The world of leveraged ETFs was jolted this week when the US Securities and Exchange Commission (SEC) signaled that it may no longer tolerate products offering more than 2x daily exposure. After years of green lights for increasingly exotic strategies, the regulator has slammed the brakes on a new wave of ultra-leveraged proposals, sending a clear message: the line has been crossed.
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Warning Letters Hit Major Issuers
Direxion, ProShares, Tidal and Volatility Shares were among the firms hit with near-identical warning letters posted Tuesday. The SEC told each of them that 3x- and 5x-leveraged fund proposals may violate federal limits on how much risk an ETF can take on relative to its assets.
In an unusually speedy public disclosure, the letters were posted the same day they were issued, a sign the regulator wanted the industry to take notice immediately. Issuers were told to either revise their strategies or withdraw their applications entirely.
First Retreat: ProShares Pulls Out
The message had an immediate impact. By Wednesday, ProShares withdrew applications for several 3x ETFs, including crypto-linked products designed to amplify the daily moves of Bitcoin and Ether.
These withdrawals underscore how aggressively issuers had been pushing the frontier. Some filings sought to deliver five times the daily return of highly volatile assets such as Tesla Inc. and Nvidia Corp and major cryptocurrencies — levels never before permitted in U.S. single-stock ETFs.
The crux of the regulator’s objection revolves around how issuers measure volatility. The SEC said that some proposals utilized reference assets that didn’t accurately reflect the true risk of the underlying securities, thereby understating potential losses.
A Hot Market Meets Regulatory Cold Water
The leveraged ETFs have exploded in popularity since the pandemic, with assets rising to roughly $162 billion as traders chase fast profits, according to Bloomberg. However, the products have a history of dramatic blowups.
Against that backdrop, the SEC’s sudden intervention suggests a broader rethink. The agency declined to comment on the filings, and most issuers stayed silent, though an attorney for Volatility Shares confirmed ongoing discussions with regulators.
Whether this crackdown marks a turning point will depend both on how much farther issuers push their luck toward higher leverage-and how hard the SEC enforces its newly drawn boundary. For now, at least, Wall Street’s arms race for ever-bigger daily swings seems to have hit a hard regulatory stop.
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