Rydex Investments' 2X Inverse S&P Select Sector Financial ETF (AMEX: RFN) halted creations last Friday afternoon, following the move made that morning by ProShares. In the wake of the Securities and Exchange Commission's ban on short-selling in financial stocks, ProShares decided to no longer authorize the creation of new shares in its Short Financials ProShares (AMEX: SEF) and Ultrashort Financials ProShares (AMEX: SKF).

At the time of ProShares' decision, Rydex said its trading mechanism was still functioning normally, but later in the day Friday, the fund group had to take the same step as ProShares, quietly putting up an announcement on its Web site.

The Rydex funds typically gain exposure through the options market, and on Friday morning, after ProShares' decision to suspend creations, it was thought the reason for Rydex's ability to continue to create new shares might be its use of the option market as a way to gain exposure, as opposed to being swaps-oriented, like the ProShares ETFs (see story).

Problems in the swaps market could have developed more rapidly on Friday morning than in the option market, or it is possible that Rydex was just a little slower, or more deliberate, in reacting to the unprecedented market action taken by the SEC. However, Rydex isn't talking. A spokesperson for the firm contacted today by IU.com could only refer to the firm's tersely worded statement announcing the suspension of share creation until further notice.

The major issue for the ETF providers is the risk of their portfolios trading at a premium. If traders were to turn to these short ETFs as a major way to short the financial market, because they are no longer able to short stocks directly, it could be a repeat of what happened in 2007 after the Indian government clamped down on foreign investment and investors turned to an iShares India ETN for exposure (see story).

Redemptions have been allowed on all three funds throughout, except for the short period of time on Friday morning during which ProShares halted all trading in its financials ETFs.