A trader works on the floor of the New York Stock Exchange on June 1.Brendan McDermid/Reuters
The U.S. Securities and Exchange Commission sought public comment on Tuesday for regulating “novel” exchange-traded funds, a fast-growing category of products that employ leverage or options or are linked to cryptocurrency and prediction market contracts.
The announcement comes after the agency repeatedly refused to approve products that offer three to five times the return on an underlying stock, and delayed the approval of dozens of ETFs that depend on outcomes in real-world events such as elections. The regulatory status of such underlying “event contracts” is also in flux.
The SEC said it was seeking comment to facilitate innovation in ETFs while protecting investors and maintaining fair, orderly, and efficient markets. It did not say whether specific product applications had sparked the move.
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Dan Sotiroff, an analyst who tracks ETFs and related investment products for Morningstar, said the leveraged and event contract-based ETF applications were likely the catalyst. “They’re really opening up the question of what is an investment product and what is just something that is going to turn the public markets into more of a casino,” he said.
The SEC comment request casts a wide net, suggesting that novel ETFs would include increasingly complex products that have exploded since the agency in 2019 allowed actively managed ETFs and simplified the approval process. Those changes have helped drive massive growth in U.S. ETFs, which have nearly tripled in size as measured by assets since then to US$15.7-trillion by the end of May, according to ETFGI data.
While ETFs tracking the main stock benchmarks remain the biggest part of the market, growth in novel products has dwarfed that of the more straightforward vehicles, said Sotiroff.
“We started seeing riskier and riskier products dominate new launches, starting with thematic ETFs in 2020, then moving into single-stock leveraged products, covered-call options strategies on concentrated portfolios, the advent of crypto products in 2024 – it just exploded into a Pandora’s box of stuff,” said Sotiroff. About 98 per cent of the filings tracked by Morningstar fall into one or more of the categories that the SEC defines as novel.
In May, SEC Chairman Paul Atkins said fund sponsors had delayed the launch of some novel ETFs while the agency considered their implications. In a statement on Tuesday, Atkins said public comment would help the SEC determine how ETFs can grow “while serving investors effectively.”
ETF assets have grown 17 per cent from the end of 2025 through May, according to ETFGI.
The SEC comment period remains open for 60 days.