In the UK, you’ve been able to bet on a general election for as long as most of us can remember. You walk into a bookmaker, or more likely open an app, and back the result you expect.
What’s new is the wrapper. Earlier this year, three US fund managers, Roundhill, Bitwise and GraniteShares, filed to launch prediction market ETFs. These exchange-traded funds would let investors take a position on whether Democrats or Republicans win the 2028 presidential race, which party controls Congress after this year’s midterm elections, and more.
TD Securities has described the idea as a possible new frontier for ETFs. It’s an interesting development and worth understanding. It’s also a good moment to clarify the difference between betting on an outcome and investing for the future.
What are prediction market ETFs?
A prediction market lets people trade contracts tied to a specific event. These contracts pay $1 if the chosen outcome happens and nothing if it doesn’t. A price of 50 cents therefore implies the market sees roughly a 50% chance, with prices moving as polls, news and sentiment shift.
The filings are open about the risk. If the outcome goes the other way, each fund warns that it will lose almost all of its value.
None have launched yet, as the US Securities and Exchange Commission delayed the funds in May, then asked for public comment on how to treat them. That consultation closed at the end of August, and none have been approved yet. Meanwhile, the filings have spread well beyond politics, to recession risk, technology layoffs and even sporting results.
The case for them
Supporters argue these funds could simplify hedging, with TD Securities citing a household facing a mortgage renewal. It could hold a fund that pays out if interest rates stay high, offsetting part of the higher repayments. Institutions might use them to protect against a particular policy decision without rearranging an entire portfolio.
In theory, that’s a reasonable idea. In practice, it depends on whether people use them that way and whether a hedge is worth the extra layer of fees.
Why the familiar wrapper matters
ETFs have earned a reputation as low-cost and sensible, and that reputation comes with the label. A product that looks like an ETF and sits in the same account as a pension fund can feel more like an investment than it really is.
For many people, there’s also the appeal of a clear answer. A yes-or-no outcome feels more knowable than the slow, uncertain progress of markets. Most of us remember calling something correctly more vividly than getting it wrong. That’s overconfidence, and a binary product gives it an easy outlet.
However, the way these funds are designed can work against people who aren’t watching closely. Most of the proposed funds would automatically roll into the next contract once results are in. An investor who doesn’t check could end up holding a view on an election they never chose to back.
A few differences are worth keeping in mind:
- An investment owns something. Shares and bonds give you a stake in businesses or a claim on their income. An event contract only holds a view about one outcome.
- Investment returns come from living with uncertainty over time. We’ve written before about why markets reward people for staying invested through the unknown [link: uncertainty article]. An event contract settles on a single date.
- Long-term investors can all do well together. In a prediction market, every gain is matched by someone else’s loss, before costs.
- Time works in the investor’s favour. A portfolio can recover after a bad year. An event contract can’t recover once the result is in.
What this means for your planning
Most of our clients face real event risks, such as an election that could change tax rules or interest rates when a mortgage comes up for renewal. The plan’s structure usually manages those risks best. That generally means holding enough cash to cover a few years of spending, and building a plan that doesn’t depend on any single event going a particular way.
Prediction market ETFs may well launch, and more products like them will follow. Some will have legitimate uses for professional investors. But for anyone investing for retirement, the useful questions to ask of any new product are what it owns and what job it would do in your plan. If the answer is “a view on a single result”, it’s probably closer to a bet than an investment.
New products will keep arriving, and it isn’t always easy to tell which ones deserve a place in a long-term plan. We have that conversation with clients regularly, and we’re always glad to help where we can.
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