Imagine getting paid $30 million a year for clicking a mouse a few times a day. Your job is to buy a single virtual asset for an exchange-traded product—or ETP—that is similar to but not exactly like an exchange-traded fund.
Call it the Steepcoin ETP. It charges a 1.50% expense ratio. You click a mouse to buy Steepcoin if investors add money to your ETP, and you click to sell Steepcoin if investors sell. You need to do zero analysis of Steepcoin’s prospects. Your strategy requires no lengthy portfolio meetings to discuss individual stocks, no company visits, no earnings calls. Steepcoin could soar like
or collapse like Enron and you still get paid because you’ve erected a virtual tollbooth for owning it.
It’s hard to say how much more complicated it is to run the
(ticker: GBTC), but competitors now charge a lot less to buy the same virtual asset. According to Morningstar, on Jan. 31, Grayscale had $20.7 billion in assets, while charging an expense ratio of 1.50%, which translates into over $30 million a year in fees. In the same month, the Securities and Exchange Commission approved the launch of less costly Bitcoin tollbooths by competing asset managers.
(IBIT) and
(FBTC) charge 0.25%;
(ARKB), 0.21%; and
(BITB), 0.20%, before fee waivers. (In Fidelity’s case, it’s waiving its entire fee through July 31.)
So how does Grayscale Bitcoin survive this competitive onslaught? According to Morningstar, Grayscale’s assets have fallen to $18.3 billion, so it’s losing shareholders, and that asset level understates the outflows because the fund is up 49% this year.
Grayscale didn’t respond to multiple interview requests from Barron’s.
But there’s a sticking point for many shareholders—taxes—which can discourage bailing out. Depending on when investors purchased the Bitcoin ETP, their gains can be immense. Grayscale has traded since September 2013 and has a 61.2% 10-year annualized return. The capital-gains-tax rate for long-term investors who have held more than a year can be as high as 20%—or 37% if they have held less than a year. Given that Bitcoin isn’t typically found in tax-deferred retirement plans yet, many of Grayscale’s investors will face hefty taxes.
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Normally, one way for investors to pressure a money manager to lower their fees and, perhaps, recoup some of the fees charged earlier would be to sue. But here’s where the fact that Grayscale and its new competitors are ETPs matters. Regular ETFs investing in stocks and bonds are governed by the Investment Company Act of 1940. Not so these Bitcoin ETPs.
According to Section 36(b) of the 1940 Act, “the investment adviser of a registered investment company shall be deemed to have a fiduciary duty with respect to the receipt of compensation for services.” That fiduciary duty requires money managers of ETFs and their boards of directors to consider when fees are excessive.
The Supreme Court ruled in 2010 that for a fee to be deemed excessive it would need to be “so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm’s length bargaining.” A 1.50% fee—six times as great as Grayscale’s competitors, which invest in the identical cryptocurrency—sounds disproportionately large.
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Because they don’t invest in normal securities, Grayscale and the other Bitcoin ETPs fall under the Securities Act of 1933 and the Exchange Act of 1934, which offer no such fiduciary protections.
Any taxable shareholder trying to force Grayscale to lower its fees is probably out of luck. Perhaps, though, the competition from other ETPs will.
Email: editors@barrons.com
