The U.S. ETF industry is pushing back against the Securities and Exchange Commission's (SEC) broad review of "novel ETFs." ETF professionals argue that an overly wide definition could slow product launches and undermine one of the market's biggest advantages, even as increasingly complex funds test the boundaries of the traditional ETF structure, according to a Reuters report.
The SEC opened the review in June after delaying a wave of proposed prediction-market ETFs. Its request covers ETFs that invest in innovative asset classes or use unconventional strategies and asks whether existing rules adequately address investor protection, market integrity, and the registration process.
More than 20 industry participants submitted comments around the Aug. 31 deadline, with the docket showing submissions from Charles Schwab, Franklin Templeton, Jane Street, Cboe Global Markets, Grayscale Investments, 21Shares, Andreessen Horowitz, and Kalshi.
From Leveraged ETFs to Prediction Markets
The debate matters because the U.S. ETF market has ballooned from $4 trillion in assets in 2019 to more than $12 trillion at the end of 2025. And many of the products that could be subject to a "novel" designation are already part of the rapidly expanding ETF universe.
Direxion, for example, has built a major business around leveraged and inverse ETFs, while YieldMax has expanded aggressively into option-income and derivatives-based strategies. Its YieldMax Universe Fund of Option Income ETFs (YMAX) invests in a portfolio of other YieldMax option-income ETFs and illustrates how far ETF structures have moved beyond traditional stock and bond portfolios.
The SEC's review also comes as issuers push leverage further. Regulators are now examining products with 3x, 4x, and 5x exposure, as well as funds built around single stocks, total-return swaps, and other derivatives. One SEC comment warned that products designed primarily for short-term leveraged speculation should be assessed differently from ETFs that support capital formation.
Prediction-market ETFs represent an even bigger departure. Roundhill has developed a suite of proposed ETFs that would give investors exposure to election outcomes through event contracts listed on Kalshi. The funds would trade like conventional ETFs but could lose all of their value substantially if the underlying political outcome goes the other way.
Roundhill, Bitwise, and GraniteShares previously filed more than two dozen prediction-market ETFs, prompting the SEC to request additional information before allowing the products to proceed.
SEC Faces an ETF Innovation Dilemma
Industry groups broadly want the SEC to regulate based on a product's risks rather than on whether its underlying asset class is considered "novel." Nasdaq has similarly argued that regulators should focus on structural characteristics that affect investor protection and market integrity. The SEC itself says its goal is to facilitate ETF innovation while protecting investors and maintaining fair and orderly markets.
The outcome could shape the next generation of ETFs, from leveraged single-stock products and options strategies to prediction-market funds. For issuers, the concern is that a new approval hurdle designed for genuinely untested products could end up applying to strategies that have already become mainstream.
