Difference Between a Spot ETF and a Futures ETF

Currently, the arrival of a Bitcoin ETF It is one of the most anticipated events by the community. This is due to the enormous impact that this can have, not only at the level of confidence in this technology, but also due to the arrival of institutional money in the ecosystem and its expansion to the investment and institutional savings sector.

All this has raised some doubts about what are ETFs but, above all, what differences exist between a Spot ETF and a Futures ETF.

What is an ETF?

An ETF or exchange traded fund It is a type of investment fund that is listed on a stock exchange. This means that it can be bought and sold like a stock, and its price fluctuates throughout the day.

ETFs were created to offer a more efficient and economical way to invest in a portfolio of assets. Unlike traditional investment funds, which are usually actively managed by a team of professionals, ETFs are passively managed, that is, their objective is to replicate the performance of a reference index.

This means that ETFs have lower fees than traditional mutual funds, since they do not require the same amount of research and management work. ETFs can be invested in a wide range of assets, including stocks, bonds, commodities and currency indices, and of course cryptocurrencies. This makes them ideal for investors looking to diversify their portfolio and reduce their risk.

You can learn more about these instruments in our article dedicated to this financial tool.

Difference Between a Spot ETF and a Futures ETF

Knowing the Spot ETF or cash ETF

A Spot ETF or spot ETF is a type of ETF that is directly linked to the current or "spot" price of a certain asset.

For example, imagine you buy a €100.000 stake in a Spot Bitcoin ETF. This means that the fund offered by that Spot ETF would buy those €100.000 in bitcoins, at a spot price, and would keep them.

At the same time, the fund would notify you that the purchase has been made and from your dashboard you could see the acquisition of said ETF and the desired amount. This way you can see that, if the price of Bitcoin rises or falls, those changes in value will be reflected in your position.

Since, although you do not have possession of that BTC, the ETF guarantees you, at a functional and regulatory level, a price behavior identical to that of BTC.

The usefulness of this is that Spot Bitcoin ETF offers investors a simple, comfortable, well-known and regulated way to expose themselves to the bitcoin price without having to manage portfolios or private keys, or worry about the security problems associated with holding bitcoin direct. In the end, all the management and security of said ETF falls into the hands of the entity that insures the ETF.

Knowing the Futures ETF or Futures ETF

For its part, a Futures ETF or Futures ETF is an ETF that is linked to futures contracts for a certain asset. Let's remember that futures are a type of contract that obliges one of the parties to deliver an underlying asset at a certain price on a future date. The other party to the contract agrees to pay for the asset on that date. Futures are used for a variety of purposes, including risk hedging, speculation, and asset management.

Let's take an example: suppose we have a futures contract on Bitcoin that expires in six months. The contract obliges the buyer to acquire one bitcoin (1 BTC) at a price of €30.000 at the end of this period, regardless of the actual market price (spot or spot) at that time.

If, on the expiration date, the price of bitcoin is higher than €30.000 (say, it reaches €36.000), the buyer of the futures contract makes a profit. This is because the contract stipulates that the price of BTC for sale is €30.000, but in reality the market price is €36.000. Thus, the buyer of the future contract would be obtaining 1 BTC at a discount of €6.000 compared to the spot price.

Of course, the opposite can also happen. If at the end of the period the price of Bitcoin is below €30.000 (suppose it is €25.000), the buyer would be losing money, because he must buy that BTC at €30.000, when the spot price is much lower. Here, the profits go to the seller, who has won €5.000.

Understanding the differences

As you can see, ETFs in both cases share some characteristics:

1. They are duly regulated instruments.
2. They are easy to use, flexible and have a more simplified and secure management.
3. They can be used as if it were the “real asset”. For example, if you have a Futures ETF, you can sell it later, before the end of its contract term, withdraw with profits or flat, leaving the risk of termination to other actors who wish to do so.
4. They usually generate a market with a high level of liquidity.

However, the operation of both ETFs differs in the representation of their assets. To be more precise:

1. The Spot ETFs reflect the actual and current price of an asset.
2. While the Futures ETFs, reflect a price agreed between seller and buyer for a certain asset. This allows investors to speculate on the price of such assets.

Of course, operating with both products is not without risk, so you must know how to manage it in your operations. In addition to all this, ETFs are a particularly useful tool for institutional players and their arrival in the crypto sector will generate an important change in this sector.