Ben Strack

<div id="highlights-block_621fe69b3855b" class="highlights">
 <ul>
 <li>The proposal comes amid trend of asset managers adding bitcoin exposure to commodity- and inflation-focused funds</li>
 <li>BlackRock, Morgan Stanley and Neuberger Berman are among other asset managers that have mutual funds investing in bitcoin futures, ETFs or the GBTC</li>
 </ul>
 
</div>



Two more fund groups are looking to offer indirect bitcoin exposure through established products running macro strategies — pending regulatory approval.



LoCorr Funds and Arrow Funds are planning to add bitcoin exposure to a mutual fund and an ETF, respectively, by investing in bitcoin futures or bitcoin ETFs, regulatory filings indicate.



The LoCorr Macro Strategies Fund (LFMAX), which has roughly $1.4 billion of assets, invests in managed futures and fixed-income instruments. The mutual fund can take long or short positions in futures, forwards, options, spot contracts or swaps that are tied to currencies, interest rates, stock market indices, energy resources, metals or agricultural products.



“The fund may also invest in exchange-traded bitcoin futures contracts,” according to <a href="https://www.sec.gov/Archives/edgar/data/1506768/000089418922001600/locorr485a.htm" target="_blank" rel="noreferrer noopener">a SEC disclosure</a> Monday. “These derivative instruments are used as substitutes for securities, interest rates, currencies and commodities and for hedging.”



The LoCorr proposal was submitted a few days after Arrow Funds revealed plans to add investments in bitcoin ETFs to its macro fund that uses research from Dorsey, Wright &amp; Associates (DWA).



The Arrow DWA Tactical: Macro ETF primarily allocates to other ETFs investing in domestic and foreign equity securities of any market capitalization, fixed-income securities of any credit quality, or alternative assets, according to <a href="https://www.sec.gov/Archives/edgar/data/1527428/000158064222000966/arrowtacticalmacroetf485a.htm" target="_blank" rel="noreferrer noopener">a Feb. 25 filing.</a>



Among other alternative assets, such as commodities and real estate-related securities, the ETF would be able to invest up to 10% in US and Canadian ETFs, trusts and other exchange traded products linked to bitcoin. The fund launched in 2014 and manages about $3 million.



An analysis of existing prospectuses for the LoCorr and Arrow funds make no mention of bitcoin futures or bitcoin ETFs.



Neither fund would directly invest directly in bitcoin. Representatives from both firms could not be immediately reached for comment.



The proposals come as exposure to bitcoin is becoming more prevalent in mutual funds and ETFs.



The WisdomTree Enhanced Commodity Strategy Fund (GCC) became the first ETF to add bitcoin futures in October — just before ProShares and Valkyrie Investments’&nbsp; launch of ETFs trading bitcoin futures. The WisdomTree Managed Futures Strategy Fund (WTMF) gained the ability on Jan. 1 to allocate up to 5% to bitcoin futures.



BlackRock, Morgan Stanley and Neuberger Berman are <a href="https://cms.blockworks.co/which-mutual-funds-etfs-are-making-crypto-related-investments/" target="_blank" rel="noreferrer noopener">among other asset managers</a> that have mutual funds investing in either bitcoin futures, ETFs or the Grayscale Bitcoin Trust (GBTC).



<a href="https://cms.blockworks.co/amplify-etfs-ceo-you-want-to-own-bitcoin-amid-inflation/" target="_blank" rel="noreferrer noopener">Amplify Investments</a> last month launched its Inflation Fighter ETF (IWIN), which treats bitcoin as a commodity. IWIN’s bitcoin exposure is capped at 20% of net assets and consists of bitcoin futures trading on the Chicago Mercantile Exchange (CME) and up to 15% in GBTC.



“I think this is going to be increasingly common,” Dave Nadig, chief investment officer and director of research of ETF Trends and ETF Database, told Blockworks at the time. “Since the best most traditional finance folks can do with bitcoin is think of it as digital gold, it makes sense to see it as a small allocation in a commodities or inflation strategy.”



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Macro Funds Aim To Add Exposures to Bitcoin Futures, Crypto ETFs

<div id="highlights-block_61c36e84b351b" class="highlights">
 <ul>
 <li>The ProShares Bitcoin Strategy ETF (BITO) underperformed spot bitcoin by 2.34% from its launch on Oct. 19 to Dec. 21, according to Bloomberg Intelligence Analyst James Seyffart</li>
 <li>BITO’s December inflows total roughly $50 million so far, compared to $1.2 billion in October, FactSet data shows</li>
 </ul>
 
</div>



The underperformance of the US’s first bitcoin futures ETF relative to the crypto asset’s spot price in its first two months of trading limit the types of investors interested and ultimately its asset growth, according to industry professionals.&nbsp;



But offerings that include a smaller allocation to bitcoin futures contracts could see more demand in 2022, some argued, particularly among longer-term investors.



Bloomberg Intelligence ETF Analyst James Seyffart noted in a Twitter post on Wednesday that the ProShares Bitcoin Strategy ETF (BITO) underperformed spot bitcoin by 2.34% from its launch on Oct. 19 to Dec. 21.&nbsp;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">The first <a href="https://twitter.com/hashtag/Bitcoin?src=hash&amp;ref_src=twsrc%5Etfw">#Bitcoin</a> futures ETF &#8212; <a href="https://twitter.com/search?q=%24BITO&amp;src=ctag&amp;ref_src=twsrc%5Etfw">$BITO</a> &#8212; is trailing spot by 2.34% with just about two months of data. Extrapolating that out: it will underperform spot by 13-14% in it&#39;s first year&#8230; <a href="https://t.co/2saAfp20u0">pic.twitter.com/2saAfp20u0</a>&mdash; James Seyffart (@JSeyff) <a href="https://twitter.com/JSeyff/status/1473652943689863173?ref_src=twsrc%5Etfw">December 22, 2021</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Extrapolated out over 12 months, Seyffart added, BITO would trail spot bitcoin by between 13 and 14% in its first year on the market.&nbsp;&nbsp;



“That’s a pretty big gap between bitcoin and your fund,” Bloomberg Intelligence ETF Analyst Eric Balchunas told Blockworks, noting that many financial advisors likely would not invest in the offering on behalf of clients. “That said, I think BITO is a great trading tool, and I think it will continue to be used for short-term exposure. It tracks great short-term, and its correlation is awesome.”



Though BITO was the first bitcoin futures ETF to launch in the US, the Valkyrie Bitcoin Strategy (BTF) launched three days later. It currently has about $55 million in assets under management, according to Valkyrie Investments’ website.



The VanEck Bitcoin Strategy ETF (XBTF) and the Global X Blockchain and Bitcoin Strategy ETF (BITS) launched in November. XBTF and BITS have $17 million and $9 million in assets, respectively.



Unlike the other three bitcoin futures products, BITS also invests in ​​US companies that directly own digital assets and may gain access to blockchain companies indirectly through ETFs.



Industry professionals <a href="https://cms.blockworks.co/a-futures-based-bitcoin-etf-could-be-suboptimal-heres-why/" target="_blank" rel="noreferrer noopener">have labeled roll costs</a> as one of several downsides to bitcoin futures ETFs. Maintaining a smaller allocation to bitcoin futures allows the firm to be “nimbler” to potentially find better value and reduce roll costs, Global X Research Analyst Matt Kunke <a href="https://cms.blockworks.co/global-x-offers-different-type-of-bitcoin-futures-etf/" target="_blank" rel="noreferrer noopener">told Blockworks last month</a>.



“I’m going to be watching it next year to see if it gets any looks,” Balchunas said of <a href="https://www.globalxetfs.com/introducing-bits-the-case-for-blockchain-equities-and-bitcoin-futures/" target="_blank" rel="noreferrer noopener">the Global X offering</a>.



<blockquote class="wp-block-quote">“BITS just seems like it’s one of those ETFs that could be palatable enough to an advisor given that small roll [cost], but at the same time have more kick than a blockchain stock ETF.”</blockquote>



<h3 class="wp-block-heading">Remaining demand for bitcoin futures ETF?</h3>



BITO notched inflows of more than $1.2 billion from its launch until the end of October, according to FactSet Data. Flows into the product have slowed, as they totaled $542 million in November and $50 million so far in December.&nbsp;



“Obviously it has completely plateaued, as all of the people who wanted to buy BITO have bought it basically,” Balchunas said. “Maybe those flows trickle in for the next couple months.”



Dave Nadig, CIO and director of research for ETF Trends and ETF Database, said that investors, particularly those who have invested in commodities, understand the deficiencies of futures versus spot.



“The funds really target a small Venn diagram of people who want crypto exposure on a fairly short-term basis but are unwilling or unable to access the crypto markets directly,” he told Blockworks. “I would not expect the [assets under management] to move significantly, as I suspect these funds will be trading vehicles.”



Though Nadig added he does not expect any new “plain-vanilla” bitcoin futures ETFs, other types of products, such as WisdomTree’s Enhanced Commodity Strategy Fund (GCC), could make allocations to bitcoin futures.



GCC, an actively managed ETF seeking to provide broad exposure to a diversified basket of commodities, <a href="https://cms.blockworks.co/wisdomtree-plans-to-launch-more-crypto-offerings-in-2022/" target="_blank" rel="noreferrer noopener">became the first ETF</a> to add bitcoin futures in October.



<h3 class="wp-block-heading">Still no spot bitcoin ETF</h3>



The US Securities and Exchange Commission (SEC) has rejected a variety of <a href="https://cms.blockworks.co/when-will-the-sec-approve-a-spot-bitcoin-etf/" target="_blank" rel="noreferrer noopener">spot bitcoin ETF proposals</a>, while regulators in Europe, Canada and other regions have allowed such products to trade.



“The SEC is unlikely to approve a spot Bitcoin ETF in 2022, we believe, leaving US investors reliant on less-efficient futures, trusts and themed equity ETFs for fund exposure,” Seyffart wrote in a Dec. 9 research note, adding that Ethereum futures ETFs could reach US exchanges before a spot bitcoin product.&nbsp;



As part of its <a href="https://cms.blockworks.co/sec-rejects-vanecks-proposed-spot-bitcoin-etf/" target="_blank" rel="noreferrer noopener">denial of VanEck’s planned spot bitcoin fund</a>, the SEC said in a letter that the Cboe BZX Exchange, on which the ETF’s shares would have traded, “has not met its burden” that the proposal meets the requirements of the Securities Exchange Act of 1934.



“The SEC cannot have been much more clear in their guidance. Any approval would be a shocking surprise,” Nadig said.



<blockquote class="wp-block-quote">“I give essentially zero odds to a pure Bitcoin ETF in 2022.”</blockquote>



Balchunas said he always expected the ProShares Bitcoin Strategy ETF to be used by traders more than long-term investors, noting that his optimism for an ETF that invests directly in bitcoin remains strong.&nbsp;



“I think a spot bitcoin ETF, and ultimately different takes on it — like a spot Ethereum, a crypto picking active ETF, a crypto basket…S&amp;P of crypto — is going to fly off the shelves,” he said, “and be the big category that we all are expecting.”



<hr class="wp-block-separator">
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What Does Demand For Bitcoin Futures ETFs Look Like in 2022?

<div id="highlights-block_617996312e2a3" class="highlights">
 <ul>
 <li>VanEck’s ETF will cost 65 basis points compared to the 95bps price of bitcoin futures ETF by ProShares and Valkyrie Investments</li>
 <li>ProShares being first to market was an important advantage as competitors will be facing “a long, uphill slog trying to chase down BITO,” ETF Store president says</li>
 </ul>
 
</div>



VanEck appears to be ready to bring to market its bitcoin strategy ETF after its <a href="https://www.sec.gov/ix?doc=/Archives/edgar/data/1137360/000113736021000971/ck0001137360-20201231.htm" target="_blank" rel="noreferrer noopener">latest SEC filing</a> on Wednesday, though industry watchers said demand for the offering could be muted compared to similar products that launched last week.



The launch of the VanEck Bitcoin Strategy ETF (XBTF) was slightly delayed, though the firm declined to comment on why. VanEck had <a href="https://www.sec.gov/Archives/edgar/data/0001137360/000113736021000952/vaneckbitcoinstrategyetf48.htm" target="_blank" rel="noreferrer noopener">filed a new date on </a>Tuesday, stating that the filing was expected to become effective on Wednesday.



Bloomberg Intelligence ETF Analyst Eric Balchunas said in a Twitter post that the latest filing means the ETF will likely start trading on Thursday or Friday.&nbsp;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">VanEck has officially &#39;gone effective&#39; (legalese for ready for launch) So good chance <a href="https://twitter.com/search?q=%24XBTF&amp;src=ctag&amp;ref_src=twsrc%5Etfw">$XBTF</a> starts trading Friday poss Thursday. Waiting on listing announcement or company to confirm tho.. <a href="https://t.co/bbFbWatnJ5">pic.twitter.com/bbFbWatnJ5</a>&mdash; Eric Balchunas (@EricBalchunas) <a href="https://twitter.com/EricBalchunas/status/1453398925373755394?ref_src=twsrc%5Etfw">October 27, 2021</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



“VanEck is excited to offer a long-awaited bitcoin exchange traded product to the U.S. market,” Ed Lopez, Head of ETF Product at VanEck, previously told Blockworks. “We were the first asset manager to file for a bitcoin futures ETF back in 2017, and we are offering what would be the most competitively priced ETF in the category when we come to market.”



A VanEck spokesperson did not immediately respond to Blockworks’ request for comment.



<h3 class="wp-block-heading">What will the demand be?</h3>



The fund is likely to be the third bitcoin futures ETF to launch in the US, following the launches of similar funds by ProShares and Valkyrie Investments last week.&nbsp;



The ProShares Bitcoin Strategy ETF (BITO) has <a href="https://cms.blockworks.co/proshares-bitcoin-futures-based-etf-to-begin-trading-tuesday/" target="_blank" rel="noreferrer noopener">more than $1 billion</a> in assets under management after trading for a week. Valkyrie Investments’ Bitcoin Strategy ETF (BTF) began trading on Friday, <a href="https://cms.blockworks.co/valkyries-btf-trades-10m-in-first-5-minutes/" target="_blank" rel="noreferrer noopener">trading $10 million in its first five minutes</a> on the market.



While the Valkyrie and ProShares offerings carry a fee of 95 basis points, the VanEck product will cost 65 basis points.&nbsp;



“This ETF should get some looks given its lower price point and VanEck’s reputation, but initial demand will be muted compared to the ProShares offering,” Nathan Geraci, president of The ETF Store, told Blockworks.



<blockquote class="wp-block-quote">“First mover was such an important advantage in this particular category and competitors will be facing a long, uphill slog trying to chase down BITO.”</blockquote>



Dave Nadig, CIO and director of research for ETF Trends and ETF Database, said that VanEck’s differentiator will be price, which will matter but will likely not create “a flood” of inflows.&nbsp;



“In general, later entrants will have a tougher time,” he explained. “Liquidity begets liquidity in the ETF market, especially for access-oriented products like these.”