Quartet of blockchain ETFs try to cash in on cryptocurrency craze
Cryptocurrency markets might be cooling off, but the hype around blockchain isn’t abating, judging by the popularity of exchange-traded funds centered on the technology.
Four new ETFs, all promising to give investors exposure to blockchain technology, launched in January. The latest is the Innovation Shares NextGen Protocol ETF, which trades under the ticker KOIN KOIN, -1.04% and made its debut on the New York Stock Exchange on Tuesday.
The newcomer said it aims to stand out thanks to a stock-picking methodology driven by an artificial-intelligence algorithm, though its methodology is similar to two competitors, which also use a combination of machines and humans to read news and regulatory filings to screen stocks.
Such ETFs are seeing a surge in interest that appears driven by hype surrounding blockchain, the distributed ledger technology that underpins digital currency like bitcoin, according to Eric Balchunas, senior ETF analyst at Bloomberg Intelligence.
Read: Ignore the ‘blockchain gimmicks’ say the men behind the new blockchain ETFs
“These ETF issuers are tapping into the mania surrounding bitcoin and blockchain and are cashing in by launching products that investors want,” Balchunas said.
Overlapping holdings
The four recently launched products are similar to each other, with an overlap in their top holdings. They also overlap with existing sector ETFs such as the Technology Select Sector SPDR Fund XLK, +0.09%
“If someone wants a pure blockchain exposure, they can’t get it because there are not enough stocks to put into an ETF,” Balchunas said.
Instead, these ETFs give you the “story of a blockchain,” but in reality perform like the broader market, he said.
Matthew Markiewicz, head of Innovation Shares, said that while a lot of technology companies overlap, “over time our AI algorithm will pick new companies that provide tools for or use blockchain technology.”
KOIN is competing against three other ETFs that listed a few weeks earlier.
The Amplify Transformational Data Sharing ETF BLOK, -1.34% was launched on Jan. 17 and to date it is the largest with $185 million under management. According to the description of the ETF, “it provides access to an actively managed basket of global companies at the forefront of blockchain-based technology.”
The second largest is the Reality Shares Nasdaq NexGen Economy ETF BLCN, -0.93% launched on the same day as BLOK, which also invests in blockchain-related companies.
“BLOK and BLCN together raised $100 million in just three days. That shows you how much demand there is for these instruments,” Balchunas said.
The two latest entrants—LEGR LEGR, -0.42% or First Trust Indxx Innovative Transaction & Process ETF, and KOIN had the disadvantage of launching a week or two later.
LEGR, which was launched on Jan 24, has attracted about $10 million in assets, while KOIN, has only $2.5 million.
All four ETFs share the same companies in their top holdings: Microsoft Inc. MSFT, -1.08% Overstock.com Inc. OSTK, -2.98% Square SQ, -5.24% Intel Corp. INTC, -1.02% NVIDIA Corp NVDA, -0.25% IBM IBM, -0.79% and Oracle Corp ORCL, +0.08%
Fees
Unlike existing technology funds, blockchain ETFs charge substantially higher fees. The Amplify fund is actively managed and charges 70 basis points. But the others passively track indexes and still charge between 65-70 basis points.
For comparison, XLK’s expense ratio is 0.13%, or 13 basis points, though popular thematic ETFs such as MJX or GAMR charge about 70 basis points.
But ultimately, blockchain funds are able to charge hefty fees because investors are willing to pay for convenience and exposure to the hot industry.
“Investors are willing to pay the fee for a product when it has a value-added component to it. In our case, we provide a strategy that capitalizes on a growing technological innovation,” said Ryan Issakainen, exchange-traded fund strategist at First Trust Portfolios.
Eric Ervin, chief executive officer at Reality Shares, said higher fees are due to costs associated with the index provider.
“The index we are tracking is rather expensive but that is because a lot of thought goes into selecting companies that are truly innovating and developing blockchain technology that will eventually benefit every company,” Ervin said.
Michael Venuto, co-founder at Toroso Investments, which serves as the subadviser of BLOK, which is actively managed, said the fee is a lot less than what a typical actively managed fund charges.
“We truly think that managing a portfolio that is focused on an industry that is changing so rapidly is a huge advantage.”
As to hype, Venuto does not disagree that there is a mad rush to cryptocurrencies, but suggests it is better to invest in companies that are “acting like shovel sellers during a gold rush than trying to mine the gold.”
Cryptocurrencies soared in 2017, with the largest, bitcoin BTCUSD, -9.41% rising from less than $1,000 in December 2016 to an all-time high just shy of $20,000 in December. Since then, digital coins have plunged, with bitcoin changing hands Thursday below $9,000.
On Thursday, BLOK fell 1.6%, while BLCN lost 1%. LEGR declined 0.4% and KOIN declined 1%.
Blockchain ETFs have been able to charge high fees because investor demand showed they could. And the flows into these products have been unprecedented, according to Balchunas.
“In fact, among the independently issued ETFs, MJX MJX, -6.24% —a marijuana ETF and BLOK were the fastest-growing,” Balchunas said.
Balchunas said that money flowing into these ETFs is primarily from retail investors, with much of the demand coming from overseas.
“Institutional investors do not have to pay 70 basis points for an ETF when they can ask their asset manager to build a portfolio based on the same basket for 1-2 basis points. But retail investors love the convenience of buying and selling with one click in the brokerage accounts,” he said.
“Anecdotally, it appears that a lot of flows come from financial advisers and individual brokerage accounts with a fair chunk coming from foreign buyers,” said Ervin at Reality Shares. “As a former financial adviser, I would say it is a much safer way to play and get exposure than investing in cryptocurrencies.”