Key Developments
- •The U.S. Securities and Exchange Commission (SEC) has stopped the approval process for exchange-traded funds (ETFs) aiming for over 200% leveraged exposure.
- •Fund issuers have been asked to revise their strategies or withdraw their filings due to regulatory concerns about risk levels.
- •This action represents a rare pause in the otherwise active ETF approval landscape, which has recently included approvals for crypto-related products.
Regulatory Action on Leveraged Products
The U.S. Securities and Exchange Commission (SEC) has halted the approval process for several highly leveraged exchange-traded funds. According to official letters posted Tuesday, the SEC requested firms to withdraw or revise proposals that aim to offer more than 200% exposure.
The letters were sent to firms including Direxion, ProShares, and Tidal, pausing reviews until risk-related issues are resolved. The regulator flagged that such funds may exceed limits on acceptable risk levels compared to their underlying assets.
These products seek to deliver amplified daily returns on stocks, crypto, or commodities, often using derivatives and complex strategies. The SEC warned that some funds may use benchmarks that do not accurately reflect the volatility of their target markets.
Increased Scrutiny Amidst Growth Surge
Leveraged ETFs gained popularity during the pandemic as investors sought high-return strategies in volatile markets. Assets under management in such products have surged to $162 billion as traders embrace short-term gains.
Despite this growth, the SEC raised concerns over investor protection and systemic risk posed by excessive leverage. The regulator noted that daily resets and high volatility could result in unexpected outcomes for retail participants.
The agency rarely posts letters on the same day, but this time published nine near-identical notices immediately. This rapid disclosure suggests urgency in communicating concerns to the broader market and industry participants.
Each letter gave fund managers two options: formally withdraw their ETF applications or revise strategies to fit within SEC risk limits. The SEC has not disclosed whether it will revisit these applications if changes are made.
This action stands out in an otherwise open ETF approval environment that recently supported crypto-linked and complex trading products. However, the SEC now appears more cautious when high-risk leveraged strategies are involved.
No immediate response was issued by the ETF firms involved. The SEC declined to comment on active registration matters.