Investors argue against novel ETF label in letters to US SEC

Market participants have voiced concerns over the U.S. Securities and Exchange Commission's proposal to label a wide range of exchange-traded funds (ETFs) as "novel ETFs," according to letters filed with the regulator by various industry stakeholders. The SEC initiated a broad review following attempts by some asset managers to launch funds based on prediction markets.

The regulator's extensive inquiries and the absence of a clear definition for "novel" could complicate the regulatory process, analysts and issuers have warned. Angela Brickl, COO and General Counsel of Rafferty Asset Management, argued that the term "Novel ETFs" cannot be effectively defined, as new asset classes will quickly fall outside the definition.

The SEC did not immediately respond to a request for comment. Many issuers and exchanges expressed a desire to avoid sweeping changes to the process that allows new ETFs to be launched automatically within 75 days of filing. If the SEC were to introduce a different process for "novel ETFs", it could potentially stifle growth in the $12 trillion U.S. ETF market.

Mike Khouw, a YieldMax strategist, criticized the proposal, stating that lumping together all products into this category would be overly broad. YieldMax, which frequently uses complex options strategies, is closely monitoring the SEC's approach. Nasdaq Senior Vice President Jeffrey Davis acknowledged that certain recent ETF filings have pushed the boundaries of current rules but urged the SEC to focus on structural characteristics affecting investor protection and market integrity rather than asset-class labels.

Only a few commenters addressed the treatment of ETFs tied to prediction markets, with Adjacent Markets' Douglas Crescenzi urging regulators to treat these products like other ETFs.