ETF Of The Week: Most Bitcoin Held Here

For Bitcoin ETF believers, this week served up another big bust. On Wednesday, the SEC rejected nine more proposed Bitcoin ETFs from GraniteShares, Direxion and ProShares, bringing this year’s total denied applications to 10 (read: “SEC Rejects 9 Bitcoin ETF Proposals”).

That comes on the heels of last month’s disapproval of a physically backed Bitcoin fund from the Winklevoss twins (read: “SEC Again Rejects Winklevoss Bitcoin ETF”).

Crypto-enthusiasts are left with few options to obtain Bitcoin exposure in a U.S.-based, exchange-traded package. In fact, only one ETF issuer, ARK, allocates to Bitcoin in its funds at all.

How To Get Bitcoin Exposure

ARK achieves exposure to Bitcoin via the Bitcoin Investment Trust (GBTC), which functions as a physical trust that owns and stores Bitcoins on its investors’ behalf.

The REX BKCM ETF (BKC) can also invest in GBTC, dedicating up to 15% of its portfolio to the trust. (At the moment, however, the fund does not maintain such a position.)

Three of ARK’s ETFs allocate to GBTC: the $1.27 billion ARK Innovation ETF (ARKK), the $657 million ARK Web x.0 ETF (ARKW) and the $174 million ARK Industrial Innovation ETF (ARKQ).

Of these three, ARKW has the highest allocation, with a whopping 0.29%. ARKK holds 0.21%, while ARKQ holds 0.10%. While scant at best, ARKW remains the highest-weighted ETF to Bitcoin, and with this week’s events, we deemed it ETF Of The Week.

Stepping Back From Bitcoin

Once, ARK kept a sizable, 6-10% position in Bitcoin in both ARKW and ARKK, which had contributed to both funds’ meteoric rise throughout 2017. Starting in January, however, ARK had substantially stepped back from that position (read: “Barely Any Bitcoin In ARK ETFs”).

When I asked ARK CEO Cathie Wood, a Bitcoin true believer, why her firm had dumped GBTC earlier this year, she placed the blame on the IRS (read: “ARK Funds Disrupting ETF Industry”).

As it turns out, Bitcoin had been a little too profitable for her firm’s funds, and the position had come close to exceeding the IRS’ limit set for gross profits originating from unqualified income. Anything beyond that threshold, the IRS would have confiscated in full. So, to prevent a nasty tax shock to investors, ARK had unwound its Bitcoin position.

“The ground could still shift beneath us,” Wood told me in July. “But we feel like we’ve done right by our clients.”

Actively Managed Internet Exposure

All that said, ARKW has a lot more to recommend it than just a miniscule position in Bitcoin. It’s the rare case of an actively managed ETF that consistently manages to outperform.

Over the past year, ARKW has returned an astonishing 52%. In contrast, the SPDR S&P 500 ETF Trust (SPY) is only up 20%.

 

Source: StockCharts.com; data as of Aug. 23, 2018

 

ARKW’s outperformance is largely due to its out-of-the-box investment scope. The fund doesn’t just focus on tech or internet stocks, but specifically on those tech companies poised to benefit from the shift to cloud computing and mobile technology. And unlike many tech funds, it digs for stocks worldwide.

As a result, although ARKW holds many of the same FAANG stocks as its competitors, it gives them less portfolio weight. Instead, it emphasizes stocks that might fall outside other ETFs’ scope, such as Chinese e-powerhouse Tencent Holdings (6%) and semiconductor heavyweight NVIDIA (5%).

ARKW’s top holding, however, is Tesla (TSLA), which may give pause to some investors worried by the drama over Elon Musk’s intent to take the company private. ARKW dedicates 7% to Tesla.

(Check out the ETF.com stock finder tool to see which individual stocks are in which ETFs.)

Contact Lara Crigger at [email protected]

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