October 27, 2021 | by Kevin Jiang, Head of Trading, 3iQ Corp.
Following a landmark greenlight from the Securities Exchange Commission for a bitcoin futures ETF, the ProShares Bitcoin Strategy ETF (BITO) began trading on October 19, 2021, and traded approximately $1 billion in volume on the first day (Source: https://www.nyse.com/quote/ARCX:BITO). This highly anticipated launch helped rally bitcoin to all-time highs, bringing confidence throughout the crypto industry.
One thing to note about futures-based ETFs, for BITO or even more recent entrants like Valkyrie Bitcoin Strategy exchange-traded fund (BTF), is that unlike physically-backed ETFs, futures-based ETFs would have to keep rolling the monthly futures contracts forward to maintain their exposure as front-month contracts approach expiry.
Why this matters to investors is that this rolling process could be costly, and may result in the futures-based ETFs underperforming their benchmark. When futures are in contango (a situation where the futures price of a commodity is higher than the spot price, which usually occurs when an asset price is expected to rise over time), the rolling process could cause a performance drag as the futures-based ETFs “roll” into the more expensive forward month contract. Additionally, since the roll generally happens monthly, futures-based ETFs may incur extra trading commissions which could further encumber tracking performance.
The illustration below shows the one-year performance comparison between the Horizon Bitcoin Front Month Rolling Futures Index (“HBITCNER Index”) and MVIS Bitcoin Benchmark Index (“BBR Index”), which is a difference of -40.24% from October 2020 to October 2021.
Based on the historical evidence in the illustration below, when making investment decisions, investors should be aware that a futures-based ETF may underperform its index by a meaningful margin over time.
Source: Bloomberg as at October 20, 2021. You cannot invest directly into an index. This example is for illustrative purposes only.
The commentaries contained herein are provided as a general source of information based on information available as of October 20, 2021. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change investment decisions arising from the use or relevance on the information contained here. Investors are expected to obtain professional investment advice to determine suitability of their investment objectives and portfolio. 3iQ Corp. “3iQ” makes no representation or warranty to any investor regarding the legality of any investment, the income or tax consequences, or the suitability of an investment for such investor. Prospective investors must not rely on this blog as part of any assessment of any potential investment and should not treat the contents of this blog as advice relating to legal, taxation, financial or investment matters. Prospective investors are strongly advised to make their own inquiries and consult their own professional advisers as to the legal, tax, accounting and related matters concerning the acquisition, holding or disposal of an investment.
The views expressed in this presentation are those of the author and do not necessarily represent the opinions of 3iQ, its affiliated companies, funds or investment strategies.
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