Asset managers haven’t been able to persuade the SEC to greenlight bitcoin exchange-traded funds. Now they’re turning to putting a crypto spin on other kinds of products.
The field is crowded with ETFs tracking benchmarks like stock and bond indexes, and firms are constantly looking for a new niche to lure assets. Intense competition has prompted a race to, and even below, zero for fees on some more basic funds.
$50 billion asset manager VanEck for years has been pursuing approval for an ETF that holds bitcoin. Another firm’s attempt to launch ETFs with bitcoin futures instead was a non-starter — in February, Reality Shares withdrew a filing for an actively-managed currency and bitcoin futures portfolio.
VanEck this week said it’s teamed with fintech partner SolidX on a bitcoin fund with the same behind-the-scenes plumbing as an ETF. But the new fund is not registered like an ETF, and it’s off-limits to individual investors.
And Franklin Templeton is putting a blockchain twist on the staid money fund realm. It already has a suite of money market funds, but said in a statement the new product is aimed at a “different and unique customer base.”
The Franklin Blockchain Enabled US Government Money Fund keeps a traditional record of share ownership as well as a record on the blockchain technology that underpins bitcoin. It does not hold any crypto.
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A gradual process
The Franklin fund is “an interesting pilot,” said Ben Johnson, Morningstar’s director of global ETF research. Firms’ margins are getting squeezed as investors flee active management in favor of low-cost passive funds.
“Asset manager fees are under greater pressure than they’ve ever been,” Johnson said, leaving “no stone unturned” when it comes to their own expenses.
In 2017, Vanguard said it would work with two other groups to share index data using blockchain with the aim of improving benchmark tracking.
While the Franklin Templeton fund may in the future be maintained solely on blockchain, the $710 billion asset manager said in a filing there’s “no guarantee” that will happen. Blockchain is “a ripe development platform,” a firm spokesperson said.
Morningstar’s Johnson said the VanEck bitcoin trust helps investors avoid the “headaches” of bitcoin custody, but noted “it’s awfully hard to predict” demand.
Grayscale Investments offers crypto for big investors via periodic private placements. Its bitcoin trust charges a 2% fee, the asset manager’s website says, and collected $2.4 billion since its 2013 launch.
“Given the channel we’re focused on, we think it’ll be a gradual process – institutions will take their time to evaluate,” said Ed Lopez, VanEck’s head of ETF product.
For perspective, SPDR Gold Shares, State Street’s physical gold ETF with an expense ratio of 0.4%, has picked up nearly $44 billion since its 2004 listing.
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Providers pushing to lock down ETF approval could risk crypto falling out of favor in the meantime. SEC Commissioner Hester Peirce said in May it may be a long time before a bitcoin ETF gets green-lighted.
Todd Rosenbluth, head of ETF and mutual fund research at CFRA, highlighted the inherent uncertainty around new crypto products.
“While the security’s price has partially recovered from lows in early 2019, it has been a volatile ride and demand remains uncertain,” he said.
Only investors with over $100 million in assets can buy VanEck SolidX Bitcoin Trust shares. If the SEC ever does allow a mainstream ETF, institutions’ shares could roll over into that product, Lopez said. Fees are 2% to the fund sponsor, plus a 0.9% insurance fee to cover bitcoin theft, VanEck’s website says.
Institutional investors lack the framework, including central clearing and brokerage accounts set up for crypto, to hold bitcoin, Lopez said.
“What we’re hoping this does for them is it wraps all that stuff together and makes a tradeable product,” Lopez said.
BNY Mellon is the VanEck fund accountant and administrator.
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