Bitcoin vann kvartalet – Japan och energi på pallen

After finally securing approval from regulators, the new Bitcoin ETFs gained an average 42.6%.

Do the investors in the new Bitcoin exchange-traded funds launched this past quarter know they’re buying a product that produces no cash flow, has no physical reality, and was invented by Satoshi Nakamoto, a pseudonymous developer whose true identity remains unknown?

Not that it seems to matter. In January, just two months after crypto bro Sam Bankman-Fried was convicted of committing one of the biggest frauds in Wall Street history, regulators approved 11 cryptocurrency ETFs after a decade of lobbying by Wall Street, greenlighting more later. In the blink of an eye, some nine new ETFs that subsequently launched have gathered $34 billion in assets. Meanwhile, an older product, the $22 billion Grayscale Bitcoin Trust, which wasn’t technically an ETF because of the regulatory holdup, converted into one as a result.

With a flood of new money and the government’s tacit endorsement, is it any surprise that funds in Morningstar’s Digital Assets category were the best performers in the quarter, up 42.6% on average? That beats the two next-highest fund categories, Energy Limited Partnership’s 12.2% and Large Growth’s 11.9%, by several country miles. Even the attention- grabbing Technology sector couldn’t keep up, rising an appealing but relatively paltry 8.7%. That’s despite the artificial-intelligence engine of Magnificent Seven stocks such as Nvidia and Microsoft in tech and large-growth stock fund portfolios.

AI stocks are highly valued, with chip maker Nvidia having a trailing price/earnings ratio of 75. But at least Nvidia produces a real product and has real earnings . The nature of the cryptocurrency market seems to embody the “greater fool” strategy of buying something with no intrinsic value simply because its price is rising, while hoping someone else will later purchase it from you at a higher price. Bitcoin isn’t a cash-flow-producing business or interest-paying security but code—an ethereal abstraction written on the virtual wind.

Of course, one could say the U.S. dollar is also a fiat abstraction, but the dollar is backed by the most powerful government on earth. Bitcoin investors have Satoshi. Moreover, unless your dollars are in your wallet or your mattress, they earn interest now in your bank account, which is federally insured, or in safe money-market funds . A Bitcoin ETF’s investors receive no interest and actually pay additional fund management fees to hold it.

Nor is the comparison to cash an idle one. As hot as Bitcoin ETFs are, investors favored money-market funds this quarter. After years of lackluster yields and investor disinterest, funds in Morningstar’s Prime Money Market category received some $67.6 billion in new money by Feb. 29, while Money Market-Taxable funds, which includes many Treasury/government debt money funds, received $56.4 billion—making them the two most popular fund categories. (Morningstar flow data for March isn’t available yet.) All told, money-market funds received some $154 billion in new money for the entire quarter, according to the Investment Company Institute.

Flows for prime money funds, which invest in ultrashort-term high-quality corporate debt, were primarily negative before 2022’s interest-rate hikes. The average fund in the Crane 100 Money Fund Index, which tracks 100 of the most popular money funds, currently yields 5.14%. undefined Such funds have only lost money—or “broken the buck”—two times since the first money-market fund launched in 1971. Their appeal is understandable as a hedge against market declines. Meanwhile, Bitcoin was up 60% in 2021, down 64% in 2022, and up 156% in 2023—great upside, but hardly a stable U.S. currency substitute.

Perhaps the most surprising breakouts this quarter are in the Energy Limited Partnership and Japan Stock categories. The average Japan stock fund rose 10.9%. Given that Japan is the fourth-largest economy in the world, there are shockingly few Japan funds available to U.S. investors—only 26 mutual funds and ETFs. Last quarter’s top mutual funds, Hennessy Japan and Matthews Japan , were neck and neck, up 15.5% and 15.3%, respectively. WisdomTree Japan Hedged Equity was the top ETF, up 22.6%, thanks to hedging its yen currency exposure. And the behemoth $16.7 billion iShares MSCI Japan ETF was up 11.1%.

Japan’s stock market had disappointed investors in past years as the country suffered from perennial deflation and lackluster growth, and a number of dedicated U.S.-based Japan funds closed. But a weak yen relative to the dollar has boosted Japanese exports and could provide an additional tailwind to U.S. investors who buy Japanese stocks in dollars. Moreover, Japan’s government has taken numerous reforms to improve corporate governance at companies.

Master limited partnership, or MLP, funds have a narrower industry focus on oil-and-gas pipeline companies, but there are more of them—46 ETFs and mutual funds. The InfraCap MLP ETF was the leader last quarter, up 18.5%. The largest fund, the $8.4 billion Alerian MLP ETF, gained 13.7%. MLPs pay hefty yields and have unusual tax treatments on those yields, but the companies also tend to be highly leveraged. The stocks are highly sensitive to both energy prices and interest rates.

Flow-wise, it’s no surprise the Vanguard 500 ETF gathered the most assets, given both the superlative performance of large-cap stocks and the long-term trend toward indexing. The ETF share class of the fund by itself received $17.3 billion in the quarter’s first two months; combined with the mutual fund share classes, it received $19.8 billion in total. This top inflow was followed by two money-market funds and rival iShares Core S&P 500 ‘s $16 billion.

Also interesting: While there was a surge in Bitcoin investments in the newer ETFs such as Fidelity Wise Origin Bitcoin and iShares Bitcoin Trust —they already have $10 billion and $17.5 billion in total assets, respectively—Grayscale Bitcoin Trust lost $8.4 billion to outflows in the first two months of the year. Then again, the Grayscale ETF charges a 1.50% expense ratio to invest in a single cryptocurrency, which is an active-management-like fee for essentially a passive investment in a single cryptocurrency. The iShares and Fidelity ETFs both charge 0.25% without current fee waivers.

Investors in these ETFs may not fully understand cryptocurrency, but they’ll be damned if they’ll overpay a fund manager to buy it.

One could argue that they have lost faith in the U.S. dollar and want an alternative, but that’s what gold is for. It has a physical presence valued by humans for millennia so you can wear it on your finger or around your neck as an albatross-like symbol of your pessimism. There are even gold ETFs such as VanEck Merk Gold that invest in bars certified to be in a vault and available for physically delivery to investors in exchange for their fund shares.

Yet despite the fact that gold bullion prices hit new highs this quarter, investors have been selling bullion ETFs. The largest, SPDR Gold, saw $3.5 billion in outflows in the year’s first two months. Perhaps investors are buying Bitcoin instead, though it isn’t the same as a hard asset. While it’s possible to buy physical Bitcoins with a code imprinted on them to access an online crypto account, they’re only gold-plated.