Fees, liquidity, brand: The factors investors would weigh when picking a bitcoin ETF

The US Securities and Exchange Commission is on the cusp of potentially approving a swathe of spot bitcoin exchange-traded funds (ETFs) simultaneously.

This move could ignite a competitive scramble among more than a dozen firms eager to launch these products, offering both institutional and retail investors a diverse range of options. Some are likely to look beyond just company brands and prices, industry watchers said.

The fund issuers with planned spot bitcoin funds have already sought to differentiate themselves from competitors.

Firms in the running are already strategizing to stand out in a crowded market. Some, such as Bitwise and Hashdex, are leveraging their status as crypto-focused specialists, kicking off targeted marketing campaigns to emphasize their expertise in the digital currency space.

Others appear poised to offer a more attractive price point than rivals.

Fidelity, a major financial services firm specializing in investment management and retirement services, recently updated its ETF application, setting its sponsor fee at a competitive 0.39% (39 basis points). This aggressive pricing strategy is the lowest among all firms that have revealed a fee, and could be a game-changer in attracting cost-conscious investors.

In contrast, the spot bitcoin ETF proposed by Invesco and Galaxy Digital intends to have a higher fee of 0.59% (59 basis points). However, it plans to implement a fee waiver for the first $5 billion in trust assets during the initial six months of trading.

Newsletter

Subscribe to The Breakdown

For buy-and-hold investors, the fund’s fee is likely to be the biggest factor when choosing which spot bitcoin ETF to buy, according to Bryan Armour, Morningstar’s director of North America passive strategies research.

Beyond price and marketing

Though advertisements and fund fees could sway some, certain investors will consider other factors.

“Traders and those actively trading these ETFs will find liquidity — meaning tighter bid/ask spreads and capacity for large trades without much price impact — more impactful to performance than fees,” Armour told Blockworks.

Issuers’ capital markets and trading infrastructure will also be key. Fund groups have noted in recent application amendments that their planned bitcoin ETFs would feature cash creations and redemptions — a method apparently preferred by the SEC.

“It’s possible that certain issuers are better prepared to trade bitcoin at scale while minimizing trading costs,” Armour said. “For me, this will be one of the most interesting developments to watch early on.”

Potential sequence of events

Early on, the way the funds trade will be important, said Dave Nadig, financial futurist at data firm VettaFi. He noted it will be “absolutely critical” for the fund issuers to have solid market makers and authorized participants, as well as enough institutional traders to keep the volumes up.

“At the end of week one, there will be some funds at the top of the liquidity list and some at the bottom,” Nadig told Blockworks. “Predicting that is quite difficult, because in general, these issuers are seasoned and have great relationships with the street.”

The Grayscale Bitcoin Trust (GBTC) launched in 2013 and has roughly $27.8 billion in assets under management. Grayscale is looking to convert the trust into an ETF.

While GBTC could win an asset race given its already robust presence in the market, Nadig said there is a “counter case” in which investors take money out of GBTC and allocate to a cheaper ETF, or one that might be trading better.

GBTC currently charges a 2% annual fee. The firm has said it would lower GBTC’s fees in the case of an ETF conversion, but has not specified by how much. Its latest ETF application amendment does not indicate a planned fee.

Following the initial trading activity, retail investors will pay particular attention to marketing and fees, Nadig said.

US ETFs currently hold more than $6.4 trillion in assets, according to ETF.com. An April 2022 survey by Nasdaq found that 72% of financial advisers would be more likely to invest client assets in the crypto segment if a US spot bitcoin ETF was available.

Model portfolios — managed by professional investment managers — are likely to allocate to spot bitcoin ETFs after the initial flurry of assets into the funds, Nadig added.

“To some extent, third-party model providers will wait to see what’s the default choice based on [assets], fee and trading,” he said. “But firms with captive models — like BlackRock — have at least a vector to shortcut that process and get a small slug of BTC into their captive models.”

Get the news in your inbox. Explore Blockworks newsletters:

The Breakdown: Decoding crypto and the markets. Daily.
0xResearch: Alpha in your inbox. Think like an analyst.