A new letter from the U.S. Securities and Exchange Commission indicates the agency is pushing back on recent filings for 3x and 5x leveraged ETFs, challenging the strategy issuers attempted to use to bypass the regulatory limit on leverage risk. Bloomberg’s Eric Balchunas shared the document, noting that the SEC is calling out the workaround and requesting revisions that align with existing leverage rules.
SEC Flags Attempts To Circumvent The 200% VaR Limit
The SEC’s Division of Investment Management expressed concern over filings that sought to provide more than 2x leveraged exposure to underlying indices, a level that exceeds the 200% Value-at-Risk (VaR) ceiling set by Rule 18f-4 under the Investment Company Act.
The letter states that the commission will not perform further review of the submissions until the issues are addressed. The SEC specifically asks issuers to:
- Revise investment objectives and strategies to comply with Rule 18f-4, or
- Withdraw the filings
Balchunas notes that issuers attempted to rely on a loophole tied to how VaR was being interpreted, but the SEC has now shut that path down.
Looks like SEC is pushing back on all the 3x and 5x filings, calling them out on the loophole they were trying to use, to get around the 200% VAR, and "requests them to revise the obj and strategy to be consistent with 18f-4 or withdrawal" Honestly, it's for the best. I'm as… pic.twitter.com/J8p6o1ND2B
— Eric Balchunas (@EricBalchunas) December 2, 2025
Why The Pushback Matters
Leveraged ETFs, especially 3x and 5x products, present significant volatility and carry elevated risks of termination events, particularly during periods of market stress. Balchunas commented that while he is “as libertarian as they come,” the SEC’s stance is ultimately healthy for investors, adding that “2x is plenty of heat” and preventing higher leverage avoids constant disruptions tied to forced closures.
The SEC’s letter also requests that issuers delay the effectiveness of the filings until the concerns are resolved, signaling that the agency does not intend to allow these products to advance in their current form.
Implications For ETF Issuers
The pushback means ETF providers pursuing ultra-leveraged products will need to:
- Redraft filings to fit the leverage constraints of Rule 18f-4
- Demonstrate compliance with VaR limits using appropriate reference portfolios
- Reassess whether 3x or 5x exposure can be structured within the bounds of open-end fund regulations
This marks one of the clearest indications yet that the SEC is not open to approving ultra-leveraged ETFs that exceed the regulatory thresholds Congress and the Commission have established.
A Clear Line Drawn For Future Leverage Products
While the market has seen growing interest in high-octane ETF products, especially after the approval of leveraged Bitcoin funds, today’s correspondence demonstrates that the SEC is unwilling to extend leverage beyond 2x for open-end ETF structures.
The letter effectively reinforces the boundaries around leverage risk in U.S. markets and sends a strong signal to issuers: the era of 3x and 5x ETF experimentation will not move forward without major regulatory restructuring.