A Big Week For The ETF Industry

The ETF industry has been evolving at what feels like an accelerating rate lately, not just with the 11 Bitcoin ETFs but let's touch on those first.

Depending on how far down the rabbit hole on this, that brokerage accessible products now track spot Bitcoin versus futures might not be much of a game changer, unless you owned the Grayscale Bitcoin trust when it had that huge discount to its NAV. If you're diehard then it probably is a very big deal. I'm here for the asymmetry, it will either go to a bazillion or it will go to zero. Lately I've been describing the risk as it blowing up some weekend. 

If Bitcoin does turn out to be just magic internet money and it does implode, what I think it more looks like is going down 80 or 90% like a fireball and then limping along there after with no relevance. A question that I've had for ages, that I've not seen addressed anywhere is why can't all of the benefits ascribed to Bitcoin instead be bestowed onto some different, even yet to be created, crypto/protocol? 

In the meantime I rearranged the deck chairs on my personal exposure. I swapped out of a couple of different futures based funds for the Bitwise ETF in three of our accounts and also own some BTC outright through an app. I'm not saying whether I think anyone should buy it or not but will continue to point out that the asymmetry of huge gains or wiping out is alive and well. 

Somewhat related, Grayscale filed for a GBTC covered call fund. If I am reading the prospectus correctly it looks like the fund will own some GBTC and will replicate other GBTC exposure with a short put, long call combo which is known as synthetic exposure and is a real thing. It will then sell at the money calls or out of the money calls, active decision, to generate income.

GBTC does not yet have options but I imagine it will once it makes its way to the NYSE. The ProShares Bitcoin Strategy ETF (BITO) is futures based and does have options. Maybe as a proxy then for GBTC, with BITO at $21.07, calls expiring on February 16th with a strike price of $22 was last traded at $1.02, the calls struck at $23 last traded at $0.80 and the $24's last traded at $0.57. About $3 out of the money bringing in 2.5% in call premium for a month seems promising in terms of the GBTC covered call product having a big yield. 

My "analysis" might turn out be an incorrect extrapolation but this is interesting. My expectation if this ever comes to the market is that like the other newer funds that sell volatility one way or another paying out huge "yields" to fund holders, they'll be lucky to keep up with their payouts on a price basis. With these, it is worth considering reinvesting some or all of the payouts. This dynamic doesn't mean the CAGR can't be positive, it can be. 

The products should not be expected to keep up with the underlying whatever that they track but they can still have a positive return, lower volatility and maybe offer a decent truer yield by only reinvesting part of the payout, by part of the payout really I mean most of the payout.  

The YieldMax AAPL Option Income Strategy ETF (APLY) tracks Apple (AAPL), sort of. APLY started trading last April at $20 and is now at $18.40 while Apple common stock is up 32%. Since it's listing, APLY has paid out $3.38 so netting out the dividends and the drop in price it is up $1.78 in total return or 8.9% for anyone still holding from $20 last April which annualizes out pretty close to 12%. Having no idea if that can continue to repeat, some sort of strategy of just taking out some or all of the net gain while reinvesting enough to maintain the initial position size would be a way to get a yield somewhere between investment grade and high yield with no interest rate risk beyond the influence of interest rates as they effect options pricing. When I applied the same thought process to the YieldMax TLA Option Income Strategy ETF (TSLY), it didn't work. The fund is down about 50% since listing in November of 2022 but has only paid out a little over 43% based on its $20 initial listing. 

Speaking of YieldMax, they announced via a Tweet that they will be launching a fund comprised of its funds with symbol YMAX. The Tweet listed 13 fund symbols that presumably would go into YMAX. There's no mention of YMAX on their website's news tab. While I am unlikely to ever use one of these funds, the idea of using them as some sort of carry trade is intellectually appealing even if that would be a difficult target to hit with how volatile they are. Maybe YMAX will have less volatility (it should) than the individual stock funds with the expected trade off of a lower yield which could combine to make it a more usable proxy for carry.

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