CIO behind second bitcoin futures ETF on tracking error concerns

The man behind the second-ever bitcoin futures-based exchange-traded fund doesn’t share concerns around how accurately his product will track the price of the red-hot cryptocurrency.

It’s one of the investing community’s top worries around bitcoin futures ETFs: The Chicago Mercantile Exchange, which regulates futures trading, sets limits on the number of futures contacts issuers can own per month. If an issuer hits the limit, it may be forced to buy contracts for months further in the future, potentially creating contango, or when futures prices exceed spot prices.

The Valkyrie Bitcoin Strategy ETF (BTF) aims to avoid that issue, Valkyrie Funds’ chief investment officer, Steven McClurg, told CNBC’s “ETF Edge” on Monday.

“We stick with the front months and we show that we’re tracking the futures really closely,” McClurg said.

The CME has limited issuers to 2,000 contracts for October and 4,000 for November. For months further in the future, there is no explicit limit, but the CME may request more information if an issuer exceeds 5,000 contracts.

ProShares, whose first-to-market bitcoin futures ETF has raked in north of $1 billion in a week, has applied for a waiver to allow it to purchase more contracts so it doesn’t get pushed too many months out on the futures curve.

“Even though we’re going up against the biggest [ETF launch] of all time and a firm that’s already gathered 1.2 billion, I think we’re going to do quite well primarily because we’re able to still stick with the October contracts and keep very little tracking error,” McClurg said.

He said healthy competition will be the key.

“I think the best strategy is actually just open up the playing field and letting other ETF issuers in,” he said, nodding to VanEck’s potential launch later this week.

“As it grows, there’s probably only room for really three or four of us, and if it grows, I think the CME will extend those limits,” he said.

If not, issuers may have to get creative, ETF Trends CEO Tom Lydon said in the same interview.

“First-mover advantage usually … carries a lot of weight” in the ETF space, Lydon said. “Not so much in this regard.”

“It’s a concern for ProShares and that’s why they applied for this extension to be able to have access to more futures contracts,” he said. “If that doesn’t happen, we’ve seen some signals from the folks at ProShares that they’re going to look at other derivatives like swaps or structured notes able to fill the demand.”

ProShares’ Bitcoin Strategy ETF (BITO) is down more than 3% since its Oct. 19 launch. BTF has declined more than 3% since its Friday debut.

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