By Suzanne McGee and Ateev Bhandari
(Reuters) -Volatility Shares, an issuer of exchange-traded funds, filed on Wednesday to launch a total of 27 highly leveraged ETFs, including the first-ever proposed 5x ETF for the U.S. market, at a time of rising caution over inflated asset prices as markets continue their upward swing.
A 5x target means that an ETF would seek to quintuple the daily return of an underlying single stock.
The single stocks involved include tech heavyweights Tesla, Nvidia, AMD, Amazon and Palantir, representing some of the greatest beneficiaries of the AI-spending fueled market rallies.
The list also includes Coinbase and crypto treasury pioneer Strategy, two key players from a sector that has produced stellar wins for the IPO market this year.
Volatility Shares has filed for a 3x and a 5x offering on Strategy, where existing issuers have struggled to manage a 2x product. Until now, the U.S. Securities and Exchange Commission has approved single-stock leveraged ETFs with a maximum of 2x.
“You have to designate a reference benchmark and use that to calculate ‘value at risk,’ or the chance that the product will be unduly risky for either investors or the market,” said Rahul Sharma, president of financial data provider Indxx, referring to the SEC’s rules about launching such products.
Sharma noted that recently the SEC changed guidance on what assets could be used as a reference benchmark to make it easier to win approval, and that the pace of new leveraged ETF filings has been growing.
According to StockTwits, there are now some 900 leveraged products, accounting for 33% of all new ETFs but only 1% of the U.S. ETF industry’s $12 trillion in assets.
However, firms have “enormous latitude in defining these calculations,” said ETF.com President David Nadig.
Volatility Shares declined to comment on its plans to calculate “value at risk.”
According to Nadig, a partisan gridlock in Washington has also provided some cover for the filing and potential launching of these ETFs.
“If the SEC came back and sat at their desks, they’d put the kibosh on this. In the normal course of business you’d expect these to be shot down quickly,” Nadig added.
A Reuters analysis of SEC filings found that Volatility has proposed its filings to go effective 75 days after submitting. Such time-based flipping of filing status has previously been used by companies looking to IPO during a shutdown as well.
According to Indxx’s Sharma, the former rules “prevented the launch of some of the highest volatility products,” while the new guidance “introduces more systemic risk.”
Concerns are piling on that a correction is on the horizon, and products designed to amplify upside could end up achieving the same for a crash.
The crypto market experienced the largest liquidations in history, with more than $19 billion wiped out across leveraged positions late on Friday after U.S. President Donald Trump escalated his trade rhetoric against China.
Tech stocks are also not insulated from such shocks and a highly leveraged market positions can amplify the selloff, as seen on Friday, when some leveraged investors were forced to close their positions after their collateral fell below certain thresholds.
A report from JPMorgan estimated that some $26 billion of selling from leveraged ETFs at Friday’s close drove the overall market even lower.
“These products are a terrible way to get this kind of leverage,” Nadig said.
(Reporting by Ateev Bhandari in Bengaluru and Suzanne McGee; Editing by Alan Barona)
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