IT'S A GAMBLE: First Bitcoin ETF Will Be Loaded with Risk

By MOZCO Mateusz Szymanski @ Shutterstock.com

Fund companies are racing hard to be the first to offer a bitcoin ETF. The Wall Street Journal’s Michael Wursthorn reports on the risks of such funds, writing:

Despite the additional safeguards, investors in such funds would have to deal with issues associated with trading futures, as well as the risks around cryptocurrencies.

Todd Rosenbluth, head of ETF and mutual-fund research at CFRA, warned that futures-based ETFs rarely replicate the performance of the underlying market they track. The reason is pricing fluctuations between futures contracts and the spot market, especially if demand for the asset or commodity is expected to change significantly in the future. There are also costs associated with rolling over contracts when they expire.

“It’s likely that some of the investors who gravitate toward these products will either be disappointed in the performance or unaware of the risks they are taking,” Mr. Rosenbluth said.

Funds that trade in futures tend to buy contracts for the nearest month, known in the market as front-month contracts. Before the contracts’ expiration, funds roll their assets into the next month. If futures contracts trade higher than bitcoin’s real-time price, funds would be forced to pay a premium to roll them.

Bloomberg ETF analyst Eric Balchunas estimated that this rolling process would cost investors as much as 10 percentage points in annual returns—on top of expense ratios that are expected to be around 1% a year.

Funds that trade futures “really are more appropriate for institutional investors,” said Steven McClurg, chief investment officer at Valkyrie, whose proposed ETF will exclusively trade in front-month futures contracts. “But when there’s not a spot product available, like with oil or natural gas, retail investors look toward futures products.”

Action Line: So investors can expect a fund that doesn’t track its index, demands high costs for trading, could charge premiums equalling up to 10% off annual returns, and charges a very high expense ratio for an ETF. I’ll be sitting out this one. Unfortunately, many college students and recent graduates will be drawn to these funds. If you want to help a college student or recent graduate you know get off to a good start with their retirement investing, click here send them my free Special Report: How To Invest After Graduating College.

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com To sign up for my free monthly Survive & Thrive letter, click here.