(Bloomberg) — The US Securities and Exchange Commission has issued a flurry of warning letters to some of the country’s most prolific providers of high-octane exchange-traded funds, effectively blocking the introduction of products designed to deliver three and even five times the daily returns of stocks, commodities and cryptocurrencies.
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In a set of nine almost identical letters posted Tuesday, the SEC told firms including Direxion, ProShares and Tidal that it would not move forward with reviewing proposed launches until key issues are addressed. At the heart of the regulator’s concern is that the funds’ risk exposures may exceed SEC limits on how much risk a fund can take on relative to its assets. The letters direct the fund managers to either revise their investment strategies or formally withdraw their applications.
“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 wrote to all nine applicants.
The move marks a rare pause in an otherwise permissive stretch for US fund approvals, which has seen a green light given to crypto-linked ETFs of all stripes, private-asset vehicles and increasingly complex trading strategies. The funds now under scrutiny are on the extreme edge of that trend — combining high leverage, daily trading resets and exposure to some of the most unstable corners of the market, including single-name stocks and digital tokens.
A central concern for the SEC is that the funds appear to be measuring their risk against a benchmark that may not fully reflect the volatility of the assets they aim to amplify.
“The issuers were aiming to go beyond the 2x limit allowed and the is SEC clearly not comfortable with that,” said Todd Sohn, a senior ETF strategist at Strategas. “Issuers were trying to get a workaround in some of the language, loopholes in a sense on what the ‘reference asset’ was on the funds.”
Some of the funds mentioned in the letters are by Volatility Shares which filed to launch ETFs with five times leverage. The funds were aimed at boosting the daily return of some of the most volatile assets including single stocks like Tesla Inc. and Nvidia Corp., as well as cryptocurrencies such as Bitcoin and Ether. No 5x — or even 3x — single-stock ETF currently exist in the US, with SEC rules having long kept a lid on such exposure effectively capping it at 2x leverage.
