The widespread allocation to digital assets presents investors with many questions, particularly related to why they should be added to a portfolio.
Diversification is a key reason why investors are choosing to allocate to ETFs offering exposure to digital assets, such as the Invesco Alerian Galaxy Blockchain Users and Decentralized Commerce ETF (BLKC), which takes a broader approach aiming to capitalize on blockchain developments, and the Invesco Alerian Galaxy Crypto Economy ETF (SATO), which offers more focused exposure to the cryptocurrency industry.
Funds like SATO and BLKC also experience less volatility than spot cryptocurrencies due to their diversified holdings.
Rene Reyna, head of thematic and specialty product strategy, ETFs, and indexed strategies, Invesco, said that over a longer-term period, the firm looked at the digital assets space and saw diversification benefits, low correlation, and the potential for the asset class to serve as an inflation hedge; however, since the peak in November, a reversal trend has been observed.
“You saw correlations tighten substantially,” Reyna said. “Look at CPI for instance. So just looking at inflation, intuitively you thought you would see our ETFs or the crypto space respond very favorably, and it was the exact opposite. So I think in this nascent stage of this emerging asset class, investors are still trying to wrap their heads around how to incorporate this into a portfolio.”
Reyna said that a better approach to digital assets investing is to consider the broad ecosystem, especially in a wrapper — like an ETF — that most investors are already comfortable with owning.
SATO, the larger of the two funds by assets under management, tracks an index that holds cryptocurrency-focused equities and crypto ETPs and trusts.
SATO invests in equally weighted stocks of pure-play digital asset companies that are engaged in cryptocurrency and its relative mining, buying, or enabling technologies, according to ETF Database.
Additionally, 15% of SATO’s portfolio allocation consists of ETP and private trust components which may only hold the Grayscale Bitcoin Trust (GBTC). The fund will not invest directly in cryptocurrencies and will instead use a Cayman Island subsidiary that holds crypto assets. Any income received from the fund’s investments in the subsidiary will be passed through to investors as ordinary income, according to ETF Database.
BLKC is also passively managed, following an index with exposure to global stocks of blockchain users, cryptocurrency mining, buying, and enabling technologies.
BLKC may gain its exposure using other ETPs and OTC-private investment trusts linked to cryptocurrencies, also including GBTC. The index’s equity allocation comprises pure-play companies in the industry, including those that mine cryptocurrency assets; facilitate buying, selling, and transfer of cryptocurrency assets; provide custody for cryptocurrency assets; provide semiconductors; provide cryptocurrency mining machines; report cryptocurrency assets on their balance sheets; and engage in the R&D of blockchain technologies for non-cryptocurrency-related purposes, according to ETF Database.
The funds each charge a 60 basis point expense ratio.
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