Franklin bitcoin DRIP ETFs set to turn dividends into BTC

Franklin Templeton's bitcoin DRIP ETFs are a step from launch. The $1.7 trillion asset manager filed a post-effective amendment and a Form 8-A on Thursday, Oct. 22, registering two funds for trading on Nasdaq, with prospectuses that become effective on Tuesday, Oct. 27, according to etf.net and Bitcoin Magazine. Trading has not started, and no first trading date has been announced.

What happened

The equity fund, FBEQ, follows the VettaFi US Large-Cap 500 Bitcoin DRIP Index and costs 0.09% a year. Its sibling, FIBT, follows a tech-heavy index built from the 100 largest non-financial Nasdaq companies and charges 0.19%. Neither lists a 12b-1 fee, etf.net said. As of Sept. 30, the large-cap index contained 499 companies worth between $10.2 billion and $5.5 trillion, Bitcoin Magazine reported. FBEQ is run by Franklin Advisory Services, with Franklin Templeton Institutional as sub-adviser, while the innovation index is concentrated in information technology stocks.

The mechanics are unusual. The equity index starts with 95% in stocks and 5% in bitcoin. Each regular or special dividend goes into bitcoin when the market opens the day after a stock trades ex-dividend, so the bitcoin weight grows over time rather than buying more shares of the payer, as a traditional dividend reinvestment plan would.

There are guardrails. When the index rebalances each quarter, any bitcoin weight over 5% is reduced to 4.5%. If bitcoin rises above 20% of the index between rebalances, it is trimmed to 4.5% within two business days and the proceeds return to stocks, Bitcoin Magazine reported.

Why it matters

The funds do not hold coins on-chain. They gain exposure through bitcoin exchange-traded products, including Franklin's own spot fund, futures and options or depositary receipts, in some cases through a Cayman Islands subsidiary. The result, as Bitcoin Magazine put it, is a stock fund with a bitcoin sleeve rather than a bitcoin fund.

That design could matter for distribution. Bitcoin DRIP ETFs let investors who would never open a crypto account accumulate small amounts through an ordinary equity fund, and they arrive as issuers compete to package bitcoin for cautious buyers, from BlackRock's downside-protected bitcoin ETF filing to Switzerland's first retail bitcoin ETF.

Timing is less friendly. U.S. spot bitcoin ETFs have just logged two days of outflows and the price has slipped under $80,000, a test for any product launching into a weak tape.

What's next

Franklin's spot bitcoin fund, EZBC, began trading in January 2024 after a September 2023 filing, and in April it bought 250 Digital to form its Franklin Crypto division. The two series were first filed in June without tickers or fees.

The prospectus warns that investors can lose money and that bitcoin's swings may affect net asset value. Watch for a listing date after Oct. 27 and for early flows. The fund terms are summarized in etf.net's review of the filings, and investor demand will show whether bitcoin DRIP ETFs find an audience.