First Trust, a financial services company, has recently submitted an application for Bitcoin Exchange-traded funds (ETFs), specifically focusing on what's termed as Bitcoin Buffer ETFs, differing from the traditional spot ETFs. On December 14, the company filed Form N1-A with the U.S. Securities and Exchange Commission (SEC) to introduce a new Bitcoin-related product known as the First Trust Bitcoin Buffer ETF.
This new fund aims to capture positive price returns of the Grayscale Bitcoin Trust or other Exchange-Traded Products (ETPs) providing exposure to Bitcoin's performance, using options rather than directly linking to Bitcoin's performance as in spot ETFs. Unlike conventional spot Bitcoin ETFs, buffer ETFs employ options to target specific investment outcomes. These ETFs are crafted to safeguard investors against market downturns by setting limits or buffers on a stock's growth within a specified period. Referred to as "outcome-determined ETFs," they utilize options to ensure certain investment results, seeking to offer tailored downside protection in case of negative market returns.
Bloomberg ETF analyst James Seyffart discussed the attributes of the First Trust Bitcoin Buffer ETF on X (formerly Twitter), noting that such funds can shield against a percentage of downside losses while capping potential gains. Seyffart anticipated additional market participants entering the realm of Bitcoin exposure with unique and distinct strategies in the upcoming weeks. The First Trust's Bitcoin Buffer ETF is among the initial ETFs of its kind to file with the U.S. SEC. Presently, there are 139 buffer ETFs operating in the U.S. market, managing a total of $32.54 billion in assets, spanning various asset classes like stocks, commodities, and fixed income, as reported by ETF.com.
In recent years, the popularity of buffered ETFs has soared, evidenced by BlackRock, the world's largest ETF issuer, unveiling the first iShares Buffered ETF in June 2023. The iShares Large Cap Moderate Buffer ETF (IVVM) and iShares Large Cap Deep Buffer ETF, launched by BlackRock, have contributed approximately 5% and 2%, respectively, to IVVB's stock price since their inception, according to TradingView. However, despite the protective features, buffered ETFs do not offer absolute protection, as highlighted in First Trust's filings, stating the possibility of partial or total loss for investors. BlackRock's ETF expert Jay Jacobs also stresses the absence of guaranteed principal or non-principal protection, indicating the potential risk of losing the entire investment in buffered ETFs.
