Leverage Overload: SEC Cracks Down on 'Supercharged' ETFs

Why so many Americans are falling behind 👇

The SEC has paused reviews of new highly leveraged ETF proposals and sent warning letters to nine issuers—including Direxion, ProShares, GraniteShares, and Tidal—questioning products that target more than 2x exposure to indices or single stocks. Issuers were told to revise strategies to comply or withdraw filings, effectively stalling planned 3x and 5x launches.

The Rule Behind the Roadblock: 18f-4 and Value-at-Risk

The SEC is anchoring its pushback on Rule 18f-4 under the Investment Company Act of 1940. That rule caps a fund's value-at-risk (VaR) at 200% of a reference portfolio essentially a way to limit how much a fund can lose relative to a benchmark in stressed scenarios.

Regulators now want ETF sponsors to explain how they choose their 'reference portfolio' and show that these ultra-leveraged designs can genuinely fit inside the rule's risk envelope. Until that's clarified, new super-leveraged products are effectively in the penalty box.

For issuers, that means delays, rewrites, or scrapping pipeline ideas. For traders, it could mean a ceiling on just how wild the next generation of leveraged ETFs can get.

The leveraged ETF backdrop

Leveraged ETFs, especially those tied to tech-heavy and crypto-sensitive names, have boomed alongside risk-on sentiment and product innovation, with retail interest front and center. ProShares UltraPro QQQ, a major 3x Nasdaq-100 vehicle, has swelled to roughly $31.3 billion in assets and posted strong double-digit gains this year, underscoring how performance can accelerate flows.

What the pause signals

Near-term: Expect a de facto cap at 2x as staff scrutinizes risk models and reference benchmarks; applications that exceed this line face delay or withdrawal.

Process risk: Sponsors using daily resets and complex derivatives on volatile underlyings (single stocks, digital assets) should anticipate longer timelines and higher compliance burden.

Policy tone: The pause is notable after a permissive streak that greenlit complex strategies and crypto-linked ETFs, suggesting a recalibration toward risk control.

Investor implications

Volatility math matters: Daily-reset leverage can diverge from the stated multiple over time due to compounding, making path-dependence and volatility drag key drivers of returns. The SEC's focus on VaR underscores that risk, not just target multiple, is under review.

Access shifts: If 3x–5x funds are constrained, liquidity and price discovery may concentrate in existing 2x products and listed derivatives; spreads and depth could change around earnings, macro prints, and crypto moves.

What to watch next

Issuer responses: Look for amended filings that re-specify reference portfolios, reduce stated leverage to 2x, or alter risk programs to fit 18f-4. Withdrawals would confirm a hard ceiling for now.

SEC guidance: Any staff bulletin on reference portfolio construction or VaR testing would set clearer industry guardrails and speed reviews.

Market behavior: Flows into existing 2x ETFs, options volume on popular underlyings, and intraday volatility around catalysts could reveal substitution effects.

Bottom line:

This is a regulatory speed bump, not a market stop sign: leverage access likely remains available up to 2x while the SEC tightens definitions and risk tests for anything beyond. If using leveraged ETFs, emphasize short holding periods, strict risk limits, and awareness of compounding and decay, features that regulators are scrutinizing because they can surprise even seasoned traders.