The regulatory action targets companies like Direxion, ProShares, Tidal Financial, and GraniteShares, marking a significant shift in how regulators view extreme leverage in investment products.
The U.S. Securities and Exchange Commission sent warning letters to nine major ETF providers on December 3, 2025, effectively blocking new funds that would offer three to five times daily exposure to stocks and cryptocurrencies.
The SEC’s move comes after a surge in applications for ultra-leveraged ETFs following the 2024 presidential election. Many firms expected a more crypto-friendly regulatory environment under the new administration, leading to a wave of aggressive product filings targeting volatile assets like Bitcoin, Ethereum, Tesla, and Nvidia.
Rule 18f-4 Sets the Boundary
The warning letters cite violations of Rule 18f-4 under the Investment Company Act of 1940. This rule caps fund exposure at 200% of their value-at-risk, using unleveraged assets as a baseline for comparison.
“The fund’s designated reference portfolio provides the unleveraged baseline against which to compare the fund’s leveraged portfolio for purposes of identifying the fund’s leverage risk under the rule,” the SEC explained in its letters to ETF providers.
The regulation essentially limits most ETF leverage to two times (2x) the daily movement of underlying assets. Anything beyond this threshold requires special approval and enhanced risk management protocols.
Currently, no 3x single-stock ETFs exist in the U.S. market. The largest leveraged ETF, ProShares UltraPro QQQ, tracks three times the Nasdaq 100’s daily performance and manages $31.3 billion in assets. However, this fund covers a broad index rather than individual stocks or cryptocurrencies.
Source: sec.gov
The regulatory environment for cryptocurrency ETFs has been evolving rapidly, with spot Bitcoin and Ethereum ETFs gaining approval earlier in 2024, but extreme leverage products remain off-limits.
Volatility Shares Pushes the Envelope
Volatility Shares filed the most aggressive proposals, seeking approval for 5x leveraged ETFs tied to Bitcoin, Ethereum, Tesla, and Nvidia. These products would amplify a 10% daily move into a 50% gain or loss for investors.
The company submitted 27 different ETF applications, including products covering Solana, XRP, Coinbase, and MicroStrategy. If approved, these would represent the highest leverage ratios ever offered in U.S. ETF markets.
Bloomberg ETF analyst Eric Balchunas noted that regulators believe some firms tried to exploit loopholes in Rule 18f-4’s language to bypass the 200% value-at-risk limits.
“The issuers were aiming to go beyond the 2x limit allowed and the SEC is clearly not comfortable with that,” explained Todd Sohn, a senior ETF strategist at Strategas. “Issuers were trying to get a workaround in some of the language, loopholes in a sense on what the ‘reference asset’ was on the funds.”
Market Volatility Sparks Regulatory Concerns
The SEC’s action follows October’s crypto market crash, which triggered $20 billion in leveraged liquidations – the largest single-day liquidation event in cryptocurrency history. This massive deleveraging highlighted the systemic risks that ultra-leveraged products can create during market stress.
“Leverage is clearly out of control,” analysts at The Kobeissi Letter responded to the SEC warning letters. Data from crypto analysis platform Glassnode shows liquidations have nearly tripled this market cycle compared to previous periods.
Daily liquidations now average $68 million in long positions and $45 million in short positions, significantly higher than the previous cycle’s $28 million and $15 million respectively. These numbers demonstrate how leveraged products can amplify market volatility and create cascading effects during stressed conditions.
Leveraged ETFs work differently from traditional leveraged derivatives. While they avoid margin calls and automated liquidations that plague crypto derivatives, they can still devastate investor capital in bear markets or sideways markets, as losses compound faster than gains due to daily rebalancing requirements.
The rapid posting of warning letters the same day they were written represents an “unusually speedy move” that signals the SEC’s urgency in communicating leverage concerns to investors, according to Bloomberg reporting.
Industry Adaptation and Future Outlook
ETF providers must now either revise their strategies to comply with existing leverage limits or withdraw their applications entirely. Some companies have already begun adjusting their approaches in recent months.
Earlier this year, Direxion launched the Direxion Titans Leveraged & Inverse ETFs offering 2x and inverse 2x exposure to top sectors like Technology and Energy, with quarterly rebalancing mechanisms. These products aim to reduce single-name risk while still offering amplified returns for active traders.
Morningstar researcher Bryan Armour revealed that over half of leveraged ETFs launched in recent years have permanently shut down operations. This high failure rate underscores the challenges these products face in volatile market conditions.
The regulatory crackdown extends beyond cryptocurrencies to include leveraged exposure to individual tech stocks. Products targeting companies like Tesla and Nvidia face particular scrutiny due to these stocks’ high volatility profiles.
Despite the current SEC leadership’s generally pro-crypto stance, officials appear unwilling to compromise on leverage limits that could threaten market stability. The agency’s 2026 examination priorities explicitly highlight robust risk management requirements for leveraged and inverse ETFs.
The warning letters specifically question how fund managers determine their reference portfolios for measuring leverage risks. The SEC directed issuers to either revise their strategies to comply with Rule 18f-4 or formally withdraw their filings entirely.
This regulatory intervention occurs as ETF adoption continues growing across traditional finance, with institutional investors increasingly viewing ETFs as safer alternatives to direct cryptocurrency holdings or complex derivatives trading.
The Leverage Reality Check
The SEC’s decisive action against ultra-leveraged ETFs reflects growing concerns about retail investor protection and systemic market risks. While these products can generate impressive short-term gains, they can also wipe out investor capital during volatile periods – sometimes within a single trading day.
The regulatory framework now clearly establishes 2x leverage as the practical ceiling for most ETF products, effectively ending speculation about 5x cryptocurrency and single-stock funds entering U.S. markets anytime soon.