4 Blockchain ETFs for Investing in Blockchain
When it comes to telling people what your business does, you’re supposed to have what’s called an “elevator pitch”. It’s a succinct way to describe your value proposition that doesn’t bore people to tears. When describing Nanalyze, we always use the same example. Suppose your dad was watching the evening telly and saw an excerpt on gene editing. He thinks it’s the most amazing thing he’s ever heard of, and decides he wants to invest in gene editing. He plugs that exact term into Google, investing in gene editing, and that’s where our article pops up – Investing in CRISPR: Which Gene Editing Stock to Buy? What we do is tell investors how they might (or might not) be able to get pure-play exposure to tomorrow’s most exciting technologies.
There are many reasons why investing in disruptive technologies like gene editing can be difficult for retail investors. Mainly it’s because most of the opportunities are to be found in startups, not publicly traded companies. Then you have OTC stocks claiming to provide exposure to various technologies, most of which are scams. There are also pretenders who say they’re working on a particular technology when in fact they’re doing something entirely different. But perhaps what makes investing in disruptive technologies so difficult is that everyone has a different opinion about which stocks will give you exposure. We saw this in our recent article on Two ETFs for Artificial Intelligence and Robotics. The problem is that since there is no industry classification for artificial intelligence (AI), there is no single authority that exists which can be used to classify companies. Then you have the whole “Investing in Everything with Google” advice that is simply misguided advice. Now, there may be an answer to that problem which involves using artificial intelligence (AI).
While ICOs continue to swindle suckers out of millions of dollars, the underlying technology called “blockchain” has tremendous potential for all kinds of applications. While the ICO fanfare subsides and speculators lick their wounds, the world’s biggest companies are now preparing to transform entire industries which will result in large cost savings which mean more profits for shareholders. So how can we invest in companies that are using blockchain to make things more efficient? We’re going to look at four different Exchange Traded Funds (ETFs) for investing in blockchain technology.
The easiest way to think about an ETF is that it’s a mutual fund that’s traded like a stock. While ETFs are supposed to have lower fees than funds, these four ETFs are all on the steep side when it comes to fees.
- Reality Shares Nasdaq NexGen Economy ETF (BLCN) 0.68%
- Amplify Transformational Data Sharing ETF (BLOK) 0.70% (.20% waived until January 16, 2019).
If you’re not familiar with “fee waivers”, this is simply a temporary discount on fees that is used to attract more assets. Of course the ETF providers don’t make squat unless people buy their ETFs, which is something referred to as Assets Under Management (AUM). The ETF that’s taken the most assets so far is BLOK with $179 million in AUM followed by BLCN with $115 million in AUM.
We wanted to start with a simple test to see how similar these 4 ETFs are by looking at which stocks are included in the top 10 holdings across all 4 ETFs. Since these ETFs are all offering exposure to blockchain technology, we’d expect there to be some consensus about what stocks should be included. Turns out that’s not the case:
So the only stock that all four ETFs could agree upon should be a top 10 holding was Intel. The next most common name was Microsoft, which appeared in three of the four ETFs. Then there were six other stocks that appeared in more than one ETF which can be seen highlighted in yellow.
It’s rather depressing to see so much disagreement about what constitutes “exposure to blockchain technology” – which brings us to the methods being used by each ETF to select stocks. The way that most ETFs work is that they try to replicate a stock index. So when we look at the methods being used, what we’re actually looking at is how the underlying indices are being calculated. Here’s what we found:
- KOIN – Uses AI algorithms to scour the Internet and see which companies are most focused on blockchain technology. Rebalanced four times yearly.
- LEGR – Based on the “Indxx Blockchain Index” which looks for companies benefiting from blockchain. Rebalanced twice a year.
- BLCN – Uses a rules-based index created in partnership with Nasdaq and governed by an advisory board. Rebalanced twice a year
- BLOK – Actively managed by a human portfolio manager who can add/remove stocks anytime which incurs transaction costs
LEGR and BLCN are rebalanced twice a year and hold quite a few more stocks than the other two ETFs, which are making more concentrated bets and therefore should be able to react to changes more quickly. In one case (BLOK) the changes are made by a human, and in the other case (KOIN) the changes are made by an AI algorithm. In all cases we see dramatically different opinions about which stocks blockchain investors should be holding.
Then there’s the opinion of company executives and leaders to consider. Juniper Research did a survey of 400 such individuals in which “more than 4 in 10 (43%) ranked IBM first – more than twice the proportion selecting second-placed Microsoft (20%).” If you want all the gritty details, you’ll need to part with $1,800.
In comparing these four ETFs which are all so different, we’re faced with a decision to make about which one to invest in for exposure to blockchain technology. Looking at past performance is largely useless given how new these ETFs are. It’s also largely irrelevant, since this is a multi-decade theme we’re investing in for the long haul. What makes KOIN stand out from the pack is that they’re using artificial intelligence for stock selection, something that we’ve talked about before.
We spoke with the leadership team over at Innovation Shares that’s building the KOIN ETF to better understand how their AI stock selection process works. It’s something hedge funds have been using for decades to realize some of the best returns ever recorded, and now Innovation Shares is making the technology accessible to retail investors. One advantage of using AI is that the algorithms pick up on things that may not be so obvious to humans – like British Petroleum – which is building out an energy trading platform using blockchain. KOIN’s biggest holding, Visa, first announced a blockchain platform back in 2016 called Visa B2B Connect. It’s a platform that Visa expects will transform the business-to-business (B2B) payments when it becomes commercially available in mid-2018. Another name that made their list – the world’s largest container shipping company, Maersk.
Innovation Shares is using their AI stock selection approach to build other ETFs as well, like one they built for autonomous driving called the NextGen Vehicles & Technology ETF (EKAR), and they’ve also filed a patent to protect their technology. With the horrendous track record that humans have when it comes to stock selection, we’d be much more comfortable having AI running the show instead. You can buy shares of KOIN using any broker, and it trades under the ticker KOIN in case you hadn’t figured that out already.