Your Take: How Crypto ETFs Fit in Portfolios

As advisors try to wrap their heads around how and if they want to recommend crypto to their clients, we have gathered insights into the investment vehicles that best suit specific client profiles based on our discussions with hundreds of wealth managers.

Crypto separately managed accounts and the bitcoin and Ethereum ETFs are complementary investment vehicles for wealth managers to consider for client portfolios based on a particular objective. The type of investment, either a crypto SMA or the crypto ETF, largely depends on the client's preferences and background.

Crypto SMAs: Efficiently Investing Today, Prepared for Tomorrow

Advisors increasingly opt for crypto SMAs for high-net-worth clients who are willing to allocate larger amounts into crypto holdings. This typically means allocations ranging from $50,000 to $5 million into crypto. These clients appreciate direct ownership of their crypto assets and the functionality of crypto SMAs.

First, crypto SMAs allow clients to automate tax-loss harvesting. Because the crypto market is volatile relative to traditional asset classes, automated tax-loss harvesting is a high priority for these clients. Automated tax loss harvesting with a crypto SMA allows investors to maintain their long-term allocation to bitcoin while creating capital losses during downside volatility.

Crypto SMAs are also attractive to clients and advisors who want to invest in the growing ecosystem backed by expert guidance. Crypto SMAs allow access to multi-asset portfolios through professional asset portfolio managers, which is critical when dealing with an emerging and complex asset class such as crypto. Advisors can lean on the expertise of a suite of some of the most experienced crypto allocators in the industry.

Meanwhile, a client looking for sheer exposure to bitcoin may prefer the crypto ETFs. Advisors may choose this option if their client wants to invest quickly and isn’t worried about direct ownership.

Crypto ETF: Point and Click

The bitcoin and Ethereum ETFs have provided an opportunity to gain exposure to crypto that was not available in prior crypto bull runs. The ETFs allow for participation from a broader set of investors. The crypto ETFs are preferable for clients with $50,000 or less allocated to crypto or investing in a retirement account.

The ETF is preferable for these clients because it allows for a point-and-click investment in a traditional brokerage account. The ease of use of the ETF is an excellent way for advisors and their clients to get initial exposure to the crypto space.

However, it’s important to note that ETFs don’t allow for direct ownership, which can limit an advisor’s opportunity to harvest tax losses for their clients. Additionally, ETFs don’t allow in-kind transfers for clients’ held-away crypto assets. For clients owning the ETF, this would necessitate selling the client's cryptocurrency and then purchasing the crypto ETF, creating a taxable event.

On the other side of the coin, crypto SMAs offer the built-in ability to facilitate in-kind transfers without triggering a tax event. This capability is particularly beneficial for advisors whose clients have held away crypto, as they can transfer these assets under their purview with an in-kind transfer.

Complimentary Investment Vehicles

The crypto ETF is a solid solution for advisors looking to get clients exposure to bitcoin and Ethereum. While the crypto SMA takes more time to set up than the ETF, it allows advisors to offer an evergreen investment solution, meeting the needs of today's crypto investors and future investment goals. The crypto SMA provides the highest level of functionality to meet clients' needs as their views and objectives on crypto evolve.

Ultimately, clients have different needs, preferences, backgrounds and goals. By offering both investment vehicles, advisors can provide the optimal solution for all their clients interested in crypto.

Do you have an opinion that you want to share with other members of the financial planning community? We encourage financial professionals to send us their ideas for a Your Take column to us at [email protected].