As the wealth management industry waits for the Securities and Exchange Commission to approve the first exchange-traded fund investing directly in cryptocurrency for U.S. investors, the industry is moving forward with a strategy that could reduce the need for a crypto ETF.
According to an announcement Friday, Ritholtz Wealth Management and WisdomTree are collaborating to offer access to a diversified cryptocurrency index in the form of a separately managed account on the Onramp Invest platform.
The WisdomTree Crypto Index, which offers direct exposure to a diversified blend of 13 digital currencies, is currently available to investors through Ritholtz financial advisers. But the plan is roll out access to a broader universe of advisers starting early next year, and potentially directly to individual investors, said Eric Ervin, Onramp co-founder and chief investment officer.
“Cryptoassets show great promise for financial advisers to add value, to be compensated for it, and to do so in a way that can be in line with their fiduciary responsibilities,” Ervin said. “Our goal at Onramp from day one was to make this possible.”
The index, which will be accessed as a separately managed account and not a registered fund traded on an exchange, has a 36% weighting in Bitcoin, a 20% weighting in Ethereum, and 4% weightings in 11 other crypto assets. According to the announcement, the index constituents are intended to represent thematic investments in diverse segments that advance crypto infrastructure and provide necessary services.
A spokesperson said Ritholtz representatives were busy Friday articulating the new crypto direct indexing strategy to clients and wouldn't be available to comment. But in blog post Friday, Ritholtz Chief Executive Josh Brown acknowledged the cooperative efforts by WisdomTree, Onramp, and custodian Gemini, while also detailing the challenge in bringing it all together.
“To a large extent, this was every bit a compliance and legal challenge as it was a technology or portfolio construction challenge,” Brown wrote. “We are building the rails for this thing at the same time as we are trying to conduct the train barreling down them.”
In a prepared statement, Michael Batnick, Ritholtz director of research, said, “The moment of mass adoption for digital assets, blockchain, DeFi, metaverse and web3 technology has arrived.”
“As wealth managers, we have a responsibility to adapt our portfolios to this burgeoning opportunity,” Batnick added. “As fiduciaries, we have an obligation to do so in a sensible way while harnessing the benefits of increased diversification.”
Steve Larsen, president of Columbia Advisory Partners, which specializes in managing cryptocurrency portfolios for clients, credits the backers of the new crypto index with leveraging the growing appeal of direct indexing.
“They’re taking what’s very hot, in terms of direct indexing, and moving it to the crypto space,” he said.
But Larsen said by investing in cryptocurrencies, the index removes the advantage of lower fees through direct indexing, compared to registered funds.
“The crypto version will be more expensive than an ETF, in general,” he said. “There will be advisory fees, custodial fees and transaction fees.”
For example, direct index investing in the S&P 500 would save investors the fund fees that come with owning those same index companies in a mutual fund or ETF. Even though there are currently no U.S. funds offering direct exposure to cryptocurrencies for comparison, it is clear the WisdomTree separate account will include a few layers of fees.
Jeremy Schwartz, global chief investment officer at WisdomTree, said the index licensing fee is set at 50 basis points. But investors in the SMA will also likely face additional fees from Onramp and Gemini, neither of which disclosed specific details on the fees.
When pressed, Ervin of Onramp said the fees will be “meaningfully less than 2%.”
While the various developers of the new index say it doesn’t eliminate the need for an SEC-approved crypto fund, it does offer a new entry point for investors and financial advisers.
“Right now, retail investors are going directly to the different exchanges and doing it on their phones, but it has been hard for traditional advisers to integrate crypto into their workflows,” Schwartz said. “Ritholtz has a great tech platform for this use case, and this is a natural evolution of a crypto-only index on their platform.”
Kristen Mirabella, director of business development at Gemini, said while financial advisers wait for regulators in the U.S. to approve crypto funds, the index “provides an amazing entry point.”
“People have gone the SMA route because there is no approval of any other type of product,” Mirabella said. “There’s a lot of room for many ways to invest in this asset class, and ETFs will also allow for broader adoption for people who might not understand this space as well. This index is just the way for those who want to be on the front lines.”
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