“Users” include companies such as Walmart and various financial institutions that use blockchain technologies to build efficiencies and competitive advantages into their businesses.
LEGR’s portfolio is split 50-50 between the enabler and user categories. The explorers are companies that have publicly talked about incorporating blockchain into their businesses but have yet to do so. “The explorer group is a watch list of companies that could eventually be included,” says Ryan Issakainen, ETF strategist and senior vice president at First Trust.
Issakainen notes that First Trust is the largest provider of active exchange-traded funds, with more than $13 billion in actively managed ETFs. “Given that, some people asked why we didn’t use an actively managed approach [with blockchain],” he explains. “When we bring out an actively managed ETF, we want to make sure it’s with the best manager in the space, and within blockchain we don’t think that manager exists yet because there’s not a proven track record of investing in this space.”
AI And Algos
The Innovation Shares NextGen Protocol ETF (KOIN) was the last of the four to launch in January, and by then some of the buzz around these funds had subsided. That might partially explain why its AUM was just $5 million by the end of March. Along with LEGR, it’s the cheapest of the four funds, with an expense ratio of 0.65% (BLOK has the highest at 0.70%).
KOIN tracks an index that uses artificial intelligence to choose portfolio holdings. Specifically, it employs a proprietary natural language processing algorithm that reads large volumes of information from news outlets on online media platforms and databases to perform keyword searches and identify companies tied to blockchain technology in various forms.
“We come up with a long list, and then we put each of the stocks into a stakeholder category,” says Matt Markiewicz, managing director at Innovation Shares. “And each category gives you a better idea of how the stock relates to the theme.”
The first category includes companies that accept crypto as payment for goods and services, or which develop blockchain payment solutions. That category includes Visa, Mastercard and Square.
The second category is mining enablers that produce equipment to mine for new blockchains. That includes Nvidia, Taiwan Semiconductor, AMD and Micron Technology.