DAPP: This Red-Hot Crypto ETF Has Its Flaws

After a rocky 2022, the crypto market bounced back in a big way in 2023. Bitcoin (BTC-USD), by far the largest digital asset by market cap, is up 75% year-to-date, while Ethereum (ETH-USD), the second-largest, is up more than 50% over the same time frame. The crypto-focused VanEck Digital Transformation ETF (NASDAQ:DAPP) has taken advantage of this resurgent crypto interest to gain nearly 200% year-to-date.

While DAPP’s 2023 performance has been stellar, there are several pros and cons that investors should be aware of before making an investment decision on DAPP.

 

What Does the DAPP ETF Do?

DAPP is a crypto-focused ETF from ETF and mutual fund provider VanEck. It seeks to track the results of its underlying index, the MVIS Global Digital Assets Equity Index, which intends to “track the performance of companies that are participating in the digital assets economies,” according to VanEck. Its ticker alludes to decentralized applications or “dApps,” the user-facing smart contracts that exist on blockchains like Ethereum.  

DAPP launched in April of 2021, and it is still relatively small in the bigger investing picture, with about $64 million in assets under management (AUM). 

DAPP’s Holdings

DAPP features a fairly limited scope of holdings. It holds just 20 stocks, and its top 10 holdings make up 63.1% of the fund’s assets. Below, you’ll find an overview of DAPP’s top holdings using TipRanks’ holdings tool.

Aside from holding just 20 stocks, DAPP also lacks diversification in that outside of top holding Coinbase Global (NASDAQ:COIN) and top 10 positions in MicroStrategy (NASDAQ:MSTR) and Block (NYSE:SQ), the fund is pretty much dominated by Bitcoin miners and companies that make Bitcoin mining equipment. This includes companies like Terawulf (NASDAQ:WULF), Riot Platforms (NASDAQ:RIOT), Marathon Digital (NASDAQ:MARA), and Canaan (NASDAQ:CAN).

This isn’t a bad thing in and of itself, but for an ETF touting the digital transformation of the economy, it seems like a missed opportunity to invest in some of the many other interesting names that are involved in different aspects of the crypto industry. Plus, owning a dozen different miners doesn’t do much for DAPP’s diversification, as these stocks all more or less move based on the ups and downs of the price of Bitcoin.

Stocks that would have been interesting to include in a digital transformation ETF are semiconductor companies like Nvidia (NASDAQ:NVDA) and Advanced Micro Devices (NASDAQ:AMD) that provide the graphics processing units (GPUs) used by Bitcoin miners. Other interesting stocks would be dominant payment networks like Visa (NYSE:V) and Mastercard (NYSE:MA), which have invested time and resources in the crypto space and are adopting blockchain technology. 

How about CME Group (NASDAQ:CME), the parent company of the CME exchange, which, in addition to commodities in the energy and agricultural markets, provides futures and options trading for Bitcoin and Ethereum?

Shopify (NYSE:SHOP) would have been a solid inclusion as well, as the e-commerce leader has forayed into crypto in a variety of ways and is making it a bigger part of its strategy. Or, if the fund wanted to get even more creative and approach it from a different angle, it could even include something like Starbucks (NASDAQ:SBUX), which has incorporated NFTs into its popular loyalty program (with promising results).

As is, DAPP’s holdings are a mixed bag when it comes to their Smart Scores, as six of its top 10 positions feature a Smart Score of 8 or higher, while the rest feature neutral scores. The Smart Score is a proprietary quantitative stock scoring system created by TipRanks. It gives stocks a score from 1 to 10 based on eight market key factors. A score of 8 or above is equivalent to an Outperform rating.

DAPP itself has a neutral ETF Smart Score of 7.

Is Its Expense Ratio High?

DAPP’s expense ratio of 0.50% is somewhat middle-of-the-road. On the one hand, it is considerably higher than most ETFs that I would typically consider investing in. On the other hand, it should be noted that it isn’t as expensive as many of the other ETFs in the crypto space, where jarringly-high fees seem to be par for the course.

DAPP’s expense ratio is equal to that of the Global X Blockchain ETF (NASDAQ:BKCH), but it is considerably lower than that of the Bitwise Crypto Industry Innovators ETF (NYSEARCA:BITQ), which has a sky-high expense ratio of 0.85%, and the Amplify Transformational Data Sharing ETF (NYSEARCA:BLOK), which also has a much higher expense ratio of 0.75%. 

DAPP’s expense ratio of 0.50% means that an investor allocating $10,000 into DAPP will pay $50 in fees over the course of the year. Assuming the expense ratio remains consistent over time and that the ETF returns 5% per year going forward, this DAPP investor would pay $160 in fees over a three-year time frame and $280 in fees over a five-year time frame. Over the course of 10 years, the investor would pay $628 in fees.  

Is DAPP Stock a Buy, According to Analysts?

Turning to Wall Street, DAPP has a Moderate Buy consensus rating, as 75.41% of analyst ratings are Buys, 14.75% are Holds, and 9.84% are Sells. At $9.63, the average DAPP stock price target implies 15.6% upside potential.

Investor Takeaway

DAPP has been a strong performer year-to-date, and it deserves credit for that. On the downside, it isn’t particularly diversified, and I feel that it missed the opportunity to look beyond the usual suspects for like Coinbase and miners to add some compelling investments to the fund that are participating in the “digital transformation” in different ways.

Furthermore, its expense ratio isn’t great, but in fairness, it is lower than that of many of its competitors in the crypto space. Additionally, DAPP’s relatively small size could make it susceptible to market volatility.

Lastly, while DAPP has been a strong performer in 2023, it has actually lost about 50% since its inception in 2021. For these reasons, I can’t really call DAPP a compelling investment opportunity at this time. 

Disclosure