Investors may soon use exchange-traded funds within their brokerage accounts to bet on the success or failure of individual NHL teams

Investors may soon use exchange-traded funds within their brokerage accounts to bet on the success or failure of individual NHL teams.

The convergence of investing, trading and sports betting may be getting a major shot in the arm - or shot on goal - starting with 32 new exchange-traded funds.

Volatility Shares has filed a prospectus with the Securities and Exchange Commission to offer ETFs tracking every team in the National Hockey League. That has caused industry experts to raise the alarm.

If the prospectus is approved by the SEC, Volatility Shares will run separate ETFs for each NHL team. Each fund will track an index based on statistical measures of the team's wins, losses, ties and other events during games, according to the filing.

The indexes are already managed by FutureSports and are designed to incorporate live results to provide "trackable and tradable number[s]" for each team ETF. The NHL is cooperating by providing data to Future Sports, but has not participated in the design of the indexes, according to Volatility Shares.

Investors already have options for buying into individual sports teams. Shares of Atlanta Braves Holdings $(BATRA)$, for instance, trade like any other stock. But these new products would be different: Rather than betting on a team's business, investors would be speculating directly on its on-field (or in this case, on-ice) performance.

In addition to incorporating wins, losses and ties, the indexes will take into account goals scored by the subject team, goals scored against the team, with points subtracted for penalties, in addition to other factors limited to performance during games. Other factors include multipliers for even-strength goals, as opposed to those scored when the team has a power-play advantage while a player on the other team sits in the penalty box. There are 55 statistical measures affecting each team's index.

According to the prospectus, the NHL will be monitoring the indexes "to support the integrity of both the game and related financial products."

Each team's index will be set at 7,500 and reset to that level after the end of the postseason.

You might be wondering how the ETFs will transfer those index values into investments.

Using the Anaheim Ducks as an example, the ETF tracking that team will invest in futures contracts that reference the Ducks Index and trade on a public exchange. Each of the team ETFs will typically hold at least 80% of assets in those futures, along with other derivatives that reference that team's index.

There's no cash-producing asset under this - it's just a big derivative onion tied to a nonsensical index.Tony Dong, founder and owner of ETF Portfolio Blueprint.

Volatility Shares stressed that the new ETFs would not be investing in prediction markets and that index valuations would be based solely on statistical factors derived from gameplay. The prospectus filing includes myriad warnings for investors and traders, as is standard. And Future Sports published its index methodology on Monday.

Reactions of experts covering the ETF industry

There are many types of ETFs, including those that track stock indexes for very low fees, those that employ options trading to provide monthly income and riskier leveraged ETFs designed to be used intraday as hedging tools by professional traders. However, the notion of using an ETF to track sports-competition results is controversial.

Tony Dong, the founder and owner of ETF Portfolio Blueprint, questions "the need to securitize everything under the sun and package it into an ETF."

In an email exchange with MarketWatch, Dong questioned the "economic value" of an ETF tracking a team's results. "There's no cash-producing asset under this - it's just a big derivative onion tied to a nonsensical index," he wrote.

Dong referred to the SEC's previous rejection of ETFs tied to "binary outcomes" in prediction markets. But he added that Volatility Shares' proposal might be approved if it satisfies the SEC's "VaR [value at risk] requirements."

Elisabeth Kashner, the director of ETF and research and analytics at FactSet, didn't specifically address the nature or the proposed new funds from Volatility Shares when asked for comment. But, in an email, she said that, as ETFs become more complex and expand into new areas, "investors must have a robust due diligence method that cuts through the noise."

"Now, more than ever, investors must do their own homework," she added.

Dave Nadig, the president of ETF.com, referred to the proposed NHL-team ETFs as "nonsense," but told MarketWatch that the proposal by Volatility Shares to the SEC was "completely unsurprising," in the current regulatory environment.

"The CFTC [Commodity Futures Trading Commission] has authorized contracts against the success of sports teams. They are binary contracts that pay a dollar if they win and pay if it doesn't," he said.

"I think the mainstreaming and financialization of gambling may be one of the most significant developments in financial services in the last decade," Nadig said.

"Nothing about these contracts is an investment. Nothing about them is a rational hedge for a financial position. They are pure and simple gambling vehicles running through a U.S. government-regulated exchange," he said.

Nadig acknowledged the opinion of some that online wagering is simply entertainment that people pay for. "But when we see statistics like a third of Gen Z men betting on sports at least weekly - some daily - that should give everyone pause."

Going further, Nadig said, the approval of derivative securities whose value is based on binary sporting-event outcomes shows that "the CTFC is currently nonfunctional."

"There are no commissioners - just the chairman. It can't hold a meeting, can't satisfy its sunshine requirements, and can't engage in any normal rule-making process. Instead, we have what amounts to one-man rule by Chair [Michael S. Selig], ramrodding through gambling as regulated financial products," he said.

Nadig added that he didn't blame ETF issuers for following the trend toward convergence of gambling and financial services.

"On one hand, I understand the libertarian argument: nobody wants a nanny state telling an 18-year-old he's not allowed to blow his entire paycheck on sports betting. On the other hand, impoverishing an entire generation through deregulation seems like a bad strategy for a strong country," he said.

-Philip van Doorn