The VanEck Bitcoin Strategy ETF (XBTF ) debuted last week, joining a pair of other futures-backed funds in the bitcoin exchange traded fund landscape.
As the third of the three ETFs to come to market in the U.S., XBTF needed to differentiate itself. That’s the case with any new ETF, regardless of underlying asset class or investment objective. The rookie VanEck fund does just that. For example, the annual fee on XBTF of 0.65%, or $65 on a $10,000 investment, is lower than the expense ratios on rival products.
A lower fee than competitors is always a solid avenue for new ETFs to stand out, but the actively managed XBTF plays another card: It’s structured as a C-Corporation, not a registered investment corporation (RIC). In the case of a bitcoin futures ETF, the former is a more tax-efficient structure for investors, though most traditional ETFs are constructed as RICs.
“C-Corps can carry forward and carry back capital losses and are not required to distribute long-term capital gains to investors. This may result in a deferral of tax and allow investors to keep more money continually invested in the fund,” according to VanEck.
XBTF’s C-Corp structure offers another benefit. Distributions from C-Corps are taxed at investors’ long-term rates, whereas distributions from a bitcoin futures fund structured as an RIC will be taxed at investors’ ordinary level, which is higher than the long-term percentage.
“RICs that invest in bitcoin futures through a Cayman subsidiary can treat the income and gains earned by that subsidiary as qualifying income for purposes of the RIC requirements. However, investing through a Cayman subsidiary results in other adverse tax consequences regarding how distributions and losses from the fund are treated for tax purposes,” adds VanEck.
Obviously, terms such as C-Corp and RIC are wonky, and many investors aren’t tax experts, meaning that they should consult advisors or tax professionals regarding the benefits and drawbacks of these fund structures. However, on the positive side of the ledger, investors craving bitcoin exposure through an ETF may come to like the C-Corp methodology offered by XBTF.
“Tax sensitive investors should focus on after-tax returns when comparing funds structured as C-Corps vs. RICs. On an after-tax basis a fund structured as a C-Corp may result in higher returns than funds structured as RICs, particularly for high net worth individuals and corporations and particularly over longer time horizons and in periods of high volatility. Tax exempt investors or individuals investing through tax deferred accounts may not be well-suited to invest in a fund structured as a C-Corp,” concludes VanEck.
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