The U.S. Securities and Exchange Commission (SEC) has asked issuers of leveraged exchange-traded funds (ETFs) to temporarily halt the launch of new funds. This request was made during a brief group call organized by the SEC’s Investment Management Division, where participants were advised not to activate the registration of new products until further notice.

The regulator expressed concerns about whether the new leveraged ETFs comply with existing regulations that govern the risk levels of funds relative to their assets. Some of the proposed funds are designed to deliver up to five times the daily returns of their underlying index.

The SEC requires that new products meet the standards of Rule 18f-4, which regulates risk management when using derivatives. At this time, the regulator is not certain that the proposed products fully comply with these standards.

Leveraged ETFs use derivatives to amplify the daily returns of an underlying asset, which increases both potential gains and losses. Since leverage is recalculated daily, returns over longer periods can differ significantly from the stated multiplier. Originally, these products were intended for professional traders, but recently they have gained popularity among retail investors seeking potentially high profits in volatile markets.

Rule 18f-4, adopted in 2020, was developed to modernize risk management approaches for derivatives in funds, setting limits on the value of assets at risk relative to a benchmark indicator.

Since 2022, more than 450 leveraged and inverse ETFs on individual securities have been launched in the U.S. The total assets in this category have reached approximately $150 billion, including leveraged index funds created before 2022. Currently, there are no ETFs in the U.S. offering fivefold or threefold leverage on individual stocks.