Franklin's new ETFs turn stock dividends into bitcoin, but still have to pay that income out

Franklin Templeton on Thursday launched two ETFs on Nasdaq whose indexes send the dividends on U.S. stocks into bitcoin, even though the funds still have to pay that income out.

Franklin's Thursday release says the funds do not invest in bitcoin directly, and instead get indirect exposure through an affiliated bitcoin exchange-traded product and derivatives. The Oct. 27 summary prospectus for the equity fund and the summary prospectus for the innovation fund also allow other bitcoin exchange-traded products, options, futures and depositary receipts. That exposure can sit in a wholly owned subsidiary in the Cayman Islands.

The Franklin U.S. Equity Bitcoin DRIP Index ETF, FBEQ, tracks the VettaFi US Large-Cap 500 Bitcoin DRIP Index. The Franklin U.S. Innovation Bitcoin DRIP Index ETF, FIBT, tracks the VettaFi US Innovation 100 Bitcoin DRIP Index. Both started at 95% in the stocks and 5% in bitcoin.

DRIP, the word in both names, means a dividend reinvestment plan. Ordinarily the payout buys more of the same shares. These indexes leave the dividends out of the stock portion and put them into the bitcoin weight at the market open on the day after the shares start trading without that dividend.

To keep the tax status of a regulated investment company, the funds generally must distribute substantially all of their net income. The prospectuses say a fund may have to limit that reinvestment, or sell other holdings to raise the cash, and that tracking of the index can suffer. Distributions are generally taxable as ordinary income, capital gains, or both, unless the shares are in a U.S. retirement account such as a 401(k) or an individual retirement account.

The index caps the bitcoin weight. If it is above 5% at a quarterly rebalance, the index resets it to 4.5% and scales the stock weights up in proportion. A weight at or below 5% is left unchanged.

If bitcoin closes above 20% between those reviews, the index resets it to 4.5% at the close of the second business day and scales the stocks up the same way. The 20% line is a ceiling that forces a reset, not a weight the index aims for.

What they cost next to funds already listed

The Oct. 27 prospectus puts FBEQ at 0.09%, with other costs estimated at zero for the current fiscal year. That is about where State Street's SPDR S&P 500 ETF Trust, SPY, sits, at a 0.0945% gross expense ratio as of Oct. 30, and it is above the Vanguard S&P 500 ETF, VOO, at 0.03% as of April 28.

FBEQ's index is not the S&P 500. It is based on the VettaFi US Equity Large Cap 500 Index, a large-cap U.S. list that includes real estate investment trusts.

FIBT's prospectus, also dated Oct. 27, puts the fund at 0.19%, on the same estimate of zero other costs. That sits next to the Invesco QQQ ETF, QQQ, at 0.18% in Invesco's Oct. 26 review, and above the Invesco NASDAQ 100 ETF, QQQM, at 0.15% as of Sept. 30.

FIBT's index is not the Nasdaq-100. It takes the 100 largest U.S. issuers on Nasdaq and excludes financial companies. The Nasdaq-100 also includes companies from outside the United States.

The full prospectus for the two funds, also dated Oct. 27, says Franklin Advisory Services, the investment manager, reimburses acquired-fund fees. It has also voluntarily waived the portion of its management fee equal to sponsor fees earned on an affiliated bitcoin fund inside the ETF, and it can end that waiver at any time without further notice.

The Simplify US Equity PLUS Bitcoin Strategy ETF, SPBC, is already listed, and it is built differently. It is actively managed and targets a 10% bitcoin stake, while Franklin's funds follow indexes that add bitcoin with dividends until a reset.

On its fund page, Simplify showed a 0.54% expense ratio and $42.8 million in total assets as of Oct. 29, against 0.09% for FBEQ.