The analog economy isn’t dead but it seems to be morphing into a digital economy, and that transformation potentially offers significant growth opportunities.
And into this environment comes today’s launch of the VanEck Vectors Digital Transformation ETF (DAPP) that invests in companies involved in that digital transformation.
DAPP stands for “decentralized applications,” which refers to computer programs or applications that exist and run on a blockchain, or peer-to-peer computer networks.
The fund tracks the MVIS Global Digital Assets Equity Index composed of companies that get at least half of their revenue from digital asset projects, or are developing projects that potentially could generate at least 50% of their revenue from the digital asset industry, or have at least 50% of their assets invested in direct digital asset holdings or digital asset projects.
To be clear, DAPP and its index don’t invest in actual bitcoin or other cryptocurrencies. So it will differ in that regard vis-à-vis any bitcoin-related ETFs that are in the queue awaiting approval from the Securities and Exchange Commission, including a product from VanEck.
“We’re providing exposure to the companies that are doing business, not the underlying digital assets,” said JP Lee, VanEck’s ETF product manager.
He compared it to the VanEck Vectors Gold Miners ETF (GDX) or the VanEck Vectors Junior Gold Miners ETF (GDXJ) that invest in gold producers but not the bullion itself.
Digital transformation companies targeted by the DAPP fund engage in various business lines within the broader digital transformation ecosystem. That includes crypto miners (35.7% of DAPP’s portfolio), hardware companies that create components used to mine or store digital assets, such as semiconductor chips (19.5%), and exchanges that are platforms for trading digital assets (17.4%).
Lee noted that Coinbase, the cryptocurrency exchange that began trading today in a massive initial public offering, could be fast tracked to join the index provided that it meets requirements regarding market capitalization and minimum trading volume.
The index currently holds companies that don’t meet the above-mentioned 50% thresholds but are enabling the digital economy. That includes top-10 positions Nvidia Corp., a semiconductor company that makes graphics processing units used in cryptocurrency mining, and PayPal Holdings Inc., which lets its U.S. customers use cryptocurrencies to make payments at millions of global online businesses. It also includes Taiwan Semiconductor Manufacturing Co.
The DAPP fund will hold 25 names but its targeted sector is very young, so if need be the index provider will add semiconductor companies and/or payment gateways like PayPal based on size to fill out the roster (which as this point is obviously the case).
“We’re trying to boost the liquidity of the fund with companies that aren’t over 50% [of digital asset-linked revenue] but are kind of in the zone,” Lee said, adding the aim is to make this a pure-play digital transformation fund in the very near future as this sector grows.
Essentially, DAPP is a blockchain-related ETF. “It’s tied to the blockchain across a wide variety of use cases, applications and implementations,” Lee said.
“Bitcoin is the number one blockchain application, but there are a lot of other things going on,” he continued. “Ethereum is a common digital currency, but it’s also a platform and a way to build other applications on the blockchain. These applications are decentralized peer-to-peer networks, and it’s a new way to build technology.”
There are several blockchain ETFs that all launched in early 2018. The largest is the Amplify Transformational Data Sharing ETF (BLOK), which has $1.4 billion in assets and charges an expense ratio of 0.71%. (DAPP’s expense ratio is 0.65%.)
BLOK has been on a roll with a one-year gain of 266%, including 71% year to date.
Both DAPP and BLOK share many similar holdings within their respective top-10 positions. Beyond that, BLOK’s other holdings include the likes of Alibaba Group Holdings, Oracle Corp., Visa Inc., Alphabet Inc. and Honeywell International Inc.
Lee said the aim of DAPP is to be more of a pure play on blockchain and the transformation to the digital asset ecosystem.
“We’re not trying to duplicate exposures or companies you already have in your core equity allocation,” he said.
Ultimately, Lee posited, technology tied to the blockchain could potentially transform the economy in numerous ways.
“There are threads of innovation happening now on the blockchain that weren’t around 15 years ago,” he said. “It’s here, and this ETF is providing exposure to the companies that are early movers doing business within this blockchain economy.”