First, the heavens invented stocks (OK, business people did that). Then, they created mutual funds, and later, starting in 1993, exchange-traded funds (ETFs). Fast forward to 2026, and it got a lot more funky. And complicated. And especially, leveraged.
So much so that the U.S. Securities and Exchange Commission (SEC) has let a lot slide in terms of permissiveness. That has turned stock investing into, as some have said, a “casino with better lighting.”
But just as regulators were asked to add another, even more exciting and risk-laden gaming table to the “Hard Stock” casino and entertainment center, they put up a stop sign. Do not pass go, do not take the S&P 500 Index ($SPX) and leverage it up 5x. There are probably more reasons to cheer this decision than jeer it, but let’s look at both sides.
SEC Says ‘No Way’ to 3x-5x ETFs
On March 2, a rare and brief group call was held between SEC members and ETF companies attempting to push the proverbial envelope just a bit further. We have been inundated with 2x and 3x ETFs in both directions (long and short), as well as single-stock ETFs, leveraged long and short. So, what’s a few hundred percent more “juice” among market participants? Perhaps we finally know where the line is.
During the call, which lasted only a few minutes and included no opportunity for questions, the SEC’s Division of Investment Management instructed independent trustees and fund counsel to relay a firm message to issuers that they should not move forward with activating these products. This move effectively blocks the registration process for funds designed to deliver as much as 5x the daily return of underlying assets, including single stocks and cryptocurrencies.
The central issue for the regulator is whether these ultra-leveraged structures comply with Rule 18f-4, which governs the use of derivatives and risk management for investment companies. This rule generally requires that a fund’s value at risk remain below 200% of the value of a designated reference portfolio, effectively capping leverage at 2x for most new products.
Issuers had recently attempted to launch 3x and 5x leveraged funds by using alternative benchmarks or designated reference assets that would mathematically lower their apparent risk profile. The SEC has now signaled it is not comfortable with these workarounds, asserting that the risk exposure in such products likely exceeds legal limits relative to their assets.
This SEC intervention marks a significant pause in what had been an increasingly permissive environment for complex investment vehicles. Since 2022, more than 450 leveraged and inverse single-security ETFs have launched in the United States, growing the category to approximately $150 billion in assets.
While 2x leverage has become common, no 3x or 5x single-stock ETFs currently exist in the U.S. listed market. The SEC remains concerned that these products, while popular with retail investors seeking outsized short-term gains, can lead to rapid liquidations or total loss of value during periods of high market volatility.
For now, the regulator appears to have established a firm ceiling at 2x leverage for any new exchange-traded products, prioritizing market stability and investor protection over the expansion of high-octane trading tools.
1 Reason To Want Highly Leveraged Products
To me, there is only one good reason to want these products: because they might be better than options. To some, they might offer a better reward-risk tradeoff than options, and they also remove the time factor. While a highly-leveraged ETF can go to zero, an option tends to get there faster. As one who uses both types of vehicles frequently in my trading, I would be just fine with, say, a 5x and -5x S&P 500 ETF as opposed to call and put options.
However, I am not every investor. Like many here (writers and readers alike), I have been investing professionally for decades. My learning curve is mature. The SEC’s rightful concerns on this are playing out every day in the form of rampant retail investor speculation.
Bottom line: I love ETFs, but there’s a nasty side to investing with leverage, for those who see it as a get-rich-quick scheme and not a risk-management tool. I can look at a 5x ETF (if there were one) and say, “I can now invest $1 and only risk that $1, instead of risking $5.” But human nature, stoked by “investing is easy” types of marketing, can add up to a big, hot mess when markets act more violently. So, perhaps we are better off keeping this leveraged genie in the bottle.
Rob Isbitts created the ROAR Score, based on his 40+ years of technical analysis experience. ROAR helps DIY investors manage risk and create their own portfolios. For Rob's written research, check out ETFYourself.com.
On the date of publication, Rob Isbitts did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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