- BlackRock is planning to launch the iShares Bitcoin Premium Income ETF (BITA).
- The fund’s goal will be to give investors access to Bitcoin and a monthly dividend.
- History shows that covered call ETFs don't outperform the underlying asset in terms of total return by much.
BlackRock, the biggest asset manager in the world and the owner of the largest Bitcoin ETF, is planning to launch a new fund that will pay investors a monthly payout. This article explores how the BITA ETF will operate and whether it is a good investment.
BITA ETF to Pay a Big Dividend to Investors Using Covered Call Strategy
A key limitation of the iShares Bitcoin ETF (IBIT) is that it does not pay investors any monthly income because it holds only Bitcoin. Still, it has become the world’s largest crypto fund, with over $52 billion in assets.
BlackRock is now working on the iShares Bitcoin Premium Income ETF (BITA), which will pay investors a big monthly dividend.
BITA will derive its monthly return from a process known as the covered call strategy. At its simplest, a covered call ETF works by buying an asset and then selling (writing) calls.
A call is a transaction that gives an investor the right, but not the obligation, to buy an asset at a predetermined price by a specific expiration period. In this case, BlackRock may decide to base the BITA ETF on Bitcoin or IBIT.
By executing this transaction, the ETF receives a premium, which it then distributes to investors as dividends. The fund also invests some of the money in government bonds and receives a yield.
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A covered call ETF transaction has three main outcomes. First, if the underlying asset falls, the call option becomes worthless as the investor can buy it in the open market. In this case, the ETF retains the premium, which helps to offset the decline.
If the asset jumps, the ETF benefits from the gains and the premium. However, gains can be limited, especially when the asset jumps sharply above the strike price.
The other outcome is when the asset remains flat during this process. In this case, the investor benefits from taking the premium payment.
Will the iShares Bitcoin Premium ETF be a Better Buy Than IBIT?
A common question among investors is whether a covered call ETF is a better investment than the underlying asset. In this case, investors will be torn between investing in IBIT, which offers no monthly return, and BITA, which benefits from Bitcoin’s appreciation while paying a monthly return.
The best approach for investors to measure an asset’s success is to look at total return, which considers dividends and price appreciation.
In this case, the best way to look at it is to compare Bitcoin’s performance with that of the NEOS Bitcoin High Income ETF (BTCI), which has accumulated over $950 million in assets, thanks to its 27% distribution rate.
Data shows that BTCI stock has dropped by 29.8% over the last 12 months, while IBIT has dropped by 11.6% over the same period.
However, when dividends are introduced, a change happens. IBIT’s total return was -11.6%, while BTCI’s has dropped by just 7.4%. In this case, we see that BTCI stock was a better investment as Bitcoin’s price dropped.
However, historically, data show that the returns of covered call ETFs are not all that superior to those of their underlying assets. A good example of this is the JPMorgan Nasdaq Equity Premium Income ETF (JEPQ), which tracks the Nasdaq 100 Index. As the chart above shows, JEPQ ETF has returned 33% in the last 12 months compared to Invesco QQQ’s 39%.
On top of this, covered call ETFs are actively managed, meaning that they always charge a higher expense ratio. BTCI charges an expense ratio of 0.98%, while the upcoming Morgan Stanley Bitcoin ETF will charge just 0.14%.
Therefore, if you strongly believe the Bitcoin price will stage a comeback, analysts recommend buying and holding Bitcoin rather than the existing or upcoming covered call ETFs.
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