Advisors, Do Crypto ETFs Belong To Qualified Retirement Accounts? | Financial advisers

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For financial advisers, questions from clients about holding cryptocurrency exchange-traded funds in retirement accounts may be on the horizon, if they haven’t started yet.

The October launch of the ProShares Bitcoin Strategy ETF (ticker: BITO) opened new doors for investors. While other crypto-related exchange-traded funds have been on the market for a few years, the ProShares fund is the first cryptocurrency ETF that the Securities and Exchange Commission has approved for trading.

The ETF holds Bitcoin futures and contracts, not the digital currency itself. It has grown rapidly and now has over $ 1 billion in assets under management. Its average daily trading volume is 5.2 million shares. This is not bad for a fund that is about a month old.

With so much attention paid to crypto assets, it is inevitable that clients of financial advisers will ask to hold cryptocurrencies in their qualified accounts, such as Roth and traditional individual retirement accounts.

While it can be fun and interesting to own the Flavor of the Month asset class, investors should also understand the risks. This is true with any asset, but is especially true if investors read about crypto in their social media feeds and see advertisements for crypto platforms on their phones.

A volatile asset class

Crypto differs from traditional stocks and fixed income assets in that prices can quickly become volatile and investments can soar or collapse in a short period of time. This is certainly the reality for stocks, but in the world of crypto the pace of price movements can be much faster and faster.

Nevertheless, the same investment rules apply: understand that cryptocurrencies, even when accessible through an ETF, have a high risk profile. This is also true for other investments, such as equities in emerging markets.

So how should investors manage crypto assets in a retirement account? Much of the advice that goes around is focused on trading, not long-term investing or assessing how a crypto ETF fits into an allocated portfolio.

Although retirement accounts ultimately provide income, savers don’t necessarily have to invest their money solely in income-producing assets, says Ric Edelman, long-time owner of an eponymous registered investment advisory firm, who has merged with Financial Engines in 2018, which now serves as the founder of the Digital Asset Council of Financial Professionals based in Fairfax, Virginia.

“Instead, it’s completely reasonable to invest some – maybe the majority of your account – in growth-oriented investments,” he says. “The ideal composition of the portfolio is a mix of stocks and bonds, and to this end, the inclusion of digital assets makes perfect sense.”

Benefits of diversification

Edelman adds that since its inception in 2009, Bitcoin has proven to be a great way to improve portfolio diversification.

“While past performance is no guarantee of future results, history shows that adding a small allocation to Bitcoin – even as little as 1% of your account – has improved returns while reducing risk,” did he declare.

Because retirement accounts don’t pay income taxes every year, growth is accelerating, Edelman says. He says this makes digital assets an ideal choice for inclusion in retirement accounts.

Since there is no performance history for the ProShares ETF or other new crypto-related ETFs, it may make sense to limit crypto exposure within an account. qualified.

“I would recommend keeping the allocation at 1%,” says Edelman. “If Bitcoin performs as well in the future as many expect, that is enough to significantly improve your overall portfolio returns.”

However, he adds that as an emerging asset class with many risks, crypto could still post mediocre returns. In this case, losing 1% of the portfolio will not destroy an investor’s ability to achieve financial security in retirement, he adds.

Futures contract risk

Futures are inherently risky investments, says Martin Smith, president of Wealthcare Financial Group in Peachtree City, Georgia.

“However, unlike an aggressively growing mutual fund which can fall into the high risk category, there is a learning curve involved in futures trading that is not common with mutual funds. placement, ”he says.

Smith does not advise his clients to buy any futures contract as part of an IRA, as this amounts to a form of speculation.

“Assuming that there might be other investments in the IRA, if margin is involved in buying a futures contract, investors might inadvertently expose their IRA to some of the risks that are unique to futures contracts, such as the negative impact of a contract expiration on the underlying investment, ”he says.

For clients who want to allocate a small portion of their portfolio to crypto, Smith recommends limiting exposure.

“If a client wants to allocate a small portion of their portfolio to a speculative investment, such as the new Bitcoin futures contract, I want them to have a plan for how much they are going to commit to that investment and not exceed that amount. He said.

He points out that for some investors it is tempting to double down on an underperforming investment, believing it will recover and eventually break even. Smith says other investors might be tempted to strengthen their position as its value increases.

“In either scenario, the investor may run the risk of wasting money after evil, or increasing their cost base by pursuing an appreciating asset,” Smith said.

In these situations, an investor may misunderstand what the real value of the security should be.

“My advice is to have a plan, stick to it, and not let your emotions sidetrack them,” Smith says.

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