Two blockchain exchange-traded funds (ETFs) launched on Wednesday, and they're the first of their kind: Reality Shares Nasdaq NextGen Economy ETF (BLCN +0.02%) and Amplify Transformational Data Sharing ETF (BLOK 0.17%).
The timing of these launches might not seem ideal, with bitcoin's price getting clobbered over the last month, after soaring during much of 2017. However, blockchain is much more than just the underlying technology that supports bitcoin and most other digital currencies. The digital and decentralized public ledger has a potentially massive range of applications, and it could transform the financial services industry and many others.
Investing in these ETFs gives investors exposure to fast emerging blockchain technology, but just how good are they? Let's take a look.
Image source: Getty Images.
Reality Shares Nasdaq NextGen Economy ETF
This ETF tracks the Reality Shares Nasdaq Blockchain Economy Index, "which is comprised of companies committing material resources to developing, researching, supporting, innovating or utilizing blockchain technology for their proprietary use or for use by others." It had 51 holdings at launch, plans to have 50 to 100 holdings at any given time, and will be rebalanced semiannually. It had a net asset value of $2.0 million on Wednesday, and has an expense ratio of 0.68%, which is moderately reasonable.
Its top 7 holdings:
|
Rank |
Company |
Market Cap |
Headquarters |
Weight (% of Portfolio) |
|---|---|---|---|---|
|
1 |
Intel (INTC +1.89%) |
$208 billion |
U.S. |
2.43% |
|
2 |
Overstock.com (OSTK 3.39%) |
$1.9 billion |
U.S. |
2.39% |
|
3 |
IBM |
$156 billion |
U.S. |
2.37% |
|
4 |
Cisco Systems |
$204 billion |
U.S. |
2.26% |
|
5 |
Hitachi |
$40.8 billion |
Japan |
2.21% |
|
6 |
Microsoft |
$695 billion |
U.S. |
2.19% |
|
7 |
Hive Blockchain |
$625 million |
Canada |
2.17% |
|
Total Top 10 Holdings |
|
22.38% |
Data sources: Reality Shares Nasdaq NextGen Economy ETF and Yahoo! Finance. SAP (Germany), SBI Holdings (Japan), and Barclays (U.K) are Nos. 8, 9, and 10, respectively. Data as of 1/17/18.
The Reality Shares NextGen Economy ETF's top holding is Intel, the chip giant that has a stranglehold on supplying central processing units (CPUs) for PCs and computer servers, and also makes other types of chips. Intel has several blockchain-related initiatives. In October, it announced that its processor technology was being used by Oracle to provide a cloud-based blockchain service to enterprise companies. In August, it said that it was collaborating with Microsoft and others to build the enterprise-focused Coco Framework to deliver improved blockchain transaction speed, scale, and data security.
Overstock.com, the ETF's No. 2 holding, whose stock price soared 265% in 2017, is a discount online retailer, which accepts bitcoin and select other cryptocurrencies for payment. Overstock is making a big push into blockchain. Its majority-owned subsidiary, tZERO, has been building the company's blockchain-based system for securities transactions. Its wholly owned Medici Ventures subsidiary manages the tZERO project, and invests in other blockchain technologies.
Image source: Intel.
Amplify Transformational Data Sharing ETF
The Amplify Transformational Data Sharing ETF is an actively managed fund, with an aim similar to the Reality Shares' ETF. It had 49 holdings at launch, had a net asset value of $2.0 million on Wednesday, and has an expense ratio is 0.70%, which is moderately reasonable.
Its top 7 holdings:
|
Rank |
Company |
Market Cap |
Headquarters |
Weight (% of Portfolio) |
|---|---|---|---|---|
|
1 |
Taiwan Semiconductor Mfg. Co. (TSM +0.01%) |
$214 billion |
Taiwan |
6.12% |
|
2 |
Overstock.com |
$1.9 billion |
U.S. |
5.60% |
|
3 |
Digital Garage |
$1.5 billion |
Japan |
5.34% |
|
4 |
SBI Holdings |
$4.0 billion |
Japan |
5.09% |
|
5 |
IBM |
$156 billion |
U.S. |
4.53% |
|
6 |
NVIDIA (NVDA +1.02%) |
$136 billion |
U.S. |
4.41% |
|
7 |
Square |
$15.6 billion |
U.S. |
4.26% |
|
Total Top 10 Holdings | 46.17% |
Data sources: Amplify Transformational Data Sharing ETF and Yahoo! Finance. Hive Blockchain, GMO Internet (Japan), and Intel are Nos. 8, 9, and 10, respectively. Data as of 1/17/18.
This ETF's top holding is Taiwan Semiconductor Mfg. Co., which is a contract manufacturer of semiconductors. It's benefiting from the rise of cryptocurrencies because it makes chips that are being used to mine digital currencies. For instance, TSMC makes the application-specific integrated circuits (ASIC) that go into many of the rigs being used to mine bitcoin.
We looked at No. 2, Overstock, above, so let's look at another Amplify holding: NVIDIA. It focuses on making discrete graphics processing units (GPUs) for computer gaming and artificial intelligence (AI)-driven applications, such as data centers and driverless vehicles. Those GPUs have found a new market among miners of certain cryptocurrencies, such as Ethereum and other newer, smaller ones.
The bottom line
There are two major differences between the Reality Shares NextGen Economy ETF and the Amplify Transformational Data Sharing ETF. The former is an index fund and not very concentrated, as its top 10 holdings comprise just 22% of the fund's total value. By contrast, the Amplify ETF is actively managed, and its top 10 holdings account for 46% of its value. Neither approach is necessarily better -- and since the Amplify ETF is a managed fund, it's too soon to know how well its managers will do at picking stocks.
Neither ETF is an ideal play on blockchain since most of their top holdings are big companies that have only a small amount of exposure to blockchain and cryptocurrencies relative to their total operations. This limitation exists with many ETFs, though it is perhaps amplified (pardon the pun) for these ETFs because blockchain is such a new technology. All in all, though, they appear to be decent options for investors who want to invest in this growing trend, but don't want to select their own blockchain-related stocks.
