- The launch of the ProShares Bitcoin Strategy ETF has been a huge success, with the fund being the fastest ETF to attract $ 1 billion in assets.
- But that success is a double-edged sword and could hurt its investors, according to JPMorgan.
- "Contango on the BTC futures curve may put a brake on the performance of these funds due to the cost of holding futures," explained JPMorgan.
The ProShares Bitcoin Strategy ETF saw a surge in entries when it launched last week, making it Fastest ETF to Ever Hit $ 1 Billion in Assets.
But the futures-based ETF has a big flaw which could lead to lower returns for your investors if the fund's assets grow too large, JPMorgan he said in a note last week.
That is because the ETF does not own bitcoin as an underlying asset. Instead, the ETF owns bitcoin derivatives that attempt to match the return profile of the cryptocurrency through futures contracts. SEC Chairman Gary Gensler has resisted requests for approval of a spot bitcoin ETF, but has allowed it.
"Contango on the BTC futures curve may impose a drag on the performance of these funds due to the cost of futures carry / roll performance. This carry carry may be several times higher than product management fees and could increase even more so if these products accumulate substantial assets, due to their impact on the market, "explained JPMorgan.
To actively manage a portfolio of bitcoin futures that are closely correlated with bitcoin price movements, the ETF must continually roll over bitcoin futures contracts the following month just before expiration. This creates various trading costs and is less efficient than simply buying bitcoin and holding it, similar to what most gold and silver ETFs do.
According to JPMorgan, the average annual cost to renew futures contracts was around 9% since mid-2019, almost 10 times the ProShares Bitcoin Strategy ETF's annualized expense ratio of 0.95%. That could leave investors disappointed with their returns, as they could significantly lag behind those of bitcoin.
The bank said long volatility ETPs are a good example of how long-term returns can erode as the costs associated with trading futures accumulate. "The more long positions for investors, the more expensive it becomes to hold due to the market impact of the ETFs themselves," JPMorgan said.
The ProShares Bitcoin Strategy ETF already owns about 25% of the open stake in bitcoin futures contracts, according to the bank, and the fund recently sought a resignation from the CME to allow you to own more than the imposed limit of 4,000 futures contracts.
If the ETF does not get its exemption from the CME, it could ultimately deviate from its futures strategy and invest in stocks with exposure to cryptocurrencies to better track the price of bitcoin, according to the fund's prospectus.
