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SEC approves listing of S&P 500 ETF with quadruple leverage

First Published 4th May 2017

MOAR leverage!

The SEC has approved a request from upstart ETF provider ForceShares to list a quadruple leveraged ETF on the S&P 500. The firm intends to list long and short ETFs with the tickers UP and DOWN. Double and triple leveraged ETFs on the same underlying - CME's S&P 500 front month futures contract - are already available from a variety of providers. The futures contract is easier to track than the actual S&P 500 cash index.

At first sight, the SEC's decision is a surprising one. Firstly, leveraged ETFs are essentially a form of regulatory arbitrage. Futures and total return swaps already offer higher leverage than equities to investors with access to them - typically those sophisticated enough to understand the risks. Secondly, as recently as October 2016, the SEC was examining a rule that would have limited the leverage available to ETFs to 150%. Politics might have been the deciding factor in authorizing the ForceShares ETF. The new US administration is keen to ease financial regulations and President Trump's nominee for SEC Chair was confirmed yesterday by the Senate. The approval of an ETF with 4x leverage could be an indication that the trend toward tighter regulation has now turned (for better or worse, there is no ETF, leveraged or otherwise, to play that trend).

Once the ETF is listed, the main beneficiaries are likely to be law firms. Leveraged ETF providers ProShares and Direxion have both been sued for failing to provide adequate risk disclosure to retail investors. Direxion settled for 8 million USD in 2013 while the suit against ProShares was dismissed. Several financial institutions - Citigroup, Morgan Stanley, UBS and Wells Fargo - were also fined for failing to properly supervise sales of leveraged ETFs. Whether retail traders now understand the magic of compounding leveraged returns remains to be seen.

One important question remains: What is a quadruple-leveraged ETF going to do on Quadruple Witching Day....?