Bitcoin, Ethereum, and other cryptocurrencies are decentralized assets. Stocks and exchange traded funds, however, are not.
Still, some equities are useful for tapping into the world of digital assets. The name of game is ensuring those stocks have adequate leverage to digital coins. Enter the VanEck Vectors Digital Transformation ETF (DAPP).
DAPP, which debuted in April, is home to 25 stocks. While that’s a concentrated lineup, it’s advantageous in that DAPP, is home to stocks that are credible plays on the expanding crypto universe. Although DAPP has just 25 holdings, it taps into multiple part of the digital asset ecosystem.
“There are a wide range of business lines that digital transformation companies can participate in — from exchanges, to mining, to asset management. Generally speaking, bitcoin and other digital assets may play a crucial role in a company’s business operations, but companies should not be conflated with digital assets,” writes John Patrick Lee, VanEck product manager.
Digging Into DAPP
DAPP follows the MVIS Global Digital Assets Equity Index, which is designed to provide exposure to “companies that are participating in the digital assets economies,” according to VanEck.
Lee highlights several important details that bolster the DAPP investment thesis, including the points that many of the fund’s components have some correlation to Bitcoin and Ethereum, reduced correlations to broader benchmarks like the S&P 500, and the fact that many DAPP holdings are barely represented in benchmarks like the S&P 500 or Russell 1000 Index.
“Low correlations and low overlap with broad market and tech-heavy indexes indicate that an allocation to digital transformation companies makes sense from a modern portfolio theory perspective,” he says. “Digital transformation companies are providing portfolio diversification and the potential for alpha. Keep in mind, these companies are early-stage movers, operating within a long-term structural growth environment.”
Examples of DAPP holdings include Jack Dorsey’s Square (NYSE: SQ), crypto exchange operator Coinbase (NASDAQ: COIN) and Bitcoin miner Marathon Digital (NASDAQ: MARA). That trio combines for about 26% of the ETF’s weight.
Another element to the DAPP equation that may catch some crypto investors off guard is that many of the ETF’s holdings generate cash flow (fiat currency), which is relevant because digital coins don’t possess cash flow.
“So while the vast majority of publicly traded digital transformation companies have some type of cash flow, bitcoin, and the vast majority of cryptocurrencies, do NOT generate cash flows. For a user to make a profit on a bitcoin trade, the user has to sell bitcoin at a higher price than what it was bought for, which is not the same as a business-related cash flow,” adds Lee.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.