ETF Market Moves Toward Higher Risk
The ETF landscape, which used to be about low-key investments tracking entire sectors or indexes, has taken a rather speculative turn in recent years. Now, it seems the market is pushing into even riskier domains.
Asset management firm Volatility Shares has recently filed with regulators for approval of 27 leveraged ETFs. Among these are a few specifically designed as 5x leveraged single-stock funds, along with a cryptocurrency fund.
The goal of these new ETFs is to amplify the daily price movements of the underlying assets. If the filings are approved, it could indicate a notable shift in the leverage that regulators allow. Historically, the Securities and Exchange Commission has only permitted a 2x leverage for single-stock ETFs.
The new 5x ETFs are set to include assets like Bitcoin, Ethereum, and Solana, not to mention popular stocks such as Alphabet and Tesla. But there’s a catch: the risks are considerably heightened because the gains or losses related to these stocks would be magnified by five times.
As things stand, the SEC’s approval is uncertain due to a government shutdown, which has caused the commission to halt many operations.
An SEC representative commented via email, “Due to the lapse in appropriations, the SEC is now operating within specific regulations.” During this shutdown, the SEC’s Office of Public Affairs is largely unable to respond to media queries.
On September 30, it was noted that some applications might automatically become valid after a certain period. Yet, even in a regular operational scenario, Brian Amour from Morningstar remarked that approval for these products isn’t out of the question, considering the SEC’s more lenient stance in recent years.
“They have a real shot here. It’s a test of how far the SEC is willing to go under the current administration,” Amour shared with Business Insider. “It’s kind of intriguing because we’re not really clear on the SEC’s limits anymore.”
Amour also pointed out that many are embracing the idea of single-stock ETFs, especially since there were 102 available in the market by December 2024, with 61 being leveraged options, as per Morningstar’s data.
The assets tied to these single-stock ETFs have increased remarkably as well, skyrocketing from $169 million in 2022 to around $24 billion in 2024.
Concerns have arisen from various sources about these new funds possibly escalating market risks and contributing to what some perceive as the trend of gamifying the market, particularly among retail investors.
Volatility Shares chose not to comment further on this matter.
Armor mentioned data reflecting the inherent risks associated with leveraged ETFs. “Over half of the leveraged ETFs launched have shut down,” he observed. Furthermore, “17% of those released have lost more than 98% of their value,” he added.
