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Fund companies are racing hard to be the first to offer a bitcoin ETF. The Wall Street Journal’s Michael Wursthorn reports on the risks of such funds, writing:

Despite the additional safeguards, investors in such funds would have to deal with issues associated with trading futures, as well as the risks around cryptocurrencies.

Todd Rosenbluth, head of ETF and mutual-fund research at CFRA, warned that futures-based ETFs rarely replicate the performance of the underlying market they track. The reason is pricing fluctuations between futures contracts and the spot market, especially if demand for the asset or commodity is expected to change significantly in the future. There are also costs associated with rolling over contracts when they expire.

“It’s likely that some of the investors who gravitate toward these products will either be disappointed in the performance or unaware of the risks they are taking,” Mr. Rosenbluth said.

Funds that trade in futures tend to buy contracts for the nearest month, known in the market as front-month contracts. Before the contracts’ expiration, funds roll their assets into the next month. If futures contracts trade higher than bitcoin’s real-time price, funds would be forced to pay a premium to roll them.

Bloomberg ETF analyst Eric Balchunas estimated that this rolling process would cost investors as much as 10 percentage points in annual returns—on top of expense ratios that are expected to be around 1% a year.

Funds that trade futures “really are more appropriate for institutional investors,” said Steven McClurg, chief investment officer at Valkyrie, whose proposed ETF will exclusively trade in front-month futures contracts. “But when there’s not a spot product available, like with oil or natural gas, retail investors look toward futures products.”

Action Line: So investors can expect a fund that doesn’t track its index, demands high costs for trading, could charge premiums equalling up to 10% off annual returns, and charges a very high expense ratio for an ETF. I’ll be sitting out this one. Unfortunately, many college students and recent graduates will be drawn to these funds. If you want to help a college student or recent graduate you know get off to a good start with their retirement investing, click here send them my free Special Report: How To Invest After Graduating College.

Originally posted on Your Survival Guy