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Quadruple Leveraged ETFs: SEC Has Second Thoughts

Sanghamitra Saha

The U.S. Securities and Exchange Commission has been reluctant toward approving the first quadruple leveraged ETF. The SEC put off its recent decision to okay an exchange-traded fund that looks to offer four times the daily price changes of S&P 500 futures contracts, as per the source.

The commission reportedly plans to review the initial verdict released earlier this month. With this, many expected Forceshares Daily 4x US Market Futures Long Fund (UP) and Forceshares Daily 4x US Market Futures Short Fund (DOWN) to see the light of day soon. These two new products are designed to deliver 400% regular/opposite the daily performance of the S&P 500 (read: SEC Approves Quadruple-Leveraged ETFs).

As per Reuters, the issues leading to the latest SEC review aren’t clear. However, excessive risks in the products can be a reason. Leveraged products are always meant for investors with a strong stomach for risks.

A fund that provides 2x the exposure will rise by 2% if the benchmark increases by 1%. The opposite also holds true. If the index drops by 1%, the ETF will lose 2%. A quadruple approach can thus understandably be much riskier for investors(see: all the Leveraged Equity ETFs here).

Investors should note that leveraged products are also suitable only for short-term traders as these are rebalanced on a daily basis. Notably, so long, up to triple-leveraged ETFs have been common in the investing world(read: An Investor's Guide to the 10 Most Popular Leveraged ETFs).

At the current backdrop,ProShares Ultra S&P500 ETF SSO, which looks to track the daily investment results, before fees and expenses, corresponding to twice the daily performance of the S&P 500, has amassed the largest asset base of $1.89 billion.

Notably, there is no shortage of leveraged ETFs tracking the S&P 500 with SSO, Direxion Daily S&P 500 Bull 1.25x Shares LLSP, Direxion Daily S&P 500 Bull 2x Shares SPUU, ProShares UltraPro S&P500 ETF UPRO and Direxion Daily S&P 500 Bull 3x Shares SPXL around.

As per xtf.com, there are over 130 U.S.-listed leveraged ETFs with an aggregate market cap of $27.75 billion and average expense ratio of 1.17% (read: Bet on ETF Industry's Growth with This Fund).

Other SEC Reconsiderations in Recent Times

Not only quadruple leveraged ETFs, the SEC has adopted the same stance for bitcoin. Bitcoins are ‘mined’ by using a greater amount of computer processing power. After rejecting the filing for an ETF on this cryptocurrency by Winklevoss Bitcoin Trust, the SEC is reviewing its decision again. The proposal actually involved listing the ETF on the Bats BZX exchange, one of the largest U.S. equities market operators (read: No Bitcoin ETF Says SEC: What's Next?).

Now that Bats’ petition to the SEC to reconsider the decision has been accepted by the authority, a new-found optimism has been noticed in the space. The tussle between the U.S. Securities Exchange Commission and Winklevoss over the launch has been going on for about three years. In fact, the issuer has restructured the proposal for the Bitcoin ETF multiple times.

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DIRX-LC BULL 3X (SPXL): ETF Research Reports
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