Five of the worst first-year ETF performances are crypto-related

Crypto exchange-traded funds account for five of the seven worst debuts in the history of the ETF industry.

The funds launched in the heady days of 2021 - just in time to face the full force of 2022's market fury, Morningstar Direct data shows.

The results, from data provided exclusively to the Financial Times, exclude the performance of leveraged and inverse funds, which are not designed to be held for the long term.

All five focused on the once high-flying cryptocurrency sector or the related field of blockchain, in a new illustration of academic claims that thematic funds tend to launch near the peak of their theme, just before returns head south.

"Specialized ETFs are launched shortly after the peak of excitement around popular investment themes. In the years following launch, the underlying assets lost some of their initial overvaluation, as did the prices of specialized ETFs," Rabih Moussawi and colleagues wrote in an academic paper first published last year.

“Specialized ETFs appear to be suitable for over-optimistic investors,” said Moussawi, an associate professor of finance at Villanova University in Pennsylvania.

The much-hyped ProShares Bitcoin Strategy ETF (BITO), which lost a record $1.2 billion in investor money in the 12 months following its highly anticipated launch in October 2021, has grabbed plenty of headlines.

Its travails were far from unique, however, as a number of smaller ETFs posted even larger percentage losses than BITO's 70.4% first-year plunge, even if their dollar losses were smaller because of their small size.

The worst performer was the France-based Melanion BTC Equities Universe Ucits ETF (FR0014002IH8), which invests in crypto-related companies such as Marathon Digital Holdings, Riot Blockchain and MicroStrategy.

It launched in October 2021, the same month as BITO and just weeks before global markets peaked, only to plunge 76.9 percent over the following 12 months.

Likewise, the US-listed Global X Blockchain ETF (BKCH), which launched in July last year, plunged 76.7 percent in its first year of operation.

Invesco Alerian Galaxy Crypto Economy ETF (SATO), another October 2021 fledgling, wasn't far behind, falling 73.7 percent, while the First Trust SkyBridge Crypto Industry and Digital Economy ETF (CRPT) sold 69.4 percent in the 12 months ended September this year.

“Blockchain investing is closely related to Bitcoin and cryptocurrency in general, but it carries additional equity risk,” said Todd Rosenbluth, head of research at advisory firm VettaFi.

"Companies connected to the broader ecosystem have faced challenges as the price of Bitcoin has fallen sharply and demand for the technology has not grown as quickly as investors expected. They are penalized to the same or greater extent than Bitcoin futures-based products themselves," he added.

The only other non-leveraged or inverse ETFs that have had a worse first year than BITO are the

In a demonstration of the risks associated with holding leveraged and inverse vehicles for long periods of time, the worst debut year ever for an ETF was reported by Dublin-based exchange-traded commodity Leverage Shares 3x Roku (ROK3), according to Morningstar.

Anyone who had held the fund for 12 months since ROK3 launched in June 2021 would have seen 99.92 percent of their money evaporate, compounding the 76 percent decline in the US streaming platform's share price during the period.

A similar story of risk in holding short-term designed products can be found in the fortunes of the Switzerland-based 21Shares Short Bitcoin ETP (SBTC), which took the opposite side of BITO's bet, but over a different time frame. SBTC would have lost 86.2 percent of investors in its first year, as its birth in January 2020 was just as Bitcoin began its dizzying rise, rising 285 percent.

But Morningstar's data also suggests that a terrible first year doesn't necessarily sound the death knell for a fund.

The SPDR Portfolio S&P 500 Growth ETF (SPYG) fell 53.8 percent in its first year of trading in 2000-2001, but has since recovered to become a $12.2 billion fund.

Likewise, the iShares Global Clean Energy ETF (ICLN) plunged 56 percent in 2008-2009 but now holds $4.5 billion in assets, and the Invesco Solar ETF (TAN) plunged 68.2 percent in the same year but now holds $2.2 billion. Even ProShares has experience with this; his UltraPro Short QQQ (SQQQ) now has assets of $4.8 billion, despite losing 68.1 percent in 2010-2011.

Kenneth Lamont, senior fund analyst for passive strategies at Morningstar, believed that the crypto sector could be another sector that could recover.

“The people I talk to who are investing in Bitcoin are still reliably bullish because the potential use cases haven’t changed,” Lamont said.

"Many industry players have just rallied for the next bull run. Whether that happens or not, who knows, but if there is an investment case for Bitcoin, perhaps a balance will be found."