The fund buys stocks in companies actively involved in blockchain technology or related to digital currencies.
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The U.S. still has no Bitcoin exchange-traded funds, but the market is getting increasingly crowded with funds aimed at giving investors access to the crypto world through side doors. VanEck is the latest, launching an ETF on Wednesday that is meant to invest in companies involved in the digital currency business.
Like a few other asset managers, VanEck has applied to securities regulators for permission to open a Bitcoin ETF that would give investors access to the digital currency via a securities exchange. While its application is pending, the firm is tapping the market from a different angle.
Instead of cryptocurrencies, the new VanEck Vectors Digital Transformation ETF (ticker: DAPP) will invest in companies actively involved in blockchain technology or related to digital currencies. That includes payment platforms, digital-asset exchanges, cryptocurrency miners, hardware manufacturers, and other technology providers.
But you wouldn’t know it from the fund’s rather vague reference to “digital transformation” in its name, with no mention of “Bitcoin,” “crypto,” “blockchain,” or even “digital currency.” John Patrick Lee, product manager at VanEck, told Barron’s the company originally applied to open the fund using the words “digital assets,” but had to change that to “digital transformation” to win approval.
This isn’t something new. The $1.4 billion Amplify Transformational Data Sharing ETF (BLOK), a similar fund launched in 2018, wasn’t allowed to use “crypto” or “blockchain” in its name, either. It seems that the Securities and Exchange Commission is still cautious about the increasingly popular technology and asset class, and may be hesitant to appear to recognize their legitimacy by allowing the use of the words. The SEC didn’t immediately respond to a request for comment.
Bitcoin has achieved many milestones in 2021 on its path to become a mainstream investment. The latest is the listing of Coinbase Global (COIN), the largest U.S. cryptocurrency exchange, whose shares started trading publicly on Wednesday.
Interest in Bitcoin ETFs has also grown. Hopes that one or more could be approved are high this year because the incoming SEC chair, Gary Gensler, is an expert in blockchain and digital currencies who has taught those subjects at the Massachusetts Institute of Technology.
Bitcoin ETFs would allow investors to buy and sell the cryptocurrency more easily and cheaply, smoothly integrate it into their portfolios, and eliminate the hassles of securing and storing it. Still, investors’ exuberance about Bitcoin, its extreme volatility, and the potential risk of market manipulation have caused concerns for the regulator.
The new VanEck fund is not the first to steer clear of the digital currency and bet on companies profiting from its development instead. The Amplify fund launched in 2018 is actively managed, with about 50 stocks. It has gained 226% over the past 12 months as Bitcoin’s price continues to surge.
Ed Lopez, head of ETF products for VanEck, says the existing funds often include companies “only tangentially involved with digital assets,” and argues that gives the VanEck ETF the space to differentiate itself as a pure play. The fund, while highly concentrated with just 25 names, is not actively managed. Instead, it tracks an index that selects stocks based on a set of rules regarding companies’ size, liquidity, and business exposure.
In an interview with Barron’s in 2018, Mike Venuto, co-manager of the Amplify ETF, said the more nuanced active management makes more sense in the space because blockchain technology is moving so quickly: “I don’t think this is an industry that you can track passively, because just changing a name can move a stock a thousand percent,” he said.
VanEck apparently doesn’t feel the same way. Its new fund aims to simply reflect what the market looks like. To be included, a company has to generate at least 50% of its revenues from digital-asset projects, or be expected to do so, such as Voyager Digital (VYGR); or have at least 50% of its assets directly invested in digital currency holdings, like MicroStrategy (MSTR).
Twenty-two of the 25 stocks meet those criteria, although the fund also holds three larger names that don’t: Taiwan Semiconductor Manufacturing Company (TSM), Nvidia (NVDA), and PayPal (PYPL). All holdings are weighted by their free-float market capitalizations.
The ETF charges an expense ratio of 0.65%, while the Amplify ETF charges 0.71%.
Although the new VanEck fund opened by coincidence on the same day as the Coinbase direct listing, it doesn’t hold the stock. If Coinbase meets the fund index’s criteria on Friday, however, it could be added next week through a fast-track inclusion, said Lee. Coinbase shares jumped 31% on its first day trading and are currently priced at $328. That’s pushed its market valuation to around $86 billion.
The VanEck Vectors Digital Transformation ETF, on the other hand, declined nearly 7% on its debut. Many of its top holdings fell sharply on Wednesday.
Write to Evie Liu at [email protected]
