Dear Reader,
I have mixed feelings about exchange-traded funds (ETFs).
They remind me of an “easy” button for trading a basket of stocks. Unlike mutual funds, they can be traded throughout the day just like any other equity. They are mostly passively managed funds that track an index, an underlying asset class, or a sector-specific basket of stocks.
It’s a massive business that generates billions in fees for those who manage the ETFs and provides financial services companies and advisors an “easy” button for their clients. If used well, ETFs can be great vehicles for both investing and for trading.
In 2002, the net assets of ETFs in the U.S. sat at just $102 billion. Today, that number has skyrocketed to an impressive $5.5 trillion. Bank of America estimates that number will grow by a factor of 10 to $50 trillion by 2030.
However, there are a couple of things to be aware of.
ETFs are often the source of market distortions. As the ETF industry has grown so large and deployed so much capital, ETFs can artificially drive up the price of stocks held in the ETF.
As ETFs ingest more capital, the largest percentage of their holdings gets pushed into large-capitalization stocks that have enough liquidity for the ETFs to put the capital to work. This forces the ETFs to be overweight on the larger stocks, even if they aren’t the best fit for a sector-specific ETF and are overvalued.
And yes, the same thing can happen to the downside. As an ETF experiences large capital outflows, it will artificially cause a stock to trade well below a reasonable valuation.
The selling has nothing to do with the value of the underlying stock… It’s only the result of billions of dollars flowing out of an ETF. For smart investors, ETFs can be a great buying opportunity for individual equities. For those investors who buy into an ETF comprising stocks that are all grossly overvalued, they can be a disaster.
The other thing to be keenly aware of is exactly what stocks are in an ETF. ETFs are marketed heavily to empower investors to gain exposure to some popular trend or asset class.
A perfect example is a recent filing by Goldman Sachs with the U.S. Securities and Exchange Commission (SEC) to offer a cryptocurrency ETF focused on decentralized finance (DeFi). This is one of the hottest sectors in the blockchain industry right now.
That would be an easy ETF to market, right? Hot sector… Big gains are implied…
But there is one major issue.
The Goldman Sachs Innovate DeFi and Blockchain Equity ETF won’t be comprised at all of digital assets and cryptocurrencies in the DeFi space. In fact, it will have very limited exposure to companies that are working in the space, as most of the leading companies are still privately held.
While the holdings are not yet finalized, this ETF will likely be made up of companies like Nokia, Facebook, Alphabet (Google), Accenture, Cisco, Microsoft, IBM, Intel, Sony, and others. These are examples of large-cap companies contained in the Solactive Decentralized Finance and Blockchain Index, which the Goldman Sachs ETF is designed to approximate.
And if it isn’t obvious yet, these companies have almost nothing at all to do with DeFi. I would never recommend any of these names as a way to gain exposure to this exciting high-growth sector of the blockchain industry.
However, I do know exactly how to help investors access the DeFi markets directly by owning the most promising cryptocurrencies that are enabling the next generation of financial services.
And I’ll be revealing all the details in a brand new investment research project that I have been preparing for years. It launches on August 25.
For those who are investing in ETFs, it’s always worth taking an hour or two to analyze the holdings of the ETF and the stocks that make up most of the ETF.
I’m always looking to see if the ETF really does provide leverage to the sector that it claims to represent, and if the stocks that make up most of the ETF are trading at reasonable valuations.
If we can understand these two things, we’ll do much better with our ETF-related investment returns.
A big $11 million non-fungible token (NFT) sale just caught my eye. At first glance, it may seem ridiculous. But if we dig a little deeper to understand, we can see why NFTs are such a promising trend.
As a reminder, NFTs are digital collectibles. They allow us to cryptographically secure and authenticate unique assets or data on a blockchain.
And the NFT sale that caught my eye was around the upcoming release of an animated series called Stoner Cats. The animated series was created by famous actress Mila Kunis.
Stoner Cats
Source: Stoner Cats
The NFTs are digital representations of the characters in the series. Basically, they are digital pictures of cats. I know it’s crazy, but please stick with me.
There were just over 10,000 NFTs available per this release, and each was priced at 0.35 ETH – Ethereum’s cryptocurrency. As I write, one ETH is worth over $3,000, which means the Stoner Cats NFTs raked in over $8 million.
Oh, and the NFT release sold out in 40 minutes. Sounds crazy, right?
Well, there is more to the story.
These NFTs also provide the owner with early access to the animated series. The NFT itself is basically the key to access early viewing rights.
What’s more, the team behind these NFTs plans to link them to future digital-to-physical transactions. This might be as simple as sending a physical poster of the animated series to NFT holders. It may give holders voting rights when it comes to merchandise design or even the future direction of the series.
In other words, NFT holders could have input into how the Stoner Cats series advances over time.
And these NFTs may even give holders access to the producers or the voice actors and actresses at some point in the future. Maybe that’s a Zoom call with the key people behind the series. Fans would love that.
While the future details haven’t been hammered out yet, I think we get the picture. This is how NFTs should be used. Anyone who has a franchise or a brand could create NFTs that grant special access or voting rights to holders.
Anyone interested in some Brownstone NFTs? Ha!
To me, this is the modern version of a fan club. Many readers may remember those. Fans of a particular franchise or brand could sign up for a mailing list to stay engaged with it.
Of course, NFTs can offer fans a much more immersive engagement experience. And they can raise significant revenue for creators at the same time. The old fan clubs could never do that.
And many NFTs are designed in such a way that the creator/artist receives a commission anytime their work is sold in the future. That’s one of the advantages of blockchain technology.
This is something that is impossible to do with physical collectibles. An artist’s work is sold once, and then there are never any future earnings associated with that piece of art.
So this Stoner Cats release shows us the true magic behind NFTs. It’s just more proof that this trend has plenty of legs.
And as I have mentioned several times, we have been working on ways for normal investors to gain access to this trend and other powerful trends in the blockchain space. If you’d like to learn more about investing in NFTs, you can go right here for all the details.
An early stage company I’ve been tracking for years just had a major venture capital (VC) round. The company is called Algolia. And it just raised $150 million in its Series D funding round. This values the company at an impressive $2.25 billion.
Algolia is a company I wouldn’t expect anyone to know about. It’s essentially a “search as a service” (SaaS) company. Algolia produces application programming interfaces (APIs) that allow any software application or website to enable its own search engine just by dropping in a few lines of code.
For example, I’m sure many of us have used the search box on our favorite websites to look for specific content. That search is most likely powered by a third-party API. And depending on the site, it could very well be Algolia’s API.
In fact, I’m sure nearly everyone reading this has used Algolia’s technology without knowing it. The company has over 10,000 customers globally. And it handles more than 1.5 trillion search queries each year.
What I love about Algolia is that its business model is the same as Twilio and Stripe. As regular readers know, these are two of my favorite companies in the world.
Twilio provides APIs for communications. It allows software apps and websites to send messages directly to consumers. For example, Uber uses Twilio’s tech every time it sends customers a message. It is the same technology that enables us to send a quick message to a driver on their way to pick us up.
This is something that would be impossible for most companies to handle themselves. It’s just too complex. That’s why Twilio is such a great company.
And for the record, we booked a triple on Twilio (TWLO) on two separate occasions in my Exponential Tech Investor service. The first was a 239% gain in October 2016. And the second was a 211% gain in December 2018.
As for Stripe, it provides the APIs that make e-commerce possible. When we buy products on the internet, there’s a great chance we are using Stripe’s technology. Apart from Amazon and a few others, the merchants we buy from online could not possibly produce and manage their own e-commerce platforms.
Well, Algolia does the same thing for search. It provides an incredible service, it’s growing exponentially, and its margins are very high. That’s the formula for big investment gains if the valuation is right.
So this is absolutely a company we need to be tracking going forward. I hope that Algolia can remain independent and go public at a reasonable valuation, which would provide us with a fantastic investment target…
Although I would not be surprised at all to see a company like Twilio step in to acquire it.
Let’s add Algolia to our early stage watchlist.
We’ll wrap up today with another fascinating early stage company on my radar. This one is in the biotech space.
Deep Genomics just raised $180 million in its Series C funding round. This is a massive Series C raise, and it’s all because Deep Genomics is on the bleeding edge of the biotech industry.
As my longtime subscribers know, the convergence of artificial intelligence (AI) and biotechnology is one of the biggest trends we are following here at Brownstone Research. And Deep Genomics is one of my favorite “convergence” companies in this space.
That’s because this company is developing an AI-enhanced approach to genetic editing. Ultimately, Deep Genomics is developing a technology that will compete with CRISPR.
It’s working on a form of RNA therapeutics called oligonucleotides. These genetic medicines use “steric blockers” to prevent targeted cells from producing proteins.
This approach is great for diseases that occur when a genetic mutation causes certain cells to produce the wrong proteins. Deep Genomics can correct this simply by turning those cells off.
Theoretically, this approach is simpler than CRISPR, which is designed to “cut” out the mutation and replace it with the correct strand of DNA.
That said, this approach still needs to be proven in clinical trials. And that’s where the AI comes in.
Deep Genomics’ AI has identified the most optimal cell targets to create a pipeline of nine new therapies for development. The company expects four of these to enter clinical trials by 2023.
And Deep Genomics just signed a major deal with BioMarin. That’s a strong signal that the industry thinks highly of Deep Genomics’ approach.
So this is another company to add to our early stage watchlist. I’m very excited to follow Deep Genomics going forward. And I can’t wait to see the early data on the efficacy of its approach.
And bigger picture, this could be yet another accelerant to the end of all human disease. I’m on record saying that we are no more than one or two decades away from curing all diseases of genetic origin.
This is just another tool in the tool kit for making that a reality. And to discover some of my current recommendations in this trend, readers can go right here to learn about the top biotech companies on my list.
Regards,
Jeff Brown
Editor, The Bleeding Edge
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The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
