Just days after the latest crop of hyper-leveraged products tested the outer edges of regulatory tolerance, a new ETF proposal is doubling down — literally.
Volatility Shares has filed to launch funds offering five times the daily return of some of the most volatile assets in global markets, including single stocks like Tesla Inc. and Nvidia Corp., as well as cryptocurrencies such as Bitcoin and Ether.
No 5x — or even 3x — single-stock ETF currently exists in the US, with Securities and Exchange Commission rules having long kept a lid on such exposure. That makes the Florida firm’s move not just aggressive, but unprecedented.
It’s shaping up as the latest high-stakes probe of a new regulatory regime that’s shown an unusually permissive bent — one that’s already allowed sports betting on exchanges, retail-ready crypto treasuries and leveraged access to speculative corners of finance once considered off-limits. But finding out what market cops think of the filings may take time. The SEC has been closed for more than a week due to the government shutdown.
It’s not clear how the proposed funds — which also offer exposure to single stocks including Advanced Micro Devices Inc., Strategy Inc. and Palantir Technologies Inc. as well as smaller crypto coins like Solana and Ripple’s XRP — will pass muster with the SEC, which until now has effectively capped new single-stock funds at 2x leverage. They are, however, a way of grabbing attention in an increasingly competitive US ETF arena that sports some 4,500 funds already.
Volatility Shares declined to comment.
Similar funds already exist elsewhere. In Europe, roughly 40 five-times leveraged funds have been in the market, amassing around $274 million, according to data compiled by Henry Jim, ETF analyst at Bloomberg Intelligence. They mostly track benchmarks, including the Nasdaq 100, the S&P 500 and the Magnificent Seven, as well as US Treasuries. None track single stocks.
Since the US is a larger market — and one where risk-loving Americans continue to pounce on high-octane offerings — the newly proposed funds could be popular, according to Jim. Yet there are signs investors are feeling some fatigue: leveraged funds have posted outflows in the past three months.
The main hurdle, for now, remains the state of the US government. An SEC bulletin dated Sept. 30 said investment companies can continue to submit filings during the shutdown and that the filings will become effective automatically after a set period depending on certain rules until the regulator resumes operating.
The surge in ultra-leveraged products recently has reignited debate over whether they do more harm than good. Asset managers say they’re simply meeting investor demand, with nearly a third of all ETFs launched this year featuring some form of leverage, according to data compiled by Bloomberg Intelligence. Critics warn that many retail traders may overlook the fine print — and the risks — that come with these turbocharged funds.
Another obstacle is whether market makers and swap counterparties will support such products, said Mohit Bajaj, director of ETFs at WallachBeth Capital. These are the firms — largely bank financing desks — responsible for writing the derivatives that provide the leverage. Their participation is crucial for the funds to function smoothly.
“There will be a lot of scrutiny on this,” Bajaj said, adding that banks may be cautious about the risk, capital requirements and regulatory optics of backing products that amplify exposure fivefold.
Volatility Shares’ proposed funds aim to target five times the daily returns of their underlying via various “financial instruments,” potentially including swaps and options, according to the filing. The funds plan to achieve five times their returns by rebalancing holdings daily.
“Investors need to be careful, especially if there is a pullback,” Bajaj said.
Written by: Isabelle Lee — With assistance from Denitsa Tsekova @Bloomberg
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