Financial services company First Trust is the latest company to file for a bitcoin (btc) exchange-traded fund (ETF), but not a spot ETF.
On December 14, First Trust sent a Form N1-A filing with the United States Securities and Exchange Commission (SEC) to launch a new bitcoin-linked product called First Trust bitcoin Buffer ETF.
According to the prospectus, the fund is designed to participate in the positive price returns, before fees and expenses, of the Grayscale bitcoin Trust or another exchange-traded product (ETP) that provides exposure to the performance of bitcoin.
Unlike a spot bitcoin ETF, which is tied to the performance of bitcoin, a reserve ETF uses options to achieve a defined investment outcome.
A reserve ETF is designed to protect investors from market decline losses by placing a reserve or limit on the growth of a stock over a defined period. Also known as “defined outcome ETFs,” reserve ETFs use options to guarantee an investment outcome and seek to provide a specific level of downside protection if markets experience negative returns.
Bloomberg ETF analyst James Seyffart took to X (formerly Twitter) to comment on the First Trust bitcoin Buffer ETF, stating that these types of funds protect against a set percentage of downside losses with an upside cap.
“Hopefully we will see other players in the space with unique and differentiated strategies that offer exposure to bitcoin in the coming weeks,” Seyffart added.
First Trust has just applied for a bitcoin?src=hash&ref_src=twsrc%5Etfw”>#bitcoin Buffer ETF. These types of funds protect against a certain percentage of downside losses with an upside limit. Expect to see other players in the space with unique differentiated strategies offering exposure to bitcoin in the coming weeks. h/t @VildanaHajric pic.twitter.com/1qiWF53dM0
-James Seyffart (@JSeyff) December 14, 2023
First Trust's bitcoin Buffer ETF is one of the first ETFs filed with the US SEC. According to data from ETF.com, at the time of writing there are 139 buffer ETFs trading in US markets, with total assets under management amounting to 32,540 million dollars. Reserve ETFs can be found in asset classes such as stocks, commodities, and fixed income.
Reserve ETFs have exploded in recent years; the world's largest ETF issuer, BlackRock, debuting its first iShares Buffer ETFs in June 2023. The new products, the iShares Large Cap Moderate Buffer ETF (IVVM) and the iShares Large Cap Deep Buffer ETF (IVVB), have added about 5% and 2% since their launch, respectively, according to data from TradingView.
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Despite its capabilities, a buffer ETF still does not guarantee complete protection, as it might seem. “You may lose some or all of your money by investing in the Fund. The fund has different characteristics than many other typical investment products and may not be suitable for all investors,” First Fund's presentation notes.
“There can be no guarantee that the fund will be successful in its strategy of providing protection against the ETFs' underlying losses,” BlackRock ETF expert Jay Jacobs wrote in “Five Questions About Reserve ETFs.” A reserve ETF also does not provide principal or non-principal protection, meaning an investor can still lose the entire investment.
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