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Bitcoin: The impact ETF conversions could have on investors

As the January 10 deadline for the SEC to decide on a spot Bitcoin (BTC-USD) ETF approaches, investors are watching closely for any new details on how it will affect the market. Yahoo Finance's Julie Hyman sat down with ARK Invest Founder, CEO, and CIO Cathie Wood to discuss her stance on bitcoin, the crypto market, and digital assets in general. During the interview, Woods enthusiastically elaborated on her interactions with the SEC: "We were thrilled to get questions back [from the SEC] because it means they're engaged now. We have met a number of the research people at the SEC... they know what they're talking about and the level of sophistication of their questions suggested okay now they're moving deeply into this."

More questions are arising on what the SEC's decision could mean for markets and investors if regulators convey positive sentiment. Lance McGray, Advisors Asset Management Head of ETF Product, joins Yahoo Finance to give insights on the impacts of the SEC decision and how successful these ETFs could be.

McGray explains how successful ETFs have already been just in the last year: "We've seen in the last year or so about 50 conversions come to market and about $75 billion dollars of assets that have come over from other wrappers, specifically the mutual fund wrapper into what is perceived to be a more cash efficient, more flexible, a more transparent wrapper, the ETF wrapper.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video Transcript

RACHELLE AKUFFO: Well, investors in the crypto space are keeping their eyes on the SEC's spot bitcoin decision with the January 10th deadline quickly approaching. Our very own Julie Hyman spoke with ARK investment's Cathie Wood about movement in the space, and the potential for SEC approvals. Take a listen to what she had to say.

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CATHIE WOOD: This summer, we got questions back from the SEC. Now normally when you get questions from the SEC, you're just saying, oh my goodness. We were thrilled to get questions back because it means they're engaged now. Now we have met a number of the research people at the SEC on the research side, and they are extremely sophisticated. They know what they're talking about and the level of sophistication of their questions suggested, OK, now they're moving deeply into this.

JULIE HYMAN: As part of our ETF report brought to you by Invesco QQQ, let's bring in advisors asset management head of ETF product, Lance McGray to discuss more. Thank you for joining us this morning. So first want to start with what we heard from Cathie Wood about the optimism that we're seeing in the momentum towards a potential spot bitcoin ETF approval here.

In terms of the likelihood, are we liking this momentum and perhaps how soon could we see it?

First off, thanks for having me. I think the-- there is plenty of optimism out there. At the end of the day, you're talking about a-- you're talking about a $700 billion market cap universe that has been rather untouched from the ETF industry. So Cathie is extremely optimistic on the conversations that they've been having with the SEC but let's not get too far ahead of ourselves.

These conversations go all the way back to 2017 when the SEC essentially rejected its first bitcoin-- spot bitcoin ETF. So again, while the SEC is coming back with conversations, and that's good news for investors that are looking for a spot bitcoin ETF, let's not forget the mandate of the SEC and that's really to protect the investors with products like this.

So I anticipate things to be moving smoothly, things to continue moving, but quite honestly, I would-- I would be shocked if something happens in 2023, probably looking at more back half of 24 than anything else.

AKIKO FUJITA: Now back half of 2024, well, we only have a few months left or one month almost left in 2023. Lance, you know, this has always been seen as a catalyst, that next leg for crypto what's the interest been like among your clients? What are you hearing?

LANCE MCGRAY: There's interest specifically around the spot bitcoin because right now, there are futures-based ETFs. The SEC has got comfortable with futures-based products because these are securities, these are on exchange where there is regulation. Their concern is really around the manipulation and the fraud tied to the underlying spot market.

So there is appetite. There's been a recent poll that came out last year that says if there's a spot bitcoin product that comes out, there's a 72% appetite for investors to get into that product rather than the current futures product. And we talk about the futures products, yes, it is essentially tracking bitcoin, but it's important to remember that these futures products wouldn't operate the same as A-- as a true spot bitcoin product.

There's going to be-- there's going to be role costs, there's carry costs, there's contango, there's different costs that come into this and at the end of the day, what the investors are telling us is that they're looking for a spot bitcoin ETF rather than a futures-based ETF which we currently have in the marketplace.

RACHELLE AKUFFO: And we are expecting that if this does get approved, there will be a wave of these. But one of these in the mix here is also Grayscale trying to convert its fund to an ETF. Not a lot of known is about this process. I know Cathie Wood was saying she wasn't sure if Grayscale would be able to do that. What do people need to know about that conversion process and what that opens up?

LANCE MCGRAY: Yeah, well, that's a big thing in the ETF industry right now. I know we're talking about bitcoins, but let's just look at mutual fund ETF conversions. This is something that's just recently come to market over the last few years, and we've seen, in the last year or so, about 50 conversions come to market and about $75 billion of assets that have come over from other wrappers specifically the mutual fund rapper into what is perceived to be a more tax efficient, a more flexible, a more transparent wrapper the ETF wrapper.

So we fully expect that we're going to see these, we're going to see this continue to roll out. We think there's a major trend on the active management side, whether it's crypto or fixed income or equity. There's going to continue to be these mergers or conversions from one wrapper to the next. And when we specifically talk about mutual fund ETF conversions, there's-- from an issuer perspective, let's talk about the benefits.

The first and foremost is that the track record from the mutual fund. If you have a mutual fund that has a track record of 10, 20, 30 years, that track record can come over to the ETF so that's fantastic news. The other thing in the ETF space is getting scale on day one. If you can bring over assets in from a mutual fund into an ETF.

The hardest thing for us to do as an ETF issuer is to get that first $100 million, and when we're doing these conversions, you can get that scale on day one. And then finally, you have improved tax consequences of the mutual-- or of the ETF over other vehicles like the mutual fund. So this is something we're going to see a lot of in the coming years, and I think it's one area that's really going to take the world of ETFs to the next step is active management and conversions of other wrappers into ETFs.

AKIKO FUJITA: There's certainly a lot to consider in a growing industry to your point. Advisors Asset Management, Head of ETF Product, Lance McGray. Good to talk to you today. Really appreciate the time.

LANCE MCGRAY: Thanks for having me.