The traditional investment approach is slowly expanding to the cryptocurrency market. Hedge funds and mutual funds are already there, and Polychain Capital, Pantera Capital, and BlockTower are widely known in investor circles. But what about EFTs? Why are they so highly appreciated on the traditional market and still being awaited by cryptocurrency investors?
What is an ETF?
ETF stands for “exchange-traded fund.” Basically, an ETF represents some asset or a basket of assets, be it gold, oil, or other commodities or shares — and its ownership is divided into shares that are traded on exchanges. In other words, the shares of a particular ETF are backed by the assets the fund owns. To better understand what exchange-traded funds are, let’s take a look at the image below.
So, an ETF is a cross between a mutual fund and a stock.
ETF vs. mutual index funds and stocks
It is sometimes easier to explain complicated things by drawing parallels and comparing them to other things. So, below is a comparison of exchange-traded funds, mutual funds, and individual stocks.
|Feature||ETFs||Mutual funds||Individual stocks|
|Priced, bought, and sold throughout the day||+||-||+|
|Offer investment diversification||+||+||-|
|Have a minimum investment||-||+||-|
|Purchased through a broker or online brokerage||+||+||+|
|Fees for trades||Usually||Sometimes||+|
|Support buy/sell options||Sometimes||-||Sometimes|
|Indexed (passively managed)||Usually||Not usually||No|
Exchange-traded funds for dummies
Exchange-traded funds are a great alternative in between stocks and mutual funds and are considered a relatively secure type of investment. They combine the benefits of mutual funds and stocks, as they are diversified on the one hand and are traded on exchanges on the other. In this way, ETFs provide traders with an opportunity to trade a basket of assets without having to buy these assets individually.
Furthermore, ETFs are managed by professional traders, which means the basket of assets they hold is likely to be more well-balanced.
Crypto ETFs: Bitcoin and Ethereum ETFs, a safer way to invest in crypto
Before going deeper, let’s check out what a Bitcoin ETF actually is. Let’s imagine a fund that owns many BTC and wants to trade its shares on traditional and regulated exchanges. In this way, the fund provides investors with an opportunity to invest in BTC in a familiar environment. The key things you need to know about Bitcoin, Ethereum, Litecoin, and other crypto ETFs are the following:
- Investors are provided with an opportunity to invest in BTC in a familiar environment.
Whenever we like it or not, the process of investing in BTC is pretty complicated and associated with many hurdles: Many exchanges are not regulated, and the counterparty risks are high there. Furthermore, there are cold wallets that need to be kept safe. Many people believe that’s a bit too much, and this is where Bitcoin ETFs come in.
- Crypto ETFs are a passive investment instrument, as there are typically no commissions to manage them, and the fund does everything for you.
- Crypto ETFs are tied to an index, and its underlying can be single Bitcoin or a basket of cryptocurrencies.
Basically, the performance of ETFs is tied to the performance of the underlying index. This index can consist of a sole Bitcoin, a portfolio of the top 10 cryptocurrencies, or even Bitcoin + S&P500 + gold — whatever.
- ETFs have no minimum investment.
But… the SEC hinders the adoption of Bitcoin ETFs
Cryptocurrency ETFs sound like an awesome solution for institutional investors, but they have to overcome several regulatory challenges before they can be traded. One such regulation is the SEC. The SEC’s decisions regarding Bitcoin ETFs are repeatedly negative. The list of cryptocurrency ETFs that have applied for Bitcoin ETF approval is long, but the SEC is rejecting one after another. It’s the same for Ethereum ETFs.
Recently, the SEC rejected ProShare’s proposal for two Bitcoin ETFs on NYSE’s Arca exchange because they did not consider them secure enough and rejected them due to “significant investor protection issues.”
So, if you are interested in investing in Bitcoin ETFs, there is currently only one option: wait for them to be approved.
How can you invest in traditional ETFs?
To invest in ETFs, you first need to find a broker or open an online brokerage account. Basically, ETFs can be purchased almost anywhere you can trade stocks. Online accounts are considered the easiest way to invest in ETFs. Evaluate ETFs the same way you would mutual funds. Pay special attention to what index the ETF tracks, how it is constructed, and how long it has been on the market and assess its performance.
Best ETFs: List of exchange-traded funds
There isn’t a universal list of the best exchange-traded funds, but here are the top ETFs of 2019 according to Eric Rosenberg’s study entitled “Investing for Beginners” from March 26, 2019:
- Best Overall: Vanguard S&P 500 ETF (VOO)
Buying into this fund gives you exposure to 500 of the largest public companies in the US.
- Best No-Fee: Fidelity ZERO Total Market Index Fund (FZROX)
This index focuses on the total return of the United States stock market, making it even more diverse than an S&P 500 fund. Best for Active Traders: SPDF S&P 500 ETF (SPY) This ETF tracks the S&P 500 in real time, and active investors use this fund to buy and sell on the US stock market in a single trade. SPY was launched in 1993 as the first exchange-traded fund.
- Best for Small-Cap Stocks: iShares Russell 2000 ETF (IWM)
Compared to an S&P 500 fund, managers of the iShares Russell 2000 ETF have four times as many stocks to buy and sell to keep the index fund in line with the index.
- Best for US Dividends: Schwab U.S. Dividend Equity ETF (SCHD)
This U.S. Dividend Equity ETF is an excellent choice for investors looking to turn their portfolio into a cash flow. The fund focuses heavily on large companies with stable dividends.
- Best for Gold: SPDR Gold Trust (GLD)
If you want to invest in gold without the inconvenience of actually acquiring the precious metal, then your best option is the GLD ETF.
- Best for NASDAQ Large-Cap Stocks: Invesco PowerShares QQQ (QQQ)
The ticker symbol QQQ gives you an ETF that tracks the NASDAQ 100 Index. The NASDAQ 100 is made up of the 100 largest stocks on the NASDAQ stock exchange, traditionally home to many technology companies.
- Best International: Vanguard FTSE Developed Markets (VEA)
VEA follows the FTSE Developed All Cap ex US Index. That means it follows companies of all sizes in developed countries outside of the United States.
We believe that one day, Bitcoin ETFs will finally be adopted. Investors need to be provided with new instruments, and Bitcoin itself is slowly gaining trust from traditional investors. This just seems like a matter of time, and in the future, we’re likely to have to compose another list — a list of the top cryptocurrency ETFs.