ETF stands for “Exchange Traded Fund” and is a type of investment fund that’s traded on the stock exchange. The purpose of an ETF is to provide investors easy access to global stock markets without the need to identify any market winners. Rather, they are already given a collection of the top investments in a single market or sector.
There are several advantages to ETFs. Most notably, trading flexibility, instant diversification, low cost and tax efficiency.
Traditional shares are only traded once per day after the markets close. The fund net asset value (NAV) is announced at the end of the day, which is when investors can find out how much they paid for new shares when buying, as well as the amount they’ll receive when selling. On the other hand, ETFs are bought and sold during the day when markets are open, offering more flexibility to investors. Therefore, they are able to quickly find out how much they paid to buy shares and how much they received through selling them.
There are a wide variety of ETFs available in the stock market which cover different sectors, industries, indices, countries and more. There are also several different terms (long, mid, short, etc.), level of quality (treasury, corporate, high yield, etc.) and regions.
ETFs also allows you to build a diversified portfolio with the same low cost as traditional stocks. They also tend to have lower expense ratios.
Finally, ETFs offer investors more control over taxes. Specifically, they work by following a certain index which, in turn, doesn’t gain a high income that would require investors to pay income tax on.
The advantages of ETFs have seen their popularity grow significantly. So, it isn’t surprising that they have made their way into the crypto world. Most notably, bitcoin (BTC) ETFs, which track the value of the cryptocurrency. They also trade on traditional market exchanges, rather than the cryptocurrency exchanges.
Much like traditional ETFs, BTC ETFs also hold several advantages such as convenience, diversification and tax efficiency.
BTC ETFs leverages the cryptocurrency’s value without the need to go through the usual steps of BTC investment. In other words, investors don’t need to sign up for a cryptocurrency exchange as the ETF simplifies the process of investment.
They can also hold multiple assets, which gives investors the opportunity to diversify their portfolios. For example, a single BTC ETF could hold several stocks, such as Apple and Facebook.
But what about BTC’s volatility? The Horizons Inverse Bitcoin ETF (BITI) aims to allow investors to take advantage of this. Specifically, it lets BTC investors bet on price losses, rather than gains. The Canadian company stated that the fund will allow investors to short BTC futures, with its executives describing it as a way to benefit from episodes of price volatility.
There are currently three different kinds of BTC ETFs – BTCC, BTCC.B and BTCC.U. They all have different names, but what sets them apart from each other?
BTCC was the first BTC ETF. It was launched in February 2021 by Purpose Investments. It is purchased with Canadian dollars and hedges US currency exposure. On the other hand, BTCC.B is also purchased with Canadian dollars but does not hedge US currency exposure. Finally, BTCC.U is purchased with the US dollar and allows investors to hold BTC in this currency.
BTC ETFs aren’t without their disadvantages. For instance, ETFs tend to charge management fees for the convenience they provide. As a result, these fees can build up over time if you own multiple BTC ETFs.
Additionally, there are also limits in cryptocurrency trading. BTC can often be traded for other cryptocurrencies, but an ETF would not be eligible to trade.
There’s also the fact that BTC, like other cryptocurrencies, is decentralised and provides privacy and anonymity through the blockchain. However, as a BTC ETFs are regulated by the government, these benefits do not apply.
Would you consider a BTC ETF in the future, or do you think it takes away the fun from investing in crypto? Let us know your thoughts in the comments below.