Volatility Shares Dares SEC to Approve 5x Leveraged ETFs

All the double-leveraged ETFs on the market are starting to look downright quaint. 

Several exchange-traded fund issuers recently flooded the SEC’s Edgar system with dozens of proposed triple-leveraged single stock products. Not to be outdone, one company, Volatility Shares, skipped right to 5x. That firm filed numerous proposed ETFs with the Securities and Exchange Commission on Tuesday, all of which are either 3x- or 5x-leveraged single-stock or crypto funds. That’s really taking the name Volatility Shares seriously.

If there is a use case for such an aggressively risky product, it is speculative intraday betting, said Bryan Armour, director of ETF and passive strategies research for North America at Morningstar Research Services. “Anything beyond that would almost certainly be a poor outcome for investors,” he said. “Leveraged ETFs have a very bloodied history.”

There Will Be Blood

Volatility Shares, which declined to comment, filed for more than two dozen new ETFs. Those include both 3x and 5x single stock versions for Circle Internet Group, MicroStrategy, Nvidia, Amazon, Coinbase Global, Palantir Technologies, Tesla, Google and AMD. There are also 3x and 5x ETFs focused on digital assets, including XRP, Bitcoin, Ether and Solana. Another is a 3x leveraged VIX ETF.

With positive stock performance, there is a big potential for amplified returns. What could go wrong? A lot, it would seem:

• Of all the leveraged ETFs that have existed in the US, more than half of those that were on the market for at least three years have closed, Armour noted. 
• 17% of ETFs in the category have lost a cumulative 98% of their values over their lifetimes, he said.
• A UK-domiciled GraniteShares exchange-traded product, the 3x Short AMD, earlier this month went to zero after AMD’s stock rocketed 38%, and shareholders lost everything they had in the fund.

‘I’m Finished!’ It’s unclear if the SEC could approve any of the 3x leveraged ETFs that issuers are now seeking, let alone any 5x ones. The regulator has limits on volatility that historically have prevented such strategies. But then again, it was not long ago that the SEC didn’t allow single-stock or spot-crypto ETFs, Armour said. “I don’t know where the line is for the SEC anymore.”

Of course, it could give some day traders what they want. “A 20% daily decline could lead to 100% losses and if held longer-term, there could be significant compounded losses even with lower daily declines,” said Roxanna Islam, head of sector and industry research at TMX VettaFi. “If approved, however, it’s a way to capture demand and volume in a segment of the market eager for high risk/high return investing.”