First Trust, a notable asset management firm, has submitted a proposal to the U.S. Securities and Exchange Commission (SEC) for a novel Bitcoin-linked product, the First Trust Bitcoin Buffer ETF. This move marks the company’s latest venture into the evolving world of Bitcoin exchange-traded funds (ETFs).
This proposal, lodged on Dec. 14, aims to establish a buffer ETF linked to the Grayscale Bitcoin Trust or another similar exchange-traded product (ETP) that tracks Bitcoin’s performance. Distinct from a conventional spot Bitcoin ETF, a buffer ETF employs options strategies to achieve a predetermined investment outcome, offering a mix of downside protection and growth potential.
The essence of a buffer ETF lies in its protective mechanism. It sets a buffer to shield investors from market downturns while also capping potential stock growth over a specific time frame. These “defined-outcome ETFs” utilize options to secure an investment outcome and aim to provide a level of downside safety during market downturns.
Bloomberg’s ETF analyst James Seyffart commented on the First Trust Bitcoin Buffer ETF, noting that such funds are designed to shield against a fixed percentage of losses while limiting upside gains.
Seyffart anticipates more innovative strategies in the Bitcoin ETF sphere in the coming weeks, hinting at the growing diversity in Bitcoin exposure methods.
Currently, the U.S. market hosts 139 buffer ETFs across various asset classes, including equity, commodities, and fixed income, collectively managing assets worth $32.54 billion.
BlackRock, the world’s largest ETF issuer, introduced its first iShares buffer ETFs in June 2023, namely the iShares Large Cap Moderate Buffer ETF (IVVM) and the iShares Large Cap Deep Buffer ETF (IVVB). Since their launch, these ETFs have shown modest growth, according to TradingView data.
However, it’s crucial to note that a buffer ETF doesn’t provide absolute security. First Trust’s filing cautions investors that the fund may not fully shield against losses in the underlying ETF. Jay Jacobs, a BlackRock ETF expert, in his piece “5 Questions on Buffer ETFs,” emphasizes that there’s no guarantee of success in downside protection strategies. Additionally, these ETFs do not assure principal protection, meaning the entire investment might still be at risk.