SEC Halts High-Leverage ETFs, Casting Shadow Over Asset Managers
Increased regulatory scrutiny on complex investment products threatens a lucrative growth area for ETF issuers, signaling a more cautious era.
Asset managers are facing mounting regulatory headwinds as the U.S. Securities and Exchange Commission quietly pumps the brakes on new high-leverage exchange-traded funds, clouding the outlook for a fast-growing and profitable corner of the investment world.
The SEC has reportedly intensified its scrutiny of proposed ETFs that use derivatives to offer amplified returns, often two or three times the daily performance of an underlying index. This move, rooted in the enforcement of risk-management rules, effectively halts the approval pipeline for more exotic products and signals a broader regulatory effort to shield retail investors from volatile and complex financial instruments.
The action directly impacts the burgeoning market for leveraged and inverse ETFs, which has swelled to approximately $155.3 billion in assets under management, according to industry data. For asset managers, these funds have been a bright spot for innovation and revenue. Lured by strong investor appetite, particularly from short-term traders, issuers have rushed into the space; leveraged products have accounted for roughly a quarter of all new ETF launches this year and attracted over $4.2 billion in net inflows as of the third quarter.
The regulatory clampdown centers on the SEC’s Rule 18f-4, a framework adopted to govern the use of derivatives by registered funds. The rule generally caps the leverage of new ETFs at 200% of the underlying index, or 2x. While funds that existed before the rule's implementation were grandfathered in, the SEC is now strictly enforcing this limit on new filings. Issuers that have recently proposed funds with 3x or higher leverage, especially those tied to volatile assets like technology stocks and cryptocurrencies, have been asked to revise their applications to comply.
This renewed focus is a challenge for specialized issuers like Direxion and ProShares, which have built significant businesses around these tactical trading tools. While many of these firms are privately held, the regulatory chill is being felt across the publicly traded asset management landscape.
Shares of Invesco (NYSE: IVZ), a major player in the ETF market with an $11 billion market capitalization, fell 1.7% in Tuesday trading. The broader sector is now confronting the possibility that a reliable source of high-fee product growth could be curtailed. Even industry giants like BlackRock (NYSE: BLK), the world’s largest asset manager with over $160 billion in market value, are sensitive to regulatory shifts that affect the broader ETF ecosystem they dominate.
“The SEC’s priority is investor protection, and the proliferation of these high-leverage products on retail platforms was clearly on their radar,” noted one market structure analyst. “For issuers, this means the low-hanging fruit in product development has been picked. Future growth will require navigating a much tougher compliance environment.”
The commission’s focus on complex products was underscored in its 2026 examination priorities, which explicitly mentioned leveraged and inverse ETFs as an area of concern. The high expense ratios these funds command—often multiples higher than plain-vanilla index funds—make them attractive for asset managers but also draw regulatory attention to their marketing and suitability for average investors.
As the SEC holds the line, asset managers may be forced to pivot their innovation strategies away from financial engineering and toward other product categories. The era of pushing the leverage envelope appears to be paused, ushering in a period of heightened caution for one of Wall Street's most profitable industries.