Bitcoin ETFs: Exploring the Potential Costs
As the chances for a bitcoin ETF appear to grow more likely, financial advisors and investors will need to dive into the details of the different proposed funds, including how much they cost. The Securities and Exchange Commission has long been opposed to an ETF that directly tracks the price of bitcoin, but a fund proposal from asset management giant BlackRock and a recent court ruling in favor of Grayscale suggest that could soon change. Many crypto and asset management industry professionals now expect the first so-called spot bitcoin funds to launch in 2024. The number of firms jockeying for a spot bitcoin ETF has already broken into double digits, and it’s still growing. Franklin Templeton jumped into the pool earlier this week.
The Importance of Management Fees
If the funds are eventually approved, a key variable for both these asset managers and investors is how high the management fees for the bitcoin ETFs will be. The current fund options for investors to bet on crypto are expensive. The Grayscale Bitcoin Trust (GBTC) has a 2% management fee. The largest bitcoin futures ETF, the ProShares Bitcoin Strategy ETF (BITO), has an expense ratio of 0.95%. The biggest equity index funds, in contrast, can have expense ratios below 10 basis points, which is equal to 0.10%. The costs of equity funds have steadily fallen in recent decades as the ETF industry has matured and become more competitive.
Expert Opinions on Fees
Steven McClurg, the chief investment officer at Valkyrie Investments, said he expects that the cost will be below the price of the futures funds because they should be cheaper to run for the asset managers. Valkyrie has a Bitcoin Strategy ETF (BTF) that holds futures and has also applied to launch a spot product. “I imagine 50 basis points is where it’s going to shake out. We don’t know yet, because we’re still working on our own expenses and everyone else’s too. But I think that’s about where it is going to shake out,” McClurg said.
Similarly, Ric Edelman, founder of the Digital Assets Council of Financial Professionals, said in an August webinar that he expected the fees to fall between 50 and 100 basis points. Bryan Armour, director of passive strategies research for North America at Morningstar, said those estimates may prove to be too high. He pointed to a Roundhill Ether Futures ETF filing with a proposed 0.19% fee as a more realistic target. “I think that gives you a better indication of where you’re going to see the most competitive fee,” Armour said.
Potential Competition and Pricing
If the funds are approved at roughly the same time, that would make it more difficult for one of the funds to gain a first-mover advantage and scale quickly, which could allow it to charge a premium, Armour said. “I’m guessing this will be effectively a commodity, sooner rather than later. Even if fees start off a bit higher, I don’t think it will be long before they’re compressed,” Armour said.
There could also be a situation where two groups of funds develop, with the larger firms that cater to institutional money pricing their funds below smaller firms that are focused on crypto and hope that their expertise in the area will win over investors despite a higher sticker price.
As the potential for bitcoin ETFs becomes more likely, investors and asset managers are eagerly awaiting details on the management fees. While estimates vary, experts believe that the fees will be lower than those of current futures funds. The competition among different funds and the desire to gain a first-mover advantage may lead to more competitive pricing in the long run. Ultimately, the launch of bitcoin ETFs could provide investors with more accessible and cost-effective options for investing in cryptocurrencies.
BTC.CM= 3M mountain The Aug. 29 spike for bitcoin proved to be short-lived. “When I talk about the pools of competitors, the pool of BlackRock, Invesco, Fidelity will probably have lower fees, because they’re going to be competing on a fee base with each other. The other pool of competitors, which will be like us and others, since we’re going to be viewed more as experts, our fees will be a little bit higher, and people will pay for it,” McClurg said.
Correction: This article has been updated to reflect that Ric Edelman is founder of the Digital Assets Council of Financial Professionals. A previous version misspelled his name.