This season appears to be one for cryptocurrency exchange-traded funds (ETFs) as multiple traditional finance companies seek regulatory approval to introduce more to the market.
First Trust is the latest asset management firm that wants to create another Bitcoin ETF. However, the company is not looking to launch a spot product like others but a buffer fund.
First Trust to Launch Buffer Bitcoin ETF
According to a December 14 Form N1-A filing with the United States Securities and Exchange Commission (SEC), First Trust has applied to launch the First Trust Bitcoin Buffer ETF to help investors protect themselves against the risk of downside loss while staying exposed to bitcoin’s (BTC) performance.
While spot Bitcoin ETFs give direct exposure to BTC’s price movement, buffer ETFs use options to provide a targeted level of protection when the market experiences negative returns. These funds are also known as defined-outcome ETFs, and they limit investor losses by providing a buffer in exchange for a cap on how much they can profit on market gains.
The First Trust Bitcoin Buffer ETF is designed to participate in the positive price returns of the Grayscale Bitcoin Trust or another exchange-traded product (ETP) that seeks to provide exposure to BTC’s performance and also serves as a buffer against the first 30% of the asset’s loss over a specified period.
“The cap and buffer will be further reduced by any brokerage commissions, trading fees, taxes, and extraordinary expenses not included in the Fund’s management fee. At the end of the Target Outcome Period, the Fund will reset for a new Target Outcome Period tied to the Underlying ETP and buffer, but the cap may change based on market rates as of the start of the new Target Outcome Period,” First Trust stated in the prospectus.
No Guaranteed Protection
While the buffer ETF seeks to achieve specified results, there is no guarantee that investors are totally protected. First Trust noted that investors may lose some or all of their money if they invest in the new fund.
The latest application comes as several asset management companies are vying to launch the first spot Bitcoin ETF in the United States. The crypto community anticipates the SEC’s decision on the applications by January.
Meanwhile, buffer ETFs have been around since 2018. Since then, they have become a significant part of the ETF market, attracting over $27 billion in assets, per a report by multinational financial services company Charles Schwab.
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