Every week, we’ll profile a high yield investment fund that typically offers an annualized distribution of 6-10% or more. With the S&P 500 yielding less than 2%, many investors find it difficult to achieve the portfolio income necessary to meet their needs and goals. This report is designed to help address those concerns.
This week, I want to talk about an asset class that a lot of investors use for income generation - crypto. OK, that’s obviously not true, but if you’re willing to look beyond spot bitcoin ETFs, there are actually some interesting products out there that are at least worth taking a look at. These aren’t traditional income products by any means, but their structure allows them to generate income in addition to maintaining close to 100% correlation to the underlying price of the coin. It’s an interesting combination that allows investors to potentially bitcoin exposure and then some.
A lot of folks assumed that bitcoin futures ETFs, such as the ProShares Bitcoin Strategy ETF (BITO), would become irrelevant once spot bitcoin ETFs were approved by the SEC. That hasn’t been the case. BITO still has $1.7 billion in assets and its net flows since the spot ETFs were launched are virtually flat. In other words, there hasn’t yet been the mass exodus of shareholders out of this fund. Part of the reason is the fund’s yield, which on a trailing 12-month basis is currently at 38%. How is a crypto ETF delivering such a high yield? Is it sustainable? Is BITO actually worth considering as an income product? Let’s dive in!
Fund Background
BITO is an actively-managed ETF. It aims to produce returns that correspond to bitcoin, but are unlikely to directly correlate. It typically invests in front month bitcoin futures contracts with an expiration of one month or less. BITO does not invest directly in bitcoin.
Because BITO invests in futures contracts and those contracts cost money to purchase and they must be rolled forward into new contracts every month, often at a higher price than the existing contract, a condition known as contango, BITO is very likely to experience a performance drag relative to spot bitcoin over time. Year-to-date, BITO’s total return trails that of spot bitcoin by about 9%. That and BITO’s 0.95% expense ratio will continue to act as a long-term drag on performance. If you’re looking purely for bitcoin exposure in your portfolio, one of the spot bitcoin ETFs will probably work better for that purpose. If you’re still interested in the “bitcoin plus yield” characterization of this fund, let’s read on.
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