The arrival of the blockchain ETF this year gives investors a new - and less risky - option for investing in a technology expected to grow into a $3.1 trillion market.
In January, the number of blockchain exchange-traded funds (ETFs) went from zero to four in just two weeks. In May a fifth launched, and more surely will follow.
The reason behind this sudden wave of blockchain ETFs is simple. The research firm Gartner expects the value of blockchain technology to skyrocket 44-fold, from just $4 billion this year to $176 billion by 2025 - and an astounding $3.1 trillion just five years after that.
What investor wouldn't want a piece of that action?
While each blockchain ETF takes a different approach, they share one basic concept. The idea is to buy publicly traded companies that stand to benefit from the growing application of blockchain technology.
Blockchain, of course, is the technology that underpins cryptocurrencies like Bitcoin and Ethereum. The buzz around blockchain derives from its many applications across multiple industries.
That means the potential winners can come from a surprisingly large variety of sectors, ranging from banking and finance to manufacturing to healthcare.
An ETF is an ideal way to gain exposure to a wide range of these blockchain stocks.
Plus, because it's such a young technology, it's unclear exactly who the biggest winners will be. Buying an ETF provides exposure to multiple candidates.
And in the case of blockchain tech, an ETF provides an investment with much lower risk and hassle than buying and holding actual cryptocurrencies.
Just look at what's happened so far this year...
Why a Blockchain ETF Strategy Is Less Risky
Most investors know cryptocurrencies are notoriously volatile. The past year has been a case in point.
Bitcoin, the flagship cryptocurrency that sets the tone for the crypto markets, soared 900% in six months - from under $2,000 in July to nearly $20,000 in December.
Since then, Bitcoin has slumped badly. When the price of Bitcoin fell below $6,000 in February, it represented a decline of nearly 70% in less than two months. Today, the Bitcoin price is about $6,700 - still down about 66% from the December high.
These extreme price swings have occurred several times in Bitcoin's short, 9.5-year history. That's a characteristic most investors try to avoid (unless they're traders, but that's a different story).
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Meanwhile, the life of a blockchain ETF - comprised of an assortment of mostly well-established stocks like Microsoft Corp. (Nasdaq: MSFT), Accenture Plc. (NYSE: ACN), Goldman Sachs Group Inc. (NYSE: GS), and Nvidia Corp. (Nasdaq: NVDA) - is much more stable.
Four of the five blockchain ETFs are up since their inception, with gains ranging from 1.48% to 4.00%. One is down 0.56%, a far cry from Bitcoin's decline.
While offering exposure to the promise of crypto technology, these ETFs aren't subject to the drama of the crypto markets.
But you don't want to choose a blockchain ETF at random. Here's what you need to know about each one of these investments - and the one we like best...
Sizing Up All 5 Blockchain ETFs
REX BKCM ETF (NYSE Arca: BKC)
- Date of inception: May 16
- Assets under management: $6.4 million
- Number of holdings: 34
- Top five: Taiwan Semiconductor (NYSE ADR: TSM), Global Unichip Corp., GMO Internet Inc., SVB Financial Group (NYSE: SIVB), Overstock.com Inc. (Nasdaq: OSTK)
- Expense ratio: 0.88%
- Gain/Loss year to date: +3.53%
- NAV: $25.62
The newest blockchain ETF may have the most aggressive strategy. It aims to invest in companies actually part of the blockchain ecosystem. That includes not just companies building blockchain-based software solutions, but companies that promote adoption of cryptocurrencies as well as crypto miners.
BKC also reserves the right to have up to 25% of its holdings in a Cayman Islands subsidiary. That would permit the ETF to invest in futures without triggering the need for a Schedule K-1 tax form (investors in master limited partnerships will be familiar with that one).
BKC is also actively managed, which will allow it to quickly adjust its holdings as new opportunities arise. Such flexibility is a key advantage considering how early we are in blockchain development.
On the negative side, BKC has the lowest amount of money under active management of the group and the highest expense ratio. In BKC's case, you're talking about $8.80 of fees for every $1,000 invested.
Innovation Shares NextGen Protocol ETF (NYSE Arca: KOIN)
- Date of inception: Jan. 30
- Assets under management: $14 million
- Number of holdings: 42
- Top five: Visa Inc. (NYSE: V), Amazon.com Inc. (Nasdaq: AMZN), Microsoft Corp., Intel Corp. (Nasdaq: INTC), Tencent Holdings Ltd. (OTC: TCEHY)
- Expense ratio: 0.65%
- Gain/Loss year to date: +3.73%
- NAV: $25.57
Appropriately enough for a technology ETF, KOIN uses artificial intelligence to build its holdings. An algorithm looks for associations between companies and blockchain-related keywords.
KOIN is also tied with LEGR for the lowest expense ratio among the group.
Rebalancing is quarterly with a semi-annual review, which is less than ideal but mitigated by the predominance of large, conventional stocks.
The conventional holdings also make KOIN the least-risky option. But the scant exposure to many of the smaller companies with higher potential will limit upside.
The next three funds are the most promising - including our top pick...
First Trust Indxx Innovative Transaction & Process ETF (Nasdaq: LEGR)
- Date of inception: Jan. 24
- Assets under management: $47 million
- Number of holdings: 83
- Top five: Advanced Micro Devices Inc. (Nasdaq: AMD), Nordic Semiconductor, SAP AG (NYSE: SAP), Alibaba Group Holding Ltd. (NYSE ADR: BABA), Micron Technology Inc. (Nasdaq: MU)
- Expense ratio: 0.65%
- Gain/Loss year to date: +1.48%
- NAV: $30.32
First Trust Indxx has a somewhat broader investment philosophy that it divides into three categories.
Tier-one companies are "enablers," those actively developing blockchain-based products or systems or serving as direct service providers for blockchain tech. Tier-two companies are active users of blockchain tech.
Tier-three companies are "explorers," which means they're looking into adopting the technology. The fund aims to focus mostly on the first two categories.
LEGR is tied for the lowest expense ratio in the group, but it is in the middle of the pack when it comes to assets under management.
One drawback is that the fund only plans to rebalance twice a year, making it less nimble than an actively managed fund. Another is that the managers apparently can't spell "index."
Reality Shares Nasdaq NexGen Economy ETF (Nasdaq: BLCN)
- Date of inception: Jan. 17
- Assets under management: $130.7 million
- Number of holdings: 65
- Top five: Advanced Micro Devices Inc., Intel Corp., Microsoft Corp., Digital Garage Inc., SAP SE
- Expense ratio: 0.68%
- Gain/Loss year to date: -0.56%
- NAV: $23.67
BLCN combines artificial intelligence with a human element. An algorithm identifies companies expected to benefit most from blockchain tech and assigns them a score.
But BLCN also has put together as advisory board of industry experts to oversee the choices as well as the philosophy of the fund.
Like KOIN, BLCN is heavy on the big names, which will limit upside. The expense ratio is only slightly higher than the lowest offered here.
BLCN is a safe bet that could get better over time it if takes advantage of the brainpower in its advisory board - the one thing that really distinguishes this ETF.
Now, here's the blockchain ETF we like best...
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Amplify Transformational Data Sharing ETF (NYSEARCA: BLOK)
- Date of inception: Jan. 16
- Assets under management: $190.2 million
- Number of holdings: 52
- Top five: Digital Garage, GMO Internet Inc., Square Inc. (NYSE: SQ), Taiwan Semiconductor Manufacturing Co. Ltd., Overstock.com Inc.
- Expense ratio: 0.70%
- Gain/Loss year to date: +4.00%
- NAV: $20.79
Like the other blockchain ETFs, the investment goal of BLOK is to seek out companies best positioned to profit from blockchain technology.
To do this, BLOK looks for four types of companies: those actively engaged in blockchain research, those profiting from blockchain tech such as supply chain data, those partnered with companies using blockchain tech, and members of consortiums working on blockchain tech adoption.
The managers invest 70% of their assets in "core" companies, which they've identified as the businesses that get the most revenue from blockchain-related activities.
As a result, BLOK's holdings are a bit more daring than its peers, suggesting higher gains over time.
BLOK also leads the way in assets under management, so it has proven its ability to attract more capital than its rivals.
Plus, BLOK is actively managed, which, as noted above, provides maximum flexibility in reacting to a quickly changing sector. And it means you're getting value for the slightly higher expense ratio.
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About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.