Evolving Sectors, Crypto’s Future, & Enhanced Income ETFs

Subscribe to this podcast on:

On the most recent episode of ETF Prime, VettaFi’s Roxanna Islam, associate director of research, dove into the evolution of the communication services sector and related ETFs with host Nate Geraci. Hashdexs co-founder and CEO Marcelo Sampaio followed with a discussion of launching the first ’33 Act bitcoin futures ETF, and then Amplify ETFs founder and CEO Christian Magoon was on to talk about their ETF lineup and funds of note.

In a volatile first quarter, the two top performing sectors by a wide margin were communication services and technology as measured by the Select Sector SPDR ETFs, Geraci explained: Communication Services Select Sector SPDR Fund (XLC) is up 23% YTD while the Technology Select Sector SPDR Fund (XLK) is up 21% YTD. Islam believes that the rise in technology and adjacent sectors this year after a dismal performance in 2022 is likely due to the anticipation of an end to the Fed rate hiking cycle.

“We’ve seen investors’ interest return back to anything that has to do with growth, innovation, and technology,” Islam explained.

The addition of banking sector stress has also been the likely catalyst for investors seeking refuge in some of the biggest large-cap companies, such as the FAANGs, including Meta, Apple, Amazon, Google, and Netflix. Meta, Netflix, and Google, while tech-oriented companies, are classified as communications services and rely heavily on metrics such as time spent on apps to boost ad revenue instead of a measurement of units sold as Apple utilizes.

The Evolution of the Communication Services Sector

The current-day communications services sector was reclassified in 2018 from the telecom sector, which previously held companies such as AT&T and Verizon. The reclassification recognized a changing technology landscape where communication spread beyond telephones to the internet and social media.

“Now the sector holds companies that not only are a lot newer but also growthier, more tech-adjacent companies,” explained Islam, and makes up roughly 8% of the S&P 500.

Other ETFs that offer exposure to the sector include the Vanguard Communication Services ETF (VOX), the Fidelity MSCI Communication Services Index ETF (FCOM), and the iShares Global Comm Services ETF (IXP), but XLC is the largest by far with more than $10 billion in AUM. Islam explained that all four funds are market-cap weighted, and investors looking to allocate to the space through any of the funds would inherently carry heavy weighting to the mega-caps in the space, specifically Meta and Alphabet/Google, which comprise anywhere from a third to half of the weight in all four ETFs.

For investors looking to avoid overexposure to the mega-caps, ETFs like the EWCO (Invesco S&P 500 Equal Weight Communication Services ETF) can offer broader exposure across the communications services sector, while the First Trust S-Network Streaming and Gaming ETF (BNGE) invests internationally and includes gaming and streaming giants like Nintendo and Sony, and is an alternative take on the evolution of the communication services sector.

Bringing a ’33 Act Bitcoin Futures ETF to Market

Hashdex’s co-founder and CEO Marcelo Sampaio was on next to talk crypto and bring the first 1933 Act bitcoin futures ETF, the Hashdex Bitcoin Futures ETF (DEFI), to market last year. Hashdex was founded in 2018 to bring the kinds of funds to market that there was growing interest in but that no one was offering. Hashdex brought the world’s first crypto ETF to market in 2021, the Victory Hashdex Nasdaq Crypto Index Fund LLC, which trades on the Bermuda Stock Exchange.

“Our approach is really not trying to change regulations — that takes too long, that is too hard,” Sampaio explained. Instead, Hashdex works within the existing framework to build out products and initially launched in Bermuda before moving on to Brazil, where the fund became the second largest ETF on Brazil’s Stock Exchange.

Hashdex launched DEFI in September 2022 in the U.S. as a 1933 Act fund which Sampaio describes as the same as buying the bitcoin futures directly as opposed to existing 1940 Act funds that needed to utilize leverage and other mechanisms to capture bitcoin futures prices. It allows for greater efficiency, and because it is a ’33 Act structure, if and when the SEC approves a spot bitcoin ETF, it can switch from futures to spot exposure as opposed to ’40 Act ETFs that would need to convert.

Conversation also included the role of the macro environment on crypto, current bitcoin performance, and an outlook for crypto looking ahead.

How to Amplify Your Portfolios

Last on was Christian Magoon, Amplify ETFs founder and CEO, to discuss their ETF lineup and ETFs of interest right now. According to Geraci, Amplify ETFs are currently in the top 20% of issuers by AUM and the top 15% by flows in 2023.

Amplify started in 2016 with the launch of the first online retail-focused ETF, the Amplify Online Retail ETF (IBUY), followed later that year by the Amplify CWP Enhanced Dividend Income ETF (DIVO), which is now the largest ETF in the Amplify suite.

Amplify hopes to bring value to investors through a “diversified product line: that’s the biggest lesson and takeaway from prior experience from Amplify is to make sure we’re not only offering door-opening, unique thematic ETFs but also solid income ETFs with some core products that are additives in investor’s portfolio,” Magoon explained.

DIVO is one such ETF that grew from $400 million in assets in 2021 to nearly $3 billion AUM today. The fund is actively managed and offers exposure to blue-chip companies while generating income from dividends and writing covered calls on the underlying securities. DIVO has a 3-year total annualized return of 18% and a 5-year annualized total return of 11% and is a 5-star Morningstar-rated ETF.

Amplify also offers the Amplify Transformational Data Sharing ETF (BLOK), an actively managed crypto equity ETF up nearly 40% YTD.

“We’ve been out in the market with BLOK since the beginning,” Magoon explained. “We’ve seen several cycles in bitcoin and digital asset prices and survived. The big lesson that I would impart to investors is this is cyclical, and the volatility involved in investing in digital assets, crypto, or blockchain equity ETFs often shakes people out at the wrong time.” Magoon recommends a long-term buy-and-hold strategy with a risk-managed approach.