had swaps with Bank of America, Credit Suisse and JPMorgan Chase, among others.

The Rydex inverse funds rely on a combination of futures, options, swaps and other instruments to gain exposure to the market.

Futures and options do not carry the same level of counterparty risk as privately negotiated swap contracts, as they are cleared on an exchange, which provides an extra guarantee that the contracts will be honored. Still, the exact mix of components is hard to determine, and there is risk with these funds too.

There is one further risk to the inverse funds.

In September, the Securities and Exchange Commission enacted a ban on short-selling in many stocks. This made it difficult for some of the inverse funds (in particular, the Financials-focused funds) to gain short exposure to the market. That's because the swap counterparty needs a way to hedge its position. If it is unable to short the underlying stocks, it cannot hedge its commitment to deliver inverse returns, and so will refuse to create more swaps.

Following the SEC's ban, both Rydex and ProShares had to suspend creations in their short Financials ETFs. That created a risk that the ETF shares might trade at a premium to their net asset value. After all, if there are a fixed number of shares and a potentially unlimited number of buyers, those buyers can drive the price up above a reasonable level.

Fixed Income Funds

Fixed-income funds operate like traditional equity ETFs, with investors holding a pro-rata share of the underlying markets.

Of course, all fixed-income funds are exposed to the risks of the fixed-income market, including defaults and (recently) illiquidity.

Illiquidity is a real issue for ETFs, as it can cause funds to trade at significant variance with their underlying indexes.

Illiquidity can also mean large spreads for the related ETFs. As long as the credit markets remain illiquid, investors should trade in and out of these funds with extra care.

Precious Metals Funds

The precious metal bullion funds are very safe. These include the SPDR Gold (AMEX: GLD), iShares Silver Trust (NYSEArca: SLV) and iShares COMEX Gold (NYSEArca: IAU) ETFs.

These funds hold physical precious metals bullion as their sole asset. The metal is stored in a vault with a custodian bank. It is not like a cash deposit where there is deposit risk.

There are circumstances under which these holdings can be lost—terrorist attacks, acts of God, etc.—but they are extraordinary.

The bottom line: These funds are as safe as, well, as safe as gold in a bank vault.

Commodity Futures Funds

Despite their risky reputation, commodity futures funds are relatively safe from a credit and counterparty perspective.

While each commodity futures trade has a specific counterparty, trades are cleared through major exchanges like the NYMEX or CME, which act to monitor and guarantee counterparty transactions. A default by a major exchange is conceivable, but has not happened in recent memory.

Currency Funds

The majority of currency ETFs hold physical currency as their sole asset. For all intents and purposes, these are essentially bank accounts, and come with the same rights and risks as other bank accounts.

In many cases, these accounts are held in London, and have limited protection under the deposit insurance programs in England and are not insured by the FDIC. If the deposit bank for one of these funds fails, investors could lose money. JPMorgan is the deposit bank for the most popular line of currency ETFs, the CurrencyShares from Rydex.

WisdomTree and others have recently launched currency funds that hold time deposits and short-term commercial paper instead of actual physical currency. These funds do not share the deposit-level risks of the deposit funds, but, of course, the commercial paper market has its own risks as well.

Exchange-Traded Notes

Exchange-traded notes are debt notes. As a noteholder, you are fully exposed to the credit of the underwriting bank.

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