Cryptocurrency ETFs Will Be Australia’s Most Expensive Passive Funds

ETF Securities funds will also charge a $500 withdrawal fee to anyone who redeems their holding for bitcoin, ether or cash, but will not charge an exit fee to traders using an exchange. The Cosmos fund will charge an exit fee of $200, but only to “authorized participants”.

Analysis performed for The Australian Financial Review by Justin Walsh, an Australian ETF analyst at research house Morningstar, found that a management fee of 1.25 percent per annum would top lists of the most expensive “index/liability ETFs” available on the local stock market.

Passive management is a strategy in which chosen investments are designed to mimic the performance of a particular market or asset class by following the composition of a related index or benchmark.

The PDS for the Cosmos Purpose Bitcoin Access ETF stated that the fund “employs a passive investment strategy of investing directly in units of the Purpose ETF, which are listed for trading on the Toronto Stock Exchange.”

ETF Securities did not explicitly describe the investment strategies for its ETFS 21Shares Bitcoin ETF and ETFS 21Shares Ethereum as “passive.” But identical wording in the PDS for both funds explained that the investment objective was to “provide a return that tracks the price performance” of bitcoin and ether in Australian dollars.

Since passive funds do not seek to outperform any particular market, and their management is determined by rules rather than investment skills, they are typically marketed as low-cost products and are designed to provide broad market access for investors. regular retailers.

‘Serious price hike’

But the expected 1.25 percent management fees for the country’s first cryptocurrency ETFs have surprised some observers, given their underlying passive strategies.

A wealth adviser, who supports launching such ETFs as a regulated method for clients to gain exposure to unregulated crypto markets, said the fee card reflected a “serious price increase.”

Chris Brycki, an ETF market analyst and founder of online investment adviser Stockspot, said the planned fees were generally on par with early versions of cryptocurrency ETFs globally. For example, the Purpose Bitcoin ETF, which the Cosmos ETF will join, charges 1 percent with a maximum cap of 1.5 percent.

Stockspot’s analysis spotted five passive ETFs with higher management fees than upcoming crypto ETFs, including Betashares Australian Equities Bear Hedge Fund (1.48 percent) and BetaShares Strong Australian Dollar Fund (1.38 percent).

However, all of them involved risky strategies such as leveraging or leveraging (amplifying profits or losses through the use of debt or borrowed funds) and are therefore not analogous, Brycki said.

Kanish Chugh of ETF Securities says that crypto assets incur specific custody and insurance costs. michele mossop

Excluding synthetic or leveraged products, the most expensive passive product on the market is the VanEck China New Economy ETF, which charges 0.95 percent a year, or a third cheaper than pending crypto ETFs.

Kanish Chugh, head of distribution at ETF Securities, said the fees charged for its outstanding bitcoin and ether funds were in line with other markets such as Canada and reflected the unique costs involved in managing and securing crypto assets.

“Supply chain costs for bitcoin and ethereum ETFs are significantly higher than for stock, bond and commodity ETFs,” Chugh said. “The most crucial of these are custody costs… and insurance costs, which provide protection to investors in the event of any hacking or fraud.”

ETF Securities and partner 21Shares will keep their crypto keys in offline “cold storage,” opting for security known as a “Faraday cage,” in a bid to defend against cybercrime.

The five-month delay in listing crypto ETFs has also added additional legal and staffing costs to the firm, impacting the final administration fee, Chugh added.

“Investors are right to focus on fund manager fees,” he said. “Fees are charged each year and compounded. And ETFs have a well-deserved reputation for charging low fees.”

However, he added that the annualized fee only applies to investors who stay the course for a full year, noting that crypto ETFs are highly traded. He added that while unregulated cryptocurrency exchanges can provide cheap access to bitcoin or ether, they cannot offer the transparency or security of a regulated exchange like Cboe.

Cosmos CEO Dan Annan said: “[We] researched the market, before assessing the operating costs of delivering the asset in an ETF.”

Stockspot’s Mr. Brycki agreed that the relatively high cost of crypto ETFs was likely more a reflection of high operating costs, such as custody, than any blatant business motivation.

But he warned investors to take a close look at fees, as well as the size and sustainability of cryptocurrency ETFs, before buying. He tipped prices to normalize as this new market matures.

“Ultimately there will be a lot of competition in this space and ETF issuers will know that price is an important factor for investors to consider,” he said.

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