Original title: "Cheap means profit? Behind the Bitcoin spot ETF fee war..."

Original author: Peng SUN, Foresight News

Two days ago, at the request of the U.S. Securities and Exchange Commission (SEC), BlackRock, ARK 21Shares, VanEck, Fidelity, Grayscale, Franklin Templeton and other issuers successively submitted the final revised ETF application documents. What is particularly noteworthy is that issuers are scrambling to reduce ETF fees, and some institutions even proposed exemption policies such as 0 fees in the first 6 months.

At the same time, Gary Gensler, chairman of the U.S. SEC, also tweeted twice to remind investors of the risks associated with investing in crypto assets. In terms of market conditions, since 0:00 on January 9, Bitcoin has broken through $45,000, $46,000, and $47,000. Currently, the price of Bitcoin has remained around $46,842.

The fee reduction trend of institutions, the SEC chairman's reminder, and the rise in Bitcoin prices indicate that the compliant Bitcoin spot ETF seems to be about to pass. At this tense moment of long-short tug-of-war, the ETF fee war is staggering. So, what is this fee, and what is the intention of institutions to roll up the fee? Compared with traditional ETFs, how is the fee level of Bitcoin spot ETFs? Behind the low fee rate, for investors, is the low fee rate really profitable?

1. What is Sponsor Fee?

In the Bitcoin spot ETF, the sponsor fee (Sponsor Fee) first appeared in the public eye on November 20, 2023, when ARK Invest added a sponsor fee (Sponsor Fee) rate to its Bitcoin spot ETF application documents, with an initial rate of 0.8%.

The Sponsor Fee is related to the fund's sponsor. The sponsor is responsible for managing and controlling the fund and for the marketing of the fund, while the Sponsor Fee is used to pay for the costs of managing the ETF, including custody costs, management staff salaries, securities buying and selling costs, legal expenses, etc.

2. Rate war is the general trend

From January 8 to January 9, 11 institutional issuers that applied for Bitcoin spot ETFs continued to reduce their fees in the final revised documents, triggering a "fee reduction wave" in the Bitcoin ETF market. As of January 10, the latest fee rates of each institution are as follows (arranged from high to low):

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, increasing to 0.3% after 12 months or AUM reaches USD 5 billion

Galaxy Invesco: 0% for the first 6 months, increasing to 0.39% after 6 months or AUM reaches USD 5 billion

Wisdomtree: 0% for the first 6 months, increasing to 0.3% after 6 months or when AUM reaches USD 1 billion

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

Bitwise: 0% for the first 6 months, and then increased to 0.2% after 6 months or when AUM reaches USD 1 billion

Image credit: James Seyffart

Among the 11 institutions, 8 had rates below 0.4% after the exemption, while the average rate of all institutions after the exemption was 0.478%.

In fact, since 1997, the reduction of global ETF fees (active and passive) has been an irreversible trend. For example, the ETF fees of Vanguard, Schwab, BlackRock's iShares, and other well-known American fee kings are even as low as about 0.03%. In addition, according to the Investment Company Institute (ICI), one of the main associations of regulated funds in the United States, the fees of various ETFs such as stock ETFs, bond ETFs, and mutual funds have mostly dropped by more than 50% in the past 26 years, and there are many that are lower than 0.1%. According to the research data of Huobi Research Institute in 2021, the average cost of ETFs in the United States (including management fees) is about 0.44%. From this point of view, American issuers are at an average level in reducing fees for Bitcoin spot ETFs, which is due to the ETF environment in the United States.

But if compared with other countries/regions in the world, the U.S. is significantly lower. For example, the Canadian Bitcoin ETF represented by BTCC has a fee rate of 1%, while the average fee rate of the 10 largest Bitcoin ETP/ETNs in Europe is 1.047%.

Considering that the user and fund volume in Canada and Europe cannot match that of the United States, and that American users prefer ETFs and tend to prefer low-cost ETF products under the same circumstances, it is not difficult to understand the internal competition of American institutional issuers in terms of Bitcoin ETF fees. After all, as the world's largest ETF market, the United States must reduce fees under homogeneous competition, and Bitcoin is no exception.

3. Fee reduction trend, cheap means profit?

The purpose of reducing fees is to attract more users, funds and market share, but does a low fee necessarily mean cheap?

"When fees are lower than costs, how do you make money by managing funds?" This is the question raised by Caitlin Long, founder and CEO of Custodia Bank, regarding the trend of fee cuts for Bitcoin spot ETFs.

Ben Johnson, global ETF director at Morningstar, also said, "There is no free lunch in the world. If you get something for free, then you are likely to subsidize it by paying for something else." Generally speaking, zero-fee ETFs make money by lending stocks to customers, selling other products, or offering lower cash fund interest. But will the Bitcoin spot ETF face such a problem? What methods will the issuer take to earn back that part of the proceeds? It is unknown.

Low fees also raise concerns for Gabor Gurbacs, strategic advisor to Tether and VanEck: “I’m scared when I make little or no money. Issuers will find other ways to make money (securities lending, trading, etc.), and I personally like to charge higher fees up front and provide clear and sustainable incentives. If possible, dig deep into the total cost of holding. But that’s not the case with the ETF fee war. People like to see the numbers are low.”

Of course, all the worries pale in the face of the ETF's approval. After all, we are witnessing history. Every time the United States passes an ETF, it brings a trillion-level blue ocean market. The market value of Bitcoin is now $800 billion, returning to a trillion-dollar market value, providing more users with diversified investment options other than U.S. bonds. Nothing is more exciting than this.

Original link