BITW underperforms BTC by 121%!
If you know Crypto, you probably know BITW, which is the fastest-growing ETF today in the crypto space. With nearly 400 million USD invested in the product, you the investor or asset owner [Who’s already invested or plans to invest] may think that there should be something awesome here, like product innovation, alternative asset awareness etc. Moreover, with so many institutional names backing the ETF [1], the product got a lot of initial credibility needed for sales.
Despite all this smart money backing, the individual and institutional investors in the product, who believe in risk diversification, and new alternative assets and the skill of the manager have been left disappointed. BITW has been an abject failure to do what it was supposed to do i.e. give the investor a reasonable exposure to the top 10 crypto currencies. The ETF since inception in November 22, 2017 has delivered 120% less than bitcoin and has underperformed disastrously. [2]
How did this happen? I think the team at BITW can do a better job of explaining their dismal performance. But from explaining it to the asset owner and the common man, who is holding his/her head in dismay, unable to process these numbers, there are a few reasons that come to mind.
Figure 1: BITW underperformed Bitcoin by 121%
First: The high expense ratio of 250 basis points is an upfront fee that has added to the crypto drawdown since the asset class peaked in Feb 2021. Products that give exposure to a market capitalized benchmark should not be run actively with high fees but passively with low fees like 0.01%.
Second: Active managers should not be paid without Alpha. The same high annual expense ratio of 250 basis points, the upfront fees will continue to bleed investor and asset owner assets for years till crypto recovers above its previous peak.
Third: The industry both venture and active management don’t understand the curse of market capitalization methods. The industry is benchmark blind. Not only market capitalized indexes are flawed in design they face long recovery periods. The Fund uses the Market Capitalization methodology, which is concentrated, risky, and consequently with longer recovery periods. [3][4] The very reason why BITW is under water now for a running 699 days and has a high chance of trailing the asset class for years.
Fourth: Believe it or not, the fund is 90% invested in Bitcoin and Ethereum. This means it is not 10 components, but a fund skewed to 2 components. This also should make the common man and the venture investing in BITW wonder, why would anyone pay 2 components yourself without paying an upfront fee of 250 bps every year.
AlphaBlock’s Exceptional & Rich Crypto 10 [E&R Crypto 10] open indexing models are not market capitalization weighted. They don’t have any upfront fees. They have a maximum weight constraint of 35% for a component. This means any time any of the top 10 component becomes large in proportion, it would be brought back to size. The model has lesser drawdowns and faster recoveries and it could have conserved cash since Dec 2020 [The public quotation date for BITW] and potentially could have delivered 100% excess returns above BITW, with an information ratio of 2.5.
E&R Crypto 10 is ready to be licensed to any asset manager out there keen to sparkle i.e. deliver risk weighted excess returns. The model is passive, slow and has a low turnover.
Figure 2: Performance plots of E&R Crypto 10 Dec 2020 vs. BITW
Figure 3: Performance metrics of E&R Crypto 10 Dec 2020 vs. BITW
Figure 4: Composition of E&R Crypto 10
Figure 5: Drawdown comparison of E&R Crypto 10 Dec 2020 vs. BITW
Figure 6: 2 Year Rolling Return of E&R Crypto 10 vs. BITW
Figure 7: Simulations of E&R Crypto 10
Asset owners, investors and asset managers need next generation tools. The unfortunate aspect of investment management is its focus on repackaging rather the understanding and identifying fundamental innovations. E&R could redesign BITW or we could help you Investors and Asset Owners beat BITW without high concentration and recovery risk. Because we have one mission, to make you aware of frugal algorithms, machine investing, dangers of market capitalization and the magic of pay for alpha.
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Bibliography
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Highland Capital Partners, Khosla Ventures, General Catalyst, Vetamer Capital Management, Third Point, Blockchain Capital, Willoughby Capital, Electric Capital, Coinbase.
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Management Fees Can Destroy Your Portfolio, AlphaBlock Research, October 2022
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Pal, M. “Warren, SPY, Machines, and the Concentration Risk!, AlphaBlock Research, September 2022