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SEC Raises Doubts Over Approval of Highly-Leveraged ETFs Amid Government Shutdown

By  |  October 16, 2025

The U.S. Securities and Exchange Commission (SEC) has indicated uncertainty about whether it will approve a surge of new filings for exchange-traded funds (ETFs) seeking to offer extreme leverage, according to Reuters.

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    Since the onset of the ongoing U.S. government shutdown, dozens of asset managers have submitted registration statements for ETFs proposing leverage levels as high as five times the daily returns of underlying equities. Brian Daly, director of the SEC’s division of investment management, told Reuters that “it is unclear whether these ETFs would comply with the Derivatives Rule (Rule 18f-4), which generally limits leverage to 2x.”

    On Wednesday, ETF issuer Volatility Shares filed to launch 27 such products, including what would be the first-ever 5x leveraged ETF in the U.S. market. According to Reuters, this unprecedented move has raised concerns about investor protection and the potential amplification of market volatility amid already elevated asset valuations.

    A 5x ETF would aim to quintuple the daily return of a given stock, magnifying both gains and losses. Until now, the SEC has allowed single-stock leveraged ETFs only up to 2x. The regulator’s hesitation comes as it operates under significant strain — the partisan budget standoff in Washington has forced the agency to run with minimal staff, hampering its ability to vet new filings, conduct investigations, and oversee the markets.

    Despite these limitations, some in the investment community see the SEC’s vigilance as encouraging. “It is reassuring to see that, despite the shutdown, the SEC continues to monitor new ETF filings and take note of those that could be potentially problematic for retail investors and for the ETF industry as a whole,” said Amrita Nandakumar, president of Vident Asset Management, in comments reported by Reuters.

    Read more: SEC, CFTC Pledge Mutual Cooperation to Bring Harmony to Financial Regulations

    Market observers warn that a growing concentration of investor capital in leveraged ETFs could heighten systemic risks. According to Reuters, recent market turbulence has underscored this vulnerability, as heavy selling linked to leveraged ETFs compounded last week’s selloff following renewed U.S.-China trade tensions.

    Leveraged ETFs, designed to multiply the performance of their underlying assets, can trigger forced liquidations when those assets decline. “Of those launched more than three years ago, over half have closed and 17% have lost over 98% of their value over their lives,” said Morningstar analyst Bryan Armour, highlighting the risks such products pose to investors.

    A JPMorgan analysis cited by Reuters estimated that roughly $26 billion in selling pressure from leveraged ETFs at last Friday’s close intensified the market’s downward spiral. Reuters also reported that Volatility Shares’ filings included 3x and 5x exposure to bitcoin-tied equity MicroStrategy (MSTR.O), with the firm proposing the products become effective 75 days after submission.

    “This SEC administration has been more amenable to new strategies coming to market, but 5x leveraged single-stock ETFs will test those limits,” Armour added. However, Daly confirmed that the SEC will be unable to review any of these filings until normal operations resume.

    Source: Reuters