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What are Buffer ETFs? First Trust Files Application for BTC Fund That Protects Against Losses

Last Updated December 15, 2023 1:34 PM
James Morales
Last Updated December 15, 2023 1:34 PM

Key Takeaways

  • First Trust has applied to launch a buffer ETF that tracks the price of Bitcoin.
  • Buffered ETFs are designed to help investors manage risk by limiting their potential losses.
  • However, compared to the assets they hold, buffered funds also limit the returns available to investors.

Barring any last-minute plot twists, the Securities and Exchange Commission (SEC) looks primed to approve one or more spot Bitcoin Exchange Traded Funds (ETFs) in the new year. 

Anticipating the next stage of American crypto investing, First Trust has filed an SEC application for a Bitcoin buffer ETF. – a type of fund designed to limit investor’s exposure to risk. 

First Trust Looks to Branch Out Into Bitcoin

First Trust is known for its variety of unique investment products. Rather than attempt to compete with the low fees and advanced technology offered by larger rivals, the firm has developed a reputation for originality. The businesses has, for example, pioneered new types of smart beta funds and thematic ETFs. 

First Trust’s latest SEC filing outlines its plan to launch a new type of Bitcoin fund. This so-called buffer ETF would limit the potential loss to investors over a defined period. 

Also known as target outcome funds, buffer ETFs use various hedging strategies to mitigate the effects of market volatility. Although popular with investors who want to avoid major losses, this strategy’s flipside arises during periods of growth, when investment returns lag behind the underlying assets buffer funds track.

According to First Trust’s SEC filing, the proposed fund will gain exposure to Bitcoin through the Grayscale Bitcoin Trust or another exchange-traded product tied to BTC. Should the SEC end its longstanding resistance to spot Bitcoin ETFs, First Trust could soon have multiple options to choose from.

How Do Buffered ETFs Work?

In ETF jargon, the “upside cap,” or simply the “cap” refers to the maximum percentage of returns during a defined period. Meanwhile, the “buffer” represents the maximum losses that can be incurred within the agreed protection range.  Issuers typically set an ETF’s cap and buffer for a defined period. However, they are able to adjust them if needed after the agreed length of time. 

Periods of higher market volatility tend to lead to higher upside caps, while lower volatility will offer lower caps.

Although they are designed to help investors manage risk, most buffered ETFs have a limited range. For example, First Trust’s planned fund  intends to buffer investors from losses of up to 30%. However, the buffer won’t apply if the price of BTC falls more than 30% within the defined period.

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