The New Spot Bitcoin ETFs Aren't Actually ETFs
In the flurry of excitement surrounding the launch of 11 spot bitcoin ETFs, an important detail has been overlooked: none of them are technically exchange-traded funds as defined by the Investment Company Act of 1940.
Instead, they are organized as exchange-traded products under the Securities Act of 1933. Says so in every S-1 filing by the products’ sponsors.
The misnomer has caused some confusion among both investors and financial professionals.
Some sponsors (ARK Invest, Bitwise, Franklin Templeton, Grayscale, Hashdex, Invesco Galaxy, VanEck and WisdomTree) describe each of their offerings as a “Bitcoin ETF”; Valkyrie opts for “Bitcoin Fund,” while BlackRock and Fidelity more accurately label theirs as a “Bitcoin Trust.”
Does It Matter?
Well, there are differences. I’m not sure anyone cares, or ought to. But if you’re finance geek like me, the definitions matter. The situation is akin to that old “dogs and animals” bit: All dogs are animals, but not all animals are dogs.
Likewise, all ETFs are ETPs, but not all ETPs are ETFs. Indeed, ETPs include not just ETFs but also exchange-traded commodities (ETCs) and notes (ETNs). ETCs enable investors to buy and sell precious metals, agricultural products and energy resources without having to hold or store them.
ETNs hold notes — debt securities — issued by banks. These are similar to corporate bonds and quite popular in Europe, though I don’t know why. (ETNs have no underlying portfolio of assets; they merely promise to pay a return at maturity based on the performance of some benchmark. I’d rather own the asset than merely be promised a return based on it. But that’s just me.)
Like dogs and animals, ETFs and ETPs are not always mutually exclusive. Both ETFs and ETPs, for example, always trade on exchanges (at least the E and the T are constant).
Nor are their differences always clear; the Financial Industry Regulatory Authority even notes that there is “no single definition of an exchange traded product.” In a not-very-helpful posting on its site, FINRA says all ETPs are investment vehicles listed on an exchange, where they can be bought and sold throughout the trading day like stocks.
