What do Wall Street, Walmart, Royal Dutch Shell, British Airways and bitcoin have in common? They all use blockchain technology in one form or another, either to make their systems run or to make their systems run better. And what do exchange-traded fund providers Amplify ETFs, Reality Shares, First Trust and Innovation Shares have in common? Within a two-week span in January, all four companies launched funds aimed at cashing in on the blockchain phenomenon.
In case you’ve missed it, blockchain is being hyped as the biggest thing since the internet. It first gained attention as the record-keeping system used by bitcoin and other cryptocurrencies, but increasingly it’s being employed by a growing roster of Fortune 500-caliber companies as a way to create more efficient supply chains, improve data tracking and facilitate safer financial transactions, among other things. Blockchain proponents tout it as a potentially transformative technology.
The ETF industry, which rarely misses an opportunity to cash in on trendy commercial themes, poured into blockchain like settlers heading into Oklahoma during the Land Rush of 1889, with each of the four above-mentioned providers hoping to stake their claim on this potentially profitable piece of real estate. When the dust settled, some investors noticed that all four funds hold portfolios that are heavy on old-school technology names (along with healthy dollops of financial services giants) and short on actual pure-play blockchain companies.
And there’s a reason for that. Namely, it’s such a new industry that there aren’t many investable pure-play blockchain companies. As a result, the roster of these four ETFs are stocked with familiar names that, at least at first blush, seem to have little to do with blockchain.
IBM, Intel, Microsoft, Nvidia and Taiwan Semiconductor, for example, hold prominent weightings in all four funds. Some investors saw that and thought, “Hmmm, why should I pay 65 to 70 basis points for one of these funds when I could get fairly similar exposure to these same companies via sector ETFs for under 15 basis points?”
It’s a fair question, and the issue was addressed in a Bloomberg article that appeared around the time these blockchain funds debuted. Indeed, there’s a degree of correlation between these four blockchain funds and larger sector funds, but perhaps not to the extent that it negates the overall intent of these products, which is to provide a greater focus on the blockchain opportunity and, thus, isolate it as a potentially fruitful investment theme.
According to a portfolio overlap analysis by ETF Research Center, the holdings in three of the four blockchain ETFs overlap by weight with the two largest technology-focused ETFs—the Technology Select Sector SPDR Fund (XLK) and the Vanguard Information Technology ETF (VGT)—by similar amounts ranging from 21% to 22%. The other blockchain fund, the Innovation Shares NextGen Protocol ETF, overlaps XLK by 32% and VGT by 30%.
What’s In A Name?
When all four funds were still in registration with the Securities and Exchange Commission, the agency requested they remove the word “blockchain” from their names because they didn’t meet the standard that 80% of a fund’s holdings must get more than half of their sales from the industry or theme denoted by the fund’s name.