Franklin Templeton sets fees for two ETFs that reinvest stock dividends into bitcoin

Franklin Templeton has filed final prospectuses for two exchange-traded funds that put stock dividends into bitcoin. The asset manager submitted a registration filing with the U.S. Securities and Exchange Commission on Oct. 22 that filled in the funds' fees and ticker symbols, and on the same day filed a Form 8-A to register the shares for listing on Nasdaq. The filing specifies Oct. 27 as its effective date.

The funds are the Franklin US Equity Bitcoin DRIP Index ETF (FBEQ) and the Franklin US Innovation Bitcoin DRIP Index ETF (FIBT). DRIP stands for dividend reinvestment plan, but unlike a typical one, the dividends are used to buy bitcoin rather than more shares.

Dividends go into bitcoin the next morning

Both funds track indexes built by index provider VettaFi. FBEQ follows the VettaFi US Large-Cap 500 Bitcoin DRIP Index, which is based on an index of the 500 largest U.S. companies by market capitalization. As of Sept. 30, the index held 499 securities with market capitalizations ranging from $10.2 billion to $5.5 trillion. FIBT's parent index is made up of the 100 largest U.S. companies listed on Nasdaq, excluding finance companies.

The equity portion is calculated on a price-return basis, which captures share-price changes but excludes dividends. Instead, when companies in the index pay regular or special dividends, all of that money is reinvested into bitcoin at the market open on the day after the ex-dividend date, so the bitcoin weight rises over time. Bitcoin is priced using the Kaiko Bitcoin New York Reference Rate at 4 p.m. Eastern time.

Above 5%, the bitcoin weight is cut to 4.5%

Both indexes start with 95% in stocks and 5% in bitcoin. To keep bitcoin a secondary allocation, there are two caps. At each quarterly rebalance, a bitcoin weight above 5% is cut to 4.5%, while a weight of 5% or less is left unchanged. If the weight exceeds 20% at any close between rebalances, it is brought back to 4.5% at the close of the second business day afterward. The equity weight is increased by the same amount.

The funds will not buy bitcoin directly. According to the prospectus, each fund invests at least 80% of its net assets in index components and bitcoin-related investments: bitcoin exchange-traded products, including spot bitcoin ETPs sponsored by Franklin Templeton affiliates, options and futures on bitcoin or those ETPs, and depositary receipts representing ownership of bitcoin. Some of these may be held through a wholly owned subsidiary in the Cayman Islands.

Investing in affiliated ETPs could mean paying fees twice. The manager said it has voluntarily agreed to waive a portion of the funds' fee equal to the sponsor fees it earns on the funds' investments in affiliated ETPs. It noted the waiver may be modified or terminated at any time.

Fees and tickers set four months after the first filing

Franklin Templeton first filed for the two funds on June 18. That filing was set to take effect 75 days after submission, with the fee and ticker fields left blank. Starting Aug. 26, the company filed several amendments pushing back the effective date: the Aug. 26 filing set Sept. 9, and the last one, on Oct. 16, set Oct. 27. The Oct. 22 filing then added fees and tickers, also with an Oct. 27 effective date. The prospectus states the funds have not yet commenced operations, and the filings do not give a trading start date.

Bitcoin traded at $80,277 on Binance at 10:30 p.m. KST on Oct. 25, down 0.57% over 24 hours. At the same time, it was at 107,693,000 won on Upbit's Korean won market, 0.76% below the previous day's close. Converting the Binance price at 1,324.82 won per dollar, the kimchi premium (the gap between prices on Korean exchanges and global markets) was about 1.26%.