The Amplify Transformational Data Sharing ETF (BLOK +0.47%) offers investors an easy way to get exposure to companies that should theoretically prosper with the rise of blockchain and the adoption of blockchain-related technology.
Before piling in the fund with your retirement money, though, one should take some time to explore how the fund works, what it costs, and what, exactly, it intends to invest in.
1. How it picks blockchain stocks
The Amplify Transformational Data Sharing ETF is different than most, given that it's actively managed by portfolio managers who will pick and choose which securities make their way into the portfolio. So, while it won't use a strict, rules-based method for picking stocks, it does have a few standards for which stocks are eligible to be included in the ETF, based on some simple parameters.
Generally speaking, the basic requirements are that U.S. stocks must have a market cap of at least $75 million, while foreign stocks must have a market cap of at least $100 million. It also requires stocks to meet minimum liquidity requirements, with average daily trading volume of at least $250,000 over the prior six months.
Image source: Getty Images.
The portfolio managers intend to divvy up the portfolio between "core" and "secondary" holdings, which made up 70% and 30%, respectively, of the portfolio at launch. Its "core" holdings must generate significant revenue or have a significant invested interest in "transformational data sharing-engaged companies."
On the other hand, so-called "secondary" holdings can include companies that invest or partner in such technologies, including companies that participate "in multiple blockchain industry consortiums."
To me, it sounds like a mouthful of jargon, but it appears to be written to give the managers a lot of leeway to choose stocks for the portfolio.
2. Its expense ratio
Typically, ETFs that track companies involved in certain themes or sectors are costlier than ETFs that track simple, well-known market indexes. This fund is also actively managed, which adds to its expenses that are passed on to investors.
The Amplify Transformational Data Sharing ETF will carry an expense ratio of 0.90% per year, though it will temporarily waive 0.20 percentage points of the annual fee until Jan. 16, 2019.
I'd call it an expense ratio of 0.70% per year, given that ETF issuers have generally spent more time slashing fees than increasing them, but it's important to point out that this fund is only temporarily priced at 0.70% per year. It could elect to eliminate the fee waiver at a later time.
Realistically, the fee is pretty low for an actively managed fund, yet high enough that it affords some latitude for the ETF manager to pay for distribution by getting it listed on retail brokers' commission-free ETF lists. After the fee waiver, it's only slightly more expensive (2 basis points after the fee waiver) than another blockchain ETF, Reality Shares Nasdaq NexGen Economy ETF (BLCN +1.42%).
3. Stocks it owns
Because it is an actively managed ETF, the Amplify Transformational Data Sharing ETF's holdings and their weightings may change more frequently than if it were a simple index ETF, but it discloses its holdings at the end of each trading day. The 10-largest holdings are detailed in the table below. Note the concentration in software and technology stocks.
|
Stock |
Percentage of ETF's Assets |
|---|---|
|
Taiwan Semiconductor Manufacturing |
6.1% |
|
Digital Garage |
5.5% |
|
SBI Holdings Inc. |
5.5% |
|
Overstock.com |
5.3% |
|
IBM |
4.5% |
|
NVIDIA |
4.4% |
|
Square |
4.2% |
|
Hive Blockchain Technologies |
4.2% |
|
GMO Internet |
4.1% |
|
Citigroup |
3% |
|
Total top 10 holdings |
46.7% |
Data source: AmplifyETFs.com.
One thing that sets this ETF apart from Reality Shares' blockchain index ETF is just how concentrated it is. Amplify's ETF has about 47% of its assets in its top 10 holdings, whereas Reality Shares has just 22% of its assets in its 10-largest positions.
I'd also argue that the Amplify ETF is also much more focused on true "blockchain" stocks, though it's far from perfect. (Seriously, how much can Citigroup's earnings really grow because of blockchain? I'd guess not very much, unless you count people who are buying bitcoin on Citi credit cards.)
A good way to bet on blockchain?
There are things I like and dislike about the Amplify Transformational Data Sharing ETF. As for dislikes, I'm generally not a fan of actively managed ETFs, since they tend to be a little less transparent and costlier than index-based ETFs. That said, in a "Wild West" industry, it can make sense to pay up for active managers who can carefully navigate between blockchain shams and legitimate blockchain bets.
I can see where this fund may be able to generate excess returns by making opportunistic investments in certain smaller operators. Because some of the smaller blockchain companies frequently raise cash with stock and warrant issuance, the Amplify Transformational Data Sharing ETF may be able to take part in deals that are off the table for ETFs that merely track an index.
Based on its major holdings at the time of writing, I think this ETF is more exposed to traditional technology stocks than blockchain and cryptocurrencies, but for those who want to speculate on the emerging technology, one could do worse than making a small wager on the Amplify Transformational Data Sharing ETF.
