ProShares has officially retracted its registration request for a series of highly leveraged exchange-traded funds (ETFs) following a warning from the U.S. Securities and Exchange Commission (SEC). The SEC had raised concerns regarding the risk exposures associated with these funds and subsequently paused the review of such plans.
The warning letters were sent to nine ETF providers including notable names like Direxion and GraniteShares, urging them to clarify the risks related to funds designed to track returns of up to five times that of the underlying stock. Among the ETFs ProShares sought approval for were products aimed at replicating three times the performance of prominent Wall Street technology companies such as Meta Platforms and Broadcom.
In a statement issued on Wednesday, ProShares acknowledged the SEC’s recent perspective on certain novel leveraged ETFs, indicating that their proposals did not meet the applicable legal standards. The company’s registration suite included funds targeting various sectors, nations, and even cryptocurrencies.
Other firms that received the SEC’s warning, such as Tidal Financial and Volatility Shares, chose not to comment on the matter. Leveraged ETFs have surged in popularity among retail investors due to ongoing bullish market conditions, a rise in speculative trading, and innovation in product offerings, particularly focusing on individual stocks and cryptocurrencies.
The SEC’s concerns are rooted in Rule 18f-4 of the Investment Company Act of 1940. This rule stipulates that a fund’s value-at-risk must stay below 200% of the value of an appropriate reference portfolio. In its communications, the SEC questioned how fund managers establish the reference portfolio needed to assess leverage risks and encouraged issuers to either revise their strategies for compliance or withdraw their filings altogether.
Dave Mazza, CEO of Roundhill Investments, commented that this recent scrutiny should not be viewed as an outright crackdown, but as an indication of a tightening framework surrounding complex financial products. This increased regulatory attention could add more pressure to the leveraged ETF market, which continues to attract retail investors despite ongoing warnings about the associated complexities and risks.
Highlighting the allure of these funds, the ProShares UltraPro QQQ ETF stands out as the largest leveraged ETF by assets under management, targeting three times the daily performance of the Nasdaq 100 index. This particular fund has experienced a notable increase of over 40% this year, although such substantial returns typically come with a heightened level of risk.
