ProShares Withdraws Leveraged ETF Application Amid Regulatory Concerns

Dec 4 – ProShares has pulled its application to register several highly leveraged exchange-traded funds (ETFs) after receiving a warning from U.S. securities regulators regarding potential risk exposure. This decision follows the suspension of reviews for similar plans.

The warning, sent to nine ETF providers including Direxion and GraniteShares, requests more information about the risks tied to funds that aim to amplify their performance by up to five times the underlying stocks.

ProShares was looking to gain approval from the Securities and Exchange Commission (SEC) for an ETF designed to replicate three times the returns of major Wall Street tech firms like Metaplatform and Broadcom.

“We understand and appreciate the SEC staff’s recent opinion regarding new leveraged ETFs filed by several issuers, indicating these funds do not meet the necessary legal criteria,” ProShares stated on Wednesday.

The registration also included funds linked to specific sectors, countries, and cryptocurrencies.

Two of the firms that received the SEC letter, Tidal Financial and Volatility Shares, chose not to comment.

Leveraged ETFs have gained significant traction among retail investors, thriving due to a bullish market environment, an uptick in speculative trading, and a wave of product innovation, especially concerning individual stocks and cryptocurrencies.

This surge in popularity has prompted closer scrutiny from regulators.

The letter from regulators highlighted concerns tied to Rule 18f-4 of the Investment Company Act of 1940, which mandates that a fund’s value-at-risk should not exceed 200% of its benchmark portfolio’s value.

The SEC raised questions about how fund managers decide on the reference portfolios for assessing leverage risk, suggesting that issuers either revise their strategies or withdraw their applications altogether.

“I wouldn’t label this a widespread crackdown, but it definitely hints that the limits on product complexity are getting clearer,” remarked Dave Mazza, CEO of Round Hill Investments.

This intensified scrutiny adds pressure to the expanding leveraged ETF market, which continues to lure retail investors, even as regulatory bodies express concerns about complexity and associated risks.

The ProShares UltraPro QQQ ETF, notable for being the largest leveraged ETF by assets, targets to triple the daily performance of the Nasdaq 100 index and has seen its value rise by over 40% this year.

However, substantial profits come with equally significant risks.