JPMorgan, the largest US bank, stated that although the ProShares Bitcoin Strategy ETF saw £726 million in trading volume in just the first few days, it would be more profitable for investors to buy Bitcoin (BTC) directly.
The bank holding pointed out a huge ETF drawback, which, with too many assets invested in the fund, can potentially lead to lower returns. Each futures contract has an expiration date, and in the BTC case, contracts are specified for six months in a row. Traders often “flip” futures contracts, selling those whose maturity date is fast approaching, and then buying others with further expiration date.
This prolongation entails expenses that are more commonly known as “contango”. The ETF also has to pay for the prolongation of monthly contracts, which leads to additional costs. “Contango in the BTC futures curve can impose a drag on performance for these funds due to the futures carry cost/roll yield. This carry drag can be several times the products’ management fees, and could become even larger if these products gather substantial assets, due to their market impact,” JPMorgan explained.
The bank projects this scenario to happen because the ETF does not own BTC as an underlying asset. Instead, the ETF owns BTC derivatives that attempt to match the crypto profitability profile through futures contracts. To actively manage the portfolio of Bitcoin futures, which are closely related to the fluctuating BTC price, the ETF has to roll over futures contracts to the next month just prior to their expiration. This approach results in various trading costs and is less efficient than simply buying and storing Bitcoin.
JPMorgan reported that since mid-2019 the average annual cost of prolonging futures contracts was about 9%, which is almost 10 times higher than the annual expense ratio of the ProShares Bitcoin Strategy ETF, which is 0.95%. Over time, ETF investors might get dissapointed, as they will be significantly lagging behind direct investors in Bitcoin in terms of profits.
The bank said long volatility ETPs are a good example of how long-term profits can be eroded as the costs associated with futures trading go up. “The more investors position long, the more expensive it becomes to hold due to the ETFs’ own market impact,” JPMorgan said.
Recently, Cathie Wood, an American investor and the CEO of Ark Invest, has announced that the company will study ETFs until it sees an orderly move with decent bilateral liquidity and a smaller contango.
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