SEC Halts Filings of Highly Leveraged ETFs

The Securities and Exchange Commission is putting a stopper in new leveraged funds, for now.

The agency on Tuesday sent warning letters to nine issuers — including Direxion, GraniteShares and ProShares — halting reviews of leveraged ETFs that provide more than 2x exposure to their underlying securities. In stopping reviews and asking issuers to either revise their strategies or withdraw their applications, the SEC, which has been on a deregulatory streak since the beginning of the second Trump administration, introduced its first hurdle for new product launches in months.

“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’s letters stated. An SEC spokesperson declined to comment.

Putting My Foot Down

The SEC’s move comes after a slew of proposals from Direxion, Defiance ETFs, REX Shares and Themes ETFs for 3x strategies — as well as some 5x fund filings from Volatility Shares — in October. Volatility’s products were aimed at pumping up the returns of notoriously volatile stocks like Nvidia, Coinbase Global and Tesla. The proposals ran up against the agency’s existing framework prohibiting the creation of new 3x leveraged ETFs, setting a maximum leverage of 2x.

Meanwhile, despite the recent interest in leveraged products, their performance has varied:

• The largest leveraged ETF is the ProShares UltraPro QQQ ETF (TQQQ), which seeks 3x the daily performance of the Nasdaq-100 Index and is up 40% this year.
• But others, like the Defiance Daily Target 2X Long MSTR ETF (MSTX) or the GraniteShares 2x Long COIN Daily ETF (CONL), have lost 88% and 40% this year, respectively.

Risk Alert. Since leveraged single-stock ETFs reproduce the performance of their underlying holdings by a set multiple, returns can be outsized. While that makes them appealing to retail investors, their volatility means losses are amplified, too. “Not a lot of people are making leveraged ETFs on Treasurys,” Morningstar research analyst Lan Anh Tran told The Daily Upside in October. “They’re making them on single stocks. The more volatile the underlying stuff, the more chances for you to have a drawdown that is very, very difficult to get back from.”