SEC pulls plug on super-leveraged ETFs—5x crypto not allowed

The U.S. Securities and Exchange Commission (SEC) has moved to block the launch of highly leveraged exchange-traded funds designed to deliver three to five times the daily performance of stocks and cryptocurrencies.

The agency issued nine warning letters to major ETF providers, including Direxion, ProShares, and Tidal Financial, stating it would not review the filings unless the firms addressed regulatory concerns related to Rule 18f-4 under the Investment Company Act of 1940.

The rule limits a fund’s value-at-risk exposure to 200% of its reference benchmark, a threshold several of the proposed products appear to exceed, according to regulatory filings released Dec. 2.

The targeted funds would use derivatives to magnify daily returns on volatile assets, including Bitcoin, Ether, Nvidia, and Tesla, with exposure of up to five times the daily move. No 5x single-stock or crypto ETF has been approved in the U.S., and 3x products have faced strict regulatory limits.

The SEC instructed issuers to either adjust their strategies to meet legal requirements or withdraw their filings. Within a day of the letters being posted, ProShares withdrew several of its 3x and crypto-related ETF applications, according to regulatory records.

The action marks a shift from what had been a permissive period for ETF approvals. Over the past year, the SEC approved spot Bitcoin and Ethereum ETFs, crypto yield products, and structured funds built around options income, partial leverage, and downside protection.

Recent filings test regulatory boundaries further

21Shares submitted an application for a leveraged fund tied to the Hyperliquid token, while Volatility Shares filed the first proposals for 5x leveraged ETFs linked to stocks and cryptocurrencies.

Leveraged ETFs have grown in popularity among retail traders. The ProShares UltraPro QQQ, which targets three times the daily return of the Nasdaq 100, holds significant assets and has risen this year, according to fund data.

However, other leveraged products have experienced steep losses. The Defiance Daily Target 2x Long MicroStrategy ETF and a 2x fund tied to Super Micro have declined substantially this year, according to market data.