Exchange-Traded Funds (ETFs) are popular investment vehicles that allow investors to gain exposure to a basket of assets, such as stocks, bonds, commodities, or cryptocurrencies. ETFs are traded on regulated exchanges and can be bought and sold like any other security. However, not all ETFs are created equal. Depending on the underlying assets and the way they track their performance, ETFs can have different characteristics, risks, and benefits.
A spot ETF is an ETF that holds the actual asset it tracks in its portfolio. For example, a gold spot ETF would own physical gold bars or coins, and its price would reflect the current market price of gold. A spot ETF provides direct exposure to the asset and its price movements.
A futures ETF is an ETF that does not hold the actual asset, but instead uses futures contracts to track its performance. Futures contracts are agreements between two parties to buy or sell an asset at a predetermined price and date in the future. A futures ETF uses these contracts to gain exposure to the asset’s expected future price.
For example, a gold futures ETF would not own any physical gold, but would buy and sell gold futures contracts on a regulated exchange. The price of the futures contracts would depend on the market’s expectations of the future price of gold, which may differ from the current spot price.
A futures ETF provides indirect exposure to the asset and its price movements. However, it also introduces some additional factors that affect its performance, such as:
Rolling costs: Futures contracts have expiration dates, so a futures ETF has to periodically sell its expiring contracts and buy new ones with later expiration dates. This process is called rolling, and it can incur costs or gains depending on the price difference between the contracts.
Contango and backwardation: These are terms that describe the relationship between the spot price and the futures price of an asset. Contango occurs when the futures price is higher than the spot price, implying that the market expects the asset’s price to rise in the future. Backwardation occurs when the futures price is lower than the spot price, implying that the market expects the asset’s price to fall in the future. These situations can affect the performance of a futures ETF relative to a spot ETF.
Leverage: Futures contracts allow traders to control a large amount of an asset with a small amount of money, known as margin. This creates leverage, which magnifies both potential profits and losses. A futures ETF may use leverage to increase its exposure to the asset, but this also increases its risk and volatility.
Spot ETFs vs. Futures ETFs for Bitcoin
Bitcoin is a digital currency that operates on a decentralized network of computers. It has become one of the most popular and controversial assets in recent years, attracting investors, enthusiasts, regulators, and critics alike. Bitcoin spot ETFs are ETFs that hold actual bitcoins in their portfolio, either directly or through a custodian. They track the current market price of bitcoin and provide investors with direct exposure to the cryptocurrency and its volatility.
Bitcoin futures ETFs are ETFs that do not hold any bitcoins, but instead use bitcoin futures contracts traded on regulated exchanges to track its performance. They track the expected future price of bitcoin and provide investors with indirect exposure to the cryptocurrency and its volatility.
As of 2022, there are no bitcoin spot ETFs available in the U.S., as the Securities and Exchange Commission (SEC) has not approved any applications for them yet. The SEC has expressed concerns about the lack of regulation, transparency, liquidity, custody, and security of bitcoin and its market.
However, there are several bitcoin spot ETFs available in other countries, such as Canada and Europe. These ETFs have proven to be popular among investors who want to access bitcoin without having to deal with its technical complexities and risks.
In contrast, there are several bitcoin futures ETFs available in the U.S., as the SEC has approved some applications for them in 2021. The SEC has deemed these ETFs to be less risky than spot ETFs, as they use regulated futures contracts instead of unregulated bitcoins. However, these ETFs also have some drawbacks, such as higher fees, rolling costs, contango effects, and leverage risks. Moreover, they may not track the actual price of bitcoin as closely as spot ETFs do. There is no definitive answer to which type of ETF is better for bitcoin investors. It depends on various factors, such as:
Investment objectives: Investors who want to gain direct exposure to bitcoin and its price movements may prefer spot ETFs, as they reflect the actual value of the cryptocurrency. Investors who want to gain indirect exposure to bitcoin and its price expectations may prefer futures ETFs, as they reflect the market’s sentiment about the cryptocurrency.
Risk tolerance: Investors who are willing to accept higher risk and volatility may prefer spot ETFs, as they expose them to the full potential of bitcoin and its market. Investors who are more risk-averse may prefer futures ETFs, as they offer some protection from the regulatory and operational uncertainties of bitcoin and its market.
Cost efficiency: Investors who want to minimize their costs and fees may prefer spot ETFs, as they have lower expense ratios and no rolling costs. Investors who are willing to pay higher costs and fees for more convenience and accessibility may prefer futures ETFs, as they are easier to trade and available in more markets.
Spot ETFs and futures ETFs are two different ways of gaining exposure to an asset, such as bitcoin. They have different characteristics, risks, and benefits that investors should consider before choosing one over the other. Spot ETFs provide direct exposure to the asset and its price movements, while futures ETFs provide indirect exposure to the asset and its price expectations. Spot ETFs may be more suitable for investors who want to capture the actual value of bitcoin, while futures ETFs may be more suitable for investors who want to capture the market’s sentiment about bitcoin.
However, both types of ETFs have their own drawbacks and limitations, such as regulatory hurdles, cost inefficiencies, tracking errors, and leverage risks. Therefore, investors should do their own research and due diligence before investing in any ETF.