BITO: Buy For Upside And Income With Risks

Summary BITO offers indirect bitcoin exposure with substantial recent payouts, but its dividend policy lacks clarity and reliability for income-focused investors. BITO outperforms option-based income ETFs in total returns, especially during bitcoin bull runs, while preserving more NAV than aggressive yield products like YBIT. Despite futures-based inefficiencies and tracking error, BITO is attractive for investors seeking bitcoin exposure with potential income, especially in brokerage or IRA accounts. BITO is a Buy for bullish bitcoin investors prioritizing total returns over income stability; for others, spot ETFs like IBIT or FBTC may be better choices. The ProShares Bitcoin ETF ( BITO ) is a derivative based indirect ownership vehicle for bitcoins, and potentially the only one. The recent payouts are substantial. The use case is to enable investors seeking bitcoin exposure to allow transactions from regular broker accounts. The Dividend Rush The dividend or payout yield in the past year has been ~55% – material for a direct exposure, non option income generating ETF. I do not see any income or dividend policy details in the prospectus . An income plan will usually explicitly mention the income objective, but BITO only talks about tracking bitcoins. It appears that the payout heavy approach is a recent strategy. There is no mention of this change being a part of why the name changed from Bitcoin Strategy ETF to simply Bitcoin ETF somewhere around July to September 2024. But in the first year and half, we did not see any dividends. Payouts started only after that and has seen an even further increase around the time the name was changed. Data by YCharts Given the unsolved official communication around the payout policy, we can assume that the payouts are definitely a return of capital invested. And more importantly, we cannot rely on the dividend payout as a policy if evaluating BITO as an income ETF. Even if the dividends are likely to be paid out in future as well, the quantum and strategy remains vague until the fund officially communicates its policy. The Concept of Paying Out on Capital Conceptually, in a lot of income ETFs I have analyzed, I have repeatedly highlighted how income ETFs relying on option premium income does worse than a vehicle like BITO. The underlying theory is this. Covered calls restrict upsides, but ideally do better when the underlying asset corrects or stagnates. However, the downside protection is not commensurate to the upside opportunity loss. If you are overall bullish in the underlying, investing directly in it and withdrawing periodic income will outperform the option writing income avatar. If you are not bullish, then you will anyway face the downside erosions. It is hard to support a use case for such ETFs in flat markets, where it works best. Withdrawing income from regular direct exposures is where active payout management becomes a deterrent for some investors. That is where ETFs like BITO become useful. I expect such a vehicle to combine the best of both worlds. Overall total returns should be higher than the income ETF equivalent. Management overhead of generating income is taken out. So, income seeking investors will benefit in the long run from BITO. Only that the income commitment from the management is not reliable and consistent, unless you go by the fact that there are payouts made today. To see how the total return of such a vehicle outperforms the income variant, take a look at BITO vs YBIT below. In the common period of existence, spanning only about a year, the total return of BITO is ~52% vs ~8% from YBIT. Certainly, this large outperformance has been helped by a bull run in the past year overall on bitcoins, but you are likely to see outperformance in BITO, although to a lesser degree (but still significantly higher), when bitcoin runs through different market cycles over the years. Data by YCharts NAV Retention One of the benefits of a payout plan, depending on the outlook of the investor, is the fact that such ETFs continually de-risk investors from the underlying. Imagine investing $100 and receiving income of $100 over a few years, and then riding the underlying for free. Of course, there is a loss of the compounding effect till this breakeven point is reached (say 2 years for BITO at current rate) – which is why I said this benefit depends on what the investor wants. Also, I assume de-risking from an underlying is mostly helpful for a case where the income proceeds are re-invested in less risky assets. Now, all income plans do de-risk investors from the underlying, but I think a non option investment vehicle like BITO preserves more NAV while paying out aggressively. And this is where I am also unsure about what BITO’s objective function is. An income ETF may prioritize payouts, as seen in most YieldMax products. It could also prioritize preserving NAV. Looking at the share price or NAV alone, it does look like BITO prioritizes maintaining a decent exposure versus payout. See how YBIT NAV has collapsed by ~47% in one year in a bid to keep aggressive payouts. BITO NAV has only eroded by ~18%. IF that is the case, it means two things. One, as said earlier, BITO’s dividend payouts will only be aggressively high as seen today when bitcoin outperforms or rallies. Two, investors will retain a decent interest in the underlying bitcoin asset over time. Data by YCharts Other Alternatives There are alternatives now with direct exposure to bitcoin like IBIT and FBTC which do not use the futures route and hence potentially save on costs. A total return comparison also shows the expected underperformance for BITO. The best vehicle would be if IBIT and FBTC paid out like BITO. Then we would have not had BITO’s futures based inefficiencies, yet an income generating plan with no upside cap. But that is not the case, and we will have to choose between these variants, unless we invest in IBIT and FBTC and derive income ourselves. Data by YCharts Buy BITO Despite its Inefficiencies The case for Buy BITO is very interesting. It is not the most efficient bitcoin rider due to its futures based underlying structure. But it does provide an investment option with income generating capabilities (without management hassles of deriving income on your own). It is certainly better than the option selling equivalents in terms of total returns. There are other corner case uses of BITO as well. It is useful for short-term traders and investors who want exposure to Bitcoin price movements without owning spot Bitcoin or using crypto exchanges. It can be traded in IRAs and brokerage accounts, and avoids the custody, wallet, and tax complexities of direct crypto ownership. BITO may also be beneficial in rising interest rate environments, as it generates dividend income from cash collateral as well. Options traders may prefer BITO because it has an active and liquid options market, enabling a wide range of strategies like covered calls, puts for downside hedging, straddles, and spread trades, all within a regulated ETF wrapper. However, due to futures roll costs, tracking error, and higher expense ratios, it’s not ideal for long-term holding. Bottom line, BITO is a Buy for the investor outlined below is bullish bitcoin prioritizes higher total returns over income stability can wade through periods of potentially low income For all other cases, better alternatives are available. IBIT FBTC for long-term ownership and YBIT for pure income outlook.

Source: Seeking Alpha