The U.S. Securities and Exchange Commission (SEC) has told multiple asset managers to scale back or withdraw plans for ultra‑leveraged exchange-traded funds.
The pushback draws a hard line against products that seek three to five times the daily moves of stocks and cryptocurrencies. SEC staff warned that the proposals clash with Rule 18f‑4, the “Derivatives Rule” that generally caps leverage at about two times a fund’s net assets.
SEC Calls on Issuers to Cut Leverage or Walk Away
In recent correspondence, the SEC told sponsors including Direxion, ProShares and Tidal that it would not process filings for new 3x and 5x ETFs unless they revise leverage down to levels that comply with Rule 18f‑4, the “Derivatives Rule” that generally caps value‑at‑risk at about 200% of net assets. Staff flagged proposed funds tied to broad equity indexes, single stocks and crypto benchmarks referencing Bitcoin, Ethereum and Solana, and argued that sponsors had not shown how these products could operate within the rule’s risk‑management framework.
Regulators also questioned a batch of 5x single‑stock filings that issuers rushed in during a federal government funding standoff in October, warning that daily compounding at that level would magnify volatility and tracking error to an unacceptable degree. Officials told firms to either withdraw the applications or resubmit new ones with leverage capped at 2x and supported by robust derivatives risk programs, including VaR testing, board oversight and liquidity stress checks.
Concerns over High-Leveraged ETFs
SEC staff point to recent crypto turbulence to justify the stance. Leveraged ETFs that track Bitcoin and other digital assets suffered steep drawdowns as the market slumped this quarter, with several strategies losing more than 80% from their peaks because of volatility decay and constant rebalancing. Internal analysis shows that more than half of leveraged ETFs launched over the last decade have shut down and that roughly one in six has lost over 98% of its value, often after retail traders held the products far longer than their daily‑reset design intended.
Critics in the industry argue that the SEC already allows risky behavior through options, futures and margin accounts, and that well‑disclosed 4x or 5x ETFs would simply give sophisticated traders a more convenient tool. Supporters of the SEC counter that ETFs package leverage in an easy‑to‑access wrapper that attracts unsophisticated investors and can force large rebalancing trades into underlying markets during sharp moves, raising systemic concerns.
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