Defiance files for first fully private company ETF using swaps

Defiance ETFs wants to let you invest in companies before they hit the stock market, no accredited investor status required. The firm is filing to register what it calls a “pre-IPO leaders” ETF, a fund that would invest primarily in swaps linked to private companies, effectively creating the first ETF product built entirely around private market exposure.

How swaps make the impossible possible

The mechanics here matter. Defiance isn’t proposing to buy actual shares of private companies and stuff them into a fund. That would create an immediate liquidity nightmare, since private shares don’t trade on exchanges and can’t be easily bought or sold on demand.

Instead, the fund would use total-return swaps with bank counterparties. Think of a swap as a handshake deal with a bank: the ETF pays the bank a fee, and the bank agrees to pay back whatever return a basket of private companies generates. The ETF never actually owns the underlying shares. It just captures the economic exposure.

This is the same synthetic plumbing that Defiance already uses in its leveraged products. Its XOVL ETF, for instance, seeks 200% daily exposure to the ERShares Private-Public Crossover ETF using a similar swap-based architecture. The difference with the new filing is scale of ambition: rather than leveraging an existing public ETF, this product would point its swaps directly at companies that haven’t gone public at all.

Defiance’s private market playbook

This filing doesn’t exist in a vacuum. Defiance has been methodically building its private market capabilities for months.

In late July, the firm amended the prospectus of its JEDI ETF to allow up to 15% of net assets to be invested in privately issued securities, with a target allocation of roughly 5%. The vehicle for those investments: special purpose vehicles, or SPVs, that hold stakes in private defense technology and AI companies.

Shield AI became the first private company added to JEDI, marking what Defiance described as the first US-listed ETF exposure to the firm.

Defiance was founded in 2018 and is led by CEO Matthew Bielski.

The risks nobody should ignore

For all its innovation, the swap-based structure introduces risks that are qualitatively different from those of a typical stock ETF.

Counterparty risk sits at the top of the list. When an ETF holds actual shares, you own something tangible even if the fund’s service providers collapse. When an ETF holds swaps, you own a contractual promise from a bank. If that bank runs into trouble, the promise can become worth less than the paper it’s printed on.

Valuation is another thorny issue. Public companies have market prices updated every millisecond. Private companies get valued periodically, often based on their most recent funding round, which might be months or even years old. The ETF’s net asset value would depend on how its bank counterparties price those swaps.

There’s also the question of what specific private companies the fund would track. No details on the underlying basket have been disclosed, nor has Defiance published expected fee structures.

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