Crypto ETFs roar with eye-popping returns in 2023

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A swarm of cryptocurrency-focused exchange-traded funds had amazing debuts through 2023, posting big gains rarely seen by diversified equity funds.

The $3.9m Valkyrie Bitcoin Miners ETF (WGMI) led the way with a 101% year-to-date return, but a gaggle of rival funds also posted gains of between 40-80% .

Most of these ETFs are still well below the water for longer-term investors, having been battered by last year’s crypto winter and the broader sell-off in tech stocks, but the nascent rally indicates the ability of niche sectors to rebound due to its inherent volatility.

The partial takeover was also echoed, albeit in a more modest way, by certain technology funds, such as the ETF Ark Innovation (ARKK). It has risen 25% so far this year, putting it on track to potentially post its highest monthly return ever, after falling 75% during 2021 and 2022.

If you were convinced two years ago by Ark’s story, the technology is now for sale, said Kenneth Lamont, senior fund analyst for passive strategies at Morningstar.

The rally in crypto ETFs was propelled by putative signs of life in the cryptocurrency market, with bitcoin rising 38% as of Jan. 27 to $22,900, after an unusually long stretch of trading at a distance, after having cratered from an all-time high of nearly $70,000 in November 2021. Solana, a smaller digital token, jumped 145%.

The rebound was widely attributed to signs that inflation may have peaked, particularly in the United States, potentially allowing global interest rates to peak at lower levels and paving the way for more investment strategies. risky.

These were some of the worst-performing ETFs in 2022, if not the worst-performing, so they may rebound strongly, in part because bitcoin and other cryptos themselves have rebounded, said Todd Rosenbluth, chief financial officer. research at VettaFi.

This is why people invest in crypto, Lamont said. For many investors investing in crypto, this is indeed a high stakes game. Its high risk and potentially high reward.

WGMI was the world’s best-performing unleveraged equity ETF in the first weeks of 2023, according to data from Morningstar Direct, though it’s still down two-thirds since its inception in February 2022. .

Its top holdings are cryptocurrency miners Bitfarms, Marathon Digital Holdings and Digihost Technology, which have seen their share prices soar 148-279% since early January.

The VanEck Digital Assets Mining ETF (DAM) isn’t far behind, with holdings such as crypto miners Riot Platforms and CleanSpark and Chinese hardware maker Canaan helping propel it to a 77% gain. However, DAM is only back to the trading levels it saw in early November, it is still down 76.8% from its March 2022 highs.

The huge rebounds have not been limited to crypto-mining ETFs, with the VanEck Digital Transformation ETF (DAPP) whose holdings include Block, a payments company created by Twitter co-founder Jack Dorsey, and the exchange of Coinbase Global crypto up 66.8%.

The Global X Blockchain ETF (BKCH), Bitwise Crypto Industry Innovators ETF (BITQ) and iShares Blockchain and Tech ETF (IBLC) also rose by more than 60%.

Lamont said thematic funds have been known to have choppy returns.

Cannabis has seen incredible swings in the past and during the post-Covid recovery some ETFs posted triple-digit returns within a year when things started to pick up again, he said. .

Between April and December 2020, the Invesco Solar ETF (TAN) jumped 305%, according to Morningstar data, perhaps the most explosive example of thematic funds’ ability to post stellar gains when markets turn .

Investors have largely remained loyal to crypto-related equity ETFs and those in the broader tech sector, however, despite last year’s losses, suggesting a degree of resilience.

Thematic funds have been ransacked [last year], Lamont said: 75% have an explicit growth bias and they have been hit extremely hard. And yet we didn’t see a scramble for the door and I found that interesting.

If you’ve stuck with a fundamental story, the fundamentals of those themes haven’t changed.

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