Portfolio Manager breaks down how he’s gauging quality in a wide array of strategies
The United States Securities and Exchange Commission (SEC) recently approved a set of generic listing standards for spot cryptocurrency ETFs. This regulatory decision removes the requirement of a time-consuming case-by-case approval and is likely to result in a massive influx of crypto ETFs onto US markets. While the US crypto ETF market is now mostly comprised of products tracking bitcoin and ethereum, the new rules could see a much wider range of products, some tied to blockchains like solana and XRP, or others tracking memecoins.
The oncoming wave of US crypto ETFs may be worth noting for Canadian advisors, both for their own capacity to access those securities and for what this represents in a rapidly evolving sector of the market. Michael Zagari, Investment Advisor & Associate Portfolio Manager at Wellington-Altus Private Wealth and avowed user of blockchain technology in client portfolios with ETFs, explained some of what excites him about this new wave of ETFs and what introduces some areas of concern. He outlined how advisors who are either curious about these products or fielding new questions from clients can work to assess the quality and utility of a crypto product.
“What I like about what's happening right now is innovation in the blockchain space is showing signs of acceleration. Things are moving so fast to the point where investors have an abundance of options. But there are areas where investors need to be cautious,” Zagari says. “There are blockchains that I believe have the potential to thrive and have the network effects in place to achieve mass adoption. Then you have blockchains that are community-based but not utility-based, and these are more like Dogecoins… You’re getting a flood of options for investors who, to be honest, are still wrapping their heads around bitcoin and ethereum. If advisors are recommending that their clients buy these ETFs without understanding the underlying technology, that’s where trouble is likely going to happen.”
Zagari’s view is that while the price appreciation of a particular cryptocurrency can be seen as highly compelling, its role in a portfolio should be assessed based on the utility of its underlying blockchain technology. Bitcoin’s utility is to store value in a secure, decentralized place. XRP’s value is to process cross-border payments within a fast and low-cost platform. The question that Zagari asks himself before investing in a particular ETF that shows correlation to the underlying blockchain’s token, is whether its underlying blockchain provides enough utility to be taken up widely and benefit from network effects.
Amid a flood of new products on US markets, tracking a range of different blockchains, Zagari will be keeping that value proposition in mind for himself and his clients. He notes that there will likely be periods of extreme hype as new products hit the market and advisors may need to justify why they avoided a product that gained double digit percentages in a matter of days or hours. A clear understanding of which blockchain represents useful technology and which blockchain doesn’t should help advisors justify their decisions.
Achieving that state of informed decision making requires education. Zagari argues that Canadian advisors need to “step up” their education on blockchain just as they have on the use of AI. These tools, he argues, will be essential to functioning as an investor or advisor over the next decades. That education, he says, is so important because buying the asset itself will be easier and easier. This new wave of ETFs represents another step towards extremely easy access to products, some of which might have merit and some of which might be little more than a meme. Zagari advocates for a triaging approach to these new products, where they are first assessed on the question of blockchain utility, before being assessed by standards of investment suitability for a particular client.
“Advisors are at the point right now where if they don't step it up on the education and if people are just buying it on hype, they're going to get burned,” Zagari says.
