The much-anticipated spot Bitcoin ETFs are likely to be disappointing for a considerable period after their launch.
This is according to recently published research on the post-launch performance of ETFs focused on specialized market niches. The study found that these narrowly focused ETFs lag the broader stock market on average, on a risk-adjusted basis, for five years after they hit the market.
The study, “Competing for attention in the ETF space“, was led by Itzhak Ben-David and Byungwook Kim of Ohio State University, Francesco Franzoni of the University of Lugano in Switzerland, and Rabih Moussawi of Villanova. It was published earlier this year in the Review of Financial Studies.
Although no spot Bitcoin ETF has yet been able to launch, many are ready at any time as soon as the Securities and Exchange Commission gives regulatory approval, which could happen any day now. Reuters estimates that eight to 10 companies have filed registration documents. to create their own ETFs, including BlackRock, the world’s largest fund manager. So far, the only Bitcoin ETFs approved by the SEC are those that invest in Bitcoin futures; Spot Bitcoin ETFs would benefit from several advantages over these futures-based funds.
The new study did not focus specifically on a possible Bitcoin ETF, and the authors make no predictions about Bitcoin’s future performance. The reason that narrowly focused ETFs that have just been launched generally tend to underperform is that they invariably come to market when investor enthusiasm for a particular investment theme is at a fever pitch. This means that the securities these ETFs invest in will tend to be overvalued.
A related reason why these narrowly focused ETFs tend to underperform is their high expense ratios. Ben-David, in an email, said Narrow ETF issuers exploit investor enthusiasm “and often charge high expense ratios on these new ETFs.”
Proposed expense ratios for new spot-to-bitcoin ETFs average close to 1%, for example. In contrast, the Vanguard Total Stock Market Index Fund ETF VTI,
which is compared to the entire US stock market, has an expense ratio of only 0.03%.
Although fund management companies have been trying to create a spot-bitcoin ETF for years, there is no doubt that investor enthusiasm for such ETFs is currently extremely high. A week ago, when BlackRock’s Bitcoin ETF project was assigned a ticker symbol, the price of Bitcoin hit its highest level in 18 months. The next day, when the stock symbol was removed from the market Depository Trust & Clearing Corporation (DTCC) website the price of Bitcoin fell by more than $1,000.
To understand how low the odds are for a new spot-bitcoin ETF, consider what the authors of this new study found when they analyzed all narrowly focused, specialized U.S. equity ETFs from 1993 to 2020. Over the five In the first years of their lives, these ETFs lagged the broader market by an average of 5.4% per year, on a risk-adjusted basis.
It is worth noting in this regard that a separate bitcoin valuation model also reveals that bitcoin’s future performance is likely to be poor. This mid-October model estimated the expected long-term future return of Bitcoin at just 1.1% annualized.. I think it’s fair to say that investors who are so excited about a possible new spot-bitcoin ETF are hoping for long-term returns much higher than that.
The essential ? On the one hand, it would not be surprising if the price of bitcoin increases if and when SEC approval for a spot-bitcoin ETF is granted. On the other hand, it would also not be surprising if Bitcoin’s performance following this rise was disappointing.