My Prediction: Prediction Market ETFs Will Be a Huge Disappointment for Long-Term Investors

Prediction markets are hot right now, so it's perhaps no surprise that investment firms are racing to offer new financial products tied to them. Already, three investment firms have applied to the Securities and Exchange Commission for prediction market exchange-traded funds (ETFs), and more could be on the way soon.

But although these new ETFs may be able to capitalize on a hot new trend, they are unlikely to be a good fit for long-term, buy-and-hold investors. Here's why.

Drawbacks to prediction market ETFs

Typically, when you invest in an ETF, you are getting exposure to a broad range of securities within a certain sector, industry, or market. But that's not the case with these prediction market ETFs.

In fact, these ETFs do not plan to hold any securities whatsoever. So you won't be getting exposure to companies such as Robinhood Markets, which has been one of the early movers in prediction markets. And you certainly won't be getting direct exposure to prediction market platforms Kalshi or Polymarket, neither of which is publicly traded.

Image source: Getty Images.

Instead, these prediction market ETFs will hold event contracts for pending elections. Each investment firm has filed for six different ETFs: two for the 2028 presidential election, and four for the 2026 midterm elections.

For the 2028 presidential election, for example, there will be a Republican and a Democrat version of the ETF. If you think a Republican will win, you invest in the Republican ETF. And if you think a Democrat will win, you invest in the Democrat ETF. The same logic holds for the Senate and House versions of the ETFs: Either the Republicans or Democrats take control, and it's up to you to choose which party you think will win.

Is this investing or gambling?

It is important to point out: These ETFs will be all-or-nothing propositions. The event contracts are for a binary event with one of two possible outcomes: either the Republicans win, or the Democrats win. If you are holding a Republican ETF, and the Democrats win, you're out of luck: The underlying event contracts will settle to "no," and your ETF will become worthless.

That means some investors will be wiped out. It would be just like buying an event contract on Polymarket and having it settle to "no." You're essentially gambling on the outcome of political elections but doing so using a slick ETF wrapper.

Should you invest in these ETFs?

As you might have guessed, I'm not a big fan of these ETFs as they are currently structured. Why not just set up an account on Kalshi or Polymarket, and make the bet yourself, instead of fooling yourself into thinking that you're actually investing in prediction markets with an ETF?

I would be against similar types of ETFs for cryptocurrencies as well. For example, there are plenty of ways to predict the future price of Bitcoin on Polymarket, and I wouldn't be surprised if some firms eventually decide to offer Bitcoin prediction market ETFs.

But I won't be buying them. For now, these new prediction market ETFs should be a clear stay-away. I'm willing to predict that they will be a huge disappointment for long-term investors.

Dominic Basulto has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.