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Staff unable to review ETF filings during shutdown, SEC

says

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Leveraged ETFs pose risks, analysts say

(Updates October 16 story with company response in paragraph 6)

By Suzanne McGee and Ateev Bhandari

Oct 17 (Reuters) - The U.S. Securities and Exchange

Commission told Reuters that it was "unclear" whether the dozens

of recent filings by asset managers to issue highly leveraged

ETFs would be approved by the agency.

Since the U.S. government shutdown began, "the agency has

received a large number of registration statements for ETFs

seeking to offer 3x and 5x leveraged, equity-linked exposure,"

said Brian Daly, director of the SEC's division of investment

management.

"It is unclear whether these ETFs would comply with the

Derivatives Rule (Rule 18f-4), which generally limits leverage

to 2x."

On Wednesday, ETF issuer Volatility Shares filed to launch a

total of 27 highly leveraged ETFs, including the first-ever

proposed 5x ETF for the U.S. market, in a move that raised

eyebrows amid widespread concerns over inflated asset prices.

A 5x target means that an ETF would seek to quintuple the

daily return of an underlying single stock. Until now, the SEC

has approved single-stock leveraged ETFs with a maximum of 2x.

Volatility declined a Reuters request for comment.

The SEC's response comes as a partisan shutdown in Washington

has forced the agency to function on skeletal staffing, limiting

its ability to review corporate filings, investigate misconduct,

and oversee markets.

"It is reassuring to see that, despite the shutdown, the SEC

continues to monitor new ETF filings and take note of those that

could be potentially problematic for retail investors and for

the ETF industry as a whole," said Amrita Nandakumar, president

of Vident Asset Management, a firm that works with ETF issuers.

A concentration of investor assets into leveraged ETFs has

fueled caution across the market, highlighted by last week's

broad-based selloff after U.S. President Donald Trump escalated

the trade war against China.

While such leveraged ETFs are designed to amplify the return of

the underlying stock or index, a fall in the price of the

indexed asset can force liquidations.

"Of those launched more than three years ago, over half have

closed and 17% have lost over 98% of their value over their

lives," said Bryan Armour, ETF analyst at Morningstar, referring

to the dangers of leveraged ETFs.

A JPMorgan report estimated that some $26 billion of selling

from leveraged ETFs at Friday's close exacerbated the downward

spiral.

A Reuters analysis of SEC filings found that Volatility, whose

filings included a 3x and a 5x offering on bitcoin treasury

pioneer Strategy, proposed its filings to go effective

75 days after submitting.

"This SEC administration has been more amenable to new

strategies coming to market, but 5x leveraged single-stock ETFs

will test those limits," Armour added.

SEC staff will not be able to review the new filings until after

the shutdown is over, the agency's Daly added.