Good Morning, VettaFi Voices! Disruptive innovation is a popular topic, and it encompasses everything from bitcoin and cryptocurrency to electric vehicles to artificial intelligence. It’s not really a term you heard 10 years ago, and it seems open to interpretation as to what can be classified under it. Let’s talk about the latest developments and how investors can get exposure.
Cryptocurrency a Key Disruptive Innovation
Todd Rosenbluth, VettaFi head of research: I’m going to start with the crypto angle since it feels increasingly likely that we will have spot bitcoin ETFs trading by the time we are all together at Exchange in February 2024.
We already have futures-based bitcoin ETFs like the ProShares Bitcoin Strategy ETF (BITO) and a wave of ether futures ETFs recently launched, including the Bitwise Bitcoin and Ether Equal Weight Strategy ETF (BTOP), the ProShares Bitcoin & Ether Market Cap Weight Strategy ETF (BETH), the VanEck Ethereum Strategy ETF (EFUT), and others.
VettaFi hosted a mid-October webcast with Bitwise titled, “How Futures Are Changing Crypto.” We asked advisor attendees about their time frame for allocating new capital to crypto. Approximately 30% said they planned to allocate to the asset class in less than 12 months. Another 24% said in more than 12 months. The remaining respondents said they had no intent to allocate. We view that constructively, as people are learning more about the asset class.
I think there’s some pent-up demand from advisors that prefer to invest in ETFs and want a spot-based product. VettaFi is hosting an alternatives symposium on November 28, and we will have Bitwise and Grayscale joining us. I can’t wait to hear from them and ask questions about what 2024 looks like for the asset class. Grayscale of course offers the Grayscale Bitcoin Trust (GBTC) and is trying to convert it into an ETF. Bitwise is trying to bring a new product to market. These are of course different than the thematic ETFs that focus on blockchain investments such as the Amplify Transformational Data Sharing ETF (BLOK), the Global X Blockchain ETF (BKCH), and the VanEck Digital Transformation ETF (DAPP).
Cutting-Edge Themes
These thematic ETFs, and others that focus on artificial intelligence, robotics, online retail, etc., often make up a single-digit percentage of an advisor’s portfolio. They are fast-growing strategies that can add returns, but also risk, to a S&P 500-based equity ETF.
Zeno Mercer, VettaFi senior research analyst: I’ve certainly been following closely, as someone who has observed the crypto space since 2017. It’s fascinating how many people still have yet to allocate. My dad has yet to open a Coinbase account.
Bitcoin has also provided some interesting price action lately, with many people saying that this move implies a spot bitcoin ETF is priced in and that “people won’t buy the ETF.” But if you look at the raw numbers and the facts, there is so much capital sitting on the sidelines, in Treasuries, cash, and especially traditional assets.
Bitcoin is definitely becoming more of a traditional asset. I’ve been known to say that I think BTC will become boring one day and low-vol. Maybe this timeline is similar to a human growing up (first 10 years: lots of growth, no one trusts you, some people see potential, etc.) but eventually things just work. Obviously, crypto goes way beyond being a fiat-alternative, and there is a lot of synergy and opportunity for AI and blockchain to work together.
Fire, the wheel, the printing press… when we think about disruptive innovation, it’s fascinating to see how history is dotted with these groundbreaking moments. They’re not just inventions; they redefine how we live. From mastering elements like fire and metal (think of how we name whole ages after metals like bronze and iron) to energy inventions with steam, oil, and electricity, and now we’re prancing past the dawn of the digital era with personal computers and the internet.
Disruptive Innovation Nothing New
Disruptive innovation isn’t just a fancy term; it’s a continuous thread in our history, shaping and reshaping our world. We’ve seen what happens to giants like Blockbuster, Sears, and Kodak when innovation catches them off guard, technologies advance, business models and consumer behaviors change.
Consider how long it took for some of these innovations to really catch on. The internet, for instance, didn’t reach the majority of the U.S. population until 2001 [despite first being established in 1983]. Now, we’re in an age where smartphones are nearly ubiquitous. It makes you wonder: when will personal AI and decentralized cryptocurrencies become the norm? Kids today are growing up with AI in their pockets. The concept of banking and currency could be so different for the AI-native generation.
Rosenbluth: When the ROBO Global Robotics & Automation Index ETF (ROBO) came to market 10 years ago, it was one of the newer thematic ETFs that made sense to investors. Rather than buying a handful of stocks that might in the future be leaders in the robotics space, own several dozen of them in a diversified portfolio. And leverage the index rebalancing approach to make sure the companies stayed true to the theme.
But it’s hard to hear disruptive technology and not think of ARK. The team at the active manager made disruptive technology the way to invest for a brief period of time. The ARK Innovation ETF (ARKK) ballooned in size, of course, before performing poorly and much of the assets shrinking down. It was once the largest active equity ETF. While its $7 billion asset base is still sizable, it is far smaller than the JPMorgan Equity Premium Income ETF (JEPI) or the Dimensional U.S. Core Equity 2 ETF (DFAC).
ARKK & Its Competitors
Heather Bell, VettaFi managing editor: I think a fund that deserves to be mentioned alongside ARKK is the iShares Exponential Technologies ETF (XT). There’s not a lot of overlap, and it has a very different approach. However, they both offer very different angles on the same concept.
And if you look at performance from XT’s inception just six months after ARKK’s, they have had similar returns, though XT has outperformed over that period. They are both multibillion-dollar ETFs that cover the “disruptive” concept in almost exact opposite types of approaches. ARKK is an active high-conviction fund with a narrow portfolio versus XT’s broad and passive portfolio.
Both are backed or promoted by big names (Cathie Wood and Ric Edelson). But ARKK is a better tactical play, I think, while XT isn’t as much of a nail-biter in terms of performance — just a fairly steady rise. There really is something for everyone I think when it comes to playing disruptive innovation.
Rosenbluth: Yes, ARKK is not alone, and, good color on XT. Indeed, since I mentioned the upcoming VettaFi symposium, we hosted an AI symposium and had managers from the AB Disruptors ETF (FWD) and the Goldman Sachs Future Tech Leaders Equity ETF (GTEK) join us to talk about their approaches and the benefits of active management in thematic strategies.
Jane Edmondson, VettaFi head of thematic strategy: The way I look at disruptive innovation from a thematic indexing perspective is more broadly. Technology is disrupting all industries in some way, from industrials with robotic manufacturing capabilities and AI to healthcare with robotic surgeries.
Companies that are able to adapt and utilize technology and innovation to their advantage will survive and thrive, and those that don’t will fall behind or be innovated away.
Crypto’s Disruptive Capabilities
Cryptocurrency and blockchain are other technologies that are going to be disruptive in finance and banking and payment, but will also have far-reaching implications for other industries and companies as well. Real estate is an interesting example — the real estate contracts of the future will likely be on the blockchain.
Bell: Jane, do you think crypto will have the same impact on emerging markets as something like cellphones? One of the fascinating aspects for me was how cellphones caused some emerging markets to skip typical development steps.
Edmondson: We have an emerging markets fintech index licensed by Amplify ETFs for the Amplify Emerging Markets FinTech ETF (EMFQ), which is exactly a play on that theme.
There are more cellphones in the world than bank accounts. Things like mobile payment and services are an important element of financial inclusivity in emerging markets. I think what you are referring to, Heather, is “leap frogging.” In emerging markets, consumers are leap frogging desktop technologies and using apps like WeChat to do everything from shopping to buying insurance.
The effect has been further amplified by the pandemic, as many countries in Latin America and Africa were cash economies. Digital payment and wallets have been a gateway into digital commerce for emerging market consumers.
And there is even a country in Latin America that has adopted bitcoin as a currency. The El Salvador experiment in crypto has not fully played out, but it is looking better as we approach crypto spring than it did in crypto winter.
And what about the upcoming halving in bitcoin? Bitcoin miners are scrambling right now to mine bitcoin before the halving, which is supporting prices. And typically, prices soar after the halving due to limited supply.
Disruption Beyond Technology
Rosenbluth: Yes, many people think of disruptive technology as being focused on the technology sector. VettaFi also offers the index behind the ROBO Global Healthcare Technology and Innovation ETF (HTEC), but there’s also the ARK Genomic Revolution ETF (ARKG), the Global X Telemedicine & Digital Health ETF (EDOC), and the iShares Genomics Immunology and Healthcare ETF (IDNA) that are HTEC’s peers in the healthcare space, for example.
Edmondson: Yes, Todd, there is a lot of disruption in healthcare. Consumer discretionary is also easily disrupted by technology.
GraniteShares has the GraniteShares Nasdaq Select Disruptors ETF (DRUP). That ticker stands for “disruption.”
Rosenbluth: Tickers like DRUP and SUPP (for the TCW Transform Supply Chain ETF) remind me how much older I am than my son.
Edmondson: Think of all the digital disruption in the consumer space from online shopping, music, payment. And there are all ETF plays on those themes.
Rosenbluth: I know Roxanna Islam had a good piece covering online retail and the impact on the Amplify Online Retail ETF (IBUY), the ProShares Online Retail ETF (ONLN), the Global X E-commerce ETF (EBIZ) and their peers.
The Consumer Space Evolves
Edmondson: The trends in online commerce are really interesting indeed, and that article does a great job of delving into the topic.
We have seen some interesting retail earnings the past couple of days among traditional retailers with a strong online presence. Target and Macy’s crushed expectations. Walmart didn’t fare as well, but did see 20% growth in their online business.
Stretched consumers are shopping online and we could see more BNPL purchases, which favors online retailers as well. BNPL is not an ETF ticker, it stands for “Buy Now, Pay Later.” There is only one public stock there so far, Affirm, so not enough names for an ETF yet.
The holiday shopping season is upon us! Thanksgiving, Black Friday, and Cyber Monday. Most surveys indicate consumers are going to do 70%-80% of their shopping online. And someday will we be paying with bitcoin, don’t you think?
Rosenbluth: How can BNPL not be an ETF ticker yet? I remember a restaurant near me in NYC that took credit cards or bitcoin as payment. It was way ahead of its time, I guess, but they stopped doing that. Can you imagine the volatility in the receipts and the tips for the staff? First let’s get a spot bitcoin ETF, after all these years.
Edmondson: In the future, there will be a lot of secure transactions moving to the blockchain, for sure. We will be buying real estate on the blockchain. The Global X Property Tech ETF (PTEC) is a play on that future theme. Even real estate is being digitally disrupted.
And warehouse REITS are definitely benefiting from the rise of online commerce. The Pacer Industrial Real Estate ETF (INDS) invests in industrial REITs, which benefit from that growth.
Todd, don’t you have a dinner bet on the spot bitcoin ETF approval?
A Spot Bitcoin ETF Wager
Rosenbluth: I indeed do.
Edmondson: It is looking more promising we might see an approval before the end of the year. SEC regulators are talking to the companies with the filings like ARK/21Shares and BlackRock. You might be buying!
Rosenbluth: It feels to me like January 2024 will be the approval date. When I made the dinner bet with my friend Eric Balchunas, I thought it was not going to be close.
Edmondson: Either way, the winner should have to pay with bitcoin! There are 10 restaurants in NYC on Yelp that mention they take cryptocurrency.
Mercer: I would say a lot of the boom to crypto utilization will come from synergy with existing rails. Credit card companies and payments companies are all looking to make a play. I would guess that with an ETF approval — a stamp on the industry, if you will — we will see acceptance rates lift. If anything, we’re also closer to point-of-sale conversion, where someone can pay with BTC. And if the merchant only wants traditional currency, they can expect that the third party assumes any immediate volatility risk.
Bitcoin for Pizza
Let it be known, I will accept 10,000 BTC for a pizza! I just want to highlight an example where you can effectively anonymously order pizza from Domino’s and pay in bitcoin: https://ln.pizza/
Edmondson: Zeno’s 10,000 BTC for pizza comment relates to the first bitcoin transaction on May 22, 2010, when Laszlo Hanyecz paid Jeremy Sturdivant 10,000 BTC for two Papa John’s pizzas that were delivered to Hanyecz’s home. May 22 is now officially Bitcoin Pizza Day!
Rosenbluth: And November 28 is VettaFi Alternatives Symposium Day!
Islam: I won’t be paying in crypto. I still swipe and insert my card — not tap the chip. I have a friend that uses Apple Pay everywhere and that’s such a foreign concept to me. She is over 10 years older than me, so I guess I’m just behind! I wrote about this a couple weeks ago, but it’s probably slightly out of date since things change daily!
I think we’ll see healthy demand for spot bitcoin ETFs, but overall it’s still a risky asset, but I don’t think as many investors are leaning risky lately.
Mercer: I just saw that StepStone is joining our Alternatives Symposium. It’s been almost a decade since my time there, and it’s really exciting for us to be joining forces at what is bound to be an exciting event.
Still-Developing Disruptive Innovation
Bell: Are there any overlooked or developing disruptive innovation themes that anyone has identified? We already have funds that track the hydrogen fuel cell industry, but I don’t think they get a lot of attention. Is there anything similar out there?
Mercer: We saw some demos of electric vertical takeoff and landing vehicles this past week in NYC, which is pretty exciting. Effectively, the helicopter 2.0. It’s unclear what the full economic reality of mass-produced eVTOLs would be. However, it’s certainly another exciting area to watch.
Additionally, we’re always watching for material advances in nuclear (fission or fusion) and semiconductor modalities (remember the superconductor chatter earlier this year). Further, the deployment of generative AI into the field of regenerative medicine and 3D printing is really exciting. That should really start to shape up next year.
I saw the founder of DEKA (Dean Kamen) keynote at the Rockwell Automation conference last week (Rockwell is a long-time ROBO Index constituent). He spoke about how they are building “Regen Valley.”
Kamen invented the Segway, the dialysis machine, the insulin pump, the stent, etc. — he’s quite a visionary
Islam: I used to chat with some of the eVTOL companies at my old job, like Blade, Volocopter, EHang. They’re a small portion of the EV market, but very interesting
Mercer: I’d love to hear more about that sometime. It does seem like it’s for good reason that drone usage for medicine delivery is easier and more quickly adopted, as Walmart is doing in Arkansas.
Energy Storage a Key Theme
Edmondson: Solid-state batteries are one of the technologies disrupting the battery space that will make these flights viable, extending range and making them safer. This will be used in cars and airplanes in the future, which is pretty exciting. I would want to have it perfected before I stepped on one of those planes, though!
There has even been some talk of space flight. That would need to be a long-life battery! ETFs with this exposure include the Amplify Lithium & Battery Technology ETF (BATT) and there is some in the Global X Lithium & Battery Tech ETF (LIT), as well.
Battery storage is also an important piece of the equation. You would definitely want a few backup batteries in space. But also for your home’s solar installation, so you can get off the grid. The Invesco Solar ETF (TAN) covers solar energy stocks. Solar is the cleanest form of clean energy and cheaper than coal. The First Trust Nasdaq Clean Edge Smart (GRID) is a great play on energy storage and infrastructure.
Zeno, I like the drone delivery option! Amazon and even Domino’s have also been experimenting with it.
Mercer: It’s huge for robots in general! Hopefully they don’t cause fires and explode like a bunch of lithium batteries have in scooters.
Bell: Exploding airborne delivery drones… I definitely did not have that on my bingo card for the near future!
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