ProShares has withdrawn its full portfolio of 3x leveraged technology and crypto ETFs. The decision came after the SEC raised concerns about how the funds measured leverage risk. The withdrawn ETFs would have offered 3x daily exposure to Bitcoin, Ether, XRP, Solana and major tech stocks.
Why Did ProShares Call off their 3x ETFs?
The firm suspended its filing after the top U.S. regulator raised concerns on whether the products reflected the extreme volatility of the underlying assets. These ETFs targeted at traders who wanted amplified daily returns. ProShares stopped the launch of the product when the SEC requested that the company amend the filings or delay the launch date.
The Division of Investment Management at SEC sent a letter to ProShares stating its concerns. The regulator cautioned that ETFs that aim to achieve leverage greater than 200% are unlikely to reflect the actual leverage risk.
The letter also stated that the problem was that the funds did not track the actual securities or indices that they are supposed to follow. It enclosed a number of Daily Target 3x ETFs that would be subject to changes prior to approval.
A comparable pullback occurred recently when CoinShares dropped the planned launch of its XRP, Solana, and Litecoin ETFs. The move is a reflection of doubts around leveraged ETF plans.
The dumped lineups were ProShares Daily Target 3x Bitcoin, 3x Ether, 3x XRP, and 3x Solana. It also had 3x funds under stocks like Amazon, Coinbase, Circle, Google, MicroStrategy, Nvidia, Palantir, and Tesla.
Are 3x ETFs Destined for Failure?
Analysis from Bloomberg Intelligence highlights why regulators intervened. Research shows that 3x leverage across single-stock ETFs and smaller volatile companies carried a high chance of failure.
Bloomberg also identified 66 underlying stocks slated for future 3x products. Over the past five years, there were more than 350 trading sessions where at least one of those stocks moved 33% in one day.
The SEC recently highlighted the same dangers when it blocked multiple 3x and 5x ETF filings. The U.S. regulator called for significant changes or full withdrawal due to leverage and volatility risks.
Such a move is enough to mathematically wipe out a 3x leveraged ETF whether crypto or any other type. About 40 of the 66 stocks crossed that threshold at least once. Analysts say this proves the blowup risk was not hypothetical but statistically likely.
Balchunas Flags Likely Weekly ETF Failures
According to Eric Balchunas, the senior ETF analyst at Bloomberg, the SEC has avoided what would have been a disaster. He added that the Bloomberg team had detected 350 extreme volatility events of the assets in pending filings over the past five years.
Balchunas cautioned that 3x and 5x crypto ETFs would have created an average of one termination every week had they been approved. He added that issuers should be the most relieved, as the products would have burdened them with several regulatory issues.
Balchunas added that the data indicated that the 2x single stock ETFs are already displaying “plenty of extreme volatility,” which makes 3x and 5x crypto ETFs more risky.
Source: https://coingape.com/proshares-drops-3x-bitcoin-ethereum-xrp-etf-plans/
