The SEC's novel-ETF file now holds a four-year loss record

The Securities and Exchange Commission has a comment file open on what it calls 'novel ETFs,' and the filings at either end could hardly sit farther apart. At one extreme is a Volatility Shares Trust proposal from August for 32 funds tracking each NHL team; at the other, Defiance ETFs filed paperwork this month for leveraged single-stock products that would rebalance six times during the trading day instead of once at the close, according to the filing. The agency asks how products like these should be regulated and, harder, what should qualify as an ETF at all.

The second question is where the shelf-wide consequences sit, because a rule about how to regulate one product leaves the wrapper alone while a rule about what counts as one redraws the line every sponsor files against. That is why the Volatility Shares proposal and the Defiance filing are better read as boundary tests than as products chasing existing demand. ETF Express reported that the request for comment came amid a run of filings extreme enough to prompt it, and the range is genuine: one proposal turns a sports league into 32 tickers, while the other takes the single-stock ETF, already a churned corner of the listed-fund market, and resets it hourly. The agency did not limit the question to sports or to leverage, which makes the request broader than either filing and larger than both.

The taste argument is already on record, and it is the weaker one. Irene Bauer of Algo-Chain argued in an ETF Express opinion column that Jack Bogle must be 'rolling in his grave' at the idea, which drew the response that Bogle held a personal stake in the actively managed Vanguard Windsor Fund. That detail matters more than the column allows, because the objection from that quarter is not to active management or to novelty itself but to a fund whose return rests on nothing more than a price series. Bauer went further, arguing that an idea blurring the lines between investing, gambling and prediction markets deserves scrutiny when it arrives inside the ETF wrapper; that is fair, and still not the argument that settles anything.

What settles things is the submission that treats the question as empirical: Morningstar filed its response to the SEC's request before the Defiance news broke, arguing that 'certain Novel ETFs raise substantial investor protection concerns' and presenting data it says lets the Commission move beyond hypotheticals. Across 518 single-stock ETFs, the median cumulative loss over the four years ended July 2026 was 38 percent, while management fees collected more than $500 million over the same stretch. Nineteen percent of funds lost more than three-quarters of their value since inception, and only 18 percent outperformed the stock they were built to track. Leverage worsens each figure, with 24 percent of leveraged ETFs launched more than three years ago down more than 90 percent, because, in Morningstar's explanation, the more volatile the underlying exposure, the faster performance decays.

The 18 percent figure ought to worry the category more than the losses do, because it undercuts the pitch rather than the returns. Single-stock ETFs can be bought for access or for intraday trading rather than for outperformance, and one in five beating its own underlying is compatible with that purpose. Access that collects more than half a billion dollars in fees while the median holder is down 38 percent, however, is a hard line to bring to a fiduciary, and harder still at six resets a day.

The dollar-weighted cut is the one sponsors will have to answer: among 95 daily leveraged long ETFs, nearly half delivered returns below the very stocks and indexes they were designed to amplify, and investors paid more than $900 million in the process. Together those figures convert a debate about structure into a four-year record of outcomes, which is why one phrase in the letter carries more weight than any single number: the claim that the data permits the Commission to move beyond hypotheticals. Sponsors can contest the weighting or the window; the sample is the category itself. A review run on hypotheticals is a design conversation, and design conversations end in approvals with conditions attached. A review run on a loss record is a consumer-protection proceeding, and those end in rules. The agency has not said which it intends to conduct, but Morningstar has supplied the material for the second.

Order of events matters here: Morningstar's letter was filed before the Defiance paperwork became public, which means the agency reads the two in sequence, first a documented decay record on the products closest to what Defiance proposes and then a request to put the same exposure through six intraday resets. Hourly rebalancing takes the mechanism Morningstar blames for decay and runs it at higher frequency, serving an investor whose horizon is measured in hours. Of the two extremes in the file, the hourly product is the harder to defend and the likelier to sit while the comment period runs.

The 32-team proposal fails on practical grounds rather than moral ones. A fund tracking a single hockey franchise likely has little correlated inventory behind it, leaving a market maker with fewer ways to hedge a widening quote. That objection is a version of the broader argument about the launch calendar: the machine filing new products has outrun the desks that have to quote the baskets behind them, and market-making capacity, rather than the SEC's calendar, is the binding constraint on what trades. Here the file tests that argument against a definitional question instead of a listing decision.

The definitional half of the request reaches further than either filing, because every sponsor's paperwork depends on where the line lands. A narrower answer would touch products with no connection to hockey or to leverage, from single-stock funds to the reset conventions already printed in existing prospectuses. That is why the industry's comment letters are likely to be about the definition rather than the extremes; the extremes are the cheap part to concede.

The sponsors doing the stretching are not the giants: ETF Daily's records put Defiance at $3.9 billion in regulatory assets across four accounts and seven employees as of Sept. 19, a small book to be carrying a filing that asks the agency to reconsider what a daily reset means. The asymmetry cuts both ways: a large issuer can absorb a rejected filing and refile, while a seven-person firm has fewer places to put the effort. That suggests the boundary will keep being probed from the small end of the shelf, where being early is the advantage available.

The shelf has been churning for years: four years after AXS listed eight funds on Tesla and Nvidia, issuers have filed 2x products on drone makers and bitcoin miners, and closed them just as quickly. That pattern of filing, gathering and folding is why the fee line deserves as much attention as the loss line in Morningstar's letter: more than $500 million collected by the 518 funds whose median investor is down 38 percent is a business model that survives bad performance. Morningstar's own research has made a version of this point before, finding that investor shortfalls concentrate where volatility runs highest and that cheap funds do not fix behavior. Boundary pushes are not new here either; BlackRock's arrival at synthetic ETFs came after a decade spent calling swap-based funds opaque.

The likely product of the file is a test of whether a documented loss record can slow a filing calendar. If it can, sponsors will price the data into what they submit, and the sports proposal and the hourly filing become cheap experiments in a strategy already costed. If it cannot, the definition of an ETF becomes whatever clears registration, and the gatekeeping moves to platform due diligence and to the model portfolios that decide which funds get bought. Those two outcomes point at very different shelves, and the record now sitting with the agency points at the first.

The next move is procedural: whatever summary of comments the agency publishes, and however it disposes of the Volatility Shares proposal and the Defiance filing, will show which question it believes it asked. The hockey funds are the easier half of that docket and the less consequential one, but the hourly filing is where a four-year loss record becomes the yardstick and the answer to what counts as an ETF gets its first narrow test.