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Many investors want to hold the cryptocurrencies bitcoin or ether without the hassle of holding the cryptocurrency, which can be lost or stolen. If so, they have a few fund options to consider: crypto trusts, strategy exchange-traded funds and spot ETFs.
Crypto trusts purchase and store the underlying digital assets, and then shares of the trust are traded on public exchanges akin to closed-end funds. Strategy ETFs, which cropped up before spot ETFs received regulatory approval, use futures and sometimes options on the crypto coin to gain exposure to its movement. And spot ETFs, which were launched in 2024, buy the underlying crypto coin at the prevailing, or spot, market price.
But which vehicle has performed best—that is, closest to the cryptocurrency itself?
Examining these various methods of buying into crypto, my research assistants (Lilia Benrabia and Seongjun Lee) and I find the clear winner for both bitcoin and ether are the spot ETFs. The clear loser: bitcoin and ether strategy ETFs, which have underperformed their underlying coin by a significant degree.
To explore this issue, we pulled all dollar-denominated bitcoin and ether crypto products available to U.S. investors going back to the start of 2024. We then organized these securities into three categories: trusts, strategy ETFs and spot ETFs.
Next, to compare each product to the underlying coin’s performance, we looked at the average return for the ETF or trust product and compared it against the spot return of the coin. We also calculated the average tracking error of each product by looking at the average monthly absolute difference between the coin’s return and the product’s return.
Bitcoin results
For bitcoin, we find that the spot ETFs performed the best when it comes to overall returns and do well at minimizing tracking error. For instance, the average spot ETF since the beginning of 2024 has delivered 6.85% a month, while the underlying bitcoin has delivered an average monthly return of 6.77%. This is an excess performance of 0.08 percentage point a month on average by the spot ETF. (While it might seem odd for the spot ETF to outperform the underlying coin, this may be due to timing techniques used by the ETF to minimize tracking error or the timing of investor purchases.)
Meanwhile, the average tracking error for bitcoin spot ETFs has been 0.88 percentage point a month. This means that if bitcoin itself delivers a 10% return in a given month, the average bitcoin spot ETF may deliver 10.88% or 9.12% on average in the same month (deviating from the coin’s return by 0.88 percentage point).
The worst performer: bitcoin strategy ETFs. On average, these ETFs delivered a monthly return of 6.28% over the same period, underperforming the coin itself by 0.49 percentage point a month on average. And their tracking error was the worst of the group, coming in at 1.24 percentage points a month.
Ether results
For ether, whose spot ETF products were launched in August 2024, we see a similar story. Ether spot ETFs averaged 4.17% monthly returns over the past year while the ether coin averaged 4.16% monthly returns. This leads to an outperformance of 0.01 percentage point a month.
As with bitcoin, ether strategy ETFs were the worst performing, averaging a monthly return of 3.55% over the same period, an average monthly underperformance of 0.61 percentage point compared with the actual spot ether returns.
For both bitcoin and ether, crypto trusts perform comparably to crypto spot ETFs. And they do far better than strategy products in terms of tracking the underlying return but not quite as good as spot ETFs.
Ultimately, the results highlight that buying a spot bitcoin or ether ETF is almost as good as buying the underlying cryptocurrency directly.
Derek Horstmeyer is a professor of finance at Costello College of Business, George Mason University, in Fairfax, Va. He can be reached at reports@wsj.com.
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