ETFs and the blockchain revolution

by , 20th July 2018

Making money in the crypto space in the last 18 months has been pretty easy. The HFR Cryptocurrency Index was up 2908% last year, but access through an ETF doesn’t exist and this year markets have tanked. If you want exposure to the crypto space then it has to be through a blockchain ETF and even then your choices are limited; but it could be worth a punt. (Alternatively, you could invest via a bitcoin ETN.) 

There’s a strong case for blockchain.

In short, it’s the network of technology, or computers that keep transactions secure in a decentralised database or digital ledger – and promoters say it could revolutionise transactions globally. It omits the need for any third parties and once transactions have been recorded they are unable to then be changed, without the agreement of other parties. It is a system that is considered to be impossible to interfere with.

Derek Fulton, CEO at First Trust Global Portfolios, explains that there are an increasing number of institutions harnessing blockchain technology and applications spanning a wide range of industries. “We believe the efficiency, auditability and transparency provided by blockchain offers the potential for significant growth opportunities.”

The advantage of the technology is that it allows customers and suppliers to connect directly, without the need for a central entity (like a bank or financial institution) to make a transaction.

One investment advisor explains that the business has gone from 0-$400bn in the space of a few years and hasn’t come close to being hacked.

They add: “No one has the ability to hack the blockchain because it keeps adapting and getting better.”

However, exposure to the sector in Europe has been slow to arrive. In the US and Canada blockchain ETFs were launched earlier this year.  

Europe’s first blockchain-focused ETF landed in April by First Trust Global Portfolios. The First Trust Indxx Innovative Transaction & Process UCITS ETF (BLOK), which tracks the Indxx Blockchain Index, is tradeable in US dollar and sterling and costs 0.65%. Since its launch it has returned 10.16%.

Source: Bloomberg

Cross listings to other European exchanges are likely to follow.

The index tracks companies that actively invest resources into products or services that enable and use blockchain technology. The index only considers companies with a minimum market cap of $250m and a three-month average daily turnover value of $1m. It’s capped at 100 constituents and is rebalanced and reconstituted semi-annually.

Investors are seemingly keen on the idea of these ETFs. After three months BLOK:LN has assets of $11.5m. Its sister ETF in the US (LEGR) has assets of $46.1bn; it launched at the end of January.

However, not all of these ETFs passively track an index, some are actively managed. This doesn’t appear to have any clear benefit in terms of performance, but might be done due to the immature nature of the sector, meaning invested companies require more due diligence.

Unsurprisingly, the largest portion of assets are in US-based ETFs, the largest being an actively traded ETF, Amplify Transformational Data Sharing ETF (BLOK), which has assets of $174m but has returned -1.2% since launch in 19th January this year.

There are also other issues that need teasing out as the space evolves. In the US the SEC has said providers are not allowed to use the label BlockChain in ETFs. In Canada this is not the case. The Blockchain Technologies ETF (HBLK) was one of the first launched on the Toronto Stock Exchange in February. It’s not done well returning -25% since launch. It has $11.2m in AUM.

ETF TER Rtn Since Launch Assets Index Exchange
Amplify Transformational Data Sharing ETF (BLOK) 0.70% -1.2% $174m Actively managed ArcaEx
Blockchain Technologies ETF (HBLK) 0.65% -25% $11.2m

(CAD)

Harvest Blockchain Technologies Index TSX
First Trust Indxx Innovative Transaction & Process UCITS ETF (BLOK) 0.65% 10.16% $11.5m Indxx Blockchain Index LSE
First Trust Indxx Innovative Transaction & Process UCITS ETF (LEGR) 0.65% – 0.83% $46.1m Indxx Blockchain Index Nasdaq
First Trust Indxx Innovative Transaction & Process UCITS ETF (BLOK) 0.65% 3.4% $11.5m Indxx Blockchain Index Borsa Italiana
Reality Shares Nasdaq NexGen Economy ETF (BLCN) 0.68% -3.2% $120m Reality Shares NASDAQ Blockchain Economy Index Nasdaq
Reality Shares Nasdaq NexGen Economy China ETF (BCNA) 0.78% -8.4% $2.2m Reality Shares Nasdaq Blockchain China Index Nasdaq
Innovation Shares NextGen Protocol ETF (KOIN) 0.65% 3.6% $7.6m Innovation Labs Blockchain Innovators Index ArcaEx
REX BKCM ETF (BKC) 0.88% 0.24% $6.3m Actively Managed ArcaEx
Horizons Blockchain Technology & Hardware Index ETF (BKCH) tbc -1.5% $8.53m (CAD) Solactive Blockchain Technology & Hardware Index TSX
Evolve Blockchain ETF (LINK) 1% -25% $1.2m (CAD) Actively managed TSX
First Trust Indxx Innovative Transaction and Process ETF (BLCK CN) 0.65% 6.7% $1.9m Indxx Blockchain Index TSX

Source: Bloomberg & RexShares

Not everyone is sure of them just yet.

Peter Sleep, senior portfolio manager at 7IM, says that for him an investment is something that pays interest, a coupon or a dividend.  “Anything else is speculation.  Do these Blockchain ETFs have any companies that pay any sort of dividend or even make profits?  I suspect not.

“Every year we run a long/short competition.  My short for the year is the Innovation Labs Blockchain Innovators Index.”

But this could be the last hurdle to get past before everyone wants a slice of the pie. After all, it is the latest technology wave and will move us from an analogue system to global international online system.

Market watchers wager that by 2024 we will be in a digital age and it will range from us at home, to companies and physical assets.

The mixed and generally poor performance of blockchain ETFs is just one reason why these ETFs may be playing a waiting game, but given how low some of them have fallen, it might be a good time to get in.

ETF Issuers Featured in this Article