What to know:
- Cboe SEC Approval is being sought for 3x Bitcoin and Ethereum ETFs alongside four other leveraged commodity funds.
- The proposed ETFs would target three times the daily performance of their underlying assets using futures contracts.
- The funds would operate as commodity pools under CFTC oversight and require specific SEC approval.
The Cboe SEC approval process has been initiated as Cboe BZX Exchange moves forward to obtain approval from the United States Securities and Exchange Commission to list a set of 3X-leveraged commodity ETFs based on Bitcoin and Ether.
Based on Cboe’s Friday filing of a proposed rule change, Cboe will introduce a total of six ETFs with exposure to Gold, Silver, Bitcoin, Ether, crude oil, and natural gas. The leveraged commodity ETFs will mostly comprise futures that have been traded on CME or COMEX.
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Cboe SEC Approval Request Covers Six Leveraged ETFs
The suggested portfolio comprises 3x Gold ETF, 3x Silver ETF, 3x Bitcoin ETF, 3x Ether ETF, 3x Crude Oil ETF, and 3x Natural Gas ETF.
The idea behind such funds is to deliver triple the daily performance of the benchmarks they track. Yet, leverage applies both ways, which implies that profits and losses are tripled when the asset drops in price.
Typically, such instruments are meant for trading purposes as opposed to long-term investment. Traders would have to constantly watch their portfolio because triple-leveraged daily returns can diverge quite significantly from the results of long-term asset ownership.
Cboe SEC Approval Requires Special Listing Process
The funds will be structured as commodity pools as opposed to investment companies registered under the Investment Company Act of 1940. This implies that the funds will also be subject to regulations by the Commodity Futures Trading Commission in view of the nature of the investments.
It should be noted that the Cboe funds do not meet the exchange’s regular listing criteria due to the leverage involved. Thus, the Cboe SEC approval application is required for the exchange to list the funds.
In addition, the exchange intends to file a Form S-1 registration statement pursuant to the Securities Act of 1933.
How the Leveraged ETFs Would Work
These changes would be made by the sponsor as and when required, depending on changes in market conditions and investor activity to ensure that the ETFs meet their investment objectives every day.
In the case of the two crypto-based ETFs, the ETFs will mainly use CME futures to get exposure to the underlying crypto asset instead of owning them.
This arrangement also provides another level of government regulation in comparison to exchange-traded products that are physically backed by commodities.
Cboe SEC Approval Could Expand Leveraged Crypto Exposure
Volatility Shares LLC will sponsor the proposed ETFs, which will be based on the VS Trust platform. The firm has prior experience providing leveraged crypto asset products, as it currently provides 2x Bitcoin and Ether strategy ETFs in the U.S.
However, the proposed 3x funds will build on the idea to provide three times daily returns of Bitcoin and Ether. If Cboe receives SEC approval, these products will offer a regulated way for U.S. investors to get leveraged exposure to the two biggest cryptos.
At the same time, the increased leverage implies an even greater risk level. The slightest change in the value of Bitcoin or Ether can lead to a substantial loss, making such a product more appropriate for investors familiar with leveraged securities.
The initiative is being introduced in the context of a further increase in the range of leveraged crypto securities. In Europe, there are already ETFs with 3x and -3x exposure to Bitcoin and Ether, while the American market mostly has lower-leverage products.
The next key step will be the consideration of the Cboe initiative by the SEC.
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