By Gordon Gottsegen
Several asset managers have filed for exchange-traded funds that offer direct exposure to election-related prediction markets
The proposed ETFs are all tied to prediction markets related to U.S. elections.
If you invest with fintech platforms like Webull (BULL) or Robinhood Markets (HOOD), you may already be seeing prediction markets for things like college basketball games or the Winter Olympics. Now it may not be long before every brokerage account has the ability to bet on these markets.
This week, a handful of asset managers - including Bitwise, Roundhill Investments and GraniteShares - filed paperwork with the Securities and Exchange Commission to begin offering exchange-traded funds that have direct exposure to prediction markets.
So far, all the ETF filings are tied to U.S. elections, with products like the PredictionShares Democratic President Wins 2028 Election ETF, the Roundhill Republican President ETF and the GraniteShares Democratic Senate ETF. While the individual details of these ETFs differ, the funds generally invest in a specific prediction market tied to an election outcome. ETF prices move in tandem with the prediction-market odds and increase substantially if the predicted outcome happens - and if it doesn't happen, &#34;the fund will lose substantially all of its value,&#34; according to the filing.
Beyond the inherent risk of investing in an ETF that could go to zero, these funds may have other unforeseen consequences. Namely, they may open the door for more institutional investors, like hedge funds and high-frequency traders, to start trading these prediction markets more actively. That could change the prediction-market space as we know it.
&#34;If we look at what's happened to the ETF industry in the last few years, once the category opens up, we just have this deluge of products,&#34; Aniket Ullal, the head of ETF research and analytics at CFRA Research, told MarketWatch. &#34;I would be very surprised if it stops with this.&#34;
Why this is happening now
While prediction markets in one form or another have been around for a few decades, the current iteration of event contracts - like those offered by Kalshi and Polymarket - is relatively new. It wasn't that long ago that Kalshi sued the Commodity Futures Trading Commission in order to offer its election contracts, or that the FBI raided the home of Polymarket founder Shayne Coplan.
But since then, prediction markets have taken off. Kalshi and Polymarket each see around $2 billion in weekly volume, according to data on Dune. And at the same time, the current CFTC administration has become a lot friendlier to prediction-market companies.
Also read: Polymarket authorized for U.S. return just days after Donald Trump Jr. joins as adviser
&#34;One of the reasons you're seeing ETF filings now and you didn't see them before is the regulatory setting is stronger, the liquidity is stronger and now they can start to matter in more traditional financial frameworks in a way that they couldn't beforehand,&#34; Matthew Hougan told MarketWatch. Hougan is the chief investment officer at Bitwise, one of the companies that have filed to offer prediction-market ETFs.
More liquidity and clearer regulation have helped make prediction markets more appealing to institutions - that includes the ETF providers, as well as the institutions that will be buying and selling those products. To draw a parallel, consider how the onset of spot bitcoin ETFs coincided with institutional participation in the cryptocurrency market.
&#34;Institutions couldn't really come into crypto until there was more regulatory clarity and there was more liquidity. Once those two things aligned and you got bitcoin ETFs and CME futures on bitcoin, and then you had confidence that crypto wasn't going to be regulated out of existence, you saw tens of billions of dollars flow into those markets.&#34; Hougan said. &#34;I think the same thing is going on here.&#34;
That flow of institutional money into bitcoin ETFs and other derivative products changed the crypto market.
&#34;If you go back and plot the price of bitcoin, once it became clear that spot bitcoin ETFs would get approved, there was a clear rally in the underlying bitcoin asset class,&#34; Ullal said.
Prior to that, the regulatory framework for crypto wasn't clear and it wasn't easily accessible by institutional investors, he said. But as that changed, more institutions felt comfortable trading crypto.
So the question is, are ETFs a sign that institutions will start pouring into prediction markets?
Prediction markets could become a playground for institutional traders
It's important for investors to understand the purpose that prediction markets serve in their portfolio. Are they for investing or trading?
The binary outcome of prediction markets and the chance that your investment could go to zero imply that these vehicles are more for trading. If that's the case, succeeding in prediction markets is all about finding an edge.
&#34;We're in the early days of prediction market, so there's probably more alpha than there will be [in the future],&#34; Hougan said, referring to a trader's ability to generate returns by beating the market.
Hougan brought up the example of a TikTok content creator who flew to Levi's Stadium in Santa Clara, Calif., before the Super Bowl in order to listen in on rehearsals for the national anthem. He then used prediction markets to bet on how long the anthem would take at the event. According to his video, his prediction was correct and he made money.
While the TikToker was rewarded for his creativity, Hougan imagined a scenario where 200 people do that at the next Super Bowl, and the odds in the betting market already reflect that &#34;insider&#34; knowledge.
That's the sort of future that could be in store for prediction markets once more institutional traders start participating. Eventually, it will be teams of quants at billion-dollar hedge funds and high-frequency trading firms that are competing with those creative TikTokers over who can gain an edge in specific prediction markets.
&#34;As they get more institutional, edge is harder and harder to find,&#34; Hougan told MarketWatch. &#34;That's true in all markets. Look how hard it is for even active portfolio managers who have access to the latest technology and teams of analysts to outperform the S&amp;P 500 SPX.&#34;
With prediction markets, it will be the retail investors who have a harder time coming out ahead, which can be dangerous in a market where your entire investment can go to zero. Hougan said that as these markets get more liquid, they would be expected to more accurately predict outcomes.
That may be good news for the utility of prediction markets for forecasting future events - recently, the Federal Reserve released a report studying the accuracy of Kalshi in predicting economic data - but for the 20-somethings who now have to compete with teams of quants, it could spell trouble.
-Gordon Gottsegen
This content was created by MarketWatch, which is operated by Dow Jones &amp; Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
02-20-26 1315ET

NANC

DEMZ

Several asset managers have filed for ETFs linked to U.S. election prediction markets, including Bitwise and Roundhill Investments. These ETFs, such as the PredictionShares Democratic President Wins 2028 Election ETF, will move in value based on election outcomes. While they offer potential for high returns, they also carry significant risks, including the possibility of losing all value. The current regulatory environment and increased liquidity have made prediction markets more appealing to institutional investors, potentially transforming them into a trading playground for hedge funds and high-frequency traders.

Prediction-market ETFs may open the door to all sorts of Wall Street tomfoolery