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SEC writes to nine ETF providers, including Direxion,

ProShares

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Review for new products stopped until clarification issued

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SEC asks issuers to revise strategies or withdraw filings

By Shashwat Chauhan

Dec 3 (Reuters) - The U.S. securities market regulator

has paused the review of proposals for new highly leveraged

exchange-traded funds from several fund managers and sought more

clarity on the risks tied to the products.

In its warning letters sent to nine ETF providers including

Direxion, ProShares and GraniteShares on Tuesday, the Securities

and Exchange Commission said some funds have sought to track as

much as fives times the performance of the underlying stock.

"We write to express concern regarding the registration of

exchange-traded funds that seek to provide more than 200% (2x)

leveraged exposure to underlying indices or securities," the

regulator said.

Tidal Financial, one of the nine recipients, declined to

comment, while the others did not immediately respond to

requests for comment.

Leveraged ETFs, often favored by retail investors, have

exploded in popularity lately due to sustained bullish market

sentiment, the rise of speculative trading and a surge in

product innovation, especially around single stocks and

cryptocurrencies.

GROWING POPULARITY, RISING RISKS

The regulator said its concerns stem from Rule 18f-4 under

the Investment Company Act of 1940, which requires a fund's

value-at-risk to remain below 200% of the value of an

appropriate reference portfolio.

The SEC asked fund managers how they determine the reference

portfolio used to measure leverage risks and suggested the

issuers to revise their strategies to comply or withdraw

filings.

The latest scrutiny adds pressure to the growing leveraged

ETF market, which continues to attract retail investors despite

regulatory concerns over their complexity and risks.

The largest leveraged ETF, $31.3 billion ProShares UltraPro

QQQ ETF, which targets three times the daily

performance of the Nasdaq 100 index, has gained close to

40% so far this year.

However, the outsized returns come with higher risks.

Among the hardest hit this year is one tied to Strategy

shares, according to VettaFi's ETF database.

The Defiance Daily Target 2x Long MSTR ETF has

plunged more than 83% this year. An ETF tracking twice

the performance of Super Micro has dropped more than

60%, while the 2x long cannabis ETF is down 59.4%.

(Reporting by Shashwat Chauhan in Bengaluru; Editing by Arun

Koyyur)