By Michael Scott
The founder of white-label exchange-traded fund (ETF) provider HANetf, Hector McNeil, has recently warned that the fierce Bitcoin ETF tussle could claim several issuers. The co-chief executive projects that the sustained Bitcoin ETF war for market share is heating the fee race as investors reap declining management fees.
The analyst considers that the cutthroat battle lodged in the rush to become the leading spot Bitcoin ETF issuer in the US could see a substantial number of listed ETFs shut down from lack of profits.
Sustained Fee War to Force Exit of Smaller Bitcoin ETF Issuers
McNeil acknowledges the analysts’ predictions that the sustained fee war could compel the smaller issuers to exit the race. The analysts illustrated the silver lining from the fierce battle: investors emerge the biggest fees as they leverage the falling fees.
McNeil revealed that most of the current ETFs listed following the approval by the US Securities and Exchange Commission (SEC) will struggle to break even. He considers that their survival rests upon securing billions of dollars’ worth of assets under management (AUM). Such an objective is challenging to realize.
McNeil observed that the newly approved Bitcoin ETFs have pulled AUM to exceed $10 billion by press time since their unveiling. Nonetheless, Fidelity and BlackRock hold the majority, estimated at $3.5B and $4B, respectively.
McNeil projects that four or five will realize a break even though some listed on January 11 will ultimately close. He considers other issuers plotting to unveil such a Bitcoin fund will halt such plans.
Fierce Bitcoin ETF War Plunging Issuers to Bottom
McNeil considers the present Bitcoin ETF war a race towards the bottom. The executive believes the race has too many contestants chasing too small a pile.
McNeil reflects on the Global X announcement in late January to terminate its bid for the Bitcoin ETF without offering a detailed explanation. The executive illustrates that other ETF bidders, Hashdex, 7RCC, and Pando, have plunged into silence on the plans.
McNeil warns that other potential issuers will likely exercise caution as the 10 Bitcoin ETF managers have lowered the fees in a trend that began before approval. The lower management fees amount to a carrot dangled to attract investors.
The race to lower the management fees saw Invesco and Galaxy cut the ETF fee in late January from 0.39% to 0.25%. The reduction brought the ETF level with VanEck, Fidelity, BlackRock, and Valkyrie.
Invesco and Galaxy Digital already announced zero fees for the initial six months. The investors could enjoy the zero fee waiver till the ETF issuer realizes $5 billion in assets.
Dilemma Aggravated by Endless Bitcoin Fee Cut War
The director at Morningstar Research, Bryan Armour, indicated that fee wars would likely edge out the issuers because it becomes challenging to realize profit with low fees. Also, potential entrants are encouraged to make a late start.
Armour indicates that new Bitcoin ETF issuers would likely allocate their assets. Alternatively, issuers could rely on the distribution channels to navigate the contested segment.
Bloomberg ETF lead analyst Henry Jim illustrated that the smaller issuers confront an uphill battle to enter the turf war against giants. The analyst argued that matching the fees would erode the revenue that the issuers need to survive. The dilemma rests in the awareness that failure to lower the fees would scare investors, thus denying the issuers the opportunity to gather critical mass assets.
Jim asserts that new entrants would need investors with sufficient liquidity to keep afloat as they propose distributing ETFs.
McNeil indicates that the institutions considering later entry to the party should only remember surviving the Bitcoin ETF war if they offer something interesting. The executive suggests that those should consider alternative offerings, including Ether ETFs and covered calls.
McNeil concurs with Armour and Jim’s argument that the sustained squeeze on fees by the ETF issuers will benefit the ETF buyers and investors.
Jim indicated that market makers are reaping the benefits as investors incur fewer fees to access the difficult-to-access market. They are celebrating the increased liquidity within the Bitcoin markets and ETF shares.
Morningstar Research’s Armour considers that issuers likely to have substantial distribution channels would scale the contest quickly. He added that such issuers would win the fee wars, as illustrated by BlackRock and Fidelity.