SEC indicates it’s ‘uncertain’ whether proposed 3x and 5x leveraged ETFs will receive approval

SEC Uncertainty on ETF Approvals Amid Government Shutdown

On October 17, the U.S. Securities and Exchange Commission (SEC) expressed uncertainty regarding the approval of numerous applications from asset managers looking to launch highly leveraged ETFs. This statement was made in a conversation with Reuters.

Brian Daley, who leads the SEC’s Division of Investment Management, pointed out that a significant number of registration filings have been submitted for ETFs intending to offer equity-linked exposure with leverage of 3x and 5x since the government shutdown commenced.

There’s still some doubt, though. It remains unclear whether these ETFs will adhere to the Derivatives Rule, which typically caps leverage at 2x.

Recently, Volatility Shares, an ETF issuer, filed to introduce 27 highly leveraged ETFs, which includes the first proposed 5x ETF for the U.S. market. This move has drawn attention, particularly given the current climate of rising asset prices.

The goal for a 5x ETF is to amplify the daily return of a single underlying stock by five times. In the past, the SEC has mostly approved leveraged ETFs with leverage of up to 2x for individual stocks.

Volatility Shares declined to comment when approached by Reuters.

The SEC’s current stance is notably impacted by the government’s shutdown, which has reduced staffing levels at the agency, thereby hindering its capability to process corporate filings, investigate fraudulent activities, and manage market oversight.

Despite these challenges, Amrita Nandakumar, president of Vident Asset Management, which collaborates with ETF issuers, expressed optimism. She noted that the SEC continues to scrutinize new ETF filings and recognizes those that may pose risks to both individual investors and the overall ETF sector.

This influx of assets into leveraged ETFs has increased market cautiousness, accentuated by a significant selloff the previous week, coinciding with President Trump’s intensified trade conflict with China.

Leveraged ETFs are designed to magnify the returns on the underlying stocks or indexes. However, if the value of those underlying assets falls, the ETFs may face liquidation.

Brian Armor, an ETF analyst at Morningstar, raised concerns about leveraged ETFs, stating that many mutual funds launched over three years ago have since closed, with a staggering 17% losing over 98% of their total value.

A report from JPMorgan indicates that approximately $26 billion in sales from leveraged ETFs worsened the recent market downturn.

Among Volatility’s offerings is a 3x and 5x product for Bitcoin Treasury’s Pioneer Strategy, according to SEC filing analyses by Reuters.

“The current SEC administration is more open to new strategies entering the market, but a single-stock ETF with 5x leverage will be a real test,” Armor noted.