The ProShares UltraShort Financials (AMEX: SKF) and ProShares Short Financials (AMEX: SEF) exchange-traded funds are halted this morning, as the SEC's ban of short-selling in the Financials sector ripples through the ETF market.

Interestingly, the Rydex 2X Inverse S&P Select Sector SPDR Financials (AMEX: RFN) ETF continues to trade. Like SKF, RFN provides -200% exposure to the Financials sector. As of 10:50 a.m., it was the only way investors can gain negative exposure to the Financials sector in the equity market.

Rydex confirmed that the fund was trading and that, as of 10:50 a.m., the creation/redemption mechanism was continuing to function normally.

Why are the ProShares halted while the Rydex funds continue to trade?

One difference between the funds is that the ProShares funds rely predominantly on swaps to gain exposure, while the Rydex funds use options.  ProShares could use options as well, but has used swaps historically because they have been a more efficient way for investors to gain exposure to the market.

It may be that while the options market continues to function normally, the swaps market is having trouble digesting the short-selling ban.

With the woes in the financial sector, specifically, ETFs that short the financial sector have been producing stellar returns and gaining widespread attention. Many believed that, with the SEC banning short-selling on financial stocks, these ETFs would become that much more important, because they would be the best alternative for gaining equity-based short exposure to the market. But with the ProShares halted today, that status is questioned somewhat.

ProShares, which surpassed $20 billion in assets this year due to the popularity of the leveraged and short ETF approach, has $2.3 billion in assets in its UltraShort Financials (AMEX: SKF). It is the largest ETF in the ProShares portfolio. The Short Financials (AMEX: SEF), which has a 1x inverse relationship with the same index, has yet to amass a serious asset base.