First ever NFT ETF: Can it offer investors thematic exposure?
Defiance ETFs, a registered investment advisor and fintech asset manager, has launched the first ever exchange-traded fund (ETF) for non-fungible tokens (NFTs). An ETF is a basket of securities bought and sold on a stock exchange.
The fund, which has an expense ratio of 0.65% and is traded under the ticker symbol NFTZ, offers investors thematic exposure to NFT ecosystems, as well as to the blockchain technology that underpins it.
Launched on 2 December this year, the first NFT ETF Defiance Digital Revolution tracks the performance of publicly listed companies that are either active in the NFT space or planning to enter it through the BITA NFT and Blockchain Select Index.
The world’s first NFT and blockchain focused index is facilitated by BITA’s own thematic data classification methodology.
It is essentially a rules-based index, which is rebalanced on a quarterly basis. It consists of the common stock (or depositary receipts) of companies listed on North American and European exchanges that are building NFT cryptocurrency trading platforms or developing blockchain-related technology for cryptocurrency mining, cryptocurrency banking or related services.
The blossoming NFT market generated $10.6bn in NFT trading volume during the third quarter of 2021, an increase of 704% over the previous quarter, while the blockchain sector, which records the ownership of such digital items, grew 25% quarter-over-quarter during that same period.
A possible reason for this explosive growth is that a digital certificate of ownership has a plethora of benefits. NFTs are seen as a key to unlocking the market for collectibles, as every NFT is unique and cannot be divided or merged.
This improves the tokenisation of individual assets. As new products emerge, the NFT industry becomes more diverse, which could attract more users and enable a variety of new use cases.
What is an NFT ETF?
Investors today can buy or create an NFT with digital wallets or cryptocurrencies, which can require some level of expertise or technical understanding. The new ETF for NFTs aims to offer a more simple and convenient experience for those looking to enter the NFT space.
The fund is not actively managed. It would not sell a security due to current or projected underperformance unless that security is removed from the index or is required upon a reconstitution of the index.
It’s non-diversified, which means that it may invest more of its assets in the securities of a single issuer or a smaller number of issuers than if it were a diversified fund.
The NFTZ portfolio contains a total of thirty four firms, including high-profile companies such as Coinbase, Silvergate Capital and eBay.
For example, one of the high-profile firms is Silvergate Capital, a leading crypto-focused bank which handled $162bn in transfers on its Silvergate Exchange Network during the third quarter of 2021.
The chief investment officer at Defiance ETFs, Sylvia Jablonski, believes that NFTs challenge the paradigms of ownership, property and value.
“The virtual sky's the limit for NFTs and they are the first asset class stored digitally that can represent a physical asset, moment in time, a piece of art, a song or a photograph,” she told Capital.com.
“Since NFT activity takes place on the Ethereum blockchain, you can programme commerce on to it so the term ‘starving artist’ hopefully will no longer exist. An artist can instead cut out the middleman and gain lifelong royalties directly from his/her digital art work.”
How does the NFT ETF work?
NFTZ is traded on the New York Stock Exchange. It seeks to track the composition of the BITA NFT and Blockchain Select Index.
There are three eligibility routes for inclusion to the first NFT-focused ETF (NFTZ):
thematic revenue exposure for companies that derive revenues from crypto asset management and trading, crypto banking, payments and services, crypto mining, crypto mining hardware or blockchain technology
NFT exposure for companies that offer services or investment in internal and external projects targeting the issuance, creation, and commercialisation of NFTs
All components of the BITA NFT and Blockchain Select Index are weighted between a minimum of 0.5% to a maximum of 4%.
NFT ETF analysis
A major benefit of the NFTZ portfolio is that it offers equity exposure specifically connected to the issuance, creation and commercialisation of NFTs, which is its key differentiator compared to a handful of similar ETF products launched in the US this year.
The launch of the first NFT ETF signals a positive step for Defiance ETFs more broadly. The company is attempting to break into the burgeoning NFT space by harnessing the unique characteristics of digital assets.
This includes the fact that ownership is secured by the Ethereum blockchain with no third-party involvement, guaranteeing that no one can modify the record of ownership.
However, as is the case with many rapidly-growing sectors, the use of blockchain technology to transact in digital assets remains a relatively new and untested frontier with a limited operating history.
Another factor to take into account is that investments in non-US securities involve certain risks associated with foreign currency fluctuations or political and economic conditions.
The Blockchain Select Index is expected to concentrate its investments in the securities of cryptocurrency and blockchain companies. Defiance ETFs notes that the value of the fund’s shares may rise and fall more than in a more diversified fund.
Since its launch on 2 December, NFTZ has already fallen by over 3%, losing 8% on 3 December. Such price movements highlight the volatility of NFT-related securities.
“There’s not a lot that distinguishes an ETF which claims to get you exposure to the NFT space from an ETF that is just tracking cryptocurrency or decentralised finance,” said Dave Nadig, chief investment officer and director of research at ETF trends.
Is the NFT ETF a good investment?
Whether the NFT ETF is a good investment for you depends on your personal circumstances and risk appetite. NFTs are an emerging niche. You should do your own research, evaluate the level of risk you are prepared to accept before investing. And never invest money you cannot afford to lose.
What is the future of the NFT ETF?
NFTZ fell by -5.02% in just one day (14 December 2021). Growth could depend on the NFT ETF achieving broader adoption.
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