Summary The Schwab Crypto Thematic ETF seeks to provide exposure to companies exposed to the cryptocurrency theme. Despite a solid 132% return since inception, STCE has underperformed peers like BITQ and FDIG. STCE's index methodology results in significant weights to some relatively small companies. I am bullish on Bitcoin and view Bitcoin ETFs as a better crypto play than STCE. The Schwab Crypto Thematic ETF ( STCE ) is an ETF which seeks to deliver exposure to companies that are poised to benefit from the development or utilization of cryptocurrencies. STCE was launched in August 2022 and currently has $106 million in net assets. The fund has a total expense ratio of 0.30% and currently holds 42 securities. While I expect crypto-related assets to do well in the near term, STCE is not my preferred way to play the sector. Management Fee Is Reasonable STCE charges a total expense ratio of 0.30% which I view as reasonable compared to other funds which offer exposure to the crypto industry. Comparable funds include the Bitwise Crypto Industry Innovators ETF ( BITQ ) which has an expense ratio of 0.85%, the VanEck Digital Transformation ETF ( DAPP ) which has an expense ratio of 0.51%, and the Fidelity Crypto Industry and Digital Payments ETF ( FDIG ) which has an expense ratio of 0.39%. Additionally, STCE's expense ratio is reasonable compared to the suite of recently launched ETFs which hold cryptocurrencies directly. The largest Bitcoin ETF, the iShares Bitcoin Trust ETF ( IBIT ) charges a fee of 0.25%. The iShares Ethereum Trust ETF ( ETHA ) also carries a fee of 0.25%. Historical Performance Overview As shown by the chart below, STCE has delivered a total return of 132% since inception. While this level of return is solid on a standalone basis, it is less compelling compared to peer funds. In the time since STCE's inception, BITQ has delivered a total return of 159% while FDIG has delivered a total return of 135%. Perhaps the most important thing to note is that all of these funds have significantly underperformed Bitcoin itself, which has delivered a total return of 337% over the same time period. I believe the reason for this is that Bitcoin has received a far greater level of adoption than any other cryptocurrency. There are a few reasons for this including the fact that Bitcoin has a longer history than other cryptocurrencies and has delivered stronger long-term results for early adopters compared to other cryptocurrencies. I expect this trend to continue as Bitcoin is now easier to access, due to the listing of Bitcoin ETFs, relative to other cryptocurrencies. Moreover, it should also be noted that STCE's largest holding, MicroStrategy ( MSTR ), has delivered outsized gains compared to STCE's other holdings (5 largest current holdings shown below.) As a Bitcoin treasury company, MSTR's focus has been on buying Bitcoin. Thus, without the impact of MSTR (which is primarily a price play on Bitcoin itself), STCE's performance relative to Bitcoin would have been even worse. Data by YCharts Data by YCharts Index Methodology STCE seeks to track the Schwab Crypto Thematic Index, which is constructed using a proprietary rules-based methodology. STCE's prospectus outlines the four-step process: 1) Each company in the eligible universe is scored based on its exposure to the Theme, their “Thematic Beta”. Each company’s Thematic Beta is calculated by applying a proprietary natural language algorithm using keyword terms to review large volumes of publicly available data, including datasets and documents... (2) Each company with a Thematic Beta score greater than zero is then mapped to one or more common equity securities, including ADRs, GDRs and EDRs, listed on exchanges in the Eligible Trading Venues (the Index Universe). If a corresponding security cannot be identified then the company is removed from consideration... (3) Liquidity and investability screens are then applied to each security in the Index Universe. Securities that do not meet the screen criteria are removed from the Index Universe... (4) The remaining securities in the Index Universe that have passed the applicable liquidity and investability screens are ranked by a function of their Thematic Beta and the weight of the security from the previous rebalancing (if applicable). Up to 50 companies are kept in the Index Universe. The securities are then reviewed by the index provider to ensure that they are positively exposed to the Theme based on one or more factors and business metrics applied by the index provider... One key thing to note is that STCE's index methodology differs from traditional market cap weighted index approaches, as a larger company is not necessarily guaranteed to make up a larger part of the fund. For example, STCE's second-largest holding IREN Ltd. (IREN) has a market cap of just $3.3 billion, while STCE's fourth-largest holding Coinbase (COIN) has a market cap of roughly $88 billion. The thematic beta approach is useful to ensure that larger companies which have some crypto exposure, but are mostly driven by exposure to other businesses, have a smaller weight in the index compared to companies that are more directly exposed to the crypto industry. However, the thematic approach also results in less concentrated exposure to the biggest companies with crypto exposure, such as MicroStrategy and Coinbase. Holdings Overview STCE is a fairly concentrated fund as it holds just 42 securities. The fund's top 5 holdings account for 42% of the fund's assets. One thing to note is that, due to the methodology discussed above, the largest market cap companies in the index such as MicroStrategy and Coinbase have exposures which are significantly lower than would be the case if the index was market cap weighted. On the other hand, much smaller companies such as Iren Ltd. and Cipher Mining have much larger exposure than would be the case if the index was market cap weighted. One interesting thing to note is that STCE has some exposure to companies with minimal exposure to the crypto theme. For example, the fund currently holds shares of PayPal (PYPL), Cboe Global Markets (CBOE), WisdomTree, StoneX Group (SNEX), Nvidia (NVDA), CME Group (CME), Intercontinental Exchange (ICE), and BGC Group (BGC). Together, these companies account for nearly 10% of STCE which is nearly as much as the fund's largest holding, MicroStrategy. While the companies mentioned here all have a small degree of exposure to crypto, I would argue that it is not a major driver of value for most of these companies, and thus these stocks are likely to move based on factors unrelated to crypto markets. STCE is primary focused on U.S. domiciled companies (76% of the portfolio) but also has exposure to Canadian domiciled companies (15.7% of the portfolio) and smaller exposures to companies from other countries. Charles Schwab Charles Schwab My Preferred Alternative to STCE My preferred way to gain exposure to the cryptocurrency theme is through Bitcoin ETFs. Specifically, I have owned the iShares Bitcoin Trust ETF since its early days of trading and continue to hold it. I am very bullish near-term on Bitcoin itself, as I believe the conditions are in place such that a melt up is likely. Positive drivers for Bitcoin in the near-term include the recent halving event earlier this year, inflows for recently launched Bitcoin ETFs, increased institutional investor interest, a more friendly regulatory environment under a Trump administration, and the recent emergence of options on Bitcoin ETFs which have potential to drive a squeeze higher. I think the bull case was well covered by Seeking Alpha contributor Stony Chambers Asset Research in a recent piece, IBIT Options And Insatiable Corporate Demand: A Historical Squeeze Is Coming . Given my bullish view on Bitcoin, one might wonder why MicroStrategy is not my preferred alternative to STCE given that fact that it is a levered play on Bitcoin. The reason why I prefer to own Bitcoin ETFs is that MicroStrategy currently trades at a significant premium to its Bitcoin asset value. I expect the company to aggressively issue stock over the next few months to buy Bitcoin. My view is that this could result in relative underperformance of MicroStrategy as the stock moves down to trade closer to its Bitcoin asset value while Bitcoin itself continues to move higher. Conclusion STCE represents one way for investors to get exposure to companies which are exposed to the cryptocurrency industry. The fund charges a reasonable fee and has performed fairly well historically on a standalone basis. However, STCE has underperformed its peer funds since inception and has significantly underperformed Bitcoin itself. While STCE has exposure to companies that are heavily exposure to the cryptocurrency industry, it also has nearly 10% exposure to companies which are primarily driven by other factors. I view this as a negative, as STCE is not a true pure play vehicle. I am currently bullish on Bitcoin but prefer to express this view through Bitcoin ETFs as opposed to owning STCE.
