The American exchange-traded fund (ETF) issuer Invesco has for the first time revealed the reason for its surprise decision to pull out of the race to bring a bitcoin (BTC) futures-backed ETF to the market – and just like its competitor Bitwise Asset Management, the firm has blamed the rules from the US Securities and Exchange Commission (SEC).
According to Invesco, the main problem is the SEC’s requirement that an ETF only holds bitcoin futures contracts traded on the Chicago Mercantile Exchange (CME). Futures contracts must be rolled over each month as they expire, which adds complexity and costs to the management of the ETF.
“We ran a number of simulations and the cost of rolling the futures, produced a drag of 60-80 basis points [a month],” Anna Paglia, Invesco’s global head of ETFs and indexed strategies, told the Financial Times in a comment on Monday.
“We are talking about some big numbers, 5-10 per cent annualised. It was not going to be plain vanilla replication of the [bitcoin] index without significant tracking error,” Paglia added, while also sharing concerns around the capacity and liquidity of the bitcoin futures market.
Invesco had originally planned to include a mix of bitcoin futures and swaps, physical bitcoin, ETFs and private funds investing in the industry as part of its ETF, but said the SEC would not allow this.
And while Paglia told the Financial Times that CME’s bitcoin futures can be an “effective element” in a fund, she also added that they “never thought they would be effective when they would be 100 per cent of the product.”
In addition to the costs associated with rolling over contracts at expiry, however, rules from the CME that limit how many front-month contracts can be held by a single entity such as an ETF are also causing problems for the bitcoin ETF issuers.
As previously reported by Cryptonews.com, the rule had already forced the first bitcoin ETF, ProShares’ BITO, to load up on November contracts shortly after its October launch. And given that longer-dated futures contracts typically trade at a higher price than the current contract – a phenomenon known in the futures market as contango – costs for investors are driven up even further.
“The more we investigated the market and the space, the more we came to realise there are better ways of providing this particular exposure,” Invesco’s ETF head went on to say about its decision to withdraw the 75-page ETF filing.
The implied criticism of the rules from Invesco thus echo what was also heard from Bitwise after it last week said it had withdrawn its application for a bitcoin futures ETF.
According to Bitwise’s chief investment officer Matt Hougan, the firm’s proposal for a futures-based ETF was withdrawn because of “added complexity” and higher-than-expected costs associated with such an ETF.
As a result of this, Hougan said long-term bitcoin investors “would be better served by spot exposure,” which he noted is already readily available. Bitwise will instead “look for other ways to help investors get access to the incredible opportunities in crypto,” Hougan concluded at the time.