An ETF (exchange-traded fund) is a passive investment fund that trades on stock exchanges that replicates a stock index, a bond index, a sector, commodities or other assets such as cryptos. ETFs are one of the best instruments to diversify and reduce the investment risk. As said before, ETFs are exchanged in the stock market and for this reason they work as stocks do: in fact they can be purchased and sold when the market is open and their price changes in real time, even if ETFs experience lower volatility as they are lower-risk instruments than stocks, and their underlying assets are highly diversified. The fact that ETFs are traded on a stock exchange is one of the differences that they have with mutual funds, which trade just once a day once the market closes and they are not traded on an exchange. ETFs aim to replicate their underlying assets with passive management that often allows commissions below 0.5% annually. These costs are much lower compared to mutual funds, which generally have costs around 2%.
ETFs can be divided into two main categories, accumulating and distributing ETFs. As aforementioned, within most exchange traded funds, there are many stocks, some of which will pay dividends to their respective holders. There are two ways that ETFs handle dividends, the first of which being through accumulation. Accumulating ETFs essentially add to the value of the ETF, meaning all of the dividends immediately get re-invested into the fund. This means that, if an ETF contains 100 shares of a company, and the company offers a dividend of $2 per share, the fund will increase by $200 in valuation. However, there is another category of tradable funds that we have to look into, called distributing ETFs. Again, the focus is on the dividends handed out by the companies within the funds. Distribution ETFs handle dividends much differently when compared to other accumulation funds, instead of reinvesting them, they just deliver them to the holder of the ETF in cash form. Using the same example as we used above, if an ETF contains 100 shares of a company, and the company offers a dividend of $2 per share, a $200 cash amount will appear on your portfolio, rather than a $200 increase in the value of the ETF. When you’re looking into investing in an ETF, you have to look at the end of the name to tell whether the fund is an accumulating or a distributing fund. If it has “ACC”, it is an accumulating fund, if it has “DIST”, it is a distribution fund.
Now, given you now have a strong theoretical understanding of how ETFs function, it’s time that we provide you with some practical advice to back up your future investments in ETFs. Our portfolio’s best picks are the Amundi Nasdaq – 100 ETF II UCITS ETF Acc, a derivative to the Nasdaq index. The Nasdaq had a stellar performance in 2023, and is poised for further growth, as big tech grows on the back of new artificial intelligence technology. Secondly, another ETF that could be facing good growth opportunities is the Vanguard Large-Cap ETF. This fund follows the largest 85% of companies traded in US markets and has similar performance to the S&P 500. This ETF is designed to have lower commissions, together with also being relatively cheap to purchase. Last but definitely not least, we recommend Pimco Active Bond Exchange-Traded Fund (BOND), for investors looking for more long term and income forming solutions. This actively managed ETF has proven over time to be capable of reliable and constant performances, which, together with the fact that over 65% of the bonds held within the ETF have a AAA rating, makes it one of the most appealing options in terms of bond ETFs on the market today.
Now we are going to talk about the newest category of exchange traded funds: the Bitcoin spot ETFs. This new fund was for a very long time demanded by both retail and average investors, since the value of the cryptocurrency rose throughout the years to tens of thousands of dollars per unit. For this reason, it was starting to become increasingly difficult for average investors to invest in bitcoin and be able also to diversify their assets, and for this reason in 2013 was sent to the SEC the first application for approval of a spot Bitcoin ETF. The ProShares Bitcoin Strategy ETF (BITO) became the first officially approved Bitcoin ETF, utilizing futures contracts. The SEC granted its approval in October 2021, and it is now listed on the New York Stock Exchange. Despite the desires of many crypto enthusiasts for a Bitcoin ETF to involve direct purchase and securitization of Bitcoin by a company, the SEC consistently rejected such proposals until 2024. Following a court order in August 2023, the SEC was forced to reconsider these proposals. Subsequently, on January 10, 2024, the Commission gave the green light to 11 Bitcoin spot ETFs. Contrary to the ProShares ETF, these spot ETFs hold actual Bitcoin instead of futures contracts. The difference between spot ETFs and future ETFs is in their underlying assets and price tracking mechanisms. Spot ETFs directly hold and manage Bitcoin, providing investors with direct exposure to the cryptocurrency’s price movements. They offer more accurate tracking and potentially lower fees compared to futures ETFs. Futures ETFs track Bitcoin’s price through futures contracts, which are agreements to buy or sell the asset at a predetermined price in the future. So with Futures ETFs the fund issuer does not hold physical Bitcoin, but financial derivatives that speculate on the future price of Bitcoin.
The current Bitcoin spot ETFs are:
- Grayscale Bitcoin Trust,
- Bitwise Bitcoin ETF,
- Hashdex Bitcoin ETF,
- iShares Bitcoin Trust,
- Valkyrie Bitcoin Fund,
- ARK 21Shares Bitcoin ETF,
- Invesco Galaxy Bitcoin ETF,
- VanEck Bitcoin Trust,
- WisdomTree Bitcoin Fund,
- Fidelity Wise Original Bitcoin Fund,
- Franklin Bitcoin ETF.
To sum it up, Bitcoin spot ETFs are valuable for investors seeking direct exposure to the cryptocurrency’s market performance. By holding physical Bitcoin, these ETFs provide a straightforward way to mirror its price movements without the complexity of derivatives. Additionally, they contribute to market efficiency by providing a regulated avenue for buying and selling Bitcoin shares, potentially reducing volatility.
Authors: Filippo Ferrero and Stefano Rizzi