First Trust Files for Bitcoin Buffer ETF; Buffer ETFs Not Immune to Losses
Summary:
First Trust has filed a form with the United States Securities and Exchange Commission (SEC) to initiate a Bitcoin Buffer ETF. Unlike spot ETFs, a buffer ETF uses options to secure a predefined investment outcome and limit a stock's growth within a defined period. As per ETF.com, there are currently 139 buffer ETFs trading on U.S. markets with assets worth $32.54 billion. Regardless, buffer ETFs cannot ensure full protection against financial loss, and investors might still lose all their investment capital.
First Trust, a financial services corporation, has recently applied for a Bitcoin (BTC) exchange-traded fund (ETF), specifically, a buffer ETF rather than a traditional spot ETF. On December 14, the firm lodged a Form N1-A with the U.S. Securities and Exchange Commission (SEC) to initiate a new Bitcoin-associated product dubbed the First Trust Bitcoin Buffer ETF. As outlined in the prospectus, this fund aims to profit from the positive price gains, minus fees and expenses, of the Grayscale Bitcoin Trust or a different exchange-traded product (ETP) that offers exposure to Bitcoin's performance.
Instead of a Bitcoin spot ETF that correlates with Bitcoin’s performance, a buffer ETF uses options to achieve a predefined investment result. A buffer ETF helps safeguard investors from the financial impact of a market tumble by instituting a constraint, or a cap on a stock’s expansion, during a specified timeframe. Known alternatively as "defined-outcome ETFs", they deploy options to assure an investment yield and aim to deliver a specific level of shelter from negative returns if markets decline.
James Seyffart, an ETF analyst at Bloomberg, remarked on the First Trust Bitcoin Buffer ETF via X (formerly known as Twitter). He pointed out that these kinds of funds safeguard against a fixed percentage of downside loss while placing a ceiling on the upside. Seyffart predicts that other innovative strategies providing Bitcoin exposure will emerge in the following weeks.
The Bitcoin Buffer ETF from First Trust is among the first such ETF filings with the U.S. SEC. According to ETF.com data, currently, 139 buffer ETFs are traded in U.S. markets with total assets under management standing at $32.54 billion. Buffer ETFs span asset classes such as equity, commodities, and fixed income.
Buffer ETFs have been gaining popularity in the recent past, with the biggest global ETF issuer, BlackRock, launching its inaugural iShares buffer ETFs in June 2023. The freshly released products, iShares Large Cap Moderate Buffer ETF (IVVM) and iShares Large Cap Deep Buffer ETF (IVVB), have both increased approximately 5% and 2% since their release, as per TradingView data.
Despite their strengths, a buffer ETF doesn't ensure absolute financial safety. First Fund's completed filing notes that investing in the fund could lead to losing some or all of your money because the product's features differ from many standard investment offerings, and it may not be suitable for all investors. BlackRock's ETF authority, Jay Jacobs, stated in his research, "5 Questions on Buffer ETFs" that there's no guarantee the buffer ETF will succeed in protecting investors from losses tied to underlying ETFs. In addition, the buffer ETF won’t safeguard the principal or non-principal capitals, meaning there is a potential for losing the complete investment.
Published At
12/15/2023 2:25:45 PM
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