The ETF proposed by VegaShares bets on 4X leveraged funds

With a name like VegaShares, it’s very easy to roll the dice.

One hopeful ETF issuer is trying its luck with the SEC, filing with the regulator last week 16 funds that would use 3X or 4X leverage on a variety of other companies’ large exchange-traded funds. A few months ago, that would hardly have been news, as at least nine other companies filed a slew of 3X and 5X ETF filings, many of which focused on individual securities or assets. What stands out, however, is that the Securities and Exchange Commission sent warning letters to those nine issuers, including Direxion, GraniteShares and ProShares, that previously applied for highly leveraged funds. In short, any such product would violate a rule limiting leverage, and it’s unclear how companies hoping to launch the funds would be able to get around that.

“The timing of the filings is puzzling because issuers seem oblivious to the SEC’s clear message that leverage beyond 200% is inconsistent with Rule 18f-4, absent an exemption,” said Bill Singer, a veteran Wall Street regulatory lawyer. “Of course, since these products walk the line between investing and gambling, issuers may be following one of several tactics.”

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Those tactics could be regulatory brinkmanship, a bet on the SEC’s lack of firepower or an assumption that the regulator is receptive to some creative math that would allow for more than 200% leverage, Singer said. “Whichever path is taken, the investing public is still left with somewhat sordid regulatory arbitrage disguised as new product development.”

To be clear, the investment advisor behind the VegaShares ETFs is Vega Capital Partners. “Vegas” is not part of the name. The company, which does not appear to have any existing ETFs, declined to comment. VegaShares, like others seeking highly leveraged funds, discloses in prospectuses that ETFs should not be used by anyone other than sophisticated investors who understand the risks.

Here’s a look at the ETFs for which it filed initial prospectuses:

• There are five funds that seek triple exposure to the Vanguard Total World Stock Index Fund ETF (VT), the Vanguard Total Stock Market Index Fund ETF (VTI), the Roundhill Magnificent Seven ETF (MAGS), the VanEck Gold Miners ETF (GDX), and the VanEck Junior Gold Miners ETF (GDXJ).

• There are 11 funds seeking 4x exposure to QQQ, iShares Semiconductor ETF, SPY, iShares 20+ Year Treasury Bond ETF (TLT), MAGS, State Street Technology Select Sector SPDR ETF (XLK), iShares Russell 2000 ETF (IWM), GDX, GDXJ, State Street Financial Select Sector SPDR ETF (XLF), and iShares China Large-Cap ETF (FXI).

For a limited time only: VegaShares’ filing raises the same issue as previous ones from other companies, which is the possibility of the SEC allowing these highly leveraged strategies, Singer said. If ETFs that violate 18f-4 are allowed to launch, that predicts other regulatory dominoes will likely fall, Singer said. “When all is said and done, this is not so much an ETF novelty as a critical stress test of the SEC’s willingness to enforce its own derivatives rule in the face of industry pressure.”

This post first appeared on The Daily Upside. To receive exclusive news and analysis of the rapidly evolving ETF landscape, created for advisors and capital allocators, subscribe to our free ETF Upside newsletter.