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First, some quick housekeeping. This piece is being penned late Monday, Oct. 18. As things stand at this writing, the first US-listed bitcoin exchange traded fund – the ProShares Bitcoin Strategy ETF (NYSEARCA:BITO) – is slated to debut on Tuesday, Oct. 19.
Several more Bitcoin ETFs are expected to follow, perhaps as soon as this week, but for the purposes of this piece, I'll focus on BITO and the broader Bitcoin ETF landscape. ProShares CEO Michael Sapir frames the debut of a bitcoin fund (it already happened in Canada) as a seminal event in ETF history and that's not hyperbole.
“BITO will continue the legacy of ETFs that provide investors convenient, liquid access to an asset class,” commented Sapir. “1993 is remembered for the first equity ETF, 2002 for the first bond ETF, and 2004 for the first gold ETF. 2021 will be remembered for the first cryptocurrency-linked ETF,” he said in a statement.
Indeed, there's no denying that a US-listed bitcoin is widely anticipated and a long-time coming. The debut of BITO and others also brings opportunity for advisors because 1) clients are increasingly enamored with crypto and 2) BITO is a futures-based strategy, which is a value-add opportunity for advisors delivered on a silver platter.
Fun with Futures? Maybe. Maybe Not.
As advisors know, there are hundreds of commodities exchange traded products on the market today. Plenty, including some successful products, are based on a single commodity's futures contracts or a basket of such contracts.
Others, such as the popular SPDR Gold Shares (NYSEARCA:GLD) and the iShares Silver Trust (NYSEARCA:SLV), are backed by physical holdings of those commodities. Generally speaking, the physically backed funds carry lower expense ratios, are easier for clients to understand and offer more room for performance that's inline with that of the underlying commodity.
Hopefully, the Securities and Exchange Commission (SEC) will eventually approve a GLD-esque bitcoin ETF, but BITO and its upcoming friends will have to suffice for now. For bitcoin-enthused clients, that's not necessarily a bad thing as long as their advisors are properly informing them on what to expect with a fund like BITO.
What many clients may not know is how total returns of futures are accrued. That occurs by way of spot return – in this case how bitcoin prices move – roll yield and cash yield. Roll yield is positive or negative contributions from rolling from one futures contract to next. Cash yield is interest earned on cash held as collateral. Of those three, roll yield has been the biggest drag on commodities futures returns for several decades.
To be sure, bitcoin futures aren't perfect. From January 2019 through September 2021, bitcoin futures had a cumulative return 127.54% while the actual cryptocurrency's cumulative return was 145.54%. In large part, negative roll yield explains the under-performance.
It's Not All Bad News
While many clients are apt to feel as though bitcoin futures are the only game in ETF town, advisors can help them see the forest through the trees. For example, futures are an excellent avenue for reducing portfolio correlations to traditional asset classes like stocks and bonds.
Second, futures markets, whether it's bitcoin or commodities, are transparent, efficient avenues for price discovery and provide risk management outlets. Futures markets are also regulated, which is a good thing for smaller investors.
Additionally, the success of BITO and friends could further cement the institutionalization of bitcoin. A broader mainstream audience could (maybe should) trigger higher prices for the digital asset.
To sum it up, it's a positive for investors that BITO is coming to market. Hopefully, the fund will be successful and spur more regulatory evolution in the crypto ETF realm. As for dealing with clients, keep them informed on BITO's plumbing. A brief chat on negative roll yield can be beneficial and avert a less pleasant conversation in the future.