How Indexing Can Tame Bitcoin

ETF.com spoke with VanEck CEO Jan Van Eck at the Inside ETFs conference in Florida this month. Here he discusses the need for a bitcoin ETF as well as the outlook for global markets.

ETF.com: What are some of the key points people need to know about bitcoin?

Jan van Eck: As you know, we filed the first futures-based bitcoin ETF. But it’s important to understand the market structure of this investment. Whenever you package an ETF, what's the market structure of the underlying component, whether it's over-the-counter bonds, international bonds, U.S. equities, small cap? You have to think about how they’re traded, what's the liquidity, all that kind of stuff.

The structure of the bitcoin market is that it's traded on digital asset exchanges, which are all over the world, and they’re basically startup companies. It used to be in China, but now South Korea, Japan, the U.S. and Europe. It's fragmented, so prices are different on different exchanges. It's a little bit chaotic. That's what drives a lot of the concerns—the liquidity, valuation—for the SEC.

The other side is the custody issue. It's like your room key. You lose your private key, it's gone. Look, ’40 Act funds have never had a crisis in their whole history because prices may go down, but no one loses the assets. I think the SEC was a little blindsided by this issue, to be honest.

ETF.com: VanEck just launched some cryptocurrency indexes. Would you talk about those?

Van Eck: We created them partially in response to this issue, the fragmentation of the market. What's the price of bitcoin? It's not analytically difficult to figure out. You take in prices from all the exchanges and say, “I care more about prices from the exchange where there's more volume.” That's not complicated. That's really all we did.

We partnered with a firm called CryptoCompare. They're well-established as a data provider in the space. We just indexed up the data. That problem is solved.

ETF.com: What else is going on with the VanEck Vectors ETFs? What are you going to be focusing on in 2018?

Van Eck: Our focus over the last couple of years as a firm has been to offer funds overseas. First, we built a fund family in Australia, and now we have a solid one in Europe.

Now it’s time to build out on the fixed-income side. Our whole approach effectively is to build allocation ETFs covering what are called “mainstream asset classes” like high yield, U.S. equities, international equities. We use different solutions for different asset classes. We don't have one all-in-one, like a five-multifactor solution that we apply to everything that moves.

ETF.com: How are you looking at the fixed-income space now?

Van Eck: Our view is that 10-year interest rates could go up to 3.5% this year on global growth, monetary policy, normalization here and in Europe. If that's correct, there are two pieces to that. One is interest rates go up; the other is that the world's actually in an OK place. We have global growth; stocks should be OK.

The biggest risk is bonds. If 10-year interest rates go from 2.5 to 3.5%, then 10-year government bonds go down by 6%. But investment grade only goes down by 4%. And what you think of as risky, like high yield and EM, actually are about flat. Again, this is if the world doesn't fall apart, but equities will do better.

We have a few solutions that apply here. One is a floating-rate investment-grade ETF, the VanEck Vectors Investment Grade Floating Rate ETF (FLTR), that's appropriate for people worried about that kind of an issue. The other is the VanEck Vectors J.P. Morgan EM Local Currency Bond ETF (EMLC), which is EM local currency. Emerging markets are out of that tightening cycle that's in the developed world.

ETF.com: What are the biggest global risks right now?

Van Eck: Knock on wood, they’re very low. I travel to China a lot, and I always think every investment committee has to think every year about how to deal with China because it's so important to global growth. If they have trouble, it will ripple through the world economy like no one's ever seen.

Having said that, I do think what you saw last year was really awesome. It was the best possible case for China, meaning that new China—technology and consumption—has become a major driver of growth in China. It’s no longer the old-style manufacturing—steel, cement, paving over of China kind of stuff.

Technology stocks are over 30% of Chinese stock market indices now. They've become more important than banks that are owned by the government. It's a world of Alibaba and Tencent and Amazon and Netflix; it's happening in China, too. It may be weird, but it's good from a growth perspective. You don’t want some huge commodity-driven downdraft.

ETF.com: So, this is a capitalism-driven China that we're seeing now, really.

Van Eck: It's the new China. It's more modern. They industrialized over 20 years ago. Now they're diversifying their growth. People are getting wealthier.

ETF.com: If anything does happen with China, is that going to affect emerging markets the most?

Van Eck: Everyone will be affected. They're a big trading partner of so many countries—the U.S., African countries, Latin America. It would impact everyone.

Contact Heather Bell at [email protected]