Unprecedented Leverage Proposed for ETF Market
The ETF market, traditionally known for relatively conservative investment vehicles tracking broad market indices, could be heading toward significantly riskier territory. According to recent filings, asset management firm Volatility Shares has submitted applications for 27 leveraged ETFs, including what would be the first-ever 5x leveraged single-stock and cryptocurrency funds.
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These proposed products would represent a substantial increase in the leverage permitted by regulators, sources indicate. Previously, the maximum leverage allowed for single-stock ETFs had been capped at 2x, making the proposed 5x funds a dramatic departure from existing standards.
SEC Review Complicated by Government Shutdown
The approval process for these high-risk investment vehicles faces uncertainty due to the ongoing government shutdown. The Securities and Exchange Commission is currently operating with reduced capacity, according to an agency spokesperson who stated in an email that “due to a lapse in appropriations, the SEC is currently operating in accordance with the agency’s plan for operating during a shutdown.”
The SEC had previously indicated that some filings could become effective automatically after a “certain number of days” without regulatory intervention. This raises questions about how the proposed ETFs might be handled during the current government shutdown that has affected multiple agencies.
Testing Regulatory Boundaries
Analysts suggest that even under normal circumstances, the approval of these products would test the limits of the SEC’s current regulatory approach. Bryan Armour, director of ETF and passive strategies research for North America at Morningstar, told Business Insider that “this is testing the limits of the SEC’s more accommodative policy under the new administration.”
Armour noted that the SEC appears to be taking a more market-driven approach to financial innovation, adding that “it does sort of fit the mold of let the market decide if this strategy deserves to be in the ETF wrapper rather than the SEC.”
Rapid Growth in Single-Stock ETFs
The proposed funds arrive amid explosive growth in single-stock ETFs, according to data from Morningstar. As of December 2024, there were 102 single-stock ETFs on the market, with 61 of them leveraged. Assets under management in these vehicles have surged from $169 million in 2022, when they were first approved, to $24 billion in 2024.
The 5x ETFs would be tied to popular stocks including Alphabet and Tesla, as well as cryptocurrencies like Bitcoin, Ethereum, and Solana. These recent technology and digital asset investments have become increasingly mainstream in portfolio allocations.
Concerns About Market Risk and Gamification
Industry sources have expressed concern that these highly leveraged products could increase market risk and amplify what many see as a trend toward gamification of investing, particularly among retail investors. The extreme market trends potentially enabled by such products have raised questions about investor protection.
Armour highlighted data demonstrating the historical risks of leveraged ETFs, noting that “55% of leveraged ETFs that have launched have closed already.” Of the couple hundred that have launched, “17% have lost over 98% of their value,” he added, pointing to the volatile nature of these financial instruments.
Uncertain Future for High-Leverage Products
The ultimate fate of these proposed 5x leveraged ETFs remains uncertain, with the SEC’s reduced operations during the shutdown creating additional complications. Volatility Shares declined to comment on their filings, leaving market participants to speculate about the potential impact of these related innovations.
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As the financial industry continues to develop new products, the balance between innovation and investor protection remains a central concern for regulators and market participants alike, according to analysts monitoring these industry developments.
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