Trying to predict Bitcoin‘s next price movement is probably not the best way to go about long-term wealth creation. But we're increasingly seeing products related to cryptocurrency that have attracted tremendous attention. Here, we'll look at an interesting fund for those too risk averse to hold crypto, but are still interested, curious, and optimistic about the blockchain space as a whole.
A portfolio of low-cost index funds, in most circumstances, is the sensible choice for the core of your portfolio. Here, you might include passive investments like Vanguard Total Stock Market Index Fund and Vanguard All-World ex US Fund. But once you've established a strong core, you might think about adding one or more thematic funds as long-term plays.
Enter Amplify Transformational Data Sharing ETF (NYSEMKT: BLOK). The fund invests 80% of its assets in companies focused on the “development and utilization of blockchain technologies.” The fund is a bit expensive at 0.71%, but it also provides extreme convenience by bundling the best-in-class blockchain firms into a single security. The fund's 47 holdings contain household names — like PayPal and Square — but also some of the more niche firms in the blockchain space, like HIVE Blockchain Technologies.
3 main reasons to invest in the fund
For even the most hands-off passive investor, Amplify's blockchain exchange-traded fund (ETF) is interesting for a few reasons.
First, the investment thesis of the fund deals with blockchain as opposed to any one cryptocurrency. Needless to say, investing in a thematic ETF that holds many companies focused on a broad idea will diversify your risk nicely. Any time you own any single company — or in the crypto world, any single currency — you're exposed to the ups and downs of that single position. If you've followed any cryptocurrency for any amount of time, you already know the ups and downs can be both swift and significant. By holding an ETF, the probability of suffering a catastrophic loss is reduced.
Second, you remove the added risk of owning cryptocurrency directly. You may have heard the horror stories about fortunes lost due to a missing security key or a rogue hard drive gone missing. When you buy an ETF on an exchange, you don't need to worry about storage or security beyond that of the broker through which you bought the product. This can help quell investor concerns about losing everything with crypto.
Third (and this may not be a valid reason for investing for some people), it's fun. It's enjoyable to have skin in the game as we see emerging technologies evolve, and based on the degree to which we've seen blockchain technology grow so far, we have every reason to believe the space will continue to expand. The best thing about expressing this view through an ETF is that it doesn't require any ongoing maintenance on your part, and you can simply buy and hold for the long-term — a Foolish philosophy indeed.
Where to hold it
Given that the fund prides itself on the potential for growth, your Roth IRA could be an interesting spot to hold it. Remember, a Roth IRA contains after-tax money that won't ever be taxed again (assuming you've had the account open for five years). Should your investments grow substantially in the future, you'll have a tax-free nest egg sitting in your Roth.
Alternatively, the fund would still work in a 401(k) or other workplace plan, but it's unlikely that your plan will allow you to buy thematic ETFs. You could also buy the fund in a taxable brokerage account earmarked for long-term expenses, though you'll be taxed periodically on any realized gains as well as any dividends received or reinvested.
A great way to dip into the crypto world
Amplify's blockchain ETF is a compelling choice for those interested in the blockchain and cryptocurrency space but don't want the added risk or volatility of holding cryptocurrency directly. A great number of people are likely in this camp — one that's almost certainly going to gain more members in the coming years. Should you find yourself in a position to allocate some extra cash to stocks, give this thematic ETF a look.
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Sam Swenson, CFA, CPA owns shares of Vanguard Total Stock Market Index Fd Admiral Shs. The Motley Fool owns shares of and recommends Bitcoin, PayPal Holdings, Square, and Vanguard Total Stock Market ETF. The Motley Fool recommends the following options: long January 2022 $75 calls on PayPal Holdings. The Motley Fool has a disclosure policy.