Bitcoin Spot ETF Fee War Begins, Beware of Low Fee "Trap"

Foresight News

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The Fee Compression is a rite of passage for ETFs, and Bitcoin is no exception.

Original Article Title: "Is Cheaper Better? Behind the Bitcoin Spot ETF Fee War..."

Original Article Author: Peng SUN, Foresight News

Over the past two days, in response to the U.S. Securities and Exchange Commission (SEC), issuers such as BlackRock, ARK 21Shares, VanEck, Fidelity, Grayscale, Franklin Templeton, etc., have successively submitted final amended ETF application documents. Of particular note is the issuers' rush to reduce ETF fees, with some institutions even proposing fee waivers, including a 0 fee rate for the first 6 months.

Meanwhile, SEC Chairman Gary Gensler also tweeted twice to remind about the risks of investing in crypto assets. Regarding the market situation, as of 12:00 AM on January 9th, Bitcoin successively broke through $45,000, $46,000, and $47,000. Currently, the price of Bitcoin has remained around $46,842.

The fee reduction trend among institutions, Chairman Gensler's mixed reminders, and the rising price of Bitcoin all indicate that a compliant Bitcoin spot ETF seems to be imminent. In this tense tug-of-war between bulls and bears, the ETF Fees War is jaw-dropping. So, what is this fee, and what is the purpose of institutions cutting fees? How does the fee level of Bitcoin spot ETFs compare to traditional ETFs? Behind the low fees, is it really a win for investors to have low fees?

1. What is a Sponsor Fee?

In a Bitcoin spot ETF, the Sponsor Fee first appeared in the public eye on November 20, 2023, when ARK Invest added a Sponsor Fee rate to its Bitcoin spot ETF application, initially set at 0.8%.

The Sponsor Fee is related to the fund's sponsor. The sponsor is responsible for managing and controlling the fund, overseeing the fund's marketing, and the Sponsor Fee is used to pay for the costs of running the ETF, including custody costs, management fees, trading costs, legal expenses, etc.

2. Fee War, the Trend

Starting from January 8th to the 9th, 11 issuer institutions applying for a Bitcoin spot ETF continued to lower fees in the final amended documents, triggering a "fee reduction trend" in the Bitcoin ETF market. As of January 10th, the latest fees of each institution are as follows (listed from highest to lowest fee rate):

·Grayscale: 1.5%

·Hashdex: 0.9%

·Valkyrie: 0.49%

·Franklin Templeton: 0.29%

·Fidelity: 0.25%

·VanEck: 0.25%

·BlackRock: 0.2% for the first 12 months, increased to 0.3% after 12 months or AUM reaches $5 billion

·Galaxy Invesco: 0% for the first 6 months, increased to 0.39% after 6 months or AUM reaches $5 billion

·WisdomTree: 0% for the first 6 months, increased to 0.3% after 6 months or AUM reaches $1 billion

·Ark/21Shares: 0% for the first 6 months, increased to 0.25% after 6 months or AUM reaches $1 billion

·Bitwise: 0% for the first 6 months, increased to 0.2% after 6 months or AUM reaches $1 billion

Image Source: James Seyffart

Out of the 11 institutions, 8 have fees lower than 0.4% after exemptions, while the average fee for all institutions after exemptions is 0.478%.

In fact, since 1997, the reduction of global ETF fees (both active and passive) has been an irreversible trend. For example, well-known fee-cutter Vanguard in the U.S., Schwab, and BlackRock's iShares have ETF fees as low as around 0.03%. In addition, according to the Investment Company Institute (ICI), a major association of regulated funds in the U.S., the fees of various types of ETFs such as stock ETFs, bond ETFs, mutual funds, etc., have mostly decreased by over 50% in the past 26 years, with many having fees below 0.1%. According to research data from Huobi Research Institute in 2021, the average cost of U.S. ETFs (including management fees) is around 0.44%. Therefore, U.S. issuers are at an average level in reducing fees for Bitcoin spot ETFs, which is a result of the U.S. ETF landscape.

However, when compared to other countries/regions around the world, the fees in the United States are significantly lower. For example, the fee rate of the Canadian Bitcoin ETF represented by BTCC is 1%, while the average fee rate of the top 10 Bitcoin ETP/ETN in Europe is 1.047%.

Considering that both the user base and capital in Canada and Europe cannot rival those of the United States, and in the same circumstances U.S. users prefer ETFs and lean towards low-cost ETF products, it is not difficult to understand the fee competitiveness among U.S. institutional issuers in Bitcoin ETFs. After all, as the world's largest ETF market, the United States faces homogenized competition, and fee reduction is the inevitable path for ETFs, with Bitcoin being no exception.

III. Fee Reduction Wave: Is Cheaper Always Better?

Fee reduction is aimed at attracting more users, funds, and market share, but is a low fee rate always cheap?

“How do you make money managing the fund when the fee is below cost?” This is the question posed by Caitlin Long, Founder and CEO of Custodia Bank, regarding the fee reduction wave in Bitcoin spot ETFs.

Ben Johnson, Global ETF Director at Morningstar, also stated, “There's no such thing as a free lunch. If you get something for free, you're likely paying for it in other ways.” Typically, zero-fee ETFs earn money by lending securities to clients, selling other products, or providing lower interest rates on cash funds. But will Bitcoin spot ETFs face such issues? How will issuers recover that part of the revenue? It remains to be seen.

The low fee rate has also raised concerns for Gabor Gurbacs, a strategic advisor at Tether and VanEck: “I fear when I make very little or no money. Issuers will look for other ways to make money (securities lending, trading, etc.). I personally like to charge higher fees upfront and provide clear and sustainable incentives. If possible, dive deep into the total cost of ownership. But that's not the case with the ETF fee war. People like to see low numbers.”

Of course, all worries seem powerless in the face of ETFs, as we are witnessing history. Each ETF approval in the U.S. has brought a trillion-dollar blue ocean market, with the Bitcoin market now at an $800 billion valuation, returning to a trillion-dollar market cap, providing more users with diversified investment options beyond U.S. bonds. There is nothing more exciting than this.