Leverage Risk Increases in Stock Exchange Investment Funds

Risks Associated with Exchange-Traded Funds

Exchange-traded funds (ETFs) have traditionally offered investors a safe way to invest in sectors and indices, but in recent years, they have increasingly taken on a more speculative nature. Especially, new public offerings in the United States have significantly raised the risk threshold of this market.

Leveraged ETF Applications and Risks

The asset management company Volatility Shares has filed for regulatory approval for 27 leveraged ETFs. Among these applications, there is a 5x leveraged single stock ETF and various crypto funds. These leveraged ETFs allow investors to multiply the daily movements of the underlying assets, making it quite risky as it can increase both profits and losses fivefold.

SEC Approval Process and Uncertainty

The future of the approval process remains uncertain. It is reported that the operations of the U.S. Securities and Exchange Commission (SEC) have been brought to a standstill due to the ongoing government shutdown. The SEC stated that it is currently operating under a closure plan due to "the cessation of budget allocations."

Market Changes and Their Impact on Investors

Bryan Armour, Morningstar's Director of North America ETF and Passive Strategies Research, expressed that the SEC might shift to a more flexible policy compared to past approval processes, emphasizing that the likelihood of approval for such products is not low. Additionally, as of 2024, there are 102 single stock ETFs in American exchanges, of which 61 are leveraged; it is noted that the managed assets in this area could rise from $169 million in 2022 to $24 billion in 2024.

Leverage and Market Risks

Some experts argue that leveraged ETFs fuel the inclination to gamify the stock market among individual investors and increase overall market risks. Armour warned that based on the past performance of such funds, 55% have closed and 17% have lost more than 98% of their value. These risk factors indicate that investors should not approach such products without careful analysis.