ETFs are emerging as a viable means for institutional investors to gain exposure to bitcoin and other cryptocurrencies, says Alexis Marinof, WisdomTree’s head of Europe, in an interview with Nicholas Pratt.
According to Alexis Marinof, head of Europe at WisdomTree, the ETF is one of the greatest innovations in the asset management market in the past 30 years.
“It has brought institutional quality to the masses. Any investor that buys an ETF has the same experience as any other,” says Marinof.
This includes the same price, the same performance, and the same level of access to various asset classes. This is in contrast to what the private banking and wealth management market offered in the past, says Marinof, before technology such as digital platforms changed the industry for the better.
Now though, cryptocurrencies, digital assets and tokenisation are the next targets for innovation. Tokenisation in particular is seen as a potential disruptor for the asset management market and could do to the ETF market what ETFs did to traditional mutual funds: that is, provide a lower-cost, more efficient investment vehicle and even remove some intermediaries from the value chain.
This was noted by WisdomTree’s chief executive Jonathan Steinberg in a December blog post. However, he also stated that he was “personally all in on DeFi” [decentralised finance].
Unsurprisingly, Marinof is similarly enthused by crypto and tokenisation and sees a role for WisdomTree and other ETF providers in this developing market. “It is not often that we see the emergence of a new asset class, so at a minimum I would expect people to be curious,” he says. “I also think crypto has a place in a portfolio.”
ETFs have emerged as the most viable and popular means for institutional investors looking to understand the crypto market and gain exposure to bitcoin and other cryptocurrencies. The benefit, says Marinof, is that investors are not investing directly in the crypto assets themselves and therefore do not have to be concerned about the storage of assets or their potential disappearance.
Nor do institutions have to change their current operating model. “At WisdomTree we are looking to build a bridge between the innovative side of the digital and crypto market and the traditional ETF buyers. We want to offer exposure to crypto through their existing infrastructure or operating model.”
WisdomTree launched a physically backed bitcoin exchange-traded product (ETP) in December 2019 and has launched others since then. The market is continuing to grow and will likely accelerate now that the US regulator, the Securities and Exchanges Commission, has approved its first crypto ETPs.
“We talk to so many clients that want to use crypto as a diversifier for their end investors and have just been waiting for an entry point into the market. It’s a fascinating and competitive part of the industry with more issuers and products, and shows that the ETF market is still at the cutting edge of the asset management industry.”
Marinof also states that bitcoin and ethereum are just the tip of the digital assets iceberg. “Crypto is just one application of the technology and there is so much work being done on DeFi and blockchain.” In February, the firm announced plans to launch a blockchain-native financial services app, WisdomTree Prime, to enable mass adoption of digital assets.
Not a perfect science
Beyond digital assets, WisdomTree’s product development extends to the creation of indices designed to capture the latest megatrends.
These include a cloud-computing Ucits ETF launched in 2019 and Volt, another Ucits ETF, launched in 2020, based on capturing the increased demand for energy storage services and developments in battery technology.
Product development is not a perfect science, says Marinof, and is based on listening to clients before moving quickly to meet demand. He also cites the importance of using innovative index providers. For the cloud ETF, WisdomTree recruited venture capital firm Bessemer Venture Partners, and for Volt it turned to Wood Mackenzie, a consultant specialising in the natural resources industry.
Although neither firm had any experience of creating an index, Marinof wanted a relatively concentrated strategy and to avoid using the same index providers as the majority of ETF providers. “It seems everyone wants to use the same benchmark and that doesn’t make a lot of sense,” says Marinof.
Competition is important in the asset management industry, he says – a point that regulators have noticed. The European Securities and Markets Authority and the UK’s Financial Conduct Authority have announced plans to examine the competitiveness and cost at the top of the financial index industry.
Marinof welcomes the regulatory attention and the general push for more cost-efficiency across the value chain, adding that the index side of the ETF market has not been looked at up till now. And while there should be more competition, part of the problem is the existence of a herd mentality among ETF investors.
“There are some very strong franchises at the top of the leaderboard in both ETF providers and index providers, but that is largely due to clients and investors not thinking more about what other products and returns they could get,” says Marinof. “If people diversified a bit more, they would have a better experience.”
He adds: “I don’t believe in the idea that you just need a handful of the same passive products. Clients want diversification and exposure to the new asset classes coming out. And, most importantly, they want diversification of providers.”
Marinof believes there is a great opportunity for WisdomTree given the current consolidation trends in the market. Recent acquisitions include that of Lyxor by Amundi. Both asset managers offer ETFs.
“You see consolidation at the top of the industry, which might be great for those firms, but it means there is a big role for independent providers like us to provide diversification,” Marinof says.
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