What Is a Blockchain ETF?

Similar to standard sector- or theme-based stock investments through exchange traded funds (ETFs), blockchain ETFs work by exclusively investing in a basket of blockchain-based companies that have business operations in blockchain technology or those that invest or profit from it. 

Key Takeaways

  • Blockchain ETFs are exchange traded funds that invest in a basket of companies that use blockchain technology for operations.
  • The main thesis of blockchain ETFs is that blockchain technology enables companies that use it to cut costs and simplify their operations through decentralization.
  • Blockchain ETFs come with the inherent risk of betting money on tech startups that could fail and hit regulatory roadblocks across the globe.

Understanding a Blockchain ETF

Blockchain is a fairly new technology that generates a ledger, which stores all information regarding a transaction (date, time, dollar amount, etc.). This ledger is decentralized, meaning it is not kept in one location but rather distributed across a network that can be viewed by the public. The information in the ledger is also incorruptible.

To constitute being a blockchain ETF, the ETF must invest in companies that focus on the development of blockchain with the purpose of altering business operations or invest in cryptocurrencies through the use of derivatives.

Blockchain ETFs offer dual benefits: pooled investments in baskets of stocks like that of a mutual fund and real-time trading with tick-by-tick price changes like that of a stock.

Blockchain ETFs have a broader mandate as compared to Bitcoin ETFs, which are yet to be approved by the Securities and Exchange Commission (SEC). This is primarily because blockchain, the technology, can be used in multiple industries beyond finance. For example, it is being used in the supply chain industry to track the origin of a product and its movement across complicated supply chains encompassing multiple geographies and regulatory regimes.

As blockchain's applications across industries grow, analysts have latched onto it as a significant competitive differentiating factor. The technology's enthusiasts claim that it reduces overall transaction costs and decentralizes the ecosystem of an industry. However, this thesis is yet to be proven in several industries.

Investing in a Blockchain ETF

Blockchain ETFs can be actively managed or passively managed, will cover companies with international exposure, and will track the performance of blockchain-based indexes specially designed to serve as benchmarks for the ETFs.

Blockchain ETFs are a relatively recent phenomenon. As such, it is difficult to determine trends or derive conclusive results from their performance. However, many blockchain ETFs have witnessed positive returns in 2019 and 2020.

That being said, investors are still concerned with the long term prospects of blockchain ETFs, as some claim there is a novelty to blockchain as a technology, which may not last. It is yet to be determined if this is a lasting technology with long-term applications that would justify increased investments. As with all investment portfolios, it is best to seek diversification and not concentrate on only one type of investment.

Blockchain ETFs also come with the inherent risk of betting money on technology-based startups while the blockchain concept is still evolving, and, therefore, regularly hitting regulatory roadblocks across the globe.

Choosing a Blockchain ETF

Two popular blockchain ETFs include the Reality Shares Nasdaq NexGen Economy (BLCN) ETF and the Amplify Transformational Data Sharing (BLOK) ETF.

The Reality Shares Nasdaq NexGen Economy seeks to replicate the returns of the Reality Shares Nasdaq Blockchain Economy Index. As of Sept. 11, 2020, the fund has $120 million in net assets and an annual performance of 8.38% since inception.

As of June 30, 2020, the fund invests 47% in information technology companies, with its top holdings being Overstock.com, Square Inc, Docusign Inc, and SBI Holdings Inc. The fund has a gross expense ratio of 0.68%.

The Amplify Transformational Data Sharing ETF has net assets of $125 million as of Sept. 22, 2020, an annualized performance of 10.93% since inception, and a gross expense ratio of 0.90%.

The fund invests 31% of its assets in the software and services sector with 46% of investments being in the Asia Pacific region and 44% in North America, as of June 30, 2020. Its top holdings are Square Inc, Z Holdings Corp, GMO Internet Inc, and Kakao Corp.