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Thesis
Among the blockchain ETFs currently available, the VanEck Digital Transformation ETF (NASDAQ:DAPP) is my preferred option due to reasonable fees, passive strategy, and attractive holdings. However, I believe that investors who are willing to put in the extra work may be better off buying a basket of individual stocks and cryptocurrencies rather than an ETF.
Why Blockchain?
Blockchain is an emerging technology that is developing a lot. Over the past five years, leading cryptocurrency Bitcoin (BTC-USD) has grown at a CAGR of 76%, and companies have moved on to blockchains such as Silvergate (SI), Block (SQ), Galaxy Digital (OTCPK: BRPHF), Coinbase (COIN). is focused. , and various crypto miners have posted high growth rates over the years.
In the long term, blockchain technology has the potential to do much more than just create a secure digital currency. It has already started to be implemented in other areas such as payments, smart contracts, decentralized finance and NFTs. As long as some of these applications prove successful, the industry should be able to grow at a high rate over the long term. Thus, many people today compare blockchain to the state of the Internet in the 1990s: a technology that is still too new to be influential, but one that has the potential to grow rapidly and disrupt many industries. Is.
Of course, early investors in the Internet did very well. Although investing in new technology is always risky, I believe that early investors in blockchain technology will do well eventually, and many early bitcoin investors have already seen incredible returns.
ETF Approach
FT Partners
The above graphic from FT Partners shows that there are a lot of companies doing blockchain related work. Most of the companies listed are related to crypto financial services such as exchange, trading, custody, payments, asset management, lending/lending, banking, wallets and ATMs. However, there are a few other categories companies can fall into:
- financial Services
- infrastructure and data
- Digital Assets (NFTs)
- crypto miners
- Semiconductors and Hardware (Not in Graphic)
For such an emerging and fragmented industry, ETFs can be a good way to get exposure. Some of the benefits of blockchain ETFs include:
- It’s hard to pick winners in an emerging industry, so it may be better to own an entire high-growth industry.
- Many of these companies are still private. The ETF will link relevant companies during the IPO without investors having to oversee the IPO market. I recently highlighted some private blockchain companies for members of the Tech Investing Edge (my marketplace service), including Zap, Lightning Labs, and Crusoe.
- Many of these companies are not US-listed, so they can be difficult to buy for investors in the USA. However, ETFs can buy them on behalf of investors.
The key point is that an ETF allows investors to find a low-maintenance middle ground where their future blockchain winners are likely to have some exposure, but not be too focused.
Available Options
| anchor | Manager | Objective |
| Nyaserka: IBLC | black Rock | Blockchain and crypto |
| Nasdaq: FDIG | fidelity to truth | Blockchain, crypto and payment processing |
| nyaserka:block | raise up | blockchain |
| Nasdaq: BKCH | Global X | blockchain |
| Nyaserka: bitcoin | bitwise | crypto |
| dapp | vanack | digital asset economy |
Source: Compiled by the author
This article throws light upon six ETFs that refer to blockchain, crypto and/or digital assets in their investment objective. Most of these ETFs are run by well-known asset managers such as BlackRock (BLK) and Fidelity. Here are some more statistics about them:
| anchor | expense ratio | strategy | start | Holdings | AUM |
| IBLC | 0.47% | Inactive | 4/25/22 | 39 | $6M |
| FDIG | 0.39% | Inactive | 4/19/22 | 39 | $5 million |
| block | 0.71% | active | 1/17/18 | 46 | $770 million |
| BKCH | 0.50% | Inactive | 7/12/21 | 25 | $85M |
| bitcoin | 0.85% | Inactive | 5/11/21 | 30 | $84M |
| dapp | 0.50% | Inactive | 4/12/21 | 25 | $48M |
Source: Compiled by the author
Based on this information, I am already ready to eliminate some options. First, BITQ has the highest expense ratio, is run by one of the lesser-known managers, and has an investment objective too narrow for my liking (it only mentions crypto, which is just one application of blockchain technology). ).
In addition, BLOK has the second highest expense ratio and is the only one of the ETFs that uses a proactive strategy. A proactive strategy can be effective with a good manager, but otherwise it can be riskier and less tax efficient than a passive strategy. BLOK has returned a total of 25% since its inception three years ago in January 2018, compared to 47% from the S&P 500 and 143% from bitcoin. Given this poor track record, it’s hard to recommend BLOK.
The remaining four options (IBLC, FDIG, BKCH, and DAPP) are all run by major asset managers using a passive indexing strategy, and all have reasonable expense ratios between 0.39% and 0.5%. Unfortunately, they are all too new to meaningfully analyze their performance. Therefore, choosing between them requires a deep dive into their holdings.
ETF Breakdown
Even though most ETFs describe themselves as passive, it is not possible to completely remove the human element, as at the end of the day one has to decide which companies have sufficient blockchain exposure to meet the fund’s investment objective. Is. As a result, unlike broad market index ETFs, which all have similar ingredients, all six blockchain ETFs have unique holdings, five of which are inactive.
Index strategy varies depending on the ETF. For example, the index tracked by the DAPP states that:
The MVIS Global Digital Assets Equity Index (MVDAPP) tracks the performance of the largest and most liquid companies in the digital asset industry. It is a modified market cap-weighted index, and includes only companies that generate at least 50% of their revenue from digital asset services and products.
IBLC’s underlying index is also modified market cap-weighted, but only has a 50% revenue rule for certain sub-industries (source):
The fund seeks to track the investment results of the NYSE FactSet Global Blockchain Technologies Index (“underlying index”), a rules-based, modified float-adjusted market capitalization-weighted equity index.
IDI selects companies that generate 50% or more revenue from the following, as “Tier 1” securities… Sub-industry: Blockchain technology; cryptocurrency mining; and cryptocurrency trading and exchanges.
To capture the companies that design and manufacture the graphic processing unit (GPU) chips needed for mining, IDI selects next, as “Tier 2” securities, RBICS Focus Level 6 Sub-Industry Video Multimedia companies in semiconductors.
I found the implications of such rules a bit abstract, so I instead classified each ETF’s holdings to get an idea of how their strategies differ. I assigned each holding in each ETF to one of four categories: financial services, mining, hardware, and others. Here’s how each ETF is distributed:
| anchor | digging | financial situation | hardware | Other |
| IBLC | 45% | 30% | 15% | 10% |
| FDIG | 36% | 62% | 0% | 2% |
| block | 17% | 42% | 10% | 31% |
| BKCH | 43% | 34% | 13% | 10% |
| bitcoin | 28% | 48% | 7% | 17% |
| dapp | 39% | 45% | 4% | 12% |
Source: Compiled by the author
Based on this table, the FDIG looks like the best option for financial services performance, which makes sense since it’s the only ETF to list payment processing as part of its investment objective. On the other hand, IBLC is the best option for mining and mining hardware.
BLOK has the highest exposure to “others” because it is the only ETF to invest in physical bitcoin ETFs, such as the Objective Bitcoin USD ETF (TSE: BTCC.U), and has a large exposure to companies such as Accenture (NYSE). There is also allocation. :ACN) which currently receives very little revenue from blockchain-related services. For other ETFs, “other” exposure comes primarily from companies with limited bitcoin exposure, such as Tesla (NASDAQ:TSLA), MercadoLibre (NASDAQ:MELI), IBM (NYSE:IBM) and Shopify (NYSE:SHOP).
Since different people have different opinions about each sub-industry, everyone will draw different conclusions from this breakdown. Personally, I have argued that investors should avoid bitcoin miners in previous articles, because of their significant counter-party risk and low likelihood that the average miner will meaningfully outperform the asset they are mining.
If investors want to get in touch with miners, there is already the Valkyrie Bitcoin Miners ETF (WGMI) which provides more targeted exposure to this sub-industry. But for people like me who want to avoid miners, I would prefer FDIG or DAPP over IBLC or BKCH based on less risk of miners.
Between these two, I have a slight preference for dApps as their investment objective in FDIG includes payment processing companies. I recently shared an in-depth research with members of Tech Investing Edge, where I argued that some traditional payment processors such as Visa(V) are at risk of disruption from blockchain technology due to the “innovator’s dilemma” where their banking Partners may oppose blockchain-based credit card payments. Ironically, I believe that some of the payment processing companies in the FDIG may actually be negatively impacted by blockchain in the long term.
Another small advantage of the DAPP is that it has Silvergate Capital (SI) as its second largest holding, while FDIG does not hold it at all. Silvergate is my top blockchain stock pick because I believe that in the long term, they will benefit from the development of stablecoins.
In short, dApps are my favorite blockchain ETF because:
- Unlike BITQ, it has a reasonable expense ratio and a clear investment objective.
- It is passively managed, unlike BLOK.
- It has less risk in mining related companies as compared to IBLC and BKCH.
- Compared to FDIG it has less risk in legacy payments companies and higher risk in some of my favorite blockchain companies.
risk and options
Risks are often cited in blockchain technology, with volatility being the greatest in cryptocurrencies. Even though these ETFs do not directly invest in cryptocurrencies, most of the top blockchain companies grow rapidly when crypto prices are rising, so the success of these ETFs is likely to be related to the success of the major cryptocurrencies.
Thus, an alternative to investing in ETFs is to simply buy major cryptocurrencies such as Bitcoin (BTC-USD) and Ethereum (ETH-USD). These assets have a longer track record than any ETF, lower counterparty risk and stellar returns. They can also be purchased through brokerages using Grayscale Bitcoin Trust (OTC: GBTC) and Ethereum Trust (OTCQX: ETH), although both of these trusts have high expense ratios and increasingly trade at steep discounts to NAV. .
That said, cryptocurrency is only one application of the blockchain. Long term investors can get exposure to other applications like stablecoins, smart contracts etc. In that case, investors who want to avoid the fees and risks associated with miners in these ETFs can buy some of their top holdings instead. My personal favorites are Silvergate (SI), Galaxy Digital (OTCPK: BRPHF), Coinbase (COIN), and Block (SQ).
conclusion
There is no shortage of options when it comes to investing in blockchain. Of the six blockchain-related ETFs I covered, dApps are my favorite, but investors who want more exposure to miners and payment processors may prefer other options. I think IBLC, FDIG, BKCH, and DAPP all look like well managed ETFs with reasonable fees. In the long term, I expect most of these ETFs to do well as blockchain becomes more widely adopted. However, they may find it difficult to beat their top holdings and major cryptocurrencies.
