SEC Says No to 5x ETFs
New SEC letters strongly suggest that proposed 3x to 5x products will not move forward.
The SEC has shut down the recent surge of filings for ETFs offering more than 2x leverage, including proposals for products with as much as 5x exposure. The agency sent nearly identical comment letters to nine issuers that were trying to launch turbocharged products tied to everything from single stocks to indexes to crypto.
The letters make it clear that Rule 18f-4 does not permit funds to offer leverage above 200% once the correct “designated reference portfolio” is applied.
Under the rule, a leveraged or inverse ETF must calculate its Value-at-Risk relative to the actual asset it tracks. If a fund seeks 3x Apple or 5x Bitcoin, then Apple or Bitcoin must be used as the benchmark for the VaR limit. Once that baseline is used, anything above 2x leverage fails the test outright.
The SEC told issuers to revise their investment objectives to comply with 18f-4 or withdraw the filings. Until that happens, staff will not review them.
The move was a setback for issuers who assumed a more permissive SEC under the Trump administration might be open to higher leverage. That assumption now appears misplaced.
While 2x leverage had long been seen as the ceiling under Rule 18f-4, some issuers believed there was a possible loophole in how the derivatives rule was written.
By structuring portfolios in certain ways, they hoped they could justify using something other than the actual underlying asset as the reference portfolio for the VaR test. The SEC made it clear that this interpretation is not acceptable.
For now, the ceiling remains where most of the industry expected it to be. 2x leverage is the limit for new ETFs, and anything higher is not getting through.
