Following some interesting events on social media Tuesday and a lengthy wait prior to that, the Securities and Exchange Commission (SEC) on Wednesday finally approved spot bitcoin exchange traded funds.
In the days ahead, advisors can expect to see debuts of such ETFs from at least 11 issuers, including some of the fund industry’s biggest names. In alphabetical order, that group of 11 is as follows: ARK 21Shares, Bitwise, BlackRock, Fidelity, Franklin Templeton, Grayscale, Hashdexm Invesco, Valkyrie, VanEck and WisdomTree.
As noted here earlier this week, plenty of advisors weren’t expecting spot bitcoin ETFs to come to market this year, but they’re likely happy they now have access to the products. It’s possible that with spot bitcoin ETFs here, advisors can increase client crypto allocations while making that exposure less about issues such as cold storage and tech authentication and more about improving returns.
Now comes the “fun” part. Advisors interested in the new spot bitcoin ETFs get to do homework. At the least the fee situation is clear. The annual expense ratios on the 11 funds range from 0.2% to 1.5%, but Bitwise, Fidelity, WisdomTree, Valkyrie and Invesco are offering temporary fee waivers while the BlackRock product has its own waiver that reduces that ETF’s expense ratio to 0.12%.
Yes, It’s a Big Deal
Bitcoin, the largest digital currency by market value, turns 16 years old this year and while it’s endured ample criticism on its way to becoming a teenager, the approval of spot ETFs is a seminal moment in bitcoin’s lifespan.
“46 percent of Americans believe the new investment opportunity will positively impact adoption of cryptocurrency,” according to Security.org. “Cryptocurrency awareness and ownership rates have increased to record levels: 40 percent of American adults now own crypto, up from 30 percent a year ago; this could be as many as 93 million people.”
One way of looking at those statistics is that the SEC approvals are well-timed and that sentiment is applicable to advisors and retail investors alike. As for bitcoin prices, there wasn’t much to speak of in either direction following the SEC headlines, indicating that news was already price into the cryptocurrency, but US-listed spot bitcoin ETFs are widely expect to positively affect the digital asset’s price over time.
Spot ETFs Better Than Alternatives
In investment classification and tax terms, bitcoin is often likened to commodities, such as gold, oil or silver. That makes the approval of spot bitcoin ETFs all the more pertinent to advisors because futures-based ETFs typically carry higher fees, create the potential for tax annoyances and often lag spot equivalents.
“Bitcoin futures ETF investors pay an extra fee to roll from one futures contract to the next, something spot bitcoin ETFs don’t need to worry about,” notes Morningstar’s Bryan Armour.
Plus, spot products do a superior job of staying to close the underlying asset’s net asset value – something some index funds don’t always do. Hence the aforementioned GBTC conversion is noteworthy.
“The problem for investors is that these grantor trusts operate more like closed-end funds. Adding and redeeming shares takes time and effort. Without the ability to easily regulate the size of the trust, managing supply and demand becomes a major issue. This wasn’t a problem for GBTC holders when it traded at a premium—Grayscale even stepped in to meet high demand by issuing more shares via private placement,” concludes Armour.
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