SEC's Daly says novel ETF review proposal is reasonably close

The SEC's Division of Investment Management is reasonably close to a proposal on how novel ETFs are reviewed, its director, Brian Daly, said on ETF Prime. About 85 comment letters and inbound conversations followed the agency's request for comment on prediction market and crypto ETFs.

Daly credited the 2019 ETF rule for much of the industry's growth, noting ETFs have gone from roughly 2,000 to just under 6,000, with about 125 becoming effective each month. He spoke in his personal capacity with host Nate Geraci.

Copycat filings often appear within hours of a new idea reaching the SEC's public database, Daly said. Geraci calls the resulting race the "ETF Terrordome," where the first fund to gather assets wins and there is no second place.

Commenters worried that a "spaghetti cannon" of rapid-fire launches pulls staff time away from complex products, a concern Daly said the agency shares, and asked the SEC to stay neutral across asset types. The request for comment was aimed at building an orderly process that still leaves room for talks with sponsors, Daly said.

Of the letters and conversations, two-thirds carried a lot of detail and one-third came from fund sponsors, he said. Sponsors backed a transparent, predictable process, and "everyone hated the term novel ETF," he added.

Johnny Wu, founder and CEO of xETFs, also joined the episode to describe two funds that sell one-day call options on up to 25% of each portfolio, close those options before the market closes and pay distributions weekly: the xETFs Nvidia Daily Income ETF (NYYY) and xETFs Tesla Daily Income ETF (TYYY).

Wu, a former Barclays structured products executive, launched xETFs in May; the xETFs AI Bottlenecks ETF (NECK) holds about 20 stocks tied to AI supply constraints. He compared the AI build-out to the internet boom, when nine of the 10 biggest companies trailed the S&P 500 over 25 years.

What the discussion did not settle is timing. Daly's framing that staff is reasonably close to a proposal leaves the date the commission would see one unstated, and no draft text was described.