The ETF Securities funds will also charge a withdrawal fee of $500 to anyone redeeming their holding in exchange for bitcoin, ether or cash, but charge no exit fee to traders using an exchange. Cosmos fund will charge a $200 exit fee but only to “authorised participants”.
Analysis conducted for The Australian Financial Review by Justin Walsh, Australian ETF analyst at research house Morningstar, found a management fee of 1.25 per cent a year would top the charts for the most expensive “index/passive ETFs” available on the local sharemarket.
Passive management is a strategy in which the investments chosen are designed to mimic the performance of a particular market or asset class by following the make-up of a related index or benchmark.
The PDS for the Cosmos Purpose Bitcoin Access ETF stated that the fund “employs a passive investment strategy of investing directly in Purpose ETF units, which are quoted for trading on the Toronto Stock Exchange”.
ETF Securities did not explicitly describe the investment strategies for its ETFS 21Shares Bitcoin ETF and ETFS 21Shares Ethereum as “passive”. But identical phrasing in the PDS for both funds explained the investment objective was to “provide a return that tracks the performance of the price” of bitcoin and ether in Australian dollars.
Since passive funds do not seek to outperform a particular market, and their management is determined by rules rather than investment skill, they are ordinarily marketed as low-cost products and designed to deliver broad access to markets for regular retail investors.
‘Serious price gouging’
But the 1.25 per cent management fees slated for the nation’s first crypto ETFs has shocked some observers, given their underlying passive strategies.
One wealth adviser, who is supportive of the launch of such ETFs as a regulated method for clients to gain exposure to unregulated crypto markets, said the rate card reflected “serious price gouging”.
Chris Brycki, an ETF market analyst and founder of online investment adviser Stockspot, said the planned fees were broadly on par with the first iterations of crypto ETFs globally. For example, the Purpose Bitcoin ETF, into which the Cosmos ETF will feed, charges 1 per cent with a capped maximum of 1.5 per cent.
Stockspot’s analysis detected five passive ETFs with higher management fees than the coming crypto ETFs, including the Betashares Australian Equities Bear Hedge Fund (1.48 per cent) and BetaShares Strong Australian Dollar Fund (1.38 per cent).
However, all of those involved risky strategies such as leveraging or gearing – amplifying gains or losses through the use of debt or borrowed funds – and are therefore not analogous, Mr Brycki said.
ETF Securities’ Kanish Chugh says crypto assets trigger specific custody and insurance costs. Michele Mossop
Excluding synthetic or leveraged products, the market’s most expensive passive product is the VanEck China New Economy ETF, which charges 0.95 per cent a year – or one third cheaper than the pending crypto ETFs.
Kanish Chugh, ETF Securities’ head of distribution, said the fees charged by its pending bitcoin and ether funds were broadly in line with other markets such as Canada and reflective of the unique costs involved in managing and securing crypto assets.
“Supply chain costs for bitcoin and ethereum ETFs are significantly higher than for shares, bonds and commodities ETFs,” Mr Chugh said. “The most crucial of these is custody costs … and insurance costs, which give investors protection in the event of any hack or fraud.”
ETF Securities and its partner 21Shares will keep their crypto keys in offline “cold storage” – opting for security known as a “Faraday cage” – in a bid to fend off cybercrime.
The five-month delay to the listing of crypto ETFs has also added additional legal and staffing costs to the firm, which has affected the final management fee, Mr Chugh added.
“Investors are right to focus on fund managers’ fees,” he said. “Fees are charged every year and compound. And ETFs have a – deserved – reputation for charging low fees.”
However, he added that the annualised fee only applies to investors who stay the course for a full year, noting that crypto ETFs are heavily traded. He added that while unregulated cryptocurrency exchanges may provide cheap access to bitcoin or ether, they cannot offer the transparency or security of a regulated exchange such as Cboe.
Cosmos chief executive Dan Annan said: “[We] researched the market, before assessing the operational costs of delivering the asset in an ETF.”
Stockspot’s Mr Brycki concurred that the relatively high cost of crypto ETFs was probably more a reflection of high operational costs such as custody than any blatant commercial motivation.
But he warned investors to closely look at fees, as well as the size and sustainability of crypto ETFs, before buying in. He tipped prices to normalise as this new market matures.
“Ultimately, there’s going to be high competition in this space and the ETF issuers will know that price is an important factor that investors consider,” he said.
