SEC Halts High-Leveraged ETF Plans In Warning Over Risk Control

The US Securities and Exchange Commission has issued a flurry of warning letters to some of the country's most prolific providers of high-octane exchange-traded funds, effectively blocking the introduction of products designed to deliver two or three times the daily returns of stocks, commodities and cryptocurrencies.

In a set of nine almost identical letters posted Tuesday, the SEC told firms including Direxion, ProShares and Tidal that it would not move forward with reviewing proposed launches until key issues are addressed. At the heart of the regulator's concern is that the funds' risk exposures may exceed SEC limits on how much risk a fund can take on relative to its assets. The letters direct the fund managers to either revise their investment strategies or formally withdraw their applications.

"We write to express concern regarding the registration of exchange-traded funds that seek to provide more than 200% (2x) leveraged exposure to underlying indices or securities," the SEC wrote to all nine applicants.

The move marks a rare pause in an otherwise permissive stretch for US fund approvals, which has seen a green light given to crypto-linked ETFs of all stripes, private-asset vehicles and increasingly complex trading strategies. The funds now under scrutiny are on the extreme edge of that trend — combining high leverage, daily trading resets and exposure to some of the most unstable corners of the market, including single-name stocks and digital tokens.

A central concern for the SEC is that the funds appear to be measuring their risk against a benchmark that may not fully reflect the volatility of the assets they aim to amplify.

Leveraged products use options to amplify returns, and they're popular with investors because they can offer big profits quickly. Trading volumes have boomed since the pandemic as traders look for a new edge in fast-moving markets while assets have climbed to $162 billion.

Staff in the SEC's Division of Investment Management publicly posted the letters the same day they were written — an unusual speedy move that suggests the regulator wants to get its concerns out fast. The agency typically posts correspondence with firms 20 business days after wrapping up reviews.

Source: Bloomberg Europe