Innovation & Crypto ETFs: A Wild Ride

By Danielle Neziol, Vice President, BMO ETFs

(Sponsor Content)

In 2021, the Canadian ETF market once again showed its ability to innovate as the first jurisdiction to allow crypto-currency ETFs.

This reaffirms one of the core benefits of ETFs, as access to vehicles for harder-to-trade asset classes, where — just like gold and other commodities — ETFs have brought cryptocurrencies to the mainstream by providing efficient trading over the exchange.

We’ve now seen the listing of over 30 tickers across providers, with over $5 billion in assets.1 Starting in February 2021, and quickly followed by further products, Purpose Bitcoin ETF (ticker: BTCC) captured global attention and earned outsized trading volumes. For investors who can stomach the volatility, crypto-currencies via an ETF have provided another portfolio tool, with the benefit of low correlation to traditional asset classes.

A small crypto allocation can have meaningful impact on returns

Crypto-currencies provide quite a ride, from the sell-off in the summer, to the rapid rise in the fall, and now a further correction late in the year, they have experienced volatility of around 70% standard deviation since market entry, showing that a small allocation can still have a meaningful impact to portfolio returns.

Another ETF trend where we are seeing volatility right now is within innovation stocks. After a gangbuster run for innovation in 2020, many of these stocks reversed course, moving into correction territory by the end of 2021. This is due to several factors: the market rotated into value and out of growth, rising interest rates and yields added pressure on growth stocks’ future cash flows, and inflation fears pushed investors towards more defensive industries.

Despite these short-term macroeconomic challenges, we have not seen anything that threatens the long-term growth of these stocks. In fact, the main disruptive innovation platforms (genomics, fintech, next generation internet, autonomous technology) have become more relevant today than they were even a year ago; much has happened in 2021 to support these megatrends’ relevance in the future.

Genomic innovations combatting Covid-19

For example, genomic innovations have been front and center in combating COVID-19. The leaders in mRNA technology — such as Moderna and BioNtech — posted significant returns in 2021. The next generation of the internet saw progress on many fronts, notably the increased use of Nonfungible tokens (NFTs), the expansion of the metaverse and the increasing demand these advancements will place on cloud computing and cyber security infrastructure. Innovative companies are investing aggressively in the development and advancement of future technologies and will be positioned for a “winner takes all” advantage as these innovations mature.

The most bullish investors in megatrends believe innovative stocks are in “deep value” territory right now after a precipitous decline throughout the start of 2022. Whether you agree with this or not, valuations for these growth stocks are much more attractive now than they were 12 months ago, and this could provide a more attractive entry point to get access to these trends.

If 2021 showed us anything about innovative stocks, it is that single stock picking is hard and can expose investors to higher portfolio volatility. Investors should also be mindful of narrowly focused innovation ETFs which might miss out on areas of a megatrend as it grows and evolves. A diversified ETF such as the BMO MSCI Innovation Index ETF (ticker: ZINN) holds over 200 of the most relevant innovation companies globally, and equally weights each of the four innovation pillars (genomics, fintech, next generation internet and autonomous technology) to give investors maximum exposure to the most relevant global megatrends while minimizing stock specific risk.

The progress innovative companies are making is continuing to build, and it is still early innings for the companies exposed to these life altering trends. So even though the market is currently favouring more defensive assets due to rising inflation, this could be short-term noise for the exponential growth story of innovative stocks.

PS: Friday’s ETF Market Insights Webinar looks at how the Ukraine conflict impacts your investments. Here is the link to register:

Danielle Neziol is Vice President, BMO ETFs. Danielle as been part of the BMO ETF Team for over five years working in ETF product development, strategy, and most recently in ETF education for direct investors. In the past she has been engaged with with the exchanges, capital markets desks, index providers and portfolio managers to bring ETFs to market and today she is focused mostly on applying her expertise in the ETF business to support and educate investors. This blog was adapted from the wider report: BMO ETFs 2022 ETF Outlook.

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