- The VanEck Bitcoin Strategy ETF (XBTF) will cost 65 basis points and will offer investors a different tax experience due to being structured as a C-Corporation
- ProShares’ competing product has amassed more than $1.4 billion assets in less than a month on the market
VanEck is getting set to launch its bitcoin futures ETF after the US Securities and Exchange Commission (SEC) denied its proposed fund that would have held the crypto asset directly.
The New York-based fund manager, which manages $82 billion in assets, is expected to launch the VanEck Bitcoin Strategy ETF (XBTF) on Cboe on Tuesday, the firm announced Monday. Though regulatory filings suggested the planned offering could launch late last month, the company’s announcement follows the SEC’s rejection of VanEck’s proposed spot bitcoin ETF on Friday.
SEC Chairman Gary Gensler first said during a virtual forum in August that his agency would prefer ETFs filed under the Investment Company Act of 1940 that were limited to bitcoin futures contracts. The SEC’s decision to deny VanEck’s filing therefore did not come as a surprise to many industry professionals.
“It’s no secret that we as a firm feel that a physical spot product is a superior product, and so we thought we would see that through,” Kyle DaCruz, VanEck’s director of digital assets product, told Blockworks. “Once we received the SEC’s decision, we decided to bring to market the futures-based product so at least investors have a tool now to access bitcoin through a regulated exchange-traded fund.”
XBTF will invest primarily in bitcoin futures listed and traded on the Chicago Mercantile Exchange (CME), a category that has recently seen tremendous growth, DaCruz added. Average daily open interest in the CME’s bitcoin futures has increased from $77 million in the first quarter of 2018 to about $1.5 billion in the third quarter of 2021, the firm reported.
Third to market, but a different structure
The fund will be the third of its kind in the US, joining the ProShares Bitcoin Strategy ETF (BITO) and the Valkyrie Bitcoin Strategy ETF (BTF), which launched on Oct. 19 and Oct. 22, respectively.
BITO has quickly grown to more than $1.4 billion while BTF has $60 million assets under management.
“It’s disappointing we’re not first to market as we were the first to file for a futures-based ETF in 2017, and certainly there are merits to being first to market clearly in this asset class,” DaCruz explained.
But the firm believes that the fund’s lower price and different tax structure position it well against the similar offerings currently available, he added.
While the Valkyrie and ProShares products carry a fee of 95 basis points, the VanEck product will cost 65 basis points. Additionally, unlike most funds under the Investment Company Act of 1940, which are classified as regulated investment companies, XBTF will be structured as a C-Corporation.
ETFs that use this structure are taxed as corporations, which means the fund will pay taxes, and investors will pay taxes on dividends and gains.
Under the C-Corporation structure, the fund can carry forward losses in the case of a drawdown, essentially offsetting gains, DaCruz explained. In addition, a C-Corporation is qualified dividend income (QDI) eligible, meaning that investors pay the long-term capital gains tax rate, rather than their ordinary income tax rate.
“For investors with a higher ordinary income tax rate, it’s pretty appealing to be in a C-Corp,” DaCruz said. “We’ve done several analyses and as you can imagine, the carry-forward of losses and the QDI eligibility can really, really impact the after-tax returns for investors, particularly long-term investors.”
Dave Nadig, CIO and director of research for ETF Trends and ETF Database, said that many investors may not even realize the ETF’s C-Corporation structure.
“It’s slightly untried territory so I am actually curious how they work the math,” he told Blockworks. “I can absolutely see that for certain high-net-worth taxable investors, VanEck may have figured out something pretty clever.”
Nadig said that VanEck’s differentiator of price will matter but will likely not create “a flood” of inflows.
Nathan Geraci, president of the ETF Store, previously told Blockworks that despite VanEck’s reputation and XBTF’s lower price point, he expects initial demand to be “muted” compared to the ProShares fund.
Bitwise Asset Management recently withdrew its application for a bitcoin futures ETF, as Matthew Hougan, the firm’s CIO, said in a Twitter post that most long-term investors would be better served by spot exposure.
“The bitcoin futures ETF market has a natural cap given that investors really want a spot bitcoin ETF,” Geraci said at the time. “I think an issuer like Bitwise is content to focus on that bigger prize and let other issuers fight over whatever scraps are available in the bitcoin futures ETF market.”
Rather than launching funds that invest almost exclusively in bitcoin futures, other issuers are choosing a different approach to get investors exposure to the growing market.
The WisdomTree Enhanced Commodity Strategy Fund (GCC) – an actively managed ETF seeking to provide broad exposure to a diversified basket of commodities – last month became the first ETF to add bitcoin futures. It can invest up to 5% of its net assets in them, a recent filing indicates.
A managed futures fund proposed by SkyRock Investment Management also may hold up to 5% of the fund’s assets in derivatives referencing bitcoin or other cryptocurrencies that are registered with the Commodity Futures Trading Commission, according to a disclosure filed on Friday.
Get the day’s top crypto news and insights delivered to your inbox every evening. Subscribe to Blockworks’ free newsletter now.