A surge in applications for ETFs linked to prediction markets is raising new regulatory concerns, with the Securities and Exchange Commission (SEC) yet to provide any clear answers.
In a recent publication by Cornerstone Research, experts Laurent Samuel, Gary Schmirer, Ross Askanazi, and Jerrod Attias delve into the surge of applications for prediction market ETFs and the potential regulatory challenges. While the SEC hasn’t given the green light to any prediction market-related ETFs, the trend started when Roundhill Investments filed plans for funds holding political derivatives traded on yes/no exchanges.
Following Roundhill, two competitors also filed for election outcome-based ETFs. However, the SEC paused the approval process citing the need for further examination of these “novel” fund structures. The Cornerstone experts highlight the intersection of regulatory oversight between the SEC and the Commodity Futures Trading Commission (CFTC) in evaluating prediction market ETFs.
“Several state gaming regulators have asserted jurisdiction over event contracts, and the question of whether CFTC regulation of DCMs preempts state gaming law remains in active litigation,” observe the Cornerstone experts.
The legal battles at the state level involving prediction market operators may impact the approval process for ETFs holding political derivatives.
Growing Complexity in Prediction Market ETF Filings
Since Roundhill’s initial filing, Bitwise and GraniteShares have also submitted applications for election outcome-based ETFs with nuanced features. These proposals extend beyond politics to cover economic outcomes related to technology sector layoffs, recession risk, and cryptocurrency and oil market prices.
Another issuer has introduced ETFs focusing on climate, economic, and policy decision event contracts. Despite the increasing number of filings, the SEC has yet to approve any of these products.
Recently, three issuers, including Roundhill, filed plans for 128 ETFs, including leveraged funds, tied to NHL team performances. The future of these NHL-based ETFs is uncertain, but their classification as futures-based products rather than event contract holdings may increase their chances of approval by the SEC.
Potential Risks and Challenges to Consider
The SEC’s public comment period on novel ETFs is closing soon. However, the Cornerstone experts emphasize that this does not guarantee further regulatory action.
“The request for comment is not connected to a proposed rule, and the SEC has not indicated whether it will act on the pending filings before or after any resulting proposal,” they wrote. “Separately, the CFTC’s June 2026 rulemaking on prediction markets and the pending state-law preemption litigation will continue to shape which event contracts remain available to serve as reference assets.”
The authors highlight various risks associated with prediction markets within ETFs, including concentration and liquidity risks, potential misuse for insider trading, and the lack of established tax treatment by the IRS for event contracts.