First, the skies invented stocks (well, business people did). Then, they created mutual funds, and later, beginning in 1993, exchange-traded funds (ETFs). Fast forward to 2026, and it got a lot more interesting. And complex. And in particular, leverage.
So much so that the U.S. Securities and Exchange Commission (SEC) has left much to slide in terms of permitting. It has turned stock investing into, as some have said, “a casino with better lighting.”
But as organizers were asked to add another, even more exciting and risky gaming table to the “Hardstock” casino and entertainment center, they put up a stop sign. Don’t go, buy the S&P 500 Index ($SPX) and leverage it 5x. There are probably many reasons to like this decision, but let’s look at both sides.
On March 2, a rare and brief group call was held between SEC members and ETF companies that tried to push the proverbial envelope a little further. We’re inundated with 2x and 3x ETFs on both sides (long and short), as well as single-stock ETFs, long and short leveraged. So, what are the other hundred percent “juice” among market participants? Maybe 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 deliver a strong message to issuers that they should not proceed with the activation of these products. The move effectively shuts down the registration process for funds designed to deliver 5x the daily return of underlying assets, including single stocks and cryptocurrencies.
A 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 firms. This rule generally requires that the fund’s value at risk remain below 200% of the value of the specified reference portfolio, effectively leveraging at 2x for most new products.
Issuers have recently attempted to launch 3x and 5x leveraged funds using alternative benchmarks or selected reference assets that would mathematically reduce their apparent risk profile. The SEC has now indicated that it is not comfortable with these workarounds, insisting that the risk exposure in such products is likely to exceed legal limits relative to their assets.
The SEC’s intervention marks a significant break in what has been an increasingly permissive environment for complex investment vehicles. As of 2022, more than 450 leveraged and inverse single-security ETFs were launched in the U.S., growing the category to nearly $150 billion in assets.
While 2x leverage has become common, no 3x or 5x single stock ETFs are currently available on the US listed market. The SEC is concerned that these products, while popular with retail investors looking for short-term gains, can lead to rapid liquidity or total loss of value during periods of high market volatility.
For now, regulators seem to have set a fixed cap at 2x leverage for any new exchange-traded products, prioritizing investor protection over market stability and the development of high-octane trading tools.
For me, there is only one good reason to want these products: because they may be better than the options. For some, they may offer a better risk-reward tradeoff than options, and they also remove the time factor. While a high-yield ETF can go to zero, an option gets there faster. As someone who frequently uses both types of vehicles in my trading, I would be fine with the 5x and -5x S&P 500 ETF versus calls and 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 real concerns about this play out every day in the form of widespread speculation among retail investors.
Bottom line: I love ETFs, but there is a downside to leveraged investing, for those who see it as a get-rich-quick scheme rather than a risk management tool. I can look at a 5x ETF (if there is one) and say, “I can now invest $1 and only risk $1, instead of risking $5.” But human nature, guarded by “investing is easy” types of marketing, can add up to a big, hot mess when markets get too violent. So, maybe we’re better off keeping this beneficial genie bottled up.
Created by Rob Isbitts ROAR ScoreBased on his 40+ years of technical analysis experience. ROAR helps DIY investors manage risk and build their portfolios. For Rob’s written research, see ETFYourself.com.
As of the date of publication, Rob Asbett had no positions (either directly or indirectly) in any of the securities mentioned in this article. All information and data in this article is for informational purposes only. This article was originally published on Barchart.com
