Not long ago, investing in Bitcoin (BTC 1.08%) was a challenging endeavor for those not directly acquiring the cryptocurrency. However, following the approval of the first Bitcoin exchange-traded funds (ETFs) in early 2024, a multitude of funds that either invest in Bitcoin or related assets have become accessible to traders. Although I do not currently hold any Bitcoin in my investment portfolio, I’ve been considering adding it primarily to diversify my holdings. With this in mind, I have identified two Bitcoin ETFs that I am evaluating, along with one that I plan to steer clear of.
A Focused Bitcoin ETF
The six leading Bitcoin ETFs available today are exclusively dedicated to Bitcoin, commonly referred to as spot Bitcoin ETFs. These funds are designed to own Bitcoin and track its price over time, minus investment fees. Among these, the largest and one I’m contemplating is the iShares Bitcoin Trust ETF (IBIT 0.37%). This fund holds a significant amount of Bitcoin, totaling around $84 billion. While there are other reputable spot Bitcoin ETFs, the iShares Bitcoin Trust stands out due to its low expense ratio of 0.25%. This means you would incur a fee of $2.50 for every $1,000 invested, which, while not paid out of pocket directly, will influence the fund’s overall performance over time. Some other Bitcoin ETFs may have expense ratios exceeding 1.5%, which can significantly affect returns over several years.
An ETF Linked to Bitcoin
No matter how Bitcoin’s price fluctuates, the broader cryptocurrency sector and the blockchain technology that supports it hold remarkable potential. One ETF that has caught my eye is the ARK Next Generation Internet ETF (ARKW 1.63%), actively managed by Cathie Wood and currently managing $2.35 billion in assets. This fund has approximately 6.4% of its portfolio invested directly in Bitcoin, but its primary focus lies on companies involved in modern technological infrastructure. The fund aims to invest in sectors such as cryptocurrencies, digital wallets, and smart contracts. While not all companies in the ETF’s portfolio are directly associated with cryptocurrency, its top ten holdings include major players like Coinbase (COIN 1.12%), Robinhood (HOOD 15.83%), known for its crypto trading services, and Circle Internet Group (CRCL -1.96%), a stablecoin provider. The ARK Next Generation Internet ETF has an expense ratio of 0.82%, which is higher than that of a pure-play Bitcoin ETF but aligns with the average for actively managed funds.
A Bitcoin ETF Not in My Investment Strategy
As a long-term investor rather than a speculator, I have no plans to include leveraged Bitcoin ETFs in my portfolio. While a few such funds exist, they operate on the premise of using derivative securities to amplify Bitcoin’s daily returns. For instance, if Bitcoin rises by 1% in a day, a 2X leveraged ETF would theoretically increase by 2%. Although this may seem appealing for those confident in Bitcoin’s future, it is crucial to remember that these funds focus on doubling daily returns rather than long-term gains. The complexities of leveraged daily returns rarely yield favorable outcomes over extended periods. For example, despite Bitcoin’s 18% increase year-to-date, a popular leveraged Bitcoin ETF has only risen by 1%. Furthermore, these ETFs often have high expense ratios, nearing 2% in some cases. In summary, leveraged ETFs are more suitable for day traders and professionals, and for those looking to invest in Bitcoin, the best approach is to invest directly in Bitcoin or in companies that engage with it.
