Bitcoin futures ETF
Investors reacted positively to the fund, which finished 4.8 percent higher.
Some industry observers see the ETF’s debut as only a partial victory because it tracks contracts that speculate on the future price of bitcoin rather than the current or “spot” price of the asset. However, it is a positive step toward positive crypto regulation and may pave the way for a spot bitcoin ETF in the future.
“I think we’ll look back on that day in three or five years and remember it as a massive positive turning point for the market: the moment bitcoin stopped being a retail-led asset and moved into the institutional world,” said Matt Hougan, chief investment officer at Bitwise Asset Management, of the ETF launch.
According to Coin Metrics, Bitcoin broke through the $64,000 barrier Tuesday afternoon, a level it hasn’t seen in about six months. It’s getting close to its all-time high of $64,899, set on April 14.
“A bitcoin ETF approval is most likely already priced in,” he said. “Hopes for a sustained rally above $60,000 and beyond the previous all-time high may turn into a ‘buy the rumor, sell the news’ scenario.” The price nearly straight-lined from $40,000 to $60,000, and it would be natural for bitcoin to take a breather after such a long run up.”
However, if a sell-off occurs, it is unlikely to be as severe or long-lasting as those that occurred after previous seminal market moments, such as when the CME listed bitcoin futures in December 2017 and Coinbase was listed on the Nasdaq this April, according to Noelle Acheson, head of market insights at Genesis.
She claims that the market was frothier when those events occurred, and that current conditions aren’t showing signs of exhaustion.
The desire of retail investors
Futures are more of an institutional product, whereas funds are where retail investors trade. Institutions trade Cboe Volatility Index (VIX) futures more frequently, but shares of VIX futures ETFs, such as those offered by ProShares, are an accessible option for retail investors
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“We might expect something similar here, where retail investors trade the ETF and then, at the end of the day, institutions are more active in trading the underlying futures,” said Juthica Chou, Kraken’s head of over-the-counter options trading.
“Institutions, particularly trading firms, will hedge their futures trades with spot,” she added. “If someone comes in to buy a futures contract, a trading shop may sell the futures contract and then go buy bitcoin.” The buying demand is still present in the spot market.”
Retail investors’ long-term appetite for a bitcoin futures ETF is uncertain, given that they have other ways to gain exposure to cryptocurrency. Crypto investing, for example, is available on trading platforms such as Robinhood. Investors can also purchase stock in companies that have bitcoin on their balance sheets, such as MicroStrategy and Coinbase.
′′[Bitcoin futures ETFs] may be of interest to a limited audience of institutions that cannot directly hold spot or derivatives, as well as retail investors who prefer the familiarity and convenience of ETFs,” said Genesis’ Acheson.
“However, most investors are more likely to continue to access bitcoin exposure through spot or derivatives, or any of the many listed securities or international funds that offer spot bitcoin exposure,” she added.
The Federal Reserve’s Jerome Powell and the Securities and Exchange Commission’s Gary Gensler have both stated that they have no plans to ban cryptocurrency. However, the industry remains in jeopardy in Washington, and some fear that lawmakers will continue to overregulate the space.
“A futures-based ETF is preferable to nothing,” said Bitwise’s Hougan, whose firm has also filed for a bitcoin futures ETF and, most recently, a spot bitcoin ETF. “Pushing the industry to go from zero to one is a good thing, even if it’s not where we ultimately want to go, and gives me hope that [the SEC] will give a physical bitcoin ETF a fair review.”
Industry participants had hoped that Gensler, who was confirmed by the Senate to lead the SEC in April, would be more supportive of cryptocurrency than his predecessor, Jay Clayton. So far, this does not appear to be the case. “We simply don’t have enough investor protection in crypto finance, issuance, trading, or lending right now,” Gensler said in prepared remarks to the Senate Banking Committee in September.
“During the Clayton era, we were kind of stuck in limbo land, and now we’re not,” Hougan said. “Because the next bull market will be led by regulatory clarity, there is a risk in Gensler advocating for that regulatory oversight… But if we get a reasonable outcome, it could spark a crypto bull market unlike anything we’ve seen before.”
Americans’ heating bills
Natural gas prices in Europe have risen in the last month as countries on both sides of the Atlantic have faced a supply shortage. Natural gas futures in the United States have risen from $4.38 per one million British Thermal Units at the end of August to north of $6 earlier this month, a smaller but still significant increase.
The good news for customers is that utilities frequently hedge their power source costs, so a frightening spike in natural gas prices will most likely only impact bills if it persists, according to Sophie Karp, an equity research analyst at KeyBanc Capital Markets.
Nonetheless, the US Energy Information Administration forecasted on Wednesday that US households would pay 30% more for natural gas this year than in 2020. The price increases for propane and heating oil were even more pronounced.
And, given the way utility bills are structured in the United States, this will directly affect customers.
“Commodity costs are a ‘pass-through’ to customers for regulated utilities without a profit margin, but there are indirect implications.” Higher bills reduce the bill headroom, or ‘wallet share,’ available for utilities to invest in rate base that generates earnings, according to Bank of America analyst Julien Dumoulin-Smith in an Oct. 5 note.
Utility stock damage, on the other hand, is more indirect. When prices rise, the higher costs can irritate customers and politicians, and “crowd out” the need for fundraising to fund infrastructure improvements, which must be approved by regulators, according to Karp.
“There’s only so far you can push the envelope. And if customer bills begin to rise at a rate that is significantly faster than the historical norm or inflation, “something will have to give,” Karp said.
Rising interest rates can also pose a threat to utilities, which frequently pay out large dividends. Higher rates can result in higher costs, which can put pressure on customer bills while also making dividends less appealing, according to Karp.
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So, what should investors looking to buy utility stocks look for when selecting companies?
Bank of America advised looking for companies with low customer bills and high approval ratings, citing Xcel Energy as a “clear standout” in this regard. Looking for utilities with diverse energy sources, and thus less reliance on natural gas, could also be a wise strategy, according to the firm.
Utilities with high customer bills in comparison to their customer populations, on the other hand, may struggle. Eversource Energy was singled out by Bank of America as a utility with high costs and low customer satisfaction.
According to Karp, geography also plays a role.
“Northeast utilities would be in the most difficult position because the northeast has historically had higher prices, and it’s further away from all the pipelines and producing regions, so the gas differentials going into New England are pretty wide,” Karp said.
CenterPoint Energy, whose customer base includes parts of Louisiana and Texas, was upgraded to overweight by KeyBanc last month.
Wall Street analysts have mixed feelings about utility stocks in general. According to FactSet, the following stocks have the highest approval rating among analysts.
Some stock picks to cash in
While investors have been focused on clean energy stocks as part of the so-called green transition, Goldman Sachs believes they can also benefit from exposure to companies further upstream in the green solutions supply chain.
“We believe Green Capex will be the dominant driver of global infrastructure over the next decade, with $6 trillion of investment needed annually to decarbonize the world, address water needs, and strengthen transportation and other critical systems,” Goldman analysts led by Brian Singer said on Oct. 11.
“We anticipate increased attention and investor support for Greenablers (Green Enablers) — sectors where Green Capex is needed more urgently to help alleviate future supply-chain bottlenecks and/or reduce execution risks.”
Companies are under increased pressure to reduce their carbon footprint and do more to mitigate the effects of climate change as a result of the impending climate emergency. In this context, Goldman noted that equity markets have rewarded companies that continue to deliver favorable returns while investing in, or having exposure to, customers’ green capex investments (capital expenditure). According to the analysts, this trend is likely to continue.
Goldman Sachs rates all of the following picks as buys.
The bank considers Advanced Micro Devices to be a “standout performer in the global semiconductor universe.” Analysts claim that the company’s products outperform competitors in terms of performance and energy efficiency, and that they contribute to energy efficiency improvements across multiple tech hardware segments. The company has a 12-month price target of $127. On Oct. 19, shares were trading around $116.
CMS Energy, based in Michigan, is a “best-in-class regulated growth story,” according to the analysts, with “visible growth upside potential from proposed generation de-carbonization plan.” The bank anticipates that the company will grow faster than its peers, and that its accelerated transition to clean energy sources will provide additional earnings upside potential through 2025, according to the analysts. The bank has set a price target of $72 for the company, up from around $60 on Oct. 19.
Eaton, a provider of power management technology, is another Goldman pick due to its exposure to trends such as electrification, energy transition, and digitalisation. According to the analysts, the company should benefit from various catalysts such as government stimulus measures and increased electrification, which should drive growth of 4-6 percent in the long term. They added that as the world shifts toward higher electrical content, the company could generate $500 million in revenue opportunities by 2025. Goldman Sachs has set a price target of $184 on the stock. On October 19, it was trading around $161.
Daikin Industries, an air-conditioning manufacturer in Asia, is rated highly by Goldman for its growth prospects. According to the analysts, the blue-chip stock has a track record of delivering “sustained high returns” and has the highest growth potential among the bank’s Japan machinery sector coverage. According to the analysts, it is expected to deliver sustained strong profit growth amid increased environmental awareness and a macroeconomic recovery. The bank also noted that the company is a leader in energy-efficient systems, setting a price target of 34,000 Japanese yen on the stock, up from 27,300 Japanese yen on Oct. 20.
Denso, a major supplier to Toyota, is one of Goldman’s top picks among auto parts companies for green capex exposure, owing to the company’s role as a “significant enabler of sustainability goals.” According to the analysts, the company, which is a component provider for electric vehicles and hybrid powertrains, will benefit from growth in these areas in the United States, China, and Japan, while also reaping the benefits of its upfront investments in R&D and capex. Goldman has set a price target of 9,600 Japanese yen on the stock, which closed on Oct. 20 at 7,878 Japanese yen.
Siemens, the German technology behemoth, is one of the most prominent names on the Goldman list. Almost half of the company’s revenue comes from its decarbonization products, which include energy, smart infrastructure, and mobility. According to the analysts, the company is undervalued in comparison to its peers, despite boasting attractive valuations across its free cash flow and price-to-earnings metrics, both of which are closely watched by investors. Analysts anticipate that Siemens will deliver top-quartile returns to shareholders and a dividend yield of around 3.5 percent in 2022. Goldman has set a price target of €177 on the stock. On October 20, Siemens was trading at around €143.
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