Investing.com – The US Securities and Exchange Commission asked leveraged-ETF issuers to halt plans for a new wave of funds during a brief group call on Monday, as the regulator renewed concerns over increasingly aggressive fund structures.
The SEC’s Division of Investment Management held the call with independent trustees and fund counsel, according to six people familiar with the matter. The call lasted only a few minutes with no question-and-answer session, participants said. The agency instructed participants to relay to issuers that they should not go effective with their proposed products. Going effective is the step that activates a fund’s registration and clears it to launch.
The issue centers on whether a new generation of ETFs comply with regulatory limits governing fund risk relative to assets. Some of the proposed funds are designed to deliver as much as five times the daily return of an underlying index.
Issuers’ proposed products would need to meet the requirements of Rule 18f-4, the SEC’s derivatives risk-management rule. Regulators remain unconvinced that the products comply.
Leveraged ETFs use derivatives to multiply the daily return of an underlying asset, meaning gains and losses are amplified equally. Because the leverage resets daily, returns over longer periods can diverge sharply from the multiple implied by the fund’s name. The products were once a niche tool for professional traders but have become popular with retail investors, who are drawn by the prospect of outsized gains in volatile markets.
Rule 18f-4, adopted in 2020, was designed to modernize how funds manage derivatives risk by requiring them to limit value-at-risk relative to a reference benchmark.
More than 450 leveraged and inverse single-security ETFs have launched in the US since 2022, when the first single-stock funds debuted, according to data compiled by Athanasios Psarofagis at Bloomberg Intelligence. Assets in the category have grown to roughly $150 billion, which includes index-based leveraged funds launched prior to 2022. No 5x or 3x single-stock ETF currently exists in the US.
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