SEC limits leverage ETFs to 2x, halting wave of 3x–5x filings
The SEC just poured cold water on a rush of 3x and 5x single‑stock ETF filings, saying approvals are “unclear” under Rule 18f‑4’s ~2x limit. With reviews slowed by the shutdown, the bar for higher leverage looks steep.
Since late last week, issuers have submitted dozens of registration statements, including Volatility Shares’ 27‑fund bundle that features the first proposed 5x ETFs in the U.S. Historically, approvals for single‑stock leverage haven’t exceeded that threshold; anything above runs into 18f‑4 constraints (the SEC derivatives rule that effectively caps leverage for most new funds around 2x).
SEC investment‑management director Brian Daly framed the stance plainly:
It is unclear whether these ETFs would comply with the Derivatives Rule.
Staffing is skeletal during the federal shutdown, further delaying any detailed review.
Beyond equities, several filings target MSTR and COIN, turning them into a levered gateway to Bitcoin‑linked exposure via stocks. Leveraged ETFs reset daily and must rebalance; on volatile days, that flow can amplify moves in the underlying and related assets.
Recent market action shows the mechanism. A JPMorgan estimate put ~$26 billion of end‑of‑day selling from leveraged ETFs during last Friday’s sell‑off, illustrating how rebalancing can deepen swings when volatility picks up.
For crypto, the channel is not just price sympathy. Levered flows around MSTR/COIN can spill into crypto rails via basis and funding: dealers hedge with futures and perpetual futures (perps), widening or compressing the cash‑and‑carry (the spot‑futures spread); short‑term funding rates react as hedges are rolled; and borrow constraints in MSTR can add squeeze risk that reverberates into Bitcoin‑linked exposure. On high‑volatility days, this loop tightens correlations between those stocks, spot/ETF flows, and BTC options skew.
There’s also a structure wrinkle worth flagging. Single‑stock ETFs rely on creation/redemption with authorized participants (large dealers who create/redeem ETF shares); in stress, frictions here can widen NAV vs price (ETF market price vs. its portfolio value) gaps intraday. That’s different from spot‑Bitcoin ETFs’ mechanics and can make equity‑routed crypto exposure behave less like the underlying.
Industry voices expect pushback. “5x single‑stock ETFs will test those limits,” said Morningstar’s Bryan Armour, noting that more than half of older leveraged funds have already closed and many suffered extreme losses over their lives.
Rule 18f‑4 keeps new U.S. products capped near 2x, and protracted talks over structure and risk controls follow. If the SEC entertains 3x/5x, expect sharper end‑of‑day rebalancing around MSTR/COIN and a tighter transmission into crypto‑linked moves on high‑volatility sessions. If approvals stall, flows likely consolidate in existing 1–2x funds and spot or unlevered crypto exposures.
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