Since their introduction in the U.S. earlier this year, cryptocurrency exchange-traded funds (ETFs) have gained significant attention and popularity, marking a pivotal moment in the financial landscape. In this article, Leo Mindyuk, CEO of ML Tech, explores the distinctions between investing in cryptocurrencies through Separately Managed Accounts (SMAs) and ETFs. Additionally, CoinDesk Indices’ Kim Greenberg Klemballa addresses common inquiries regarding SMA ownership and its growing adoption in the investment community.
– Sarah Morton
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The Impact of Crypto on Mainstream Investment
The approval of ETFs that track spot Bitcoin and Ethereum by the U.S. Securities and Exchange Commission (SEC) has been a watershed moment for cryptocurrency. This regulatory endorsement has enabled traditional investors to engage with these digital assets in a regulated environment. As a result, cryptocurrencies have transitioned from niche investments known primarily to tech enthusiasts into a more widely accepted asset class.
Understanding Crypto SMAs and ETFs
While many novice investors are entering the crypto space through ETFs, seasoned institutional investors may find that ETFs do not always provide the best investment strategy. This is where Separately Managed Accounts (SMAs) come into play.
Definition of SMAs
Crypto SMAs are investment portfolios of digital assets that are actively managed by professional investment managers. This personalized management is crucial in the crypto realm, as the market operates differently than traditional stock markets. Investors can benefit from the expertise of managers who understand the complexities of cryptocurrencies, including their unique trading patterns and underlying blockchain technologies.
Advantages of SMAs Over Crypto ETFs
- Direct Ownership: SMAs allow investors to directly own their assets, providing greater control over their investment strategies. This ownership also facilitates customized risk management and portfolio adjustments tailored to individual goals.
- Tax Management: Direct ownership simplifies tax management strategies, such as tax-loss harvesting, enabling investors to optimize their tax positions effectively.
- Diversification Opportunities: Unlike ETFs, which typically track a single asset or index, SMAs allow for a diversified investment approach across multiple cryptocurrencies. With over 200 cryptocurrencies available on major exchanges, investors can build a portfolio that aligns with their risk tolerance and investment objectives.
- Active Management: The active management aspect of SMAs enables managers to respond swiftly to market changes, potentially leading to superior performance compared to passive ETFs that can underperform during volatile market conditions.
- 24/7 Market Access: The cryptocurrency market operates continuously, unlike traditional stock markets with set trading hours. SMAs allow for trading at any time, providing managers the flexibility to react to market movements and mitigate risks effectively.
Is an SMA Right for You?
While crypto ETFs are attracting new investors, it is anticipated that institutional investors and high-net-worth individuals will increasingly opt for SMAs. The personalized service, flexibility, and potential for enhanced returns offered by SMAs make them particularly appealing for more sophisticated investors.
Expert Insights on Tailoring Crypto SMAs
Customization of Crypto SMAs
One of the key advantages of an SMA is the ability to tailor the investment portfolio to meet specific client needs. For instance, if a client desires a balanced exposure of 50% Bitcoin and 50% Ethereum, an SMA can be structured to achieve this allocation. Furthermore, the flexibility of SMAs allows for investments in a broader range of cryptocurrencies beyond just Bitcoin and Ethereum, facilitating deeper market exposure.
Potential Tax Benefits of SMAs
Investors utilizing SMAs may benefit from tax-loss harvesting opportunities, which can help offset gains in other areas of their investment portfolio. Additionally, SMAs provide the possibility for charitable gifting strategies that can offer tax advantages. However, it is essential for investors to consult with tax professionals to ensure they are making informed decisions regarding their tax strategies.
The Growth of the SMA Market
Recent surveys indicate a growing preference for SMAs among financial advisors. As fewer advisors express interest in increasing allocations to model portfolios, a notable shift toward SMAs is evident. By 2023, assets under management in SMAs have surged to nearly $2.2 trillion, reflecting their increasing acceptance in the investment community.
– Kim Greenberg Klemballa, Head of Marketing, CoinDesk Indices