The Securities and Exchange Commission is putting a stop to new leveraged funds, for now.
On Tuesday, the agency sent warning letters to nine issuers, including Direxion, GraniteShares and ProShares, pausing reviews of leveraged ETFs that provide more than double the exposure to their underlying securities. By pausing reviews and asking issuers to review their strategies or withdraw their applications, the SEC, which has been on a deregulatory streak since the start of the second Trump administration, introduced its first hurdle to launching new products in months.
“We write to express our concerns regarding the registration of exchange-traded funds that seek to provide greater than 200% (2x) leveraged exposure to underlying indices or securities,” the SEC letters said. An SEC spokesman declined to comment.
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The SEC’s action comes after a series of proposals from Direxion, Defiance ETF, REX Shares and Themes ETFs for 3x strategies, as well as some 5x fund filings from Volatility Shares, in October. Volatility’s products were aimed at boosting the returns of notoriously volatile stocks like Nvidia, Coinbase Global and Tesla. The proposals clashed with the agency’s existing framework that prohibits the creation of new 3x leveraged ETFs, setting a maximum leverage of 2x.
Meanwhile, despite recent interest in leveraged products, their performance has varied:
Risk Alert. Since single-stock leveraged ETFs replicate the performance of their underlying holdings at a given multiple, the returns can be huge. While that makes them attractive to retail investors, their volatility means losses are also amplified. “There aren’t many people creating leveraged ETFs on Treasuries,” Morningstar research analyst Lan Anh Tran told The Daily Upside in October. “They’re doing them with individual stocks. The more volatile the underlying things are, the more likely you are to have a crash that’s very, very difficult to recover from.”
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