SEC’s novel ETF review draws early pushback over prediction markets

A little more than one week in, the SEC’s request for public feedback on novel exchange-traded funds — those that “invest in innovative asset classes or engage in novel investment strategies” — has drawn a small but largely skeptical set of responses.

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The regulator’s request for comments opened on June 30. It covers a range of ETF-related questions, including whether and how the products should be allowed to expand into cryptocurrencies and prediction markets akin to Kalshi and Polymarket. Responding to market changes, the SEC’s comment request aims to support fund innovation, especially as ETF assets have risen from $4 trillion in 2019 to more than $12 trillion by year-end 2025, according to the agency. 

The public has until the end of August to weigh in.

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Early commenters raise concerns about speculation, investor risk

While the comment period remains in early stages, the handful of responses received so far have generally expressed concern about expanding ETFs into areas like prediction markets.

“ETFs as an investment vehicle should not be allowed for such speculative events,” said Tim Thompson, a commenter responding through the SEC’s online form. Thompson also criticized sports betting commercials for “having a negative influence on fans and participants as the lure of ‘easy money’ invites unsportsmanlike actions.” 

“Please don’t also allow ETFs based on ‘event contracts’ as that will only exacerbate this activity,” he wrote.

JoAnn Dolan, another respondent, said, “Novel ETFs expose a broader number of investors to greater financial risk. The fundamentals of market investment have devolved enough. Do not pour fuel on the fire. We do not need to head any closer to a full-out investment casino.” 

Seeking public input regarding a major change

While some novel ETFs, like bitcoin or other crypto ETFs, already exist, the SEC is considering whether additional categories should be allowed to come to market, and how to regulate them. If allowed to launch, new categories of novel ETFs would be made available through traditional brokerage systems. Part of the resistance to prediction market ETFs, in particular, stems from the potential allowance of innovative products to become part of the ETF ecosystem. 

In February, Roundhill Investments filed to register six novel ETFs based on presidential and congressional election results. In May, the SEC stepped in as Chair Paul Atkins requested a pause, adding that the proposed ETFs raised “novel questions.” The SEC has also delayed action on proposals from Bitwise and GraniteShares involving prediction market exposure in ETFs. 

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Atkins then requested that the public weigh in late last month. “Innovation in exchange-traded funds depends on a consistent, transparent, and efficient regulatory framework,” he said in a press release. Atkins said the SEC hopes to hear how the ETF market can both grow and serve investors effectively.

“Public engagement is essential to answering key questions to make the next years of development a success,” said Brian Daly, director of the SEC Division of Investment Management, in the same statement.

Among the issues the SEC is seeking feedback on are whether novel ETFs should be subject to the Investment Company Act of 1940 and whether the current registration and review process is sufficient for increasingly complex ETF structures. Another key aspect concerns Rule 6c-11 and potential amendments to it that account for risks around liquidity, valuation and leverage.

The debate extends beyond the SEC comments section

Skepticism about prediction market ETFs isn’t limited to the SEC comment file. In an op-ed, Morningstar’s Jeffrey Ptak argued against allowing prediction markets anywhere near ETFs, calling them, among other things, a “bad bet.”

“The concept seems very misguided, a solution in search of a problem,” Ptak told Financial Planning in an email. “There are, of course, ETFs that allow investors to speculate with leverage. Those strategies also seem ill-advised to me, but a crucial distinction is that they ultimately involve a reference security — a basket of stocks in an index, a single stock, etc. — that has some fundamental value.”

Prediction market ETFs, he continued, “would reference events having no economic value whatsoever and be completely zero-sum. Perhaps one could argue there’s information to be gleaned from the odds-making that wider participation (via ETFs) would facilitate and enhance. But at what cost? Do we really want to further financialize wagering? I would think not.” 

Not all feedback has been opposed to expanding ETF structures. In an online comment to the SEC, Neil P. Osnato, founder of risk consultancy firm Persistence Analytics Group, said, “The goal should not be to prevent new ETF structures from reaching the market. The goal should be to ensure that, when they do, investors can understand and verify the exposure they are buying. Simple principle: Trust the wrapper. Verify the exposure.”