Growing Scrutiny on Leveraged ETFs as ProShares Withdraws Registration Request
By Shashwat Chauhan
Dec 4 (Reuters) – ETF provider ProShares has decided to withdraw its registration request for some highly leveraged exchange-traded funds after receiving a warning letter from the U.S. securities regulator. The Securities and Exchange Commission flagged risk exposures and paused the review of plans that sought to track up to five times the performance of the underlying stock.
The SEC sent similar letters to nine ETF providers, including ProShares, Direxion, and GraniteShares, asking for more clarity on the risks associated with funds that aimed to replicate multiple times the performance of the underlying assets.
ProShares had submitted requests for ETFs that targeted three times the returns of Wall Street tech giants like Meta Platforms and Broadcom.
“We understand and appreciate the SEC staff’s view on certain leveraged ETFs filed by various issuers, indicating that such funds may not comply with legal requirements,” ProShares stated in response to the SEC’s concerns.
The fund manager’s registrations also included ETFs tracking specific sectors, countries, and cryptocurrencies.
Tidal Financial and Volatility Shares, two of the recipients of the SEC’s letter, declined to comment on the matter.
Leveraged ETFs, popular among retail investors, have seen a surge in demand due to bullish market sentiment, speculative trading, and innovation in single stocks and cryptocurrencies.
Growing Popularity Brings Regulatory Scrutiny
The SEC expressed concerns related to Rule 18f-4 under the Investment Company Act of 1940, which mandates that a fund’s value-at-risk should not exceed 200% of the value of a reference portfolio. The regulator questioned how fund managers determine the reference portfolio for leverage risks and advised issuers to revise their strategies or withdraw filings to ensure compliance.
Dave Mazza, CEO of Roundhill Investments, commented, “I wouldn’t characterize it as a broad clampdown, but it does signal a firmer boundary around product complexity.”
The increased scrutiny adds pressure to the leveraged ETF market, which continues to attract retail investors despite concerns over complexity and risks. The ProShares UltraPro QQQ ETF, the largest leveraged ETF in terms of assets under management, has gained over 40% this year by targeting three times the daily performance of the Nasdaq 100 index, but with heightened risks.
