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For many investors, crypto is a mysterious and unpredictable asset class.DADO RUVIC/Reuters

Canada has a well-earned reputation as a pioneer in developing low-cost exchange-traded funds, so it should be no surprise that it has established itself as the leader in the creation of cryptocurrency ETFs.

While U.S. regulators have been wary of the crypto space, it has been embraced in Canada with 36 different funds in the segment (not including U.S. dollar and hedged versions), according to National Bank Financial.

For many investors, crypto is a mysterious and unpredictable asset class, yet they want some exposure. Crypto proponents argue that bitcoin may be a better store of value than traditional currencies because there is a finite supply of coins. Soaring prices over the years tend to buttress that argument.

“It is the biggest FOMO [fear of missing out] exercise you could ever undertake,” says Yves Rebetez, an ETF analyst and partner with Credo Consulting Inc. in Oakville, Ont.

He doesn’t currently invest in crypto funds but did have a small equity holding in blockchain, the foundation technology for crypto assets.

Mr. Rebetez advises ETF investors to add a small amount of crypto to their portfolio if they are motivated by that fear of missing out.

ETFs provide an easy way to dip a toe into investing in cyber currencies such as bitcoin or ethereum (ether) and tuck them into registered or non-registered portfolios. It’s touted to have a low correlation to traditional assets such as stocks, bonds and cash; however, it remains a volatile asset class.

Crypto assets on which these ETFs are based as “highly speculative and risky,” says Tiffany Zhang, an ETF analyst with National Bank Financial in Toronto.

The digital assets are volatile, often fluctuating by huge amounts within a short period.

“We advise clients to exercise caution before investing in them,” she says.

Although the Canadian crypto ETF space is barely a year old, fund companies have been busy innovators. The vast majority hold spot crypto assets (three funds invest in bitcoin futures), two utilize covered-call options to boost yield, a few are “green” using carbon offsets and another invests in multiple crypto asset ETFs and related stocks.

Bitcoin ETFs

The first crypto ETF launched in Canada (by one day on Feb. 18, 2021) was the Purpose Bitcoin ETF (BCCT-T), which has a management expense ratio (MER) of 1.48 per cent and the unhedged Canadian dollar version has $623-million in assets. It has dropped by about 12 per cent year to date. (All figures are from Morningstar as of April 20).

The fund’s main competitors in the space include the 3iQ CoinShares Bitcoin ETF (BTCQ-T), charging a 1.25-per-cent MER and with $1.1-billion in assets; the CI Galaxy Bitcoin C$ Unhedged ETF (BTCX-B-T), charging 0.85 per cent and with $258-million in assets and; the Evolve Bitcoin ETF (EBIT-T), with a fee of 1.8 per cent and $100.7-million in assets. Each has lost about 12 per cent so far this year.

Because these hold spot bitcoin assets, there’s not a big difference between them other than their individual MER and the currency/hedged version.

Ether-based crypto ETFs

Toronto-based Purpose Investments, which rolled out five crypto ETFs in just over a year, was among four companies that launched ether-based crypto ETFs within days of each other in April last year. The Purpose Ether ETF (ETHH-T) charges 1.48 per cent with $163.4-million in assets and has dropped 17 per cent so far this year.

The ether category is led by the CI Galaxy Ethereum (C$) ETF (ETXX-B-T), charging 0.76 per cent and with $550.5-million in assets. Others include the 3iQ Coinshares Ethereum ETF (ETHQ-T), with an MER of 1.24 per cent and $262-million in assets, and the Evolve Ether (C$ non-hedged) ETF (ETHR-T) charging 1.23 per cent and with $78.7-million in assets. All of these are also down by about 17 per cent year to date.

Purpose chief investment officer Greg Taylor noted that hedge funds were utilizing calls on crypto funds to generate yield, which led the firm to adopt the strategy of launching yield-focused crypto ETFs last November.

The Purpose Bitcoin Yield ETF (BTCY-T) charges 1.41 per cent and has $26.7-million in assets. It has dropped 10 per cent so far this year. The Purpose Ether Yield ETF (ETHY-T) charges 1.41 per cent with $42.5-million in assets and has lost 15 per cent year-to-date.

According to Purpose Investments’ website, BTCY (CAD hedged) yields 12.8 per cent, BTCY.B (CAD unhedged) yields 12.9 per cent and BTCY.U (USD) yields 16.2 per cent. ETHY (CAD hedged) yields 15.4 per cent, ETHY.B (CAD unhedged) yields 15.5 per cent and ETHY.U (USD) yields 19.5 per cent.

Broader crypto ETFs

Investors looking for a wider crypto investment can choose among three funds: the recently launched CI Galaxy Multi-Crypto ETF (CMCX-T), which charges 0.50 per cent with $2.6-million (down 5.7 per cent since inception on Jan. 28); the Purpose Crypto Opportunities ETF (CRYP-T), which charges 1.58 per cent, has $4-million in assets and is down about 7 per cent year to date; and the Evolve Cryptocurrencies ETF (ETC-T) with $29.1-million in assets and a drop of 13 per cent so far this year. (ETC is listed as having a zero MER, however since it holds both EBIT and ETHR, a management fee of 0.75 per cent will apply for underlying ETF holdings).

The broader crypto funds differ in how they gain exposure: ETC holds two underlying Evolve crypto ETFs (EBIT and ETHR); the CMCX fund (Canadian unhedged and U.S. dollar) holds a 50-50 exposure to bitcoin and ethereum, and the actively managed CRYP fund primarily holds bitcoin and ethereum, with smaller amounts of crypto-related companies.

Investors in the U.S. can’t buy ETFs that hold physical crypto. Currently, the only option is a trio of futures-based crypto-asset ETFs that have combined assets of about US$1.2-billion.

Crypto’s promise as a haven from fluctuations in markets and currency has not been borne out so far, notes Neena Misha, director of ETF research with Zacks Investment Research in Chicago.

“We found that cryptocurrencies were highly related to those high-growth tech stocks and when those stocks fell, cryptocurrencies also fell,” she says.

Still, she says investors may want to hold between 1 per cent and 5 per cent of their portfolio in crypto. She owns a small percentage in her personal investments: “This is something new which I don’t want to miss out on.”