Betting on blockchain with exchange-traded funds? It’s going to cost you some real — not virtual — dollars. And it’s worth avoiding them for now.
Looking under the hood of these ETFs, the holdings are surprisingly vanilla technology names investors know well — Cisco, Intel, Microsoft, Taiwan Semiconductor, and SAP.
Why? Probably because no one knows exactly how to use blockchain yet in a major way, so these are vehicles to bet on the building blocks of blockchain and companies that may use blockchain.
The four major blockchain ETFs to scrutinize are BLOK, BLCN, LEGR, and KOIN. You’ll quickly sense a trend. These four just started trading in January, so there’s not a lot of price performance history.
“These are not pure plays, these funds are pricey, and they are very correlated to the stock market,” said Bloomberg analyst Eric Balchunas. The S&P 500 is now approaching the tech-heavy weighting of the index during the 2000 internet boom-and-bust period with the addition of Twitter last week.
Moreover, these blockchain ETFs cost investors roughly 0.65 percent to 0.70 percent annually — or about $6.50 for every $1,000 invested — quite expensive compared to other ETFs and about the same as an actively managed mutual fund.
For comparison, the simple average expense ratio of index-equity ETFs (the average for all index equity ETFs offered for sale) was 0.50 percent in 2017, but the asset-weighted average expense ratio for index-equity ETFs (the average shareholders actually paid) was less than half of that, 0.21 percent, according to the latest Investment Company Institute figures.
“For people expecting dirt cheap, you won’t find it here. For the time being, blockchain ETFs are a Vanguard-free zone. Someone may pull a ‘Vanguard‘ and come in cheaper eventually,” but that’s not an option yet, he said.
BLOK and BLCN between them manage about half the assets in blockchain ETFs so far, but BLOK holds about three-quarters tech stocks, and BLCN holds more financials, he added.
For newbies, what is blockchain? A blockchain is a tamper-proof database shared by all its users. Traditional databases are stored in central locations, which makes them easy targets for hackers (Equifax, Yahoo, and Target, to name a few).
Blockchain databases are virtual and decentralized. Currently, a variety of major corporations from insurance to finance, entertainment, and even airlines are exploring this technology, said Roberto Riva, a fund manager investing in one asset that’s created using blockchain — cryptocurrencies. Other companies may use blockchain to track deliveries of lettuce, sales of stock, and other hard-to-trace transactions. More on that later.
So now, let’s look under the hood of these blockchain ETFs.
Reality Shares Nasdaq NexGen Economy ETF (BLCN) tracks a similarly named index, the Reality Shares NASDAQ Blockchain Economy Index of companies in blockchain technology or that benefit from the new technology. Top holdings: Intel, International Business Machines (creator of IBM Watson), Microsoft, SAP, Cisco Systems, Hitachi, Nasdaq Inc., Barclays, Accenture, and SBI Holdings.
Amplify Transformational Data Sahring ETF (BLOK) has holdings in Taiwan Semiconductor, GMO internet, Digital Garage, Square, NVIDIA Corp., International Business Machines, SBI Holdings, Intel, Red Hat, and Overstock.com.
First Trust Indxx Innovative Transaction & Process ETF (LEGR) tracks something called the Indxx Blockchain Index. Same thing with the top holdings: Intel, ASUSTeK Computer, Gemalto, Taiwan Semiconductor, International Business Machines, Alibaba Group, Nordic Semiconductor, SAP, and Accenture. Balchunas points out that LEGR invests more heavily overseas, and has the most semiconductor exposure.
Finally, there’s KOIN: the Innovation Shares NextGen Protocol ETF tracks the performance of the Innovation Labs Blockchain Innovators Index, and invests in transaction-based companies that may use blockchain, including Visa, Microsoft, Intel, Tencent Holdings, Taiwan Semiconductor, Amazon.com, Oracle, Mastercard, Cisco, and BP.
If you’re an “accredited investor “— meaning you have a net worth of $1 million — you could certainly invest in blockchain through a venture or hedge fund. Roberto Riva, for instance, last year opened a hedge fund that invests directly in cryptocurrencies, which are one invention based on blockchain. Riva and his brother cofounded Jefferson Capital in West Palm Beach, Fla., which manages the cryptocurrency hedge fund.
“Blockchain ETFs are conventional equities that are incorporating blockchain technology in their company,” such as IBM or Microsoft, whereas the fund he and his brother founded invests directly in cryptocurrencies. The minimum investment is $250,000, and they charge 2% annually in management fees and a hefty 20% performance fee.
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