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In the last week, multiple ETF sponsors filed for first-of-their-kind ETFs based on event contracts tied to political outcomes. These funds would invest in swaps referencing binary event contracts—or directly in the contracts themselves—tied to which party controls the House and Senate in 2026, and which party wins the 2028 Presidential Election.
These novel filings raise several critical questions:
Liquidity, Valuation, and Market Manipulation
The underlying contract markets are relatively new, with liquidity varying based on the event and its imminence. This creates valuation concerns and potential market manipulation risks, as has been alleged on certain platforms.
Validity
While the CFTC Chair recently stated that event contracts are derivatives, the CFTC historically has not permitted election contracts outside narrow exceptions. In 2023, the CFTC prohibited one prediction market from listing "congressional control contracts." Additionally, multiple states are suing prediction markets, arguing that sports event contracts violate state gambling laws. These disputes create uncertainty about the underlying contracts' validity.
Total Loss Risk
The binary nature of these contracts means that if the outcome resolves to "no," the entire ETF's NAV will be wiped out—likely on a single day—creating significant operational challenges and concentrated investor impact.
Settlement Issues
Event contracts specify how outcomes are determined, but this process may not align with reality. Contracts pay out based on stated metrics, yet subsequent events may change the actual outcome. These ETFs are structured as evergreen funds that "reset" rather than liquidate after outcome events—a feature that has raised staff concerns previously.
Many questions remain unanswered, including whether SEC staff will raise significant issues and what investor demand will look like. Nonetheless, this likely represents just the opening bell for prediction market-based ETFs. They offer a distribution channel for investors wary of participating in prediction markets directly but comfortable with a registered fund wrapper. If successful, we expect sponsors to explore similar products covering GDP, geopolitical events, and even sports championships.
We acknowledge the contributions to this publication from our law clerk Stewart Atkins.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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