Have you ever watched someone at the blackjack table double down after already losing half their stack and thought, “Dude, just walk away”? That’s pretty much how I felt watching Wall Street try to push 5x leveraged single-stock ETFs past regulators.
Turns out, even the supposedly crypto-friendly, pro-innovation SEC of 2025 has a limit. And that limit, my friends, is apparently anything above 2x leverage when it comes to daily-reset ETFs on individual names or digital assets.
The SEC Finally Drew a Line in the Sand
Last week, nine different issuers got the same polite but firm letter from the SEC: thanks, but no thanks on your 3x, 4x, and 5x single-stock and crypto leveraged crypto ETF proposals. The reasoning wasn’t complicated. In fact, it was refreshingly straightforward.
These products simply blow past the risk limits set by Rule 18f-4, the derivatives rule that came into effect a few years ago. And no amount of creative accounting was going to change that.
What Exactly Went Wrong for the Issuers?
Here’s where it gets interesting, almost comical, really.
The issuers thought they’d found a loophole. Rule 18f-4 requires funds using derivatives to run a Value-at-Risk (VaR) test. The VaR of the leveraged fund can’t be more than 200% of the VaR of its “designated reference portfolio.” Sounds dry, but it’s the guardrail that keeps 3x and higher funds from existing in most cases.
So what did the clever folks on Wall Street do? They tried to redefine the reference portfolio as something much calmer than the actual underlying asset. Think comparing a 5x Tesla ETF not to Tesla stock itself, but to some sleepy broad-market index or a custom basket designed to look low-volatility on paper.
Nice try.
“We write to express concern regarding the registration of ETFs that seek to provide more than 200% leveraged exposure to underlying indices or securities.”
– SEC staff comment letter
The SEC basically responded with the regulatory equivalent of “we’re not stupid.” The benchmark has to reflect the actual economic exposure you’re giving investors. No gaming the system allowed.
Why Leverage Above 2x Is a Different Beast
Most retail investors kind of understand that a 2x ETF. If the underlying goes up 1%, the fund aims for roughly 2% (before fees and tracking error). Painful on down days, sure, but mathematically manageable over short periods.
But 5x? That’s a whole different animal.
Let me paint you a picture with a real example. Say you have a 5x leveraged MicroStrategy ETF (yes, someone actually proposed this). MSTR drops 10% in a single day, not uncommon for that name. Your 5x fund is down roughly 50% in one session. The next day it drops another 8%? Congratulations, you’re down over 90% in 48 hours and the fund has to deleverage or face total wipeout.
That’s not investing. That’s not even trading. That’s playing Russian roulette with five bullets in a six-shooter.
- A 2x fund on a 20% drawdown loses ~40%
- A 3x fund loses ~60%
- A 4x fund loses ~80%
- A 5x fund? Often liquidated or down 95%+
And remember, these are daily reset products. The compounding effect over multiple days turns volatility into a wood chipper for long-term holders.
The Crypto Angle Makes It Even Crazier
Some of the rejected filings were for leveraged ETFs on Bitcoin and Ethereum spot prices. Which, if you’ve paid any attention to crypto the last five years, move like meme stocks on steroids.
Bitcoin regularly swings 5-10% in a day. A 5x version doing 25-50% moves daily? That’s not a financial product. That’s a legal way to run an unlicensed casino inside retirement accounts.
In my view, the SEC actually did crypto investors a favor here. The first real 30% BTC correction after a 5x ETF launch would have wiped out thousands of accounts and triggered a political firestorm. Better to stop it before it starts.
Is This Really “Peak Speculation” Being Reined In?
Some commentators are calling this decision evidence we’ve reached peak financial madness, that even a relatively permissive SEC is saying “whoa there.”
I’m not so sure.
We still have:
- 2x leveraged single-stock ETFs trading today (TQQQ, SOXL, etc.)
- Options on meme stocks with 1000%+ implied volatility
- Perpetual futures on offshore crypto exchanges offering 100x leverage
- Zero-day-to-expiration options (0DTE) making up 50%+ of SPX volume
The casino is still very much open. The SEC just removed one particularly explosive game from the floor.
What Happens Next for Leveraged Product Issuers?
They’ll pivot, of course. We’re already see filings for “buffered” leveraged products, monthly-reset instead of daily, or “defined outcome” leveraged ETFs that cap upside but limit downside.
Some will try Europe or Canada where rules are looser. Others will push the envelope with 2.9x products and dare the SEC to call it over the line.
But the message was clear: daily-reset, high-leverage, single-stock or crypto ETFs are off the table in U.S. regulated markets. At least for now.
The Bigger Lesson for Investors
If you were excited about 5x NVDA because “AI is going to the moon,” I’ve got bad news: you were about to become the exit liquidity for someone much smarter (or luckier) than you.
Leverage magnifies returns, yes. But it magnifies losses exponentially more in volatile conditions. And single stocks plus crypto are literally the definition of volatile conditions.
Personally? I sleep better owning boring index funds and the occasional well-researched individual name with no borrowed money. The 5x crowd can keep their heart attacks.
At the end of the day, the SEC didn’t kill innovation. They killed a product that would have eventually killed a lot of retirement accounts. And sometimes, that’s exactly what a regulator is supposed to do.
Whether Wall Street listens? That’s another story entirely.
