While in a previous article we noted that there was no such thing as an Art ETF, we did consider that the art funds offered by Masterworks and Yieldstreet to be the next-best alternatives. These art funds do not function exactly like an Art ETF but they do offer some similar benefits and features, including being able to purchase fractional shares in many expensive artworks as well as the ability to enter into and exit out of an investment with some fluidity.
In this article I want to go a little more in depth and compare the perks and the handicaps of Masterworks and Yieldstreet to examine which platform might be best for you.
Masterworks
Started in 2017, Masterworks is an online platform where investors can buy and sell “blue-chip” fine art. In this time, it has invested over $700 million in contemporary art, including works by Picasso, Monet, Warhol, Banksy, Kaws, and Basquiat.
How Masterworks Works?
Masterworks uses data analytics in addition to its in-house experts to identify art by blue chip artists that could be undervalued. After conducting its research, Masterworks’ acquisitions team sources the works of the chosen artists. The company then files the artwork with the Securities and Exchange Commission (SEC), making shares available for purchase on their website starting at ~$20 per share (depending on the number of shares issued and valuation of the artwork). I was surprised to hear that they typically introduce a new artwork to its market place every week, which means that you get a steady flow of new investment opportunities presented to you.
Masterworks follows a buy-and-hold strategy, with a time frame of 3 to 10 years given for the artwork to appreciate, but will pursue early opportunities to sell if it is beneficial for the investors. After they sell the artwork they distribute the proceeds to investors based on their share ownership.
So far, the company has sold seven pieces of art, which have generated an average realized net return of 17.8%, including:
- Mona Lisa by Banksy (+32%)
- Lured by Cecily Brown (+27.3%)
- Rhubab by Joan Mitchell (+17.8%)
The Perks of Masterworks
- Artwork is known to be an illiquid asset (meaning it cannot be exchanged for cash very easily), and that is typically why investors seek out Art ETFs. To overcome this limitation of art investing, Masterworks‘ Trading Market allows you to sell your shares to other investors, at any time, without incurring any fees.
- Masterworks’ minimum required investment is only $10,000. I understand this can be a lot for some investors, but it is more affordable than Yieldstreet’s minimum requirement, so have decided to include this as a benefit of the platform.
- Their online portal is pretty user friendly and easy to navigate on both desktop and mobile.
The Handicaps of Masterworks
- Masterworks charge fees is in 2 places. The first is an annual management 1.5% fee based on the total value of your account which seems unnecessarily high. Second, when Masterworks sells an artwork, they take 20% of the profits (not the principal amount) as an incentive to maximize the return on a single artwork as well as to cover the costs of storage, appraisals and insurance, along with SEC regulatory fees.
- Masterworks do not offer a product that lets you invest across a number of artworks all at once (like an Art ETF would). Rather, you have to purchase fractional shares in individual artworks to build up your own portfolio to something that might resemble an Art ETF.
- Demand for their product is quite substantial so there might be a waiting-list. So, signing up (which is free to do) as early as possible is advisable if you think you might be interested in the platform.
Visit Masterworks
Yieldstreet
Yieldstreet is an online alternative investment platform founded in 2015 that allows individuals to invest in a variety of asset classes, such as real estate, art, and corporate debt. They offer these investments via funds like the Art Equity Fund which is currently up to its fourth iteration. As of January 31, 2023, Yieldstreet previous 3 art funds have repaid investors at a realized net annualized return of 9.6%.
How Yieldstreet’s Art Funds Work
Similar to Masterworks, Yieldstreet‘s Art Equity Funds feature artwork from lower-risk Blue Chip artists like Jean-Michel Basquiat, Damien Hirst, Yayoi Kusama, and Banksy. Where it differs is that the artworks are bundled together and you invest in all of them at the same time.
The investment team searches for mispriced artworks in the auction and dealer markets and seeks to acquire them below their more accurate fair-market value.
Before buying the artworks, an independent third-party appraiser estimates their value to provide a fair market value assessment, and a museum conservator evaluates their condition.
Yieldstreet maintains possession of all artworks at all times, except when artworks are requested to be exhibited by museums, major institutions or other exhibition spaces, as this can increase the value of these artworks. I’m unsure if this is something that Yieldstreet actively pursue, but I would hope so as it is an easy strategy to help the artworks appreciate.
Yieldstreet’s investment times are generally shorter than Masterworks at 3 to 4.5 years, which is too short in my opinion, but might help the company avoid possible drastic shifts in the art market that could emerge over a larger time span. However, they do continually monitor the artworks and the art market to optimize the timing of sales based on sales data.
The Perks of Yieldstreet
- The fact that Yieldstreet lets you invest in a bundle package makes the product more similar to an art ETF than Masterworks. But it also means you could be investing in artworks from artists that you don’t personally care for or for who you see limited upside potential.
- Yieldstreet’s annual management fee of 2% is greater than Masterworks’, but its stake in the profits once the artworks sell is 15%, 5 percentage points lower, which means you receive a greater share of any potential profits.
The Handicaps of Yieldstreet
- Yieldstreet accept investment from $15,000, but generally will prioritize Accredited Investors (net worth over 1M or annual income over 250K).
- You cannot cash out early as easily if you needed to do so via a secondary market place like you can with Masterworks.
Visit Yieldstreet
Final Thoughts
While Masterworks and Yieldstreet are not exactly Art ETFs, they both offer investors a way to invest in the art market without having to take ownership of the underlying asset. Masterworks allows investors to purchase fractional shares in individual works of art, with a low minimum investment and the ability to trade shares with other investors. Yieldstreet, on the other hand, bundles together artwork from blue chip artists and offers them through its Art Equity Fund.
Ultimately, the decision of which platform to choose will depend on the investor’s preferences and goals, and how these align with the perks and handicaps noted above. Some of these things Ive mention are subject to change so it is important to research and understand the current fees, minimum investments, and investment strategies of each platform before making a decision.