First Trust, a financial services provider, is the most recent organization to file a Bitcoin buffer exchange-traded fund (ETF) to the SEC, aiming to help investors mitigate risks when dealing with Bitcoin.
First Trust filed Form N1-A with the Securities and Exchange Commission (SEC) of the United States on December 14 to introduce the First Trust Bitcoin Buffer ETF, a new Bitcoin-linked product.
The prospectus states that the fund aims to accrue positive price returns, excluding expenses and fees, on the Grayscale Bitcoin Trust or another exchange-traded product (ETP) that exposes Bitcoin’s performance.
In contrast to spot Bitcoin ETFs, trading with Bitcoin’s performance, buffer ETFs pursue a predetermined investment outcome via options.
To safeguard investors against losses caused by market declines, buffer ETFs impose a limit or buffer on developing a single stock for a specified duration.
Buffer ETFs, alternatively referred to as “defined-outcome ETFs,” employ options to ensure a particular investment outcome and aim to furnish a specific degree of downside protection if markets yield negative returns.
James Seyffart, an ETF analyst at Bloomberg, commented on the First Trust Bitcoin Buffer ETF via X (formerly Twitter), stating that these funds protect a specified percentage of downside loss with a capped upside.
“In the coming weeks, other entrants to the market will likely offer Bitcoin exposure through distinctive, differentiated strategies,” Seyffart continued.
First Trust’s Bitcoin Buffer ETF is among the earliest ETFs to apply with the U.S. Securities and Exchange Commission. Based on data obtained from ETF.com, as of the moment of writing, the U.S. markets were home to 139 buffer ETFs, collectively managing $32.54 billion in assets. Asset segments containing buffer ETFs include fixed income, commodities, and equities.
In recent years, buffer ETFs have increased, and in June 2023, BlackRock, the largest ETF issuer globally, will introduce its inaugural iShares buffer ETFs.
According to data from TradingView, the iShares Large Cap Moderate Buffer ETF (IVVM) and the iShares Large Cap Deep Buffer ETF (IVVB) have gained approximately 5% and 2%, respectively, since their introduction.
Contrary to appearances, a buffer ETF does not provide absolute protection despite its capabilities. An investment in the Fund Fundies the risk of total or partial loss of capital.
“The fund possesses attributes that distinguish it from numerous conventional investment products and may not be appropriate for all investors,” First Fund’s filing explains.
BlackRock ETF expert Jay Jacobs wrote in “5 Questions on Buffer ETFs” that “there is no assurance that the fund will be successful in its endeavor to provide downside protection against underlying ETF losses.” Investors can still lose their entire investment because buffer ETFs do not offer principal or non-principal protection.
