The U.S. Securities and Exchange Commission (SEC) has stated that it is “unclear” whether dozens of recent filings for highly leveraged ETFs — including 3x and 5x single-stock ETFs — will be approved. The comments highlight growing regulatory scrutiny amid market volatility and a U.S. government shutdown.

Brian Daly, director of the SEC’s Division of Investment Management, said the agency has received a surge of registration statements seeking to quintuple or triple the daily return of underlying equities.

“It is unclear whether these ETFs would comply with the Derivatives Rule (Rule 18f-4), which generally limits leverage to 2x,” Daly said.

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Volatility Shares Files 5x ETF Proposals

On Wednesday, Volatility Shares, an ETF issuer, submitted filings for 27 new highly leveraged ETFs, including what would be the first-ever 5x single-stock ETF in the U.S. market. A 5x leveraged ETF aims to quintuple the daily return of its underlying stock, significantly amplifying both gains and losses.

Until now, the SEC has only approved single-stock leveraged ETFs with up to 2x exposure, meaning the proposed 5x products represent a major departure from past regulatory practice.

Volatility Shares declined to comment to Reuters.

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Market Concerns About Investor Risk

Analysts warn that concentrated exposure to leveraged ETFs poses substantial risks to retail investors. A Morningstar analysis noted that for leveraged ETFs launched over three years ago:

• Over half have closed
• 17% lost more than 98% of their value

The risks are magnified during market selloffs, where forced liquidations from these funds can accelerate downward price spirals. A JPMorgan report suggested that $26 billion in selling from leveraged ETFs contributed to last week’s market downturn.

Amrita Nandakumar, president of Vident Asset Management, praised the SEC for monitoring new filings despite skeletal staffing caused by the shutdown.

“It is reassuring to see that, despite the shutdown, the SEC continues to monitor new ETF filings and take note of those that could be potentially problematic for retail investors and for the ETF industry as a whole,” Nandakumar said.

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Impact of the U.S. Government Shutdown

The current partisan government shutdown has limited the SEC’s ability to:

• Review corporate filings
• Investigate misconduct
• Oversee market activities

As a result, staff will not review the new leveraged ETF filings until the shutdown ends, delaying any official decision on the proposals.

Bryan Armour, an ETF analyst at Morningstar, noted that the SEC’s current administration has been relatively open to innovative ETF strategies, but 5x single-stock ETFs will test regulatory boundaries.

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Key Takeaways:

• SEC is uncertain whether 3x and 5x leveraged ETFs comply with Rule 18f-4.
• Volatility Shares filed 27 leveraged ETF proposals, including the first-ever 5x single-stock ETF.
• Leveraged ETFs carry high risk; historical data shows many fail or lose nearly all value.
• U.S. government shutdown is delaying SEC review of these filings.
• Analysts warn the market should exercise caution due to potential volatility and liquidity risks.