Investment Fad Stacking?

Do you like Bitcoin? Do you like trend following? Well Global X has a new fund that combines both. The Global X Bitcoin Trend Strategy ETF (BTRN) owns Bitcoin but will change the exposure ranging from 0%, 25%, 50%, 75% or 100% based on a secret sauce combination of exponential moving averages of varying lengths. Anything not allocated to Bitcoin will be in a Global X T-bill ETF. 

The index methodology sheet says "based on the average of the four exponential moving average calculations" and talks about a scoring system to determine the current bitcoin weight. Page 3 of the prospectus includes "...at each scheduled rebalance date..." 

My first reaction to this is that Bitcoin might move much faster than any sort of blended moving average signal and that is I what think they are doing, blending the four m/a signals together. As Mark Yusko has said, risk happens fast. That is true in both directions and very relevant to Bitcoin. It can move 10% in a day or two "just to stay in shape." 

If you have an interest in speculating on Bitcoin, or you're a true believer it might make more sense to avoid funds that get in the way of capturing the full effect. A futures based fund might have a small tracking error which is not what I mean. The Roundhill Bitcoin Covered Call Strategy ETF (YBTC) is very new, but right out of the starting blocks does not look like Bitcoin. Where BTRN is trying to "minimize downside risk" there's a good chance it won't look like Bitcoin either.

One fund that might not get in the way of capturing Bitcoin's effect is the Simplify Bitcoin Strategy PLUS Income ETF (MAXI). MAXI owns Bitcoin and sells options combos on equity indexes to layer an income stream on top of the Bitcoin exposure. I've mentioned MAXI before. I said it sort of tracked Bitcoin other than a very large payout at the end of 2023. 

BITO is the ProShares Bitcoin Strategy ETF. MAXI pays $0.15 every month except in December when gains are accounted for. It paid $4.18 for 2023 which might be a big tax bite depending on the end user but add that back in and MAXI is arguably a Bitcoin proxy with yield. I've bagged plenty on Simplify before but this fund doesn't seem like a failed product.

It is almost a long/short volatility fund. It buys volatility via Bitcoin and sells volatility with the options overlay. To be clear, it is not selling options on Bitcoin so the options strategy should not impede access to the full effect of Bitcoin. The risk here, beyond the obvious of Bitcoin dropping 70 or 80% again is that selling equity volatility can go badly in a bear market. Yes, it is spread off but some of the spreads are very wide. 

Someone wanting the full Bitcoin effect might not want BTRN or YBTC but what about the attributes they do provide. I have to believe that BTRN will deliver some of Bitcoin's volatility. At times it can make sense to increase or decrease portfolio volatility. Doing so with one trade allows for changing the volatility profile without a lot of portfolio turnover, just one simple trade. 

The above surprises me. Will Bitcoin evolve to have a closer correlation to equities? If it was as high as 0.75 before it can get there again. If BTRN turns out to be half as volatile as plain vanilla Bitcoin, it will still be much more volatile than equities, so a possible way to add volatility with one trade without the line item risk of full boat Bitcoin if BTRN works as advertised. 

Similarly with YBTC which is the green line in the first chart. It hasn't captured Bitcoin's volatility but it is more volatile than the S&P 500 and it is harnessing Bitcoin's volatility to generate a high yield. A small slice of the portfolio that adds a little volatility and a little yield into a portfolio isn't a terrible idea. If a 2% weight into one of these things goes to zero, tisk tisk it was a bad trade but clearly not ruinous. 

I use the word proxy all the time as in some fund is a proxy for equity exposure or the covered call funds we look at are not proxies for the S&P 500 and so on. That word has been a crucial part of my process for portfolio construction for my entire career. MAXI might be a proxy for Bitcoin, I don't think BTRN or YBTC will be proxies for Bitcoin but they can be proxies for other things is the point. This highlights the benefits of being curious enough to explore new funds even if the odds of actually using them is very low. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.