Understanding the Cost of Bitcoin ETFs
Introduction
As the chances for a bitcoin Exchange-Traded Fund (ETF) appear to grow more likely, it is important for financial advisors and investors to understand the details of the different proposed funds, including their costs.
The Current Landscape
The Securities and Exchange Commission (SEC) has historically been opposed to ETFs that directly track the price of bitcoin. However, a fund proposal from asset management giant BlackRock and a recent court ruling in favor of Grayscale suggest that this stance could soon change.
Many players in the cryptocurrency and asset management industries now anticipate the launch of the first spot bitcoin funds in 2024. The number of firms vying to offer a bitcoin ETF has already surpassed ten and continues to grow.
Franklin Templeton recently joined the race as well. If these funds are eventually approved, a crucial consideration for both asset managers and investors will be the management fees associated with the bitcoin ETFs.
The Cost Comparison
Currently, the available fund options for crypto investments are expensive. For example, the Grayscale Bitcoin Trust (GBTC) charges a 2% management fee, while the ProShares Bitcoin Strategy ETF (BITO), the largest bitcoin futures ETF, has an expense ratio of 0.95%.
In contrast, the largest equity index funds often have expense ratios below 0.10%. Over the years, the costs of equity funds have decreased as the ETF industry has matured and become more competitive.
Experts’ Predictions
Industry experts have varying opinions on the expected management fees for bitcoin ETFs. Steven McClurg, the chief investment officer at Valkyrie Investments, anticipates that the fees will likely be below the price of futures funds due to lower operational costs for asset managers.
Rid Edelman, founder of the Digital Assets Council of Financial Professionals, expects the fees to fall between 50 and 100 basis points (0.50% to 1.00%). However, Bryan Armour, director of passive strategies research for North America at Morningstar, suggests that a proposed 0.19% fee, as seen in the Roundhill Ether Futures ETF filing, may be a more realistic target.
The Future Outlook
If multiple bitcoin ETFs are approved around the same time, it may be challenging for any one fund to gain a first-mover advantage and quickly scale. This could prevent a single fund from charging a premium for its services.
Armour believes that bitcoin ETFs will eventually become a commodity, leading to fee compression. Larger firms catering to institutional money, such as BlackRock, Invesco, and Fidelity, are likely to compete with each other on fees, while smaller firms focusing on crypto expertise may charge slightly higher fees.
Overall, it is expected that the management fees for bitcoin ETFs will decrease over time as the market becomes more competitive.
