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Hassan Shittu
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The U.S. Securities and Exchange Commission has stepped in to stop the launch of some of the most aggressive exchange-traded funds ever proposed in the country.
The products were designed to deliver three to five times the daily performance of stocks and cryptocurrencies, pushing the limits of how much risk regulators are willing to allow.
ETF Issuers Pull Filings After SEC Flags Leverage Rule Violations
On Tuesday, the agency issued nine warning letters to major ETF providers, including Direxion, ProShares, and Tidal Financial.
In the letters, the SEC said it would not review the filings unless the firms addressed serious regulatory concerns.
At the center of the issue is Rule 18f-4 under the Investment Company Act of 1940, which limits how much leverage a fund can use.
The rule caps a fund’s value-at-risk exposure at 200% of its reference benchmark, a level several of the proposed products appear to exceed.
The targeted funds used derivatives to magnify daily returns. Some were linked to highly volatile assets such as Bitcoin, Ether, Nvidia, and Tesla, with exposure of up to five times the daily move.
No 5x single-stock or crypto ETF has ever been approved in the U.S., and even 3x products have long faced strict limits from regulators.
The SEC told issuers to either adjust their strategies to meet legal requirements or withdraw their filings altogether.
Within a day of the letters being posted, ProShares moved to pull several of its 3x and crypto-related ETF applications.
Market analysts say the SEC’s latest move shows a clear effort to rein in ETF issuers that have been testing the limits of leverage rules.
The filings under scrutiny were widely viewed as attempts to stretch existing regulations to push higher-risk products into the market, an approach the agency has consistently resisted.
SEC Challenges High-Risk ETF Strategies as Leveraged Funds Hit $162 Billion
The decision also interrupts what had been one of the most permissive periods for ETF approvals in U.S. history.
Over the past year, the SEC approved spot Bitcoin and Ethereum ETFs, crypto yield products, and a wave of structured funds built around options income, partial leverage, and downside protection.
Even during October’s government shutdown, ETF filings continued to surge despite the agency operating with reduced staff.
Several issuers pressed even further. 21Shares submitted an application for a leveraged fund tied to the Hyperliquid token.
Volatility Shares went a step beyond, filing the first proposals for 5x leveraged ETFs linked to both stocks and cryptocurrencies, applications that quickly drew regulatory attention.
With its latest response, the SEC has effectively drawn a boundary on how far leverage will be allowed to go.
Leveraged ETFs have grown rapidly in popularity among retail traders, particularly after speculative activity surged during the pandemic. Total assets across leveraged funds now stand at roughly $162 billion.
The largest of these products, the ProShares UltraPro QQQ, which targets three times the daily return of the Nasdaq 100, has risen nearly 40% this year and holds more than $31 billion in assets.
However, losses across other products show the risks. The Defiance Daily Target 2x Long MicroStrategy ETF is down more than 83% this year, while a similar 2x fund tied to Super Micro has fallen over 60%.
Another metric of the SEC’s concerns was the speed at which it made its warning letters public.
The notices were released on the same day they were issued, a rare step for correspondence that is typically disclosed weeks later. The agency declined further comment, citing the ongoing review process.
Bloomberg ETF analyst Eric Balchunas said the SEC is now directly challenging strategies it believes exploit technical gaps in leverage limits, leaving issuers facing a clear choice: adjust their products or abandon them.
The action also coincides with renewed warnings from former SEC Chair Gary Gensler, who continues to caution that most crypto-linked assets remain highly speculative despite growing institutional interest.
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