Summary The Fidelity Crypto Industry and Digital Payments ETF is heavily correlated with Bitcoin and primarily invests in crypto-related stocks, including Coinbase and Bitcoin miners. Despite a bullish outlook on Bitcoin, I have concerns about FDIG's heavy exposure to Coinbase, which I currently don't favor. FDIG's price relative to Bitcoin is down 33% since July, making it cheap relative to Bitcoin, but key support levels must hold. Given the high correlation with Coinbase and my reservations about the stock, I rate FDIG a hold, suggesting better Bitcoin exposure alternatives. The explosion in the popularity of alt-coins such as OG Bitcoin has also given rise to numerous funds that seek to take advantage of mega-trends in the industry. One such fund is the Fidelity Crypto Industry and Digital Payments ETF (FDIG). As the name implies, this ETF looks to capitalize on digital payments infrastructure, most of which is crypto-related. So while this isn't a pure Bitcoin fund, we'll call it Bitcoin-adjacent. While I don't love the current construction of the fund, given its correlation to Bitcoin itself, I cannot help but lean bullish longer-term. However, the current setup has too much exposure to a stock I don't particularly care for at the moment. Let's dig in. What is FDIG? The fund is a Fidelity-managed ETF that invests in stocks of companies that operate within information technology, software, IT services, data processing, payment processing, and crypto and blockchain technology. That opens the fund up to a variety of financial and adjacent stocks, but we'll see below it's extremely crypto-heavy. Seeking Alpha The fund's largest holding is Coinbase (COIN), followed by a slew of Bitcoin miners and a meaningful position in Block (SQ). These are all crypto stocks, so this is not a traditional payment processor/digital finance fund; it's a crypto fund. Obviously, there's nothing inherently wrong with that as Bitcoin has been an awesome place to be in 2024. Indeed, I remain bullish on Bitcoin for the foreseeable future, so I'm intrigued by anything that's related to what I see as the start of a big bull run in crypto. Indeed, all one needs to do is look at the 50-day correlation between FDIG and Bitcoin, which currently sits at 0.87. StockCharts While this relationship doesn't always hold, this kind of correlation means if you are bullish on Bitcoin, you pretty much have to be bullish on FDIG. They're moving in tandem, so you simply need to ask yourself if you think Bitcoin is a good place to be. FDIG is one way to take advantage of that if you are. So why did I say I don't love the current construction of the fund above, then? I'm not thrilled about the fund's largest position being Coinbase. StockCharts The correlation of FDIG to Coinbase is even higher at 0.96, meaning the fund and the stock are moving almost 1:1 with each other. If you like Coinbase, that's not an issue. I happen to think Coinbase is egregiously overpriced , and given it's by far the largest holding of FDIG, that concerns me. Let's take a look at the charts to further the discussion. Will support hold? That's the key question right now as FDIG tests key support after the recent drawdown. StockCharts Shares are testing the low-$30s, which is below both of the major moving averages. That's not a good start, as that's the best way to identify if an asset is in a primary uptrend or not, and FDIG isn't any longer. However, all is not lost so long as the area between $32 and $34 holds, which I've highlighted above. The RSI is holding 40, which is a good sign for the bulls, as is the PPO turning higher at the centerline. If those indicators go below those respective levels, that's a warning sign that this is morphing into something worse. But for now, it looks okay. If we highlight just the relationship between FDIG and Bitcoin, this is where things get pretty interesting. StockCharts This chart just shows the price of FDIG to the price of Bitcoin as a valuation measure of the fund. Since the high at $35 in July - which is almost exactly the same price as we have today for FDIG - its value relative to Bitcoin is down 33% . That means Bitcoin has rallied hard, while FDIG just hasn't. That means the fund is very cheap relative to Bitcoin, so that lessens the risk of buying today if you're so inclined. Turning to the weekly chart, we have more support for the bulls. StockCharts A large ascending triangle formation was broken out of back in November, and we're retesting that level today. That also happens to correspond to the rising 20-week exponential moving average, so again, there's plenty of reason for the bulls to step in here. With ascending triangles, we generally see some sort of test of the breakout area, and that's exactly what we're getting. The key is that the bulls need to show up very soon to avoid this pattern being invalidated. Watch the levels on the daily chart to make sure key support isn't violated. One final note on the charts is that we'd be remiss if we didn't look at Coinbase, given the almost perfect correlation between FDIG and that stock. StockCharts While I don't see the fundamental case for Coinbase at $265, we have to respect the charts. Unsurprisingly, this chart looks very similar to FDIG's chart, so a lot of the same commentary applies. We have a PPO centerline test, a 40 RSI test, and key support. The triple top that was put in earlier this year at $265/$270 is the key level to watch, and Coinbase is precariously perched there today. Unless and until the relationship between FDIG and Coinbase breaks down, you can watch the action in Coinbase to understand where FDIG is going. So what to do, then? I want to be clear that I'm bullish on Bitcoin, and therefore, I lean bullish on FDIG. However, I really don't like Coinbase here, and the fact is that Coinbase is nearly perfectly correlated to FDIG. With that in mind, I'm initiating FDIG at a hold rating. I think there are better ways to own Bitcoin exposure than FDIG, including simply buying the coin itself or a fund that does so for you. If FDIG had less exposure to Coinbase, I'd rate it a buy, but for now, I think it's a less optimal way to gain Bitcoin exposure.
