SEC Approves Quadruple-Leveraged ETFs

A critic of the SEC's move says it is "the latest in what has become the story of the ETF product development run amok."
Matthew HellerMay 5, 2017
SEC Approves Quadruple-Leveraged ETFs

In a possible indication that regulators are taking a more favorable view of exotic derivatives, the U.S. Securities and Exchange Commission has approved a request to trade quadruple-leveraged exchange-traded funds.

The ForceShares Daily 4X US Market Futures Long Fund and ForceShares Daily 4X US Market Futures Short Fund are the first 4x ETFs to be approved by the SEC. The request for a rule change allowing them to be listed and trade was made in October by Intercontinental Exchange Inc.’s NYSE Arca exchange.

According to The Financial Times, the SEC’s action is a sign that previous concerns about this type of investment have eased at the agency since President Donald Trump took office.

“The approval process for new products ebbs and flows and is often related to the administration’s priorities,” said Nick Cherney, head of exchange traded products at Janus Capital. “Four times leveraged products on equities were unlikely to be approved in the last five years. It is definitely a change.”

ETFs offering three times leverage already trade in the U.S., but more leveraged products had been limited to listing in Europe. One of the ForceShares funds is designed to deliver 400% of the daily performance of S&P 500 stock index futures, while the other seeks to deliver four times the inverse of that benchmark.

“For those people that are looking for the leveraged exposure to the S&P and they’re not looking to do it by way of a futures product here you have a publicly listed security,” Sam Masucci, chief executive officer at Exchange Traded Managers Group LLC, which is distributing the product, told Reuters.

Under the Obama administration, the SEC had begun to clamp down on mutual fund and ETF derivatives, proposing a rule in 2015 that would put a stranglehold on highly leveraged ETFs.

Ben Johnson, director of global ETF research at Morningstar, criticized the SEC’s apparent change of heart. “It is kind of the latest in what has become the story of the ETF product development run amok,” he told the FT, adding that virtually all four times leveraged products “have no place in most investors’ portfolios.”