Active management and cryptocurrency are attracting investors’ attention in 2024. Combine those two and you get some of the highest-performing exchange-traded funds of the year.
While the passively managed spot bitcoin ETFs have performed well, three of the top five crypto ETFs, as measured by year-to-date performance, are actively managed, futures-based funds.
Keeping in mind that spot bitcoin ETFs didn’t begin trading until Jan. 12, the Grayscale Bitcoin Trust ETF (GBTC), which began the year as a closed-end fund, leads all crypto ETFs with a year-to-date gain of nearly 78%.
Best Crypto ETFs by 2024 Performance
Performance data as of June 3, 2024. Leveraged ETFs were not included in our search.
Crypto ETFs, Futures and Active Management
Futures-based crypto ETFs actively invest in contracts mimicking cryptocurrency prices, offering regulated exposure without directly holding the underlying digital assets they track. However, they can deviate slightly due to rolling over expiring contracts and potential tracking errors.
A futures contract is an agreement between two parties to buy or sell a certain asset (in this case, a cryptocurrency like Ethereum or bitcoin) at a predetermined price on a specific future date.
The value of the futures contracts fluctuates based on the underlying cryptocurrency’s price expectations. If the cryptocurrency’s price goes up, the value of the futures contracts typically goes up as well, and vice versa. By holding these futures contracts, the ETF aims to track the price movements of the cryptocurrency.
Benefits of Futures-Based Crypto ETFs
-
Convenience: Investors can gain exposure to cryptocurrency price movements without the complexities of managing private keys or crypto wallets.
-
Regulation: These ETFs are regulated by financial authorities, primarily the Securities and Exchange Commission (SEC), offering a potentially safer alternative to unregulated cryptocurrency exchanges.
-
Potential liquidity: Futures-based ETFs generally offer greater liquidity compared to directly buying and selling cryptocurrency on exchanges.
Drawbacks of Futures-Based Crypto ETFs
-
Tracking error: As mentioned earlier, the rolling of futures contracts can introduce a tracking error, meaning the ETF’s price might not perfectly mirror the underlying cryptocurrency’s price movement.
-
Counterparty risk: There’s a risk of default by the counterparty to the futures contract, potentially leading to losses for the ETF and its investors.
-
Fees: Management fees associated with the ETF can eat into potential returns.
Futures-Based Crypto ETFs vs Spot Funds
Unlike owning the actual cryptocurrency like a spot bitcoin ETF, futures contracts have expiration dates. As the expiration date approaches, the ETF needs to roll over its contracts to maintain exposure. This involves actively selling the expiring contracts and simultaneously buying new contracts with further expiration dates.
The difference between the current spot price of the cryptocurrency and the futures price can cause the ETF’s price to deviate slightly from the actual cryptocurrency’s price movement over time. This difference is called the basis.
Fees associated with buying and selling futures contracts generally lead to higher expense ratios compared to spot ETFs and can also contribute to a fund’s tracking error.
Bottom Line on Investing in Futures-Based Crypto ETFs
Futures-based crypto ETFs provide a regulated and convenient way to gain exposure to cryptocurrency prices. However, investors should be aware of the tracking error, counterparty risk, and fees involved before investing. It’s also important to note that these ETFs do not provide ownership of the underlying cryptocurrency and may not perfectly replicate its price movements.