Key Takeaways
- • The SEC's recent call for comment on "novel ETFs" reflects regulatory concern that complex products, including those built on illiquid markets, derivatives and binary options, are being marketed as legitimate asset classes.
- • SIFMA challenged the SEC's definition of a "novel ETF," which the SEC describes as one investing in an "innovative asset class" or using a "novel investment strategy," including crypto assets, commodity-focused instruments, single-stock strategies, private assets and event contracts.
- • FCLT Global CEO Sarah Keohane Williamson argued in her SEC comment letter that registered-fund packaging aimed at retail investors "advances neither capital formation nor the long-term wealth creation" the federal securities laws intend.
- • The SEC's 2027 examination priorities target registered investment companies offering access to less liquid or illiquid investments, along with the advisers who recommend them.
- • Vanguard's Ankul Daga cautioned that "a new label doesn't necessarily represent a new source of diversification," and that an asset class must share economic characteristics and drivers of risk and return.
Summary
The rapid growth of the U.S. ETF market, with State Street Investment Management projecting net inflows above $2 trillion for the year after $1.54 trillion at the three-quarter mark, has been accompanied by a proliferation of products marketed under the label of "asset class." According to the article, Morningstar expects ETFs to outnumber traditional mutual funds in the U.S. by February of next year. Against this backdrop, the SEC has requested comment on the broad category of "novel ETFs," and many submissions were critical.
SIFMA challenged the SEC's definition, which lists crypto assets, commodity-focused instruments, single-stock strategies, heightened leverage, blockchain-enabled opportunities, private assets, event contracts, and combinations thereof. The concern intensified after several issuers proposed products tracking U.S. election outcomes before the Commodity Futures Trading Commission had fully considered the underlying event contracts. In her SEC comment letter, Sarah Keohane Williamson, chief executive officer of FCLT Global, wrote that such packaging "advances neither capital formation nor the long-term wealth creation" the federal securities laws and ETF structure are meant to support. The SEC's recently announced 2027 examination priorities also single out registered investment companies providing access to less liquid or illiquid investments, and the advisers who recommend them.
The article argues that institutional portfolios rest on defined asset classes: cash, equity and debt, with buyouts and venture as forms of equity and private credit and asset-backed securities as forms of debt. Hedge funds and absolute return approaches are described as strategies rather than asset classes. Peter Went, Senior Director at the CFA Institute, said that real estate and infrastructure have become established institutional holdings, noting that "the key for any asset class is that it is both measurable and investable." Real estate ETF exposure is largely achieved through publicly traded REITs, while infrastructure is harder to access; the article cites the $172 million Amplify Breakwave Tanker Shipping ETF (BWET), launched in 2023, as the only U.S.-listed product with direct oil shipping exposure.
Crypto presents a more nuanced case. ETF assets tied to crypto reached $100 billion according to ETF.com, nearly two-thirds held in BlackRock's iShares Bitcoin Trust. David Lutz, head of ETF trading at Jones Trading, said "liquidity is key for adoption as an asset class." The article also cites the VIX complex as a cautionary example: its ETFs and exchange-traded notes attracted attention before a notable product failure in 2012, and few assets remain. Housing index futures and ETFs tied to the S&P Cotality Case-Shiller U.S. National Home Price Index were delisted in 2009, and the futures have no market today.
The article also flags proposed ETFs offering exposure to GPU rental rates for compute futures, which have not yet launched as available futures on CME, and CME index futures on sports teams built with FutureSports, a new index administrator. Apollo and KKR have promoted "sports as an asset class" in reference to returns from media rights, ticketing and merchandising. Ankul Daga of Vanguard's Investment Strategy Group concluded that classifications should help investors understand what they own and how it contributes to their portfolio.
SIFMA challenged the SEC's definition, which lists crypto assets, commodity-focused instruments, single-stock strategies, heightened leverage, blockchain-enabled opportunities, private assets, event contracts, and combinations thereof. The concern intensified after several issuers proposed products tracking U.S. election outcomes before the Commodity Futures Trading Commission had fully considered the underlying event contracts. In her SEC comment letter, Sarah Keohane Williamson, chief executive officer of FCLT Global, wrote that such packaging "advances neither capital formation nor the long-term wealth creation" the federal securities laws and ETF structure are meant to support. The SEC's recently announced 2027 examination priorities also single out registered investment companies providing access to less liquid or illiquid investments, and the advisers who recommend them.
The article argues that institutional portfolios rest on defined asset classes: cash, equity and debt, with buyouts and venture as forms of equity and private credit and asset-backed securities as forms of debt. Hedge funds and absolute return approaches are described as strategies rather than asset classes. Peter Went, Senior Director at the CFA Institute, said that real estate and infrastructure have become established institutional holdings, noting that "the key for any asset class is that it is both measurable and investable." Real estate ETF exposure is largely achieved through publicly traded REITs, while infrastructure is harder to access; the article cites the $172 million Amplify Breakwave Tanker Shipping ETF (BWET), launched in 2023, as the only U.S.-listed product with direct oil shipping exposure.
Crypto presents a more nuanced case. ETF assets tied to crypto reached $100 billion according to ETF.com, nearly two-thirds held in BlackRock's iShares Bitcoin Trust. David Lutz, head of ETF trading at Jones Trading, said "liquidity is key for adoption as an asset class." The article also cites the VIX complex as a cautionary example: its ETFs and exchange-traded notes attracted attention before a notable product failure in 2012, and few assets remain. Housing index futures and ETFs tied to the S&P Cotality Case-Shiller U.S. National Home Price Index were delisted in 2009, and the futures have no market today.
The article also flags proposed ETFs offering exposure to GPU rental rates for compute futures, which have not yet launched as available futures on CME, and CME index futures on sports teams built with FutureSports, a new index administrator. Apollo and KKR have promoted "sports as an asset class" in reference to returns from media rights, ticketing and merchandising. Ankul Daga of Vanguard's Investment Strategy Group concluded that classifications should help investors understand what they own and how it contributes to their portfolio.
Go deeper than the headline
Research every firm in this story, track the ones that matter and get the daily briefing — free for 7 days.