First, the heavens invented stocks (Okay, entrepreneurs do that). Then, they created mutual funds, and later, from 1993, exchange-traded funds (ETFs). Fast forward to 2026, and it was a lot of fun. And complicated. And, mostly, it’s allowed.
So much so that the US Securities and Exchange Commission (SEC) has allowed a lot of leeway in terms of approval. That turned stock investing into, as some say, “a casino with better lighting.”
But just as the regulators were asked to add another, even more exciting and dangerous gaming table to the casino and entertainment center, they put a stop sign. Don’t go overboard, don’t take the S&P 500 Index ($SPX) and use it up 5x. There are probably more reasons to cheer this decision than to scoff at it, but let’s look at both sides.
On March 2nd, a rare and brief group call was held between members of the SEC and ETF companies trying to push the proverbial envelope just a little. We are exposed to 2x and 3x ETFs in both directions (long and short), as well as single-stock ETFs, used long and short. So, what is the “juice” of a few percent among market participants? Maybe we finally know where the line is.
During the call, which lasted only a few minutes and did not include an opportunity to ask questions, the SEC’s Division of Investment Management instructed independent trustees and fund advisers to convey a strong message to issuers that they should not proceed with implementing these products. This move effectively blocks the registration process for funds designed to deliver 5 times the daily return of underlying assets, including single stocks and cryptocurrencies.
The regulator’s main concern is whether these powerful entities are complying with Rule 18f-4, which regulates the use of derivatives and risk management in investment firms. This rule generally requires the fund’s value at risk to remain below 200% of the value of the designated reference portfolio, effectively including a 2x ratio for many new products.
Issuers have recently been trying to introduce 3x and 5x capital leverage using alternative benchmarks or designated reference assets that would statistically reduce their apparent risk profile. The SEC has now signaled that it is not comfortable with these practices, asserting that exposure to risk in such products may exceed legal limits related to their assets.
The SEC’s intervention marks a significant break in what has been an increasingly permissive approach to sophisticated investment vehicles. As of 2022, more than 450 single-hedge ETFs have been launched in the United States, growing the category to nearly $150 billion in assets.
While a 2x ratio is common, no 3x or 5x ETFs currently exist on the US listed market. The SEC remains concerned that these products, while popular with retail investors looking for short-term gains, can lead to rapid liquidation or total loss of value during periods of high market volatility.
Currently, the regulator appears to have established a strict ceiling at 2x the rate of any new exchange-traded products, prioritizing market stability and investor protection over the expansion of high-octane trading instruments.
For me, there is only one good reason to want these products: because they might be better than the alternatives. For some, they may offer a better risk tradeoff than options, and remove the time factor. While a leveraged ETF can go to zero, an option tends to get there faster. As someone who uses both types of vehicles regularly in my trading, I would be fine with, say, 5x and 5x S&P 500 ETF instead of call and put options.
However, I am not every investor. Like many here (writers and readers alike), I have been investing legitimately for decades. My learning curve has matured. The SEC’s rightful concern with this plays out every day in the form of speculative investors.
Bottom line: I love ETFs, but there is a downside to aggressive investing, for those who see it as a get-rich-quick scheme rather than a risk management tool. I would look at a 5x ETF (if it existed) and say, “Now I can invest $1 and risk that $1, instead of risking $5.” But human nature, fueled by “easy investing” types of marketing, can add up to a big, hot problem when markets run wild. So, maybe it’s best to keep this powerful genie in a bottle.
Rob Isbitts created the The ROAR Scorebased on his 40+ years of technical analysis experience. ROAR helps DIY investors manage risk and build their own portfolios. For Rob’s written research, see ETFYourself.com.
At the date of publication, Rob Isbitts had no (directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is for informational purposes only. This article was originally published on Barchart.com
