The U.S. Securities and Exchange Commission has effectively thrown the brakes on a new wave of ultra-leveraged exchange-traded funds, issuing a set of warning letters that halt plans by some of the industry’s most aggressive product issuers to launch ETFs designed to deliver three and even five times the daily returns of volatile assets.
The nine letters, almost identical in structure and language, were posted on Tuesday and sent to firms including Direxion, ProShares, Tidal, and Volatility Shares. Each one made it clear that the regulator sees unresolved questions about how these funds measure and manage risk relative to their assets.
In its communication with the issuers, the SEC said it would not move forward with reviewing the proposed launches until key concerns are addressed. A central issue is that several of the proposed ETFs appear to exceed the permitted limit on how much risk a fund can assume compared with its asset base.
The agency gave the managers a choice: revise the strategies or withdraw the filings. The warning was blunt and the same across all nine letters.
“We write to express concern regarding the registration of exchange-traded funds that seek to provide more than 200% (2x) leveraged exposure to underlying indices or securities,” the SEC wrote.
The decision stands out because it interrupts a long stretch of approvals that has included crypto-linked ETFs in multiple categories, funds tied to private-market assets, and vehicles built around increasingly complex derivative-driven strategies. The products now being scrutinized sit on the farthest edges of that expansion. They combine extreme leverage, daily resetting mechanisms, and exposure to some of the most volatile areas of the market, from individual high-velocity tech stocks to major cryptocurrencies.
Todd Sohn, a senior ETF strategist at Strategas, said issuers appeared to be pushing right up against the walls of what the SEC has historically tolerated. According to him, “The issuers were aiming to go beyond the 2x limit allowed and the SEC is clearly not comfortable with that. Issuers were trying to get a workaround in some of the language, loopholes in a sense on what the ‘reference asset’ was on the funds.” That comment touches on another central theme in the letters: fears that some applicants were benchmarking risk against measures that may not match the true volatility of the underlying assets.
Among the most ambitious plans were those from Volatility Shares, which filed to introduce ETFs offering five times leverage on daily moves in Tesla Inc., Nvidia Corp., Bitcoin, and Ether. No such funds exist in the U.S. today. Single-stock products have long been capped at 2x leverage under SEC rules, and even 3x products have never been approved, making the 5x filings some of the boldest proposals to date.
Investor appetite for these vehicles is unmistakable. Leveraged ETFs use derivatives like swaps and options to amplify daily moves, and their popularity has soared in recent years as traders chase bigger, faster payoffs across whipsawing markets. Assets in leveraged ETFs have climbed to roughly $162 billion.
The expansion, though, has not come without warnings. These products can behave in unpredictable ways because of their daily resetting structure, and they can leave inexperienced traders nursing losses even when the longer-term trend of the underlying asset moves in their favor. Europe’s GraniteShares provided a stark example last October when its 3x Short AMD product lost all its value in a single session after a sudden surge in shares of Advanced Micro Devices Inc.
The speed at which the SEC published its letters adds another layer of significance. Staff in the Division of Investment Management made the documents public on the same day they were written, a rare step that shows the regulator wanted its stance known immediately. Usually, such correspondence is posted only after a review has wrapped up, often after a lag of about 20 business days.
The Implications
The pause carries major implications for retail traders. For several years, highly leveraged ETFs have fed a segment of trading culture that thrives on outsized moves. Retail platforms helped fuel that momentum during the pandemic, when easy access to derivatives and ETFs drew waves of new traders into complex products.
The SEC is drawing a line that limits how far the most aggressive products can evolve by signaling that the ceiling on single-stock leverage will stay at 2x. That keeps traders from stepping into vehicles where small intraday moves in volatile assets like Tesla, Nvidia, or Bitcoin could snowball into explosive swings magnified fivefold.
For issuers, the letters function as both a warning and a map of where the boundaries lie. The rush to file 3x and 5x products was driven by competition among fund managers who want to capture retail flows in an increasingly crowded ETF landscape.
The SEC’s move forces a recalibration. Firms that hoped to carve out niches in the highest-volatility corner of the market will now have to rethink their approach, re-engineer strategies, or shift toward other categories where growth is still possible, such as options-based income funds or thematic ETFs tied to regulated crypto exposures.
For the broader regulatory climate, this moment signals that the period of wide-open approvals may be entering a more cautious phase. The SEC has been under pressure as trading behavior in the U.S. continues to evolve at high speed. Retail volumes surged through the pandemic, options activity has exploded, and new asset classes like digital tokens have become deeply embedded in mainstream trading patterns. The ultra-leveraged ETF proposals tested how far regulators were willing to stretch long-standing boundaries.
The SEC telegraphed that some limits remain non-negotiable by publishing the letters immediately and pausing all related registrations, particularly when it comes to leverage, daily resetting, and products that could magnify volatility in ways ordinary traders may not fully understand.
An SEC spokesperson said the agency does not comment on active registration matters, leaving its letters as the clearest available guide. But the message has been delivered: The ceiling stays at 2x, the proposals must be reworked, and ultra-leveraged single-stock and crypto-linked ETFs will not be entering the U.S. market anytime soon.
