How ETF Innovation And Mainstreaming Of Fintech Converged Last Week

In many ways, ETFs and fintech are like peas in a pod

226

The development and maturation of fintech continues to accelerate, but it was a particularly eventful week in the universe of fintech-related ETFs and funds.

In Canada, North America’s first Bitcoin ETF launched on the Toronto Stock Exchange. The Purpose Bitcoin ETF (BTCC) debuted on Thursday and saw $165 million in volume on its first day, $80 million in its first hour, and is technically the world’s first exchange-traded fund to invest directly in Bitcoin.

There are several filings for a U.S.-listed Bitcoin ETF, including proposals from Bitwise Asset Management and VanEck Associates.

Bitwise made its own news, however, launching the first decentralized-finance (DeFi) fund in the U.S. The BitWise DeFi Crypto Index Fund tracks companies and securities involved in the DeFi movement, mainly  peer-to-peer payments and lending companies that disintermediate financial transactions, obviating the need for banks.

The fund, which is only open to accredited investors, offers limited liquidity. New investments and redemptions can be made on a weekly basis, but redemptions made within 12 months of initial investment will be assigned a 3% penalty.

“We’re going to continue looking ahead this year, to try to help you stay ahead of the curve in crypto,” said CIO Matt Hougan in announcing the DeFi fund. “Just weeks ago, a form 211 was filed with FINRA to allow for the Bitwise Bitcoin Fund to begin public trading, like (the Bitwise Crypto 10 Index Fund). We continue to offer the Bitwise Ethereum Fund, and we’re doubling our staff (from 13 to 20+) to help us increase our ability to provide incredible service to an expanding client base.”

Hougan argued that in a rapidly growing and evolving space like DeFi, it’s often difficult to identify long-term winners from firms that will not survive. Thus, it makes sense to invest in these companies via a broad index.

Both BTCC and Bitwise’s new DeFi fund are helping to lend credibility and stability to the cryptocurrency space in ways that purchases by Tesla and Microstrategy or zeal from billionaires and mavens like Elon Musk and Mike Novogratz cannot. Of course, Novogratz’s Galaxy Digital Holdings is one of the firms providing Bitcoins for BTCC, and is behind a recent filing for another Canadian cryptocurrency ETF, the CI Galaxy Bitcoin ETF, sponsored by CI Global Asset Management.

Another Bitcoin booster, Cathie Wood, last week saw her Ark Innovation ETF (ARKK) reach $28 billion in assets, carrying Ark’s ETF assets under management to over $60 billion all-told, as investors sought managers who could identify the next big technological trend to dominate the public markets – but another of Wood’s ETFs, the Ark Fintech Innovation ETF (ARKF) is also beginning investor attention.

Still a small fish compared to Ark’s flagship at approximately $5 billion in assets, ARKF has targeted the sweet spots for fintech’s recent exponential growth, with Square, PayPal, Zillow, Silvergate Capital, Tencent, Pinterest, Intercontinental Exchange and Shopify among its ten largest holdings. The fund returned a whopping 108% in 2020, 128% on a one-year basis and through Feb 22 was still accelerating, offering a return of over 21% year-to-date.

ARKF’s rivals include the Global X FinTech ETF (FINX), the ETFMG Prime Mobile Payments ETF (IPAY), the Capital Link NextGen Protocol ETF (KOIN) and the Ecofin Digital Payments Infrastructure Fund (TPAY).

Ark’s success is probably in part a symptom of investors’ search for the next FAANG stocks. Rather than try to find one Facebook or Google needle from the haystack of emerging technology, many investors are figuring that they’re better off paying 75 basis points to let an experienced, forward-thinking manager like Wood to do the hardest work for them. But Wood’s work with ARKF is helping to push the highest tier of fintechs into the conversation for future ”FAANG” status.

Elsewhere, New York-based ETF sponsor and manager WisdomTree Investments offered a major leg-up for advisors interested in using its ETF model portfolios through an integration with 55ip. 55ip offers technology that allows advisors to incrementally implement models in an automated and tax-efficient manner.

Partnering with 55ip allows WisdomTree to offer advisors an answer to one of the largest problems with adopting ETF model portfolios – the tax sink of transitioning a current or newly onboarded client’s investment portfolio into a model. 55ip’s technology also enables automated, tax-aware management and withdrawals from model portfolios and client reporting.

“I do think technology in the model space has come a long way, but there’s a long way to go,” said Tom Skrobe, WisdomTree’s head of client solutions. “Efficiencies of the kind that 55ip can build for advisors are critical for success.”

Skrobe said the next steps in technology for ETF model portfolios include more integrations to allow models to be more portable between advisors, firms and custodians, and better research and insight into how models work to allow them to be more easily compared by advisors and the end investor.

Finally, we should keep an eye on one of the biggest ongoing fintech story lines of 2021, the rise of retail trading via online communities like Reddit’s WallStreetBets and trading applications like Robinhood, TradeZero and WeBull.

Even as Robinhood, Reddit and Citadel execuctives testified before Congress about the now notorious short squeeze in GameStop, Reddit’s army of traders were at it again, suspected of doubling the asset of the ProShares Ultra VIX Short-Term Futures ETF (UVXY), the world’s largest volatility ETF, to over $2.5 billion. This activity included $280 million of inflows in a single day.

As if on cue, the Chicago Board Option Exchange’s CBOE Volatility Index (VIX) rose from a close of 19.97 on Feb. 12 to a close of 23.45 on Feb. 22.