Fresh off a pivotal win in court this week, Grayscale Investments may soon find itself in another fight: the $7.5 trillion U.S. exchange-traded industry’s never-ending contest over fees.
A ruling Tuesday overturned the Securities and Exchange Commission’s decision to block Grayscale’s bid to convert its $17 billion bitcoin trust into a physically backed ETF. While the action potentially paves the way for the firm to attract a fresh wave of investors, there’s just one thing: The product carries a 2% fee in its current form. That compares to an average of 0.54% across U.S.-listed ETFs, and 1.48% for crypto exchange-traded products globally, Bloomberg Intelligence data show.
That disconnect means that Grayscale’s bitcoin trust, known as GBTC, faces a dilemma over fees should the SEC finally give its blessing to spot-bitcoin ETFs. Asset-management titans including BlackRock Inc., Invesco and Fidelity Investment — known for their low-cost lineups — all have similar applications filed with the SEC, which the regulator is expected to respond to in the coming days. Fees aren’t yet listed for their proposed products, though history suggests it’ll be a fraction of what GBTC charges.
“Grayscale is up against issuers such as BlackRock and Invesco who are highly accustomed to bludgeoning each other on fees,” said Nate Geraci, president of The ETF Store, an advisory firm. “Spot-bitcoin ETFs will all generally look the same – they simply hold bitcoin — which makes fees a key differentiator.”
Grayscale’s Chief Executive Michael Sonnenshein reiterated on Bloomberg Television Wednesday that the firm is “committed to lowering fees when GBTC converts to an ETF,” but declined to specify by how much. On Thursday, a Grayscale spokesperson said the company’s legal team “is focused on actively and expeditiously pursuing next steps to convert GBTC to an ETF, and we will share next steps and additional information as soon as possible.”
Fee wars are a familiar phenomenon in the increasingly crowded ETF arena — both in new categories as well as established asset classes. In the nascent market for ETFs that track collateralized loan obligations, for example, BlackRock undercut rival issuers by debuting the cheapest such offering in January, only to be one-upped by PGIM in July. Meanwhile, just this month, State Street Global Advisors put BlackRock and Vanguard Group Inc. on notice by slashing the fee on its S&P 500 fund to just 2 basis points, or 0.02%. The ETF Store’s Geraci says another good gauge of what’s likely to come can be found within applications for Ether-futures ETF filings, where issuer Roundhill has indicated that it would like to launch a product that charges just 0.19%. For bitcoin ETFs, contestants could come in asking for 0.4%, he projects.
“Grayscale needs to enter the ETF Terrordome with the mindset that they might have to go from 200 basis points to 20 basis points on fees,” Geraci said. “It seriously might take that to be successful in this space. This is a high-stakes battle with significant asset potential and firm revenue on the line.”
At current asset levels, GBTC rakes in roughly $339 million per year for its parent company from fees alone, a Bloomberg calculation shows. Any reduction in the fee could also impact its parent company Digital Currency Group, where Grayscale and its suite of products are seen to be a crown jewel subsidiary.
Though Tuesday’s ruling is being seen as a step forward in the race for a bitcoin ETF, such a product is by no means guaranteed for U.S. investors. The SEC has said it is reviewing the decision.
Another key question remains: Which, if any, of the numerous issuers trying for a spot-bitcoin ETF might get to launch a product first? Cathie Wood, whose firm has an application pending, told Bloomberg Television that she expects the SEC to “approve more than one at once.”
Dave Nadig, financial futurist at VettaFi, says that should any one company get to debut its product before anyone else, it would have a huge advantage, regardless of the fee it charges. But if several get to launch on the same day, “there will be some combination of who’s got a great capital markets desk and can get folks trading this at the institutional level and price.”
“I think it would be an instantaneous race to the bottom,” he said on Bloomberg Television, adding that he wouldn’t be surprised to see fees settle in the 50-to-75 basis-point range. “I certainly don’t think we’re going to see products over 1%.”