Statement on Complex Exchange-Traded Products
Oct. 4, 2021
This week, I directed staff of the Securities and Exchange Commission to study the potential risks of complex financial products that are listed and traded on exchanges. I also asked them to present recommendations for the Commission’s consideration on potential rulemaking proposals to address those risks, as part of a broader look at exchange-traded products (“ETPs”).
Some ETPs use strategies and structures that are more complex than typical stocks and bonds. For example, there are products such as “leveraged ETFs” and “inverse ETFs.”  For more than a decade, SEC staff and a number of Commissioners have been warning the public that these products, often called “complex ETPs,” can pose risks to individual investors. In 2009, the SEC’s Office of Investor Education and Advocacy highlighted the risks that one type of exchange-traded fund can pose to investors who buy and hold them for longer than one day. In 2015, the Commission sought public comment on a broad range of issues relating to ETPs, including listing standards and broker-dealer sales practices. Even more recently, the Commission settled charges against financial professionals who recommended that retail customers buy and hold ETPs designed for very short-term trading strategies.
Last year, then-SEC Chairman Jay Clayton and several SEC Division directors expressed their concern that certain ETPs “may present investor protection issues — particularly for retail investors who may not fully appreciate the particular characteristics or risks of such investments.” 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.
Though the listing and trading of these products, including the listing and trading of the two ETPs that the Commission voted to approve last Friday, can be consistent with the Exchange Act, that doesn’t mean the products are right for every investor. I encourage all investors to consider these risks carefully before investing in these products. I believe that potential rulemaking could strengthen the investor protections around these products.
 For a general discussion of the different types of exchange-traded products, their features, and how they function, see Request for Comment on Exchange-Traded Products, Exchange Act Release No. 75165 (Jun. 12, 2015) (“2015 ETP RFC”) at 6-15, available at https://www.sec.gov/rules/other/2015/34-75165.pdf.
 See Leveraged and Inverse ETFs: Specialized Products with Extra Risks for Buy-and-Hold Investors, Office of Investor Education and Advocacy (Aug. 1, 2009), available at https://www.sec.gov/investor/pubs/leveragedetfs-alert.htm. This statement, like all staff statements, has no legal force or effect; it does not alter or amend applicable law, and it creates no new or additional obligations for any person. Exchange-traded funds that seek to provide the multiple of a performance of a benchmark across a single day are commonly referred to as “leveraged ETFs,” while funds that seek to provide the opposite performance of a benchmark are commonly referred to as “inverse ETFs.”
 See 2015 ETP RFC.
 SEC Charges Investment Advisory Firms and Broker-Dealers in Connection with Sales of Complex Exchange-Traded Products (Nov. 13, 2020), available at https://www.sec.gov/news/press-release/2020-282. See also Statement on Recent Enforcement Matters Involving “VIX-Related” and Other Complex Exchange Traded Products (ETPs) from the SEC Office of Compliance Inspections and Examinations (Nov. 16, 2020), available at https://www.sec.gov/news/public-statement/ocie-vix-matters-2020-11-16.
 Joint Statement Regarding Complex Financial Products and Retail Investors, from Chairman Jay Clayton; Dalia Blass, Director, Division of Investment Management; William Hinman, Director, Division of Corporation Finance; and Brett Redfearn, Director, Division of Trading and Markets (Oct. 28, 2020), available at https://www.sec.gov/news/public-statement/clayton-blass-hinman-redfearn-complex-financial-products-2020-10-28. As part of the study I have requested, the staff will continue to consider comments received in response to this statement.
 For example, the SEC’s Asset Management Advisory Committee noted that while “ETPs generally performed as designed” during volatility associated with COVID-19, “[c]ertain ETPs, particularly those offering inverse or leveraged exposures, experienced conditions that industry participants might have found hard to predict, such as triggering provisions that resulted in product liquidation.” The Committee made six recommendations to the SEC and FINRA designed to improve the ETP ecosystem. Preliminary Recommendations of ETP Panel Regarding COVID-19 Volatility: Exchange-Traded Products, Asset Management Advisory Committee (Sept. 16, 2020), available at https://www.sec.gov/files/prelim-recommendations-to-amac-on-etps.pdf. Additionally, during the February 5, 2018, market event known as “Volmageddon,” the VIX futures market experienced a rapid increase in price and corresponding increase in demand. During this period, several VIX-related ETPs that held VIX futures attempted to execute their daily rebalance activity; due to their size, the Investors in many of these ETPs suffered significant losses. See The Day The VIX Doubled: Tales of “Volmageddon,” Luke Kawa, Bloomberg (Feb. 6, 2019), available at https://www.bloomberg.com/news/articles/2019-02-06/the-day-the-vix-doubled-tales-of-volmageddon.
 Order Setting Aside Action by Delegated Authority and Approving a Proposed Rule Change, as Modified by Amendment Nos. 2 and 4, to List and Trade Shares of the 2x Long VIX Futures ETF Under BZX Rule 14.11(f)(4) (Trust Issued Receipts), Release No. 34-93299 (October 1, 2021); Order Setting Aside Action by Delegated Authority and Approving a Proposed Rule Change, as Modified by Amendment Nos. 1 and 3, to List and Trade Shares of the -1x Short VIX Futures ETF Under BZX Rule 14.11(f)(4) (Trust Issued Receipts), Release No. 34-93230 (October 1, 2021).