New York-based Defiance ETFs became the first ETF issuer to offer exposure to the emerging market of non-fungible tokens (NFTs) at the tail end of 2021. The Defiance Digital Revolution ETF (NFTZ) listed on New York Stock Exchange on December 2 with a total expense ratio (TER) of 0.65%. NFTZ will track the BITA NFT and Blockchain Select index and is rules-based, rebalances quarterly, and offers physical equity exposure to a universe of companies that generate at least 50% of their revenue from blockchain, cryptocurrency, and NFT-related activities.
NFTs, which are either unique or rare physical items or more commonly units of data, such as photographs, videos, audio, blueprints, and other digital files, have enjoyed regular media attention of late and have become increasingly popular among investors. And while ETF investors already had access to a range of crypto and blockchain thematic products, NFTZ attempts to break into the burgeoning – and to many, unfamiliar – NFT space. Like cryptocurrencies, they rely on storing data on a digital ledger (blockchain) to provide proof of ownership. Unlike digital assets, NFTs are non-fungible, meaning they are not mutually interchangeable.
Trading volume in NFTs has increased dramatically of late. For instance, between November 2017 and February 2021, $163 million had been spent on NFTs. According to Defiance, by October of 2021, the products’ trading volume had surged to $15 billion. In an interview, Defiance co-founder and CIO, Sylvia Jablonski, said: "The NFT revolution will fundamentally change the economic model for artists, athletes, creators, and many more industries that we cannot even conceive of today. NFTs could be bigger than the internet.”
However, NFTs are also an innately difficult asset to gain direct exposure to via the ETF structure. While some NFT issuers and providers of the underlying blockchain technology are listed companies, the original creators of the assets themselves are individuals or small groups. In addition, NFTs faced similar challenges to those of cryptocurrencies, such as scams, custody issues, accounting errors, association with nefarious activities, and high valuation volatility. But the introduction of NFTZ indicates investors are still looking to wrapped products for diversified exposures to future themes.