US SEC review delays first prediction-market ETFs

By Suzanne McGee

PROVIDENCE, Rhode Island, May 4 (Reuters) – More than two dozen exchange-traded funds tied to elections, recessions, tech layoffs and other real-world events are still awaiting U.S. regulatory clearance, as issuers race to package the booming prediction-market business into a product retail investors can trade as easily as a stock.

Roundhill Investments, GraniteShares and Bitwise filed in February with the Securities and Exchange Commission to launch products seeking to capitalize on booming interest in prediction markets.

The launches, originally expected this week, have been pushed back as the SEC seeks more information from issuers about product mechanics and disclosures, two people familiar with the matter said. The delay is likely temporary, according to these people, who asked not to be identified discussing private regulatory matters.

Under SEC rules, ETFs are automatically effective 75 days after filing, unless the SEC steps in. That 75-day holding period was due to expire this week. 

A spokesperson for the SEC, which has taken a more relaxed stance toward clearing the way for novel ETFs under the Trump administration, declined to comment, as did Roundhill CEO Dave Mazza and a spokeswoman for GraniteShares.

“It’s an area that is maturing rapidly and regulations and oversight are maturing rapidly as well,” said Matt Hougan, chief investment officer at Bitwise, noting other innovative products such as bitcoin ETFs went through lengthy reviews but were ultimately launched successfully. He would not comment for this article on the regulatory discussions or expected approval timeline.

MERGING ETF AND PREDICTION MARKET BOOMS

Prediction market betting has boomed since pioneers Kalshi and Polymarket accurately forecast Donald Trump would win the 2024 presidential election and Trump’s Commodity Futures Trading Commission said it would regulate the market rather than ban it. Interactive Brokers, Robinhood and others have also entered the market, which they expect to get a further boost from this year’s midterm elections.

But remarkably well-timed wagers on the Iran war and other military events have drawn scrutiny from lawmakers who say prediction markets create incentives to foment violence, as well as drawing insider trading scrutiny from federal prosecutors.

Still, ETF providers seek ways to transform every hot trend into new products, said Dave Nadig, director of research at ETF Trends. 

“Everyone in the ETF market is looking for something that’s new or different they can bring to the table, and this is just the latest example,” said Nadig. He added that the ETF products could be attractive to retail investors because ETFs are easier to trade than the underlying event contracts. 

RISK WARNINGS

Combined, the three issuers have filed for more than two dozen prediction-market-linked ETFs, with the first focusing on this year’s Senate and House midterm races and the 2028 presidential election, according to SEC data. Others focus on events such as tech industry layoffs and whether the U.S. will enter a recession this year. Bitwise filed on Friday for an ETF that would allow users to bet on the price of crude oil topping $120 a barrel this year.

Precise features differ, but the ETFs generally use derivatives to track the odds of binary “yes/no” outcomes in underlying contracts traded on CFTC-regulated exchanges, such as Kalshi. Those contracts — and many users can buy hundreds of contracts — pay out $1 if an event takes place, but nothing if it doesn’t. Similar to the way other products like options and futures track an asset over a predetermined time frame, these ETFs offer users the chance to roll their positions into a similar outcome for the next election, calendar year or other period.

The SEC filings are full of warnings about the potential impact of new regulations, litigation and what Roundhill describes as “heightened risks” related to insider trading in event contracts.

Investors also run the risk of “catastrophic” losses, it warns.

And even if an outcome, such as the number of tech-industry layoffs or the result of an election, is disputed or later revised, investor losses are final. In that scenario, investors will have “no recourse,” Roundhill warns.

Some market participants say that mainstream investors increasingly find prediction markets useful.

Edward Ridgely, co-founder of Strand, a trading platform that consolidates prediction market order books, said some clients use event-driven contracts to hedge their exposure to everything from bonds to crude oil.

“The prospect of adding prediction-market ETFs to the mix is tantalizing,” he said.

(Reporting by Suzanne McGee in Providence, Rhode Island; additional reporting by Sruthi Shankar in Bengaluru; editing by Michelle Price and Ethan Smith)