WinklevossBitcoin Trust Exchange Traded Fund (ETF), which will track the performance of Bitcoins, the most talked about digital currency, will be available to investors later this year. Launched by Cameron and Tyler Winklevoss – the twins who worked with Mark Zuckerberg in the early stages of Facebook – the ETF is currently in the process of regulatory approval.
According to the Winklevoss brothers, Bitcoins is a better investment than gold as they believe it to be more durable due to the fixed supply built into the rules of the digital currency. The model of the product is based off the SPDR Gold Trust GLD ETF.
As the Investment Insight in April’s Money Management shows, ETF’s have become extremely popular among investors in the past few years. There are 1,134 exchange-traded products (ETPs) on the London Stock Exchange as of February 2015, with a total of 555,528 trades and roughly £45bn turnover in the year to date.
Popular for their lower costs than actively managed funds, ETFs come in two forms – physical and synthetic. While a physical ETF owns the assets that it tracks, such as shares in an index or a specific commodity, a synthetic ETF holds derivatives of the chosen asset.
Synthetic ETFs pose a greater risk than physical replications due to counterparty risk. Synthetic replications rely on the investment bank behind the product to responsibly handle the derivatives and to design them in a way that suits any stated investment objective.
A number of investors also look to invest in esoteric or exotic ETF’s. These allow investments in obscure or niche investments that they may not otherwise consider. Esoteric ETF’s come in all sizes and sectors – from commodities, to currencies, equities and real estate. Examples include the First Trust ISE Cloud Computing ETF that follows developments in cloud technology. Launched in 2011, the fund tracks the performance of companies involved in cloud computing, such as Apple, Google and Microsoft.
However, advisers need to ensure their clients are fully aware of risks that accompany a low-cost esoteric ETF as overesposure within your portfolio can be risky.