The Canadian arm of one of the world’s largest money managers has decided there’s a place for cryptocurrency in the portfolios of everyday investors, even those who see themselves as conservative.
A small bitcoin weighting can be found in each of the four All-In-One exchange-traded funds offered by Fidelity Investments Canada. The name says it all with these ETFs – they’re a way for mainstream investors to buy a fully diversified portfolio in one convenient package. Canadian, U.S. and international stocks are in the mix, as are bonds.
On top of that, there’s a 1-per-cent bitcoin weighting in the Fidelity All-In-One Conservative ETF (FCNS-NE) and a 2-per-cent weighting in a balanced version. These are your mom-and-dad funds, with a substantial helping of bonds to smooth the bumpiness of stocks. Fidelity adds 3-per-cent bitcoin weightings in a more aggressive All-In-One growth fund, and a still racier all-equity version.
Cryptocurrencies are a form of digital, or virtual, currency that exist outside of central banks, governments and the rest of the traditional global financial system. There are thousands of cryptocurrencies, many of them obscure. Bitcoin, introduced in 2009, is the most popular and has become a byword for crypto.
Beyond their dramatic ups and downs in value, the thing that makes bitcoin and other cryptocurrencies so interesting is the lack of consensus about them. Investing traditionalists dismiss crypto because there are no underlying fundamentals to analyze it, but others see a disruptive force that will change our financial system. Amid this disagreement, cryptocurrency is starting to punch through to the mainstream of investing.
“The initiative of adding cryptocurrency was largely to improve diversification benefits within our funds,” said Andrew Clee, vice-president of product at Fidelity Canada. “We believe it serves as a great diversifier and has validity as an alternative asset class, given that there’s over a decade of history on it.”
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Fidelity recently added bitcoin to a pair of All-In-One funds launched in January, 2021 – the balanced and growth versions – and introduced a new pair of funds with bitcoin – the conservative FCNS and the Fidelity All-In-One Equity ETF (FEQT-NE) – a few weeks ago. There are also mutual fund versions of these funds.
Bitcoin exposure comes through one of the company’s own products, the Fidelity Advantage Bitcoin ETF (FBTC-T). Several ETF companies have launched funds that invest in cryptocurrencies such as bitcoin and Ethereum, and attracted billions in assets. What sets Fidelity apart is introducing its crypto fund to its lineup of asset allocation ETFs, a product category that has so far emphasized the most traditional concepts of portfolio building.
This helps explain why some Fidelity competitors are not following the company’s example in adding crypto – and may never do so.
“We think the investment case is weak and really unproven, at best,” said Tim Huver, head of intermediary sales at Vanguard Investments Canada, which introduced balanced ETFs to Canada back in 2018 and now has more than $8-billion sitting in these funds.
Mr. Huver said a well-balanced portfolio of stocks and bonds is a proven way to achieve long-term investing success. “When you think about adding cryptocurrency to that, what you’re actually doing is substituting those proven asset classes for something that introduces greater complexity, greater volatility, actually greater risks, but also greater costs.”
A BMO ETFs spokesman said the company continues to evaluate cryptocurrency, but has no immediate plans. A spokesman for BlackRock declined to comment.
Horizons ETFs launched the BetaPro Bitcoin ETF (HBIT-T) last April, but has no plans to add this fund to its lineup of balanced ETFs. The Horizons lineup of balanced ETFs are built using long-term data on risk-adjusted returns for various types of assets, Mark Noble, executive vice-president of ETF strategy at Horizons ETFs, said by e-mail. Crypto doesn’t have enough data to qualify for inclusion, he added.
One of the defining traits of cryptocurrency is its tendency to swing wildly in price. The price of bitcoin was down last month by close to half from a November peak, but it’s now on an upswing again. Fidelity’s Mr. Clee said the small bitcoin weightings in the All-In-One ETFs were calibrated specifically to provide enough potential upside to compensate for the inevitable sharp declines.
The usual balanced ETF gets its exposure to stocks and bonds via low-cost index-tracking ETFs. Fidelity, which built its global brand with actively managed mutual funds, takes a different approach of blending underlying ETFs built on a process of screening markets for securities that meet criteria for things such as low volatility, quality and value.
This process means higher costs than basic index-tracking. The management expense ratios for Fidelity’s pair of year-old All-In-One funds are: 0.39 per cent for Fidelity All-In-One Balanced ETF (FBAL-NE) and 0.41 per cent for Fidelity All-in-One Growth ETF (FGRO-NE). Asset allocation ETFs from other companies have MERs as low as 0.2 per cent.
It’s too soon to judge the effect on returns of having a small bitcoin weighting in Fidelity’s All-In-One ETFs. But FBAL and FGRO have both performed well in comparison to peer funds from other companies from the vantage point of only a single year.
Investors who want to own cryptocurrencies have up until recently been able to invest in bitcoin and other coins directly through crypto exchanges, or via crypto ETFs. The challenge in doing this is to get the crypto allocation right. Should crypto be 5 per cent of your portfolio … 10 per cent … more?
The appeal of Fidelity’s All-in-One ETFs is that the allocation is handled for you. If you want the drama of crypto in your portfolio, this is probably the least risky way to do it.
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Rob Carrick