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These Blockchain Funds Break Old Wall Street Rules

The third quarter so far has done a good job of debunking Old Wall Street’s advice to “sell in May and walk away” because anyone doing so would have suffered heavy losses and missed out on a very strong start to the quarter. . While most of the year has been dominated by energy names, there is a new boss on the block, and by block I mean blockchain.

Of the 25 best-performing non-leveraged exchange-traded funds so far this quarter, all but five are crypto- or blockchain-focused. Returns range from ProShares Bitcoin Strategy ETF (BITO), up 25.2% QTD, to top dog, First Trust Skybridge Crypto Industry & Digital Economy ETF (CRPT) and its gain of 51.12%.

But funds that appear to offer the same or similar exposures will often produce different results for investors and this is a prime example. So I pulled four funds from this list and performed an attribution, so we can better understand what drove returns for each product.

Funds

The other most profitable funds are the ETFs Bitwise Crypto Industry Innovators (BITQ) (with gains of 46.13%), the Global X Blockchain ETF (BKCH) (43.76%) and Grayscale ETF Future of Finance (GFOF) (30.91%).

The CRPT is the only actively managed portfolio in the group. Index methodologies for other funds can be found via these links: BITQ (Bitwise Crypto Innovators 30 Index), BKCH (Solactive Blockchain Index), and GFOF (Bloomberg Grayscale Future of Finance Index). From what I can tell, the issuers of ETFs have developed the intellectual property behind the indices and have contracts with various index providers for calculation services, as opposed to the index providers creating those indices and offering to issuers to launch products.

The Bitwise index, however, is the only one that has selection criteria that I can follow, which means the index has set a 75% “Tier 1” threshold for revenue exposure to services related to the cryptography or net asset exposure directly to cryptocurrencies. “Tier 2” names may be lower, but only 20% of the index may be weighted to Tier 2 names. The Solactive index tracked by BKCH has a similar “Pure Play” and “Diversified” approach, but the threshold is set at only 50%. The Bloomberg The index tracked by GFOF has a multi-factor eligibility process, but the income factor also classifies exposures above 50% as “high”. Although there is no index methodology for the CRPT, the prospectus emphasizes that earnings exposure greater than 50% in an applicable business is sufficient for success.

The results

Before discussing what drove the quarterly returns of these funds, I will mention the overlap between them, ie the percentage of interests held in common in all the funds. Looking at CRPT and its 31 holdings, there is 39% overlap with BKCH and GFOF, and 58% overlap with BITQ, which means that if you own CRPT, it’s like having 58% exposure to BITQ.

One thing that struck me was that across all four funds, the bottom 10 contributors to performance over the period added net to returns and in fact, apart from BKCH, each fund had only only one name that lost ground during the period, including BITQ: CME Group (CME) (-3.51%), First Trust SkyBridge Crypto Ind and Digi Econ (CRPT): Meta Platforms (META) (- 0.66%); and, GFOF: BC Technology Group (BCTCF) (-23.71%). Falling names in BKCH include Bigg Digital Assets (BBKCF) (-7.64%), Greenbox (GBOX) (-25.54%) and SOS Ltd. (SOS) (-37.74%).

In the 40 potential locations that make up the top 10 contributors to return for these funds, there are only 17 unique tickers, and taking into account some funds holding both US and Canadian listed stocks, this number drops to 14. Of these 14, the five names that had the greatest positive impact on average across the four funds are Marathon Digital Holdings (MARA), Riot Blockchain (RIOT), Coinbase (COIN), Silvergate Capital (SI ) and Galaxy Digital Holdings (GLXY). All five names are held across all funds and feature in all of the top five or six returning contributors.

Wrap

These results are all impressive. I love how all of these funds seem to fit along the lines of crypto and the crypto industry, although I’m not crazy about names like Interactive Brokers (IBRK), Alphabet (GOOGL) (GOOG ) and Meta appearing on CRPT. Much like another gold rush of 1849, it appears that selling picks and shovels is a better long-term approach than exposure to the actual commodity, as evidenced by BITO’s quarter-to-date returns. , in relation to these funds. If I had to choose one fund out of these for exposure to the crypto and crypto industry, I would have to go for the Bitwise Crypto Industry Innovators ETF, if only for the income exposure. If you think this trend is likely to continue in the short to medium term, then perhaps BITQ deserves a closer look.

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