Popular leveraged funds could burn retail investors and shock the wider financial system, Gary Gensler says

• Leveraged exchange-traded funds could pose a systemic threat to the financial system, SEC Chair Gary Gensler said.
• These funds, while perfectly legal, may not be wise buys for every investor, Gensler said.
• Yet these funds have been a big hit with retail investors.

Leveraged exchange-traded funds, much loved by retail investors, could pose a systemic threat to the financial system, Securities and Exchange Commission Chair Gary Gensler said in a statement this week.

He has directed SEC staff to study the universe of risky exchange-traded products and consider rules to protect individual investors.

"For more than a decade, SEC [officials] have been warning the public that these products, often called 'complex ETPs,' can pose risks to individual investors," Gensler said Monday.

"These ETPs, however, can pose risks even to sophisticated investors, and can potentially create system-wide risks by operating in unanticipated ways when markets experience volatility or stress conditions," he added.

Gensler was referring to certain funds that behave in novel ways - such as "inverse" ETFs that mimic the opposite of an asset's performance, or leveraged funds that multiply gains or losses. Fund provider GraniteShares even offers a triple-leveraged inverse Tesla ETF, gaining 3% for every 1% Tesla shares fall.

These funds, while perfectly legal, may not be wise buys for every investor, Gensler said.

Many complex ETFs are meant to be held for short durations or alongside other assets. Inverse ETFs, for example, will tend to lose value as the stock market grows in the long run.

Yet these funds have been a big hit with retail investors. On Monday, one of the most popular assets traded on Fidelity was the triple-leveraged ProShares UltraPro QQQ ETF, which mirrors three times the Nasdaq 100 index, according to Bloomberg.