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SEC uncertain over approval of proposed 3x and 5x leveraged ETFs amid market risks

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The U.S. Securities and Exchange Commission (SEC) said it is “unclear” whether newly filed 3x and 5x leveraged exchange-traded funds (ETFs) will meet regulatory approval, raising questions over products that amplify returns beyond current leverage limits.

“Since the U.S. government shutdown began, the agency has received a large number of ETF registration statements seeking 3x and 5x leveraged, equity-linked exposure,” said Brian Daly, director of the SEC’s Division of Investment Management. “It is unclear whether these ETFs would comply with the Derivatives Rule (Rule 18f-4), which generally limits leverage to 2x,” he added.

The filings include 27 proposed leveraged ETFs from Volatility Shares, which submitted the first-ever 5x ETF for the U.S. market. Such funds aim to multiply daily stock returns fivefold, but carry heightened risk of losses in volatile markets.

The SEC’s limited operational capacity during the shutdown has also slowed reviews. Analysts warn that excessive leverage could expose retail investors to amplified losses.

“Over half of leveraged ETFs launched more than three years ago have closed, and 17% have lost more than 98% of their value,” said Bryan Armour, ETF analyst at Morningstar, underscoring the danger of high leverage.

Amid recent market turbulence linked to U.S.–China trade tensions, leveraged ETFs have been blamed for intensifying selloffs, with JPMorgan estimating $26 billion in forced selling last Friday alone.

The SEC said no filings will be reviewed until the shutdown ends, leaving the fate of the proposed ETFs uncertain.

MicroStrategy Stock Turns Negative Despite Bitcoin Reaching $100,000 Milestone

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Cryptocurrency-related stocks took a downturn on Thursday, even after Bitcoin reached a historic milestone, surpassing $100,000 for the first time. MicroStrategy, a software company that has become closely associated with Bitcoin due to its large holdings of the cryptocurrency, saw its stock slip by 4.8%, reversing an earlier gain of more than 7%. Other crypto-linked companies also experienced losses, with Riot Platforms and Mara Holdings falling around 5% and 4%, respectively. Robinhood Markets and Coinbase Global also saw declines, with drops of 2.7% and over 3%, respectively.

MicroStrategy has increasingly become a proxy for Bitcoin itself, with the company’s stock price closely tied to the value of the cryptocurrency. Since 2020, when it first began purchasing Bitcoin, MicroStrategy’s stock has skyrocketed by more than 2,700%. Similarly, Coinbase, which operates a cryptocurrency exchange, and Robinhood, which allows users to trade Bitcoin, have seen their stocks rise due to their exposure to the digital currency. Meanwhile, Mara Holdings and Riot Platforms focus on Bitcoin mining and digital infrastructure.

Despite Thursday’s setbacks, these companies have posted significant gains year-to-date. MicroStrategy has surged nearly 512%, Robinhood has risen more than 205%, and Coinbase has increased by over 84%. Mara Holdings, however, has underperformed, with a gain of just over 5%.

Investor enthusiasm around Bitcoin has been fueled by expectations of a more crypto-friendly regulatory environment following the November election of President-elect Donald Trump. The belief that his administration would be more relaxed on cryptocurrency regulations has led to increased investments in the sector.

“This price surge, particularly with Bitcoin reaching $100,000, is significant not only as a psychological milestone but because it increases the likelihood of more institutional and traditional finance investment,” said Pascal St-Jean, CEO of 3iQ. St-Jean further noted that the growing accessibility of digital assets to investors also contributed to the price appreciation.

In addition, traders have shown increased interest in leveraged MicroStrategy exchange-traded funds (ETFs), which use debt to amplify potential gains from the underlying assets. According to JPMorgan, these leveraged ETFs accounted for a significant portion of the $11 billion inflow into crypto funds in November, reflecting the heightened investor activity in the cryptocurrency sector.