The SEC has issued warning letters to nine issuers, including Direxion and ProShares, halting reviews of leveraged ETFs with more than 2x exposure. This move is part of the SEC’s deregulatory streak and marks the first hurdle for new product launches in months.

The SEC’s action follows a slew of proposals for 3x leveraged ETFs from various issuers in October, including 5x fund filings from Volatility Shares. These proposals aimed to boost returns on volatile stocks like Nvidia and Tesla but clashed with the SEC’s existing framework limiting leverage to 2x.

Leveraged products have seen varied performance, with outsized returns but amplified losses due to volatility. Morningstar analyst Lan Anh Tran warns that leveraged ETFs on single stocks can lead to significant drawdowns that are challenging to recover from, especially with highly volatile underlying assets.

The SEC’s move to halt highly leveraged ETF filings is a response to the recent surge in proposals for leveraged products. While these products can offer significant returns, their volatility can lead to substantial losses, particularly with single stock ETFs. Investors should be cautious when considering leveraged ETFs.

Read more at Yahoo Finance: SEC Halts Filings of Highly Leveraged ETFs