Bitcoin and cryptocurrencies’ underlying blockchain technology has been gaining popularity among big firms from Amazon to Alibaba Group to Nvidia and Mastercard.
What do these top-rated stocks have in common? They’re involved with blockchain in one way or another and see huge potential in the technology, not to mention cost savings, operational efficiencies, and increased profits.
ETF issuers have taken note of this trend. As a result, four ETFs have sprouted that represent companies involved in this up-and-coming disruptive technology.
Blockchain is a chronological and public digital ledger of information, which can be applied in a nearly infinite number of ways to facilitate and expedite tasks for businesses.
The four blockchain ETFs are $176 million Amplify Transformational Data Sharing, $112 million Reality Shares Nasdaq NexGen Economy, $21 million First Trust Indxx Innovative Transaction & Process and $5 million Innovation Shares NextGen Protocol.
The funds have significant differences in their approach and methodology. But all four were launched in January, their fees range from 0.65% to 0.7%, and a big chunk of their holdings is in technology and finance.
“I think the big argument against blockchain ETFs I’ve seen so far is, ‘Is this just a repackaging of tech and financial names?’ ” said Christian Magoon, CEO of Amplify ETFs. “Usually the leaders of any emerging segment are the most well-funded companies who have the money to invest in private companies or the money to do the research and development into that technology.”
He added: “Early on, you’re owning conglomerates or less pure-play companies. But over time, business lines develop, private companies come to market and spinoffs happen.” Magoon says that every quarter to six months, the portfolio will change in composition and become more purely focused on blockchain companies.
Amplify’s BLOK is the only actively managed blockchain ETF. Top 10 holdings, which represent 46% of the fund, include Taiwan Semiconductor (TSM), Japanese IT firm Digital Garage, Square (SQ), Nvidia, Overstock.com (OSTK) and Japanese internet and media firm GMO Internet.
Being an actively managed fund is a big advantage in the fast-evolving blockchain universe, Magoon says. This flexibility allows BLOK to quickly sell names that may get involved in controversies or buy new blockchain-related stocks.
Among the other three ETFs, BLCN tracks the Nasdaq Blockchain Economy index, which uses a score to rate companies’ involvement with blockchain. It states on its website that “10% of the global GDP is predicted to be stored on blockchain platforms by 2027,” according to the World Economic Forum.
“We really believe this could be one of the major innovations of the last 20 or 30 years, including the internet; it could be even possibly bigger than the internet was as far as disruption,” said Eric Ervin, CEO of Reality Shares. “We wanted to take it seriously, so we built out a board of advisors that are experts in the space.”
“Like any new emerging technology, you really have to be able to discern which one is a fraud, and which ones are really genuinely using the technology and how they’re using it,” he said.
BLCN is more diversified at the top than BLOK, with top 10 holdings representing 22% of the fund’s assets. Top names include Overstock.com, Intel, International Business Machines, Japanese internet financial group SBI Holdings, Cisco Systems and Microsoft.
The blockchain score that’s used excludes companies that may be “toying around with the technology but won’t have a high economic impact,” those with market caps less than $200 million, illiquid stocks, certain global exchanges, as well as firms in the early stages of development such as testing. Consequently, the index has omitted controversial names like Kodak (KODK), Riot Blockchain (RIOT) and Xunlei (XNET).
The two smaller funds are LEGR and KOIN. LEGR invests in firms that make products and services to enable the use of blockchain and those that are using the technology to be more efficient. The fund has tighter liquidity constraints and only invests in companies that have clearly demonstrated a success case.
KOIN is using a unique patent-pending approach whereby artificial intelligence (AI) uses special algorithms to scan for new stories, keywords and themes, to identify stocks related to the blockchain. It then compounds a sentiment score on the basis of which it will include or exclude a stock. As a result, the ETF holds a few stocks others don’t, such as Sprint (S) and the world’s largest shipper, Maersk.