SEC Blocks High-Leverage ETF Launches Over Risk Concerns

In Brief

• SEC blocks progress on ETFs seeking over 200% leveraged exposure across volatile assets.
• Fund issuers must revise strategies or withdraw filings following regulator risk concerns.
• Move marks rare pause amid otherwise active ETF approvals, including crypto products.

The U.S. Securities and Exchange Commission (SEC) has halted the approval process for several highly leveraged exchange-traded funds. According to official letters posted Tuesday, the SEC requested firms to withdraw or revise proposals that aim to offer more than 200% exposure.

The letters were sent to firms including Direxion, ProShares, and Tidal, pausing reviews until risk-related issues are resolved. The regulator flagged that such funds may exceed limits on acceptable risk levels compared to their underlying assets.

These products seek to deliver amplified daily returns on stocks, crypto, or commodities, often using derivatives and complex strategies. The SEC warned that some funds may use benchmarks that do not accurately reflect the volatility of their target markets.

Leverage Products Face New Scrutiny After Growth Surge

Leveraged ETFs gained popularity during the pandemic as investors sought high-return strategies in volatile markets. Assets under management in such products have surged to $162 billion as traders embrace short-term gains.

Despite this growth, the SEC raised concerns over investor protection and systemic risk posed by excessive leverage. The regulator noted that daily resets and high volatility could result in unexpected outcomes for retail participants.

The agency rarely posts letters on the same day, but this time published nine near-identical notices immediately. This rapid disclosure suggests urgency in communicating concerns to the broader market and industry participants.

Each letter gave fund managers two options: formally withdraw their ETF applications or revise strategies to fit within SEC risk limits. The SEC has not disclosed whether it will revisit these applications if changes are made.

This action stands out in an otherwise open ETF approval environment that recently supported crypto-linked and complex trading products. However, the SEC now appears more cautious when high-risk leveraged strategies are involved.

No immediate response was issued by the ETF firms involved. The SEC declined to comment on active registration matters.