Our latest Product Focus looks at First Trust's recent and hugely timely blockchain-related ETF. Here's what the company had to say about a product which has excited much interest already in ETF and blockchain circles.
Can you explain the product?
The First Trust Indxx Innovative Transaction and Process UCITS ETFs (BLOK) was the first UCITS blockchain ETF to launch in Europe. BLOK tracks the Indxx Blockchain Index and this innovative physically replicated fund aims to provide an efficient way to gain exposure to a spread of companies that are actively investing resources into products or services that enable and use blockchain technology. Tracking the yield and price of the Index, BLOK will hold eligible securities classified by Indxx based on their exposure to blockchain technology and/or the potential to benefit from the increased process efficiency the technology could provide. Focusing exclusively on active enablers and active users of blockchain, the index will only consider companies with a minimum market cap of $250m and a three-month average daily turnover value of $1m. Capped at 100 constituents, the index is rebalanced and reconstituted semi-annually.
Obviously blockchain is in the news, but why is now the right time to be launching these funds in terms of the adoption of the technology?
With 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. BLOK offers exposure to this growing investment class leveraging the liquidity and efficiency that a UCITS ETF structure provides. Discounting cash flows can be a tough business and forecasting cash flows of new technologies is even more tricky considering the potentially multiple streams of revenue, and the often onerous costs in making them become a reality. Many investors have often therefore turned to diversified, passive approaches to thematic investments, finding them more attractive to stock picking.
What do investors need to know about blockchain when investing in these funds? And why is blockchain such an exciting investment class?
Blockchain is essentially a network of computers that keep transactions secure in a decentralized database, or digital ledger, similar to a shared spreadsheet that the network can see and must approve before it can be verified and recorded. Once recorded, no one person can change it without the agreement of others and it is nearly impossible to tamper with. A growing number of industries and institutions are looking to embed blockchain technology into their day-to-day processes. Blockchain allows customers and suppliers to connect directly, without the need for a central entity, like a bank or financial institution, to make a transaction. We feel the future for blockchain is exciting because it has potentially limitless applications bound to no specific sector and that it has the potential to further enable the internet to advance. Blockchain has the ability to makes uses of the internet, previously thought impossible, to become a reality. Considering that the internet is so pervasive and has been around for over 20 years, one can see how thrilling it would be to consider that this incredibly powerful tool is potentially about to get more powerful; and impact on the world as the internet did in the 1990s.
What index will these fund track?
BLOK tracks the Indxx Blockchain Index. The Index is designed to track the performance of companies that are either actively using, investing in, developing, or have products that are poised to benefit from blockchain technology and/or the potential for increased efficiency that it provides to various business processes.
What should investors bear in mind in terms of risk when looking at this fund?
BLOK exposes investors to a few risks, starting with emerging markets as a pure thematic exposure. BLOK will invest in companies in both Emerging Markets and Developed Markets securities. While it does have a significant allocation in mega cap securities, the minimum size for inclusion is only $250m and once included in either enablers or users a company is equally weighted, and thus the fund will expose investors to smaller company risk. Further, BLOK by definition is investing in a cutting-edge technology subject to rapid change as the market for blockchain technology is in its nascent phase, as opposed to something more mature like consumer staples. Other risks stem from the fact that blockchain technology remains cutting edge and, in many industries, there is still a lack of understanding of how the technology operates and how it may be best utilized. This is why First Trust have obtained the index license from a reputable company such as Indxx, that effectively targets it via a disciplined and transparent approach. Of course, BLOK also bears with it all the risks common to any all-equity investment as well.