Defiance launches first short blockchain companies ETF
Independent New York based ETF provider Defiance has launched the world’s first ETF that short sells blockchain-related companies.
The Defiance Daily Short Digitizing the Economy ETF (IBIT) will give inverse blockchain exposure by short selling the Amplify Transformational Data Sharing ETF (BLOK). The fund's prospectus says the short selling can be done in two ways. Firstly, Defiance portfolio managers can short BLOK themselves. Secondly, Defiance can get an investment bank to provide a swap.
BLOK, the ETF getting shorted, is actively managed and currently houses $544 million in assets. It holds blockchain companies, such as Coinbase and Silvergate, but also companies like CME Group and Accenture, whose core business is at a remove from blockchain.
The swap, or short position, will reset daily to ensure the fund is always give -1x the return on BLOK.
The fund charges a 4.70% annual fee. The fee includes the swap fee, Defiance’s management fee (0.95%), Amplify’s management fee (0.70%).
Bernie’s commentary – SARK replica
The inspiration for this ETF possibly comes from SARK.
Late last year, Tuttle, a small ETF shop, launched an anti-Cathie Wood ETF – SARK – which short sold ARK’s flagship fund. SARK gave retail investors a way to bet that Cathie Wood couldn't outrun mean regression forever. And did so while piggybacking on her high profile.
Launched with perfect timing, SARK surged as Cathie Wood's luck ran out and her fund's performance deteriorated. Within six months SARK gathered $500 million in assets. This year, it ranks among the top performing ETFs.
Its success has apparently spawned copycats, which is my interpretation of this launch today.
BLOK's story, after all, is pretty similar to Cathie Wood's. Actively managed, it saw tremendous outperformance in the months following the coronavirus crisis. Binging on growth stocks, it shot up 220% as central banks around the world sent real interest rates negative. The fund collected nearly $1 billion in assets and gained a cult following.
However, when financial gravity returned to markets late last year, BLOK's performance went splat. (It is down 65% since its November peak). Like ARKK, BLOK now has a dedicated inverse ETF too.
The commercial logic all makes sense. Still, I wonder if Defiance has made some mistakes here.
I'm put off by the fee. At 4.70% a year, this is one of the most expensive ETFs in the world. There’s three financial institutions charging fees--sure. And short selling always includes negative carry, as the dividends and rental fees owed to the lender have to be covered. Nevertheless, this still seems a bit high.
I also wonder if the timing is wrong. There's no good news anywhere for crypto at the moment. And this is reflected in the prices of bitcoin, ethereum--and all the companies that are geared to them. At today's prices, my gut feel is you'd be better going long crypto than short. But I could be wrong.