First Trust Launches Bitcoin ETFs With 15% Loss Cap

First Trust Advisors has launched two Bitcoin strategy exchange-traded funds (ETFs) designed to provide investors with Bitcoin exposure while capping losses and earning yield. The move comes amid an outpouring of funds seeking to enhance Bitcoin’s appeal to traditional investors by offering tailored exposure to the cryptocurrency’s performance.

The FT Vest Bitcoin Strategy Floor15 ETF (BFAP) is designed to track Bitcoin’s performance up to a capped upside while limiting drawdown risk to approximately 15%. This ETF employs a target outcome strategy using short-term U.S. Treasury securities, cash, and options on the Bitcoin Reference Instrument. The fund does not directly invest in Bitcoin but uses derivatives to achieve its objectives.

“Over the past few years, investors have shown a remarkably strong appetite for bitcoin-linked ETFs, but the potential for sharp drawdowns has kept many on the sidelines,” said Ryan Issakainen, an ETF strategist at First Trust.

The FT Vest Bitcoin Strategy & Target Income ETF (DFII) is an actively managed fund aiming to offer partial Bitcoin exposure while generating a yield that beats short-dated US Treasurys by at least 15%. The DFII fund “will seek to take advantage of bitcoin’s high volatility to generate income by selling call options,” Issakainen said. The BFAP fund also uses financial derivatives to hedge downside risk.

Options are contracts granting the right to buy or sell — “call” or “put,” in trader parlance — an underlying asset at a certain price.

Both ETFs are managed and sub-advised by Vest Financial LLC, which specializes in outcome-focused investment solutions. Vest is known for its Target Outcome Investments and has a track record of managing buffer strategy funds. Karan Sood and Trevor Lack of Vest will serve as the portfolio managers for these funds, responsible for their day-to-day management.

The launch of these ETFs reflects First Trust’s commitment to providing innovative investment solutions that cater to the growing demand for Bitcoin-linked products. By offering ETFs with built-in risk management features, First Trust aims to attract investors who are interested in Bitcoin's potential upside but are cautious about its volatility. The introduction of these funds also underscores the increasing acceptance of digital assets in the mainstream investment landscape, as more financial institutions develop products to meet the evolving needs of investors.