The First Trust SkyBridge Cryptocurrency and Digital Economy Industry Foundation (ETF)NYSEARCA:CRPT) has been very hot, driving the cryptocurrency bull market to massive gains of 196.1% over the past year. However, while the ETF deserves praise for this outstanding performance, I am currently bearish on it and clearly biased due to two red flags lurking beneath the surface – its heavy exposure to a pair of volatile stocks and its high expense ratio.
What is the CRPT ETF strategy?
Before we look at the concerns, let's briefly review the CRPT strategy. According to fund sponsor First Trust, CRPT is “designed to provide exposure to companies that SkyBridge considers to be companies that are driving cryptocurrencies, cryptoassets, and innovations related to digital economies.”
The fund was launched in September 2021 and has $51.7 million in assets under management (AUM).
CRPT invests in companies from all aspects of the cryptocurrency landscape. This includes cryptocurrency exchanges like Coinbase (Nasdaq: Currency), Bitcoin (Bitcoin-dollar(miners like Marathon Digital)NASDAQ:MARA) and riot control platforms )Nasdaq: Riot), and semiconductor stocks such as Nvidia (Nasdaq: NVDA) and advanced micro devices (Nasdaq: AMD) (whose GPU chips are used by miners to mine Bitcoin).
It even includes big tech giants like Meta Platforms (Nasdaq: Meta) and the alphabet (Nasdaq:Google), who have several important components when it comes to cryptocurrencies, although it is certainly not a major part of their own business.
I would actually say that CRPT does a pretty good job of covering all the bases and casting a wide net when it comes to investing in companies involved in cryptocurrencies. The issue isn't really what she's investing in, but more about how much she's invested in some of her holdings, as we'll discuss below.
Massive exposure to just two stocks
CRPT owns 31 stocks, and its top 10 holdings make up an incredibly high 91.5% of assets, so it's a very concentrated ETF.
Below you'll find an overview of CRPT's top 10 holdings using TipRanks' holdings tool.
Not only do the fund's 10 largest holdings make up more than 90% of its assets, but only the two largest holdings, Coinbase and Microstrategy (Nasdaq:MSTR), representing 44.7% of the fund.
To be fair, Coinbase and Microstrategy have been great stocks over the past year, as rising cryptocurrency prices have seen their shares rise significantly. Coinbase is up 205.8% over the past year, and MicroStrategy is up 465.7%.
Although these stocks have performed well, investors should note that these stocks are still very volatile and usually decline significantly when the price of Bitcoin declines.
TipRanks' Smart Score system isn't enthusiastic about any of these stocks, giving Coinbase an Underperform Equivalent Smart Score of 2 and MicroStrategy a Neutral Equivalent Smart Score of 4. Smart Score is a proprietary quantitative scoring system for stocks created by TipRanks. It gives stocks a score from 1 to 10 based on eight market factors.
We're in the midst of a cryptocurrency bull market, so it's easy to forget that now, but it wasn't long ago that these stocks performed poorly as cryptocurrency prices plummeted in 2022, causing CRPT to decline 80.8% that year.
When the cryptocurrency market is booming, CRPT will perform well, but the next time it declines, investors may need to run for cover.
To zoom out a bit further, not only is over 44% of the fund in just these two top holdings, but 78.4% is allocated to just its top five holdings, which include volatile bitcoin mining stocks. There is simply no way around the fact that this is a significant amount of concentration in a few stocks, and volatile stocks at that.
Sky high expense ratio
My other concern about CRPT is that it is an expensive ETF with an expense ratio of 0.85%. This is significantly higher than the average expense ratio for all ETFs, which is currently 0.57%. An expense ratio of 0.85% means an investor would pay $85 in fees on a $10,000 investment per year.
These fees can accumulate over time. For example, if the fund returns 5% annually going forward and maintains its current expense ratio, an investor putting $10,000 into the fund would pay a whopping $1,049 in fees over 10 years. Paying high fees like this can eat into your portfolio equity over time, so it's always important for investors to be mindful of fees.
If the ETF continues to perform well, as it has over the past year, most investors won't mind paying the higher fees. But if the ETF underperforms again, as it did in 2022, these higher fees make matters worse.
Is CRPT stock a buy, according to analysts?
Turning to Wall Street, CRPT has a Moderate Buy consensus rating based on 27 Buy, five Hold and zero Sell ratings assigned in the past three months. CRPT stock's average price target of $15.56 indicates upside potential of 11.6%.
Takeaway: Caution is warranted
CRPT deserves a lot of credit for its strong performance over the past year. Although I'm bullish on the overall cryptocurrency market (and the ETF could continue to do well for a while if cryptocurrency prices continue to rise), I'm bullish on CRPT overall, given its massive position in just two Of volatile stocks with Smart disappointing. Results: Coinbase and MicroStrategy. This leaves investors with a lot of potential downside exposure.
Furthermore, the fund is very expensive, with a well above average expense ratio of 0.85%.
The fund has performed well over the past year, but it also fell more than 80% in 2022 when cryptocurrency prices were in a long-term downtrend, so investors should be mindful of that.
Investors have plenty of other options to learn about the cryptocurrency space. They can invest directly in cryptocurrencies such as Bitcoin and Ethereum (Ethereum-dollar) Or invest in Bitcoin through one of the many new, low-cost Bitcoin ETFs like BlackRock's iShares Bitcoin Trust (Nasdaq: EBIT) or ARK Invest's ARK 21Shares Bitcoin ETF (Bat:ARKB), which features fees that are a fraction of CRPT fees. In fact, many of these ETFs are waiving their fees right now as they compete to attract money, which suits investors.
For those who want to invest specifically in the types of cryptocurrency-related stocks that CRPT invests in, there are less expensive options that offer a bit more diversification and less concentration, such as the Fidelity Crypto Industry and Digital Payments ETF (Nasdaq: FDIG). It's worth noting that FDIG also features a large Coinbase position, but overall, its 10 largest holdings make up a more manageable 62.9% of assets, and its expense ratio is less than half of CRPT.
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