Canadian bitcoin ETFs take a hit from new U.S. competition

Sign up for the Globe Advisor weekly newsletter for professional financial advisors on our sign-up page. Get exclusive investment industry news and insights, the week’s top headlines, and what you and your clients need to know. For more from Globe Advisor, visit our homepage.
Bitcoin is trading close to its all-time high, but new competition from south of the border has led many investors to withdraw funds from most Canadian bitcoin exchange-traded funds (ETFs).
Spot bitcoin ETFs in Canada have seen $655-million in outflows this year as of March 31, according to Linda Ma, vice-president of ETFs and financial products research at National Bank Financial Markets in Toronto. On the other hand, U.S.-based spot bitcoin ETFs, which launched in January after receiving long-awaited regulatory approval, have brought in US$40.8-billion.
The movement in assets comes as the crypto asset is trading in the US$65,000 range after hitting a record high of more than US$73,000 in mid-March.
Spot bitcoin ETFs had an almost three-year head start in Canada, with Purpose Investments Inc. launching Purpose Bitcoin ETF BTCC-B-T in February, 2021. While still the largest crypto ETF based in Canada, with $2.7-billion in assets under management between its currency-hedged, unhedged, U.S.-dollar versions, the fund has seen outflows of $513-million this year, according to National Bank data.
“Everyone knew there would be some pent-up demand and there would be a lot of investor interest in the space,” says Greg Taylor, chief investment officer at Purpose Investments in Toronto, about the introduction of crypto ETFs in the U.S. “Even the most optimistic of people are surprised at just how much demand there has been.”
Case in point: BlackRock Inc.’s iShares Bitcoin Trust IBIT-Q has seen US$14-billion in inflows since it began trading in January.
To further spur that demand, U.S. providers launched their products with low management fees, ranging between 0.19 and 0.30 per cent. Several asset managers also waived management fees entirely for a set period. The management fees for Canadian spot bitcoin ETFs range from 0.39 to 1 per cent, with the management expense ratios (MERs) between 0.44 and 2.18 per cent. The MERs for the U.S. products aren’t available because they haven’t been around for a full year.
“We saw one of the craziest fee wars that I’ve ever seen,” says Andrew Clee, vice-president of product at Fidelity Investments Canada ULC in Toronto.
Fidelity responded to the U.S. launches by reducing the management fee on its Canada-listed Fidelity Advantage Bitcoin ETF FBTC-T to 0.39 per cent. (The U.S.-listed Fidelity Wise Origin Bitcoin Fund’s FBTC-A 0.25 per cent management fee was waived until Aug. 1.)
“Given the access to U.S. markets for Canadian investors, fees are a very important part of the investment decision, so we wanted to be priced competitively to still attract Canadian retail assets,” Mr. Clee says.
The move may have paid off. Compared with the outflows from the unhedged and U.S.-dollar versions of Purpose Bitcoin ETF and from CI Galaxy Bitcoin ETF BTCX-B-T (0.40 per cent management fee and $162-million in outflows year to date between the two versions, according to National Bank data), Fidelity Advantage Bitcoin ETF has brought in $118-million, Ms. Ma says.
So far, other manufacturers have been reluctant to compete on price. “It’s something we’re definitely going to keep on top of, but right now we haven’t made any changes to our management fee,” Mr. Taylor says.
Almost two-thirds of the outflows from Canadian spot bitcoin ETFs are from the U.S.-dollar versions, Ms. Ma says, which could suggest many U.S. investors – both retail and institutional – are switching to U.S.-based products.
“We were the only game in town, so we had a lot of interest from U.S. funds and institutions,” Mr. Taylor says. “It’s natural to expect that once they have a U.S. product they will start to gravitate toward that. Some of the flows have just been U.S. investors who are [choosing] U.S. funds.”
Meanwhile, the currency-hedged version of Purpose Bitcoin ETF BTCC-T has seen inflows of $35-million year to date.
Perhaps counterintuitively, bitcoin’s strong performance this year may also be playing a part in the outflows, Ms. Ma says. The Canadian ETFs launched in 2021 and many investors purchased the products close to bitcoin’s pandemic peak before watching their investment crash.
“With the prices now coming to historical highs, maybe people are getting out of the asset class because they’ve been waiting for an exit point,” she says.
While that may be true in some cases, Mr. Taylor says bitcoin’s rebound means more investors are paying attention to the asset class again. The funds will begin to benefit from an increase in the pool of investors looking for exposure, he says: “It’s no longer just a niche asset that you can ignore.”
He also points to the “halving” event this month, a mechanism built into bitcoin’s underlying blockchain software that will reduce the amount of bitcoin mined. The reduction in supply comes amid the increased demand from U.S. ETF investors.
Michael Zagari, associate portfolio manager at Mandeville Private Client Inc. in Montreal, says this all contributes to “a support level built in now to bitcoin.” He’s bullish on cryptocurrency, allocating 3 per cent to 5 per cent of client portfolios to the asset class.
However, the introduction of U.S. ETFs hasn’t affected Mr. Zagari’s strategy. “I would caution investors on just chasing the lowest fee,” he says, when it comes to bitcoin ETFs.
Canadian funds have a track record and the benefit of simplicity. For example, while bitcoin ETFs typically don’t pay distributions, he says, investing in Canadian funds means there won’t be any cross-border complications during tax season.
For more from Globe Advisor, visit our homepage.