HOLMES BEACH – Good food, good times and Mother Nature combined for an exciting Anna Maria Island Chamber of Commerce Business Card Exchange Aug. 26 at Whitney Bank.

Whitney Bank Branch Manager Lois Gift has always gone all out to make its annual hosting fun and this time, it had a hat contest, delicious food catered by the Sandbar restaurant, a well-stocked bar behind the teller counter and a rain and lightning show outside.

Whitney Bank Area President Tramm Hudson joined employees from other branches to make the Chamber members feel at home. Several of the Whitney employees dressed for the part, although they did not take part in the contest because they felt the Chamber members should be the winners.

Both the best male and female winners had ingenious entries. Ryan Davis, of Yolu Parasail, wore a blue hat with a boat on top and a parachute above and behind it. He said that his mother deserves the credit for the hat. Island Wellness massage therapist Amanda Escobio wore a pink hat that gave new meaning to the phrase, “When pigs fly.” It was a stuffed pig with wings on its back that went up and down when she pulled a string. They each won a large gift basket donated by Whitney Bank.

Chamber Board Chairman Mark Davis and Chamber President Mary Ann Brockman emceed the door prize giveaways, with the help of assistant Debbie Wing. They also introduced new Chamber members who were: Sand Pebble Weddings, Island Fitness, Wells Fargo, R & R Heating and Cooling, A Tropical Affair, Ato’s Polynesian Paradise Catering, the Hyatt Place, Island Limousine, Zegway by the Bay, Beach Horses.com, the Plumbing Connection and United Electric, Gary Wooten of Anna Maria Elementary School and Planet Stone and Marble.

As the event wound down, everyone looked outside at the intense rain and the rooster tails left by cars going through the curve in Gulf Drive around the bank and decided to wait it out. Thankfully, there was still food on the table and refreshments behind the teller counter.

Exchange Traded Funds (ETFs) are now commonplace and considered a mainstream investment. The second wave of ETF innovation brought leveraged ETF shares, inversely correlated ETFs, and leveraged inversely correlated ETF shares to investors. The leveraged form uses futures contracts and options within the portfolio to provide an increased effect compared to the index the fund is designed to follow. Generally the leverage is designed to multiply the movement of the index by two or three times.

Inverse ETF shares are designed to move in the opposite direction of the underlying index. Again, future and options contracts are used to obtain this effect, allowing investors to bet against a particular stock or bond index by easily purchasing shares of an inversely correlated ETF, rather than going through the trouble of short-selling stocks or buying put options which have a limited lifetime.

Unfortunately, recent data reveals that the leveraged ETFs, inverse ETFs and leveraged inverse ETFs are subject to a process known as “degradation” over longer periods of time. Degradation relates to the fact that the options and futures used to construct these portfolios are wasting assets which expire at some point in the future. There is also a cost within the ETF portfolio for the continuous rebalancing necessary to keep the portfolio tracking the index in the closest manner possible.

What does this mean to you and me? If you want to own a leveraged or inverse ETF for a few days or a few weeks, you may not notice any problem with the ETF not tracking the underlying index with the targeted leverage (two or three times), and in the opposite direction for inverse versions. But hold the shares for several months or longer and you are likely to experience moderate or extreme disappointment.

The degradation effect described above is extreme enough over time to reduce the results of leveraged and inverse ETFs to the point where it is noticeable, and perhaps a total failure for the investor. The table below shows the results of various ETFs from ProShares, which are all tied to the S&P 500 Index. Data is through July 31, 2009 and was taken from the ProShares website. Keep in mind that the S&P 500 Index itself was down 19 percent over the last year.

In a 12-month period where the S&P 500 was down 19 percent, you would expect the “Short” or inverse versions to be up substantially – but the opposite has been true. You can also see the result of the leveraged “Ultra S&P 500” which should have gone down double what the S&P 500 Index went down, actually went down much more.

To their credit, the risk of degradation is disclosed in the prospectus for the ETFs from the sponsoring fund companies. How many prospectuses have you read lately? Most investors do not. Some brokerage firms are starting to ban trading in these funds by retail clients or at least issuing warnings about the risks.

It seems as though greed may have experienced its limit in the ETF world with these revelations. We suggest you steer clear of ETFs which are inverse or leveraged in nature, especially if they are not being used as shorter-term holdings. So far, ETFs which are positively correlated and unleveraged seem to be delivering results close to their goals and I encourage their use, where appropriate, as a legitimate investment vehicle in your portfolio.

Tom Breiter is president of Breiter Capital Management, Inc., an Anna Maria based investment advisor. He can be reached at 778-1900. Some of the investment concepts highlighted in this column may carry the risk of loss of principal, and investors should determine appropriateness for their personal situation before investing.