Franklin Templeton clears last regulatory hurdle for bitcoin dividend ETFs

Franklin Templeton has completed the final regulatory requirement ahead of introducing two ETFs that turn dividends from stocks into bitcoin.

The asset manager submitted a Form 8-A to the SEC on October 22, registering shares for the Franklin US Equity Bitcoin DRIP Index ETF and the Franklin US Innovation Bitcoin DRIP Index ETF for Nasdaq trading. A prospectus also filed that day shows an effective date of October 27.

Both funds were first filed in June with no ticker symbols or expense ratios disclosed. After four months, those specifics have now been revealed.

Fund mechanics

The Equity ETF, under the ticker FBEQ, follows the VettaFi US Large-Cap 500 Bitcoin DRIP Index. That index comprises the 500 biggest U.S. firms by market cap, with weighting based on float-adjusted market cap.

As of September 30, the index contained 499 stocks with market capitalizations between $10.2 billion and $5.5 trillion, heavily weighted toward information technology.

Initially, the index puts 95% of its assets into stocks and 5% into bitcoin. Any dividend paid by the companies, whether regular or special, gets reinvested into bitcoin at the market open on the day following the ex-dividend date. With each dividend, the bitcoin allocation increases.

A standard DRIP uses dividends to purchase additional shares of the same company. Franklin's variant directs that cash toward bitcoin instead.

For investors, the dividends from America's largest corporations effectively become a recurring bitcoin buying program, requiring no exchange account, wallet, or custody choices.

The bitcoin exposure is capped. During quarterly rebalancing, any allocation exceeding 5% is reduced to 4.5%. If bitcoin's share surpasses 20% of the index between rebalances, it gets trimmed to 4.5% within two trading days, with the proceeds flowing back into stocks. The outcome is an equity fund with a bitcoin component, rather than a pure bitcoin fund.

The ETF does not directly own bitcoin on the blockchain. It achieves its bitcoin exposure via bitcoin exchange-traded products, such as Franklin's own spot bitcoin fund, as well as bitcoin futures, options, or depositary receipts, sometimes through a Cayman Islands subsidiary.

FBEQ has a 0.09% expense ratio and no 12b-1 fee. Franklin Advisory Services serves as the fund's manager, with Franklin Templeton Institutional acting as sub-advisor. The portfolio managers are Dina Ting, Hailey Harris, Joe Diederich, and Basit Amin.

The Innovation ETF applies the same mechanism to the VettaFi US Innovation 100 Bitcoin DRIP Index, which selects the 100 largest non-financial firms listed on the Nasdaq.

Heavier bitcoin focus

Franklin Templeton submitted a spot bitcoin ETF application in September 2023, which began trading as EZBC in January 2024. In April, the company bought 250 Digital and established Franklin Crypto, an institutional digital asset unit. CEO Jenny Johnson has argued that blockchains pose a bigger risk to Wall Street's fee structure than to its technology.

These DRIP ETFs expand that approach to investors who might not purchase bitcoin directly. For example, a retiree with an S&P 500-type fund in a brokerage account can, via FBEQ, have dividends from her existing holdings accumulate into a bitcoin position over time.

The prospectus cautions that investors may lose money and that bitcoin's volatility can impact the fund's net asset value. Whether that risk-reward profile attracts Franklin Templeton's intended audience will be seen after October 27.