The third-quarter has done a pretty good job so far of debunking the Old Wall Street advice to “sell in May and go away,” as anyone doing so would have locked in some hefty losses and missed a very healthy start to the current quarter. While most the year was dominated by energy names, there’s a new boss on the block, and by block, I mean to say blockchain.
Of the top-25 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) , rising 25.2% to the quarter-to-date, to top dog, First Trust Skybridge Crypto Industry & Digital Economy ETF (CRPT) and its 51.12% gain.
But funds that sound like they provide the same or similar exposures will often produce different results for investors and this is a great example. So, I pulled four funds from this list and ran some attribution, so we can get a better understanding of what drove returns for each product.
The other top-gaining funds are the Bitwise Crypto Industry Innovators ETF (BITQ) (with 46.13% gains), the Global X Blockchain ETF (BKCH) (43.76%), and Grayscale Future of Finance ETF (GFOF) (30.91%).
CRPT is the only actively managed portfolio of the bunch. Index methodologies for the other funds can be found through 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 ETF issuers developed the intellectual property behind the indexes and have contracts with various index providers for calculation services, as opposed to the index providers creating these indexes and pitching them to the issuers to launch products.
The Bitwise index, however, is the only one that has selection criteria I can get behind, meaning that index has set a 75% “Tier 1” threshold for revenue exposure to crypto-related services or net asset exposure directly to crypto currencies. “Tier 2” names can be lower, but only 20% of the index can be weighted in Tier 2 names. The Solactive index tracked by BKCH has a similar “Pure Play” and “Diversified” approach, but the threshold there is set at only 50%. The Bloomberg index tracked by GFOF has a multi-factor eligibility process, but the revenue factor also classifies exposures above 50% as being “High.” While there is no index methodology for CRPT the prospectus outlines that revenue exposure greater than 50% in an applicable activity is enough to pass muster.
Before I get into what drove quarter-to-date returns for these funds I’ll mention overlap between them, which is what percentage of holdings are held in common across all the funds. Looking at CRPT and its 31 holdings, it has 39% overlap with BKCH and GFOF, and 58% overlap with BITQ meaning if you own CRPT it’s like having a 58% exposure to BITQ.
One thing that struck me was that in all four funds, the bottom 10 contributors to performance over the period were net additive to returns and in fact, aside from BKCH each fund only had one name that lost ground over 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%). The down names in BKCH include Bigg Digital Assets (BBKCF) (-7.64%), Greenbox (GBOX) (-25.54%) and, SOS Ltd. (SOS) (-37.74%).
In the 40 potential slots that make up the top 10 contributors to return for these funds there are only 17 unique tickers, and accounting for some funds owning both U.S.- and Canada-listed shares that number drops to 14. Of those 14 ,the five names that had the biggest positive impact on average across all 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 in all funds and across the board figure into the top five or six contributors to return.
Wrap It Up
These results are all impressive. I like how all of these funds seem to draw inside the lines of crypto and the crypto industry, although I’m not crazy about names like Interactive Brokers (IBRK) , Alphabet (GOOGL) (GOOG) , and Meta showing up on CRPT. Very much like another gold rush from 1849, it seems like selling picks and shovels is a better long-term approach than getting exposure to the actual commodity, as evidenced by BITO’s returns quarter-to-date, as compared to these funds. If I had to pick a fund out of these for crypto and crypto industry exposure, I’d have to go with the Bitwise Crypto Industry Innovators ETF, if only for the revenue exposure focus. If you think this trend is likely to carry through the near to mid-term, then perhaps BITQ is worth a closer look.
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