SEC Solicits Comment on 4x Leveraged ETF Proposal
Commentary by Steven Lofchie
The SEC requested comment to determine whether to approve or disapprove a proposed rule change by Cboe BZX Exchange, Inc. to list and trade shares of two new highly leveraged exchange-traded funds.
According to the Order instituting the proceedings, the proposed funds seek to provide daily investment results, before fees and expenses, that correspond to 400% or -400% of the daily performance of the Russell 1000 Index. The SEC noted that the funds intend to achieve these leveraged returns by investing in a combination of financial instruments, including over-the-counter swaps, forward contracts, options, and futures based on the benchmark index.
The SEC stated that instituting proceedings is appropriate to allow for additional analysis of the proposal's consistency with SEA Section 6(b)(5) ("National securities exchanges"), which requires exchange rules to be designed to prevent fraudulent and manipulative acts and to protect investors and the public interest. Specifically, the Commission requested public comment on whether the proposal to list funds seeking 400% daily leverage raises new or novel concerns not previously contemplated by the Commission. The SEC also invited views on the sufficiency of the Exchange’s statements in support of the proposal.
Comments on the proposed rule change are due by January 20, 2026.
Commentary
4X is serious leverage for a publicly traded product. It's not hard to imagine the regulators feeling some discomfort with it. It will be interesting to see where the SEC comes out, both as to the potential for fraud and as to the public interest.