SQ - DAPP: Eyeing An Upside Target High Volatility & Valuation Are Key Risks

2023-12-28 16:44:29 ET

Summary

• Crypto stocks have seen significant price increases in Q4 2023, with some digital-asset equities outperforming Bitcoin and Ether by a wide margin.
• The VanEck Vectors Digital Transformation ETF has cleared two key price levels recently, but has a high-volatility rise and lofty valuation.
• DAPP is a small ETF focused on small-cap growth stocks, with a concentrated portfolio and a high-risk, high-return potential.
• I outline a key price level to watch on the upside while reminding investors that risk management is critical with DAPP.

A handful of crypto stocks have gone parabolic in price action this month. While Bitcoin, Ether, and other more speculative coins have shot higher in Q4 2023, many digital-asset equities have seen even more pronounced upside moves since October. This is a time when risk management is needed, in my view, and I will outline key price levels to watch on the VanEck Digital Transformation ETF ( DAPP ).

I have a hold rating on the fund given a high-volatility rise in the ETF’s price this month while its valuation is very lofty. Still, DAPP did clear two key price levels recently.

Bitcoin Surges in Q4, Lifting Digital-Asset Stocks

According to the issuer , DAPP seeks to track as closely as possible, before fees and expenses, the price and yield performance of the MVIS Global Digital Assets Equity Index, which is intended to track the performance of companies that are participating in digital-asset economies. The fund aims to invest in companies at the forefront of the digital assets transformation while offering investors diversification through exposure to exchanges, miners, and infrastructure firms. The issuer states that DAPP offers access to companies that have the potential of getting 50% of revenue from digital assets.

DAPP is a small ETF with just $110 million in assets under management, and it does not pay a dividend . Share-price momentum has been very strong lately, nearly parabolic, while its 0.50% annual expense ratio is not particularly high. It is a risky fund, though, as evidenced by Seeking Alpha’s F ETF Grade – I dug into it and found that it is due to an extreme standard deviation percentage of 86% and short interest of nearly 4%.

Liquidity is strong with the fund, though, considering average daily trading volume is almost 200k shares (though the ETF has averaged closer to 600k shares over the last few weeks). I encourage investors to use limit orders when trading this product since its 30-day median bid/ask spread, as of December 26, 2023, is quite high at 0.46%.

Inspecting the portfolio, data from Morningstar reveal that DAPP is focused among small-cap growth stocks. That corner of the style box commands a 27% weight, while small-cap blend contains a high 40% of net assets. So, changes in the growth outlook with digital currencies is a major risk. Expect DAPP to differ significantly in performance compared to the broad market due to its style box positioning.

With a price-to-earnings ratio near 50, it is also extremely richly priced, though historical earnings growth has been robust, too. Given that DAPP’s average market cap size is just $1.3 billion, volatility will likely persist with this high-risk, high-return-potential fund in 2024.

DAPP: Portfolio & Valuation Figures

Adding to the risk construct is the ETF’s sector breakdown. While it is a 70/30 split between the Financials and the Information Technology sectors, it’s fair to say that the allocation is focused in fintech and cryptocurrency-related firms with no access to steady, blue-chip names. Thus, it is among the most concentrated portfolios you will find in an ETF. The top 10 positions comprise more than 60% of the fund, also adding to risk.

DAPP: Sector Profile & Position Detail

Seasonally, I caution against drawing conclusions from what the new year might bring, considering that DAPP has a limited track record. Still, Q1 has historically been positive.

DAPP: Limited Seasonal Historical Data Trend

The Technical Take

With a high valuation, wide bid/ask spread, and narrow allocation, the technical situation is actually quite solid, but not without substantial risk. Notice in the chart below that the fund climbed above not only its July high of just under $10, but also its early 2022 range lows. I see next resistance at $19.50 - the low from Q3 of 2021, shortly before the peak in crypto fervor. The ETF’s RSI momentum oscillator is at nosebleed levels, but that’s not inherently bearish, since it is a sign of intense buying pressure over the last handful of sessions.

Also take a look at the volume profile at the bottom of the graph – major buying activity has taken place this month in a parabolic rise in the fund’s price. So long as DAPP is above the $9.76 peak, maintaining a speculative long position can be considered, but I urge investors to use a small amount of capital with this product given the extreme volatility and since it has returned 250% from its October low. Considering that DAPP is 97% above its rising 200-day moving average, quick and intense pullbacks can take place with little technical warning.

Overall, momentum is very high, but caution is warranted after the parabolic rise in DAPP this month.

DAPP: Shares Surge Through the Previous 2023 High, $19.50 in Play

The Bottom Line

I like how the fund has climbed above key technical points, but would only be long with a small position considering the ETF’s high volatility. A potential rally toward $19.50 could be in the works next year, but its high valuation is a fundamental risk that should not be ignored. Overall, I have a hold rating on the fund.

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