While the rules regarding stock redemptions do not directly affect small trades made by retail investors in brokerage accounts, they do play a role in the execution of larger trades made by institutions.
There are some concerns that using a cash-only payback model could make ETF plumbing less efficient.
“Some funds may be able to get better execution prices than others. The other thing is that trading costs, whether it’s transaction costs or market impact type costs that aren’t necessarily quantifiable, those costs are now borne by investors. Morningstar North America Passive Strategies Research: “Investors.
In-kind redemptions are typically used by large equity funds and, as crypto-asset manager Grayscale noted in a filing to the Securities and Exchange Commission, commodity funds. Using cash-only redemptions can lead to ETFs with weaker liquidity and wider bid-ask spreads, Grayscale said.
But Stephen McClurg, Valkyrie’s chief investment officer, said the situation may be more similar with fixed-income ETFs, where cash redemptions are more common because accredited market participants who work with the funds may be more comfortable with the process.
“In this case, there are a lot of access points that don’t have the ability to transact bitcoin. If it’s an in-kind model, it’s going to throw a lot of advantages at the access points that do have that ability. … We want as many market makers as possible,” McClurg said. And approved participants in these products, because that leads to better markets.”
From a regulatory perspective, the decision to allow cash-only redemptions simplifies the chain of custody for bitcoin and removes middlemen and dealers from the process, said Jeremy Cinderovich, a lawyer and shareholder at Vedder Price, a firm that specializes in ETFs.
Broker-dealers are still expected to follow best interest regulations regarding cryptocurrency products, SEC Chairman Gary Gensler said in a statement on Wednesday, a possible sign that the SEC is concerned about those companies being directly involved. In this money.
The good news for investors is that the cash back should not change the tax treatment of the funds, although the cash back is generally more associated with mutual funds than ETFs. Many investors and financial advisors choose to use ETFs because the funds give them more control over when tax events are generated.
“These things are taxed as donor trusts. The consensus is that when AP is redeemed for cash, the tax consequences only accrue to that AP. So it’s not like cash redemptions in regular 40-stat mutual funds and ETFs where, To the extent that it is a cash transaction, the taxable income generated from fund transactions is passed on to all shareholders, Cenderovich said.