Why Highly Leveraged ETFs Are Still in Limbo at SEC

The snooze button is getting a workout.

ETF issuers with big plans to expand their product lines, as well as the envelope of index investing, find themselves delaying launches for bold new funds such as highly leveraged strategies and ones similar to event contracts. There have been a record number of such exchange-traded fund filings this year with the Securities and Exchange Commission, and the regulator’s message to issuers has been: Not so fast. In response, companies pushed back the effective dates numerous times on products that, in some cases, may not see the light of day. Such has been the case for Volatility Shares, which has been preparing a range of ETFs with 3x and 5x leverage.

“The SEC has asked us, and all the other ETF issuers, to not let those filings go effective,” Volatility Shares CEO Justin Young told ETF Upside, noting that the agency “is quite adamant about issuers not launching those highly leveraged ETFs in the ’40 Act.”

Bettor Odds

Issuers are also sitting tight on gambling-style ETFs that would make all-or-nothing bets similar to event contracts. The SEC, which is considering how to treat such products and other novel ETFs, began collecting public comments just over a month ago and will do so through August. The agency appears to be more concerned with making the application process fair for issuers than forbidding gambling-style products, said Daniel Sotiroff, associate director of US passive strategies at Morningstar. “I don’t think it’s about restricting ETFs or concepts of ETFs that most people would consider to be risky or downright speculative,” he said. “I would not be surprised if they were to let some of these more novel things like prediction markets ETFs come onto exchanges and start trading.”

That issuers are pursuing more unusual and extreme flavors of funds is a consequence of the success of the ETF wrapper. Broad-market products, especially index-based funds, have won most of the assets, benefiting a handful of the biggest managers. Smaller and newer firms can’t expect to launch S&P 500 index ETFs and compete with the likes of iShares, Vanguard or State Street, so it’s natural that they would pursue unique strategies, Sotiroff said. “You’ve moved a step beyond what ETFs and stocks and bonds were meant to do,” he said. “You’re not gaining access to a company and its growth. You’re making a bet.”

But even the leveraged ETF niche is a difficult one for new funds:

• There have been close to 900 ETF launches so far this year, with many of those being single-stock funds, putting 2026 on track to easily break last year’s record.
• While less than two dozen leveraged or inverse ETFs bit the dust last year, more than 70 have closed so far this year, Sotiroff said.

If at First You Don’t 6c’d: Despite the pushback on highly leveraged funds, Young said the ETFs Volatility Shares filed comply with the SEC’s Rule 6c-11, which allows issuers to bring products to market without getting exemptions. There’s also a question of fairness, as a handful of 3x and inverse 3x ETFs already trade on US exchanges, he noted. For example, ProShares and Direxion have a number of funds that launched before the agency’s 2x leverage limit was adopted in 2020. 

“You have a few issuers that just have dominated the best space,” Young said, pointing to a “monopoly” enabled by the SEC. “That’s the antithesis of what they should be doing. We’re quite frustrated that we haven’t been able to find a solution with them. And unfortunately, those conversations have been shut down.”