There was a day not long ago when the words "market timing" failed to raise so much as a murmur among mutual fund executives and state and federal regulators.

But since New York State Attorney General Eliot Spitzer and the Securities and Exchange Commission began their sweeping investigation of the practice some 20 months ago, it's become the most nerve-racking term in the industry, despite the fact that, by and large, it's legal.

As a July 12 report from Dow Jones points out, market timing is a longstanding practice in the fund industry that isn't illegal. The scandal erupted when it was discovered that some fund companies stated in their prospectuses that they didn't allow the practice in their funds, and then turned around and allowed favored investors to benefit from old, or stale, prices. Further complicating matters is the fact that the phrase tends to be confused with "late trading," an illegal practice where trades are placed after that day's net asset value is set, experts told Dow Jones.

"Due to certain abuses by a handful of fund firms, this term has taken on a very negative tone implying illegal activities and even late treading abuses," noted Melinda Clore, a spokeswoman for Rydex Investments, whose business model is based on rapid trading.

Some firms have gone so far as to remove the phrase from their promotional literature, choosing to refer to it instead as "dynamic asset allocation," or "strategic allocation."

But the folks who make living by rapidly trading in and out of funds say fund companies have gone overboard in discouraging the activity because of the baggage it carries.

"Mutual funds in general have gotten almost hostile to investors wanting to make any changes in their portfolios," said Peter Mauthe, COO of Dallas-based Lucca Capital Management and secretary of the National Association of Active Investment Managers.

To curb market timing, fund companies now charge higher, or have newly enacted, redemption fees. As a result, the securities have become less liquid, Mauthe claimed.

But at least one group of investors is still profiting from market timing, the Dow Jones report offers. Exchange-traded funds, which can be bought and sold all day long just like a stock and mimic index-tracking mutual funds, are enjoying explosive growth.

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.