Proposed ETF from VegaShares Bets on 4X Leveraged Funds

With a name like VegaShares, it’s all too easy to roll the dice.

A hopeful ETF issuer is trying its luck with the SEC, last week filing with the regulator for 16 funds that would use 3X or 4X leverage on a variety of large exchange-traded funds from other firms. A few months ago, that would hardly have been news, as at least nine other companies made a blitz of filings for 3X and 5X ETFs, many of which focused on single securities or assets. What stands out, though, is that the Securities and Exchange Commission sent warning letters to those nine issuers, including Direxion, GraniteShares and ProShares, that previously filed for the highly-leveraged funds. In short, any such products would violate a rule that limits leverage, and it’s unclear how any of the firms hoping to launch the funds would get around that.

“The timing of the filings is perplexing because the issuers seem oblivious to the SEC’s clear messaging that leverage beyond 200% is incompatible with Rule 18f-4, absent exemptive relief,” said Bill Singer, a veteran Wall Street regulatory lawyer. “Of course, given that these products sort of border the line between investing and gambling, it may be that the issuers are pursuing one of several gambits.”

ETF Roulette 

Those gambits could be regulatory brinkmanship, a bet on a lack of potency at the SEC or an assumption that the regulator is amenable to some creative math that would allow for leverage beyond 200%, Singer said. “Whichever of those three routes is pursued, the investing public is still left with a somewhat sordid bit of regulatory arbitrage dressed up as new-product development.”

To be clear, the investment advisor behind VegaShares ETFs is Vega Capital Partners. “Vegas” isn’t part of the name. The company, which does not appear to have any existing ETFs, declined to comment. VegaShares, like others pursuing the highly leveraged funds, discloses in the prospectuses that the ETFs should not be used by anyone other than sophisticated investors who understand the risks.

Here’s a look at the ETFs for which it filed initial prospectuses:

• There are five funds seeking 3X exposure to the Vanguard Total World Stock Index Fund ETF (VT), Vanguard Total Stock Market Index Fund ETF (VTI), Roundhill Magnificent Seven ETF (MAGS), VanEck Gold Miners ETF (GDX) and VanEck Junior Gold Miners ETF (GDXJ).
• There are 11 funds seeking 4X exposure to QQQ, the iShares Semiconductor ETF, SPY, iShares 20+ Year Treasury Bond ETF (TLT), MAGS, State Street Technology Select Sector SPDR ETF (XLK), iShares Russell 2000 ETF (IWM), GDX, GDXJ, State Street Financial Select Sector SPDR ETF (XLF) and iShares China Large-Cap ETF (FXI).

For a Limited Time Only: The filing from VegaShares raises the same issue as prior ones from other firms, which is the potential for the SEC to allow these highly leveraged strategies, Singer noted. If ETFs that violate 18f-4 are allowed to launch, that foretells other regulatory dominos possibly falling, Singer said. “When all is said and done, this is not so much an ETF novelty story as a critical stress test of the SEC’s willingness to enforce its own derivatives rule in the face of industry pressure.”