The U.S. Securities and Exchange Commission (SEC) has signaled uncertainty over whether dozens of recently submitted applications for highly leveraged exchange-traded funds (ETFs) will win approval, citing potential violations of leverage limits.
Since the U.S. government shutdown began, the agency has received a wave of registration statements from asset managers seeking approval for ETFs offering three- and five-times leveraged exposure to equities, SEC Investment Management Director Brian Daly told Reuters agency.
“It is unclear whether these ETFs would comply with the Derivatives Rule (Rule 18f-4), which generally limits leverage to 2x,” Daly said.
The comments came shortly after ETF issuer Volatility Shares filed to launch 27 leveraged funds, including what would be the first-ever 5x leveraged ETF in the U.S. market — a move that drew attention amid growing concerns about inflated asset prices.
A 5x leveraged ETF aims to multiply the daily performance of an underlying stock or index by five, magnifying both gains and losses. So far, the SEC has only approved single-stock ETFs with up to 2x leverage. Volatility Shares declined to comment.
U.S. government shutdown
The government shutdown has left the SEC operating with limited staff, slowing its ability to review filings and enforce regulations. Still, industry watchers welcomed the agency’s continued oversight.
“It’s reassuring to see that, despite the shutdown, the SEC is monitoring filings that could pose risks to retail investors and the broader ETF market,” said Amrita Nandakumar, president of Vident Asset Management.
The popularity of leveraged ETFs has raised red flags in recent years. These products, which amplify returns, can also accelerate losses when markets turn. Morningstar analyst Bryan Armour noted that more than half of leveraged ETFs launched over three years ago have since closed, and 17% have lost over 98% of their value.
A recent JPMorgan report estimated that around $26 billion in selling from leveraged ETFs intensified last week’s market downturn following renewed U.S.-China trade tensions.
Volatility Shares’ latest filings also include leveraged products tied to bitcoin treasury strategies, proposing an effective date 75 days after submission.
“This SEC administration has been open to new ETF strategies, but 5x leveraged single-stock ETFs will push those boundaries,” Armour said.
Daly confirmed that SEC staff won’t be able to review the new applications until after the shutdown ends.
