Securities regulators squashed the dreams of a dozen companies earlier this month when they asked them to pull their applications for bitcoin exchange-traded funds. But two ETFs tied to blockchain, the technology behind bitcoin, came to life even as those bitcoin ETFs died.
Blockchain has taken on the same magical quality as bitcoin, with companies using it as a buzzword they know will appeal to investors—a turbocharger to turn a boring business into a rocket ship. Investors have rushed into the two blockchain ETFs, from Reality Shares and Amplify ETFs, since their launch on Jan. 17. By Friday, they were together managing more than $250 million in assets, an astonishing rate of growth.
A look under the hood of these ETFs, however, shows that—by design—they’re unlikely to live up to the hype around blockchain. For the most part, they are filled with the kind of humdrum investments that would appeal to those who otherwise find digital coins terrifying.
For cautious investors looking to dip a toe into this new phenomenon, the ETFs are an appealing option. But for anyone who wants to make a substantial bet on transformative change, they fall well short. If the buyer-beware for bitcoin is, “Look out, this thing could go bust!” the warning for these ETFs is, “Relax! These are a mundane mix of tech and financial stocks.”
Blockchain is software that enables computers to keep a shared ledger of data. It is the backbone of bitcoin, allowing people to transact with each other without a middleman. But it’s also useful for other operations. At financial companies, it could greatly simplify record-keeping and speed up transactions like trade settlement. Walmart (ticker: WMT) is even testing it to track its food-supply chain.
While bitcoin is worth nearly $200 billion, these other uses for blockchain may eventually be worth much more. But it’s been difficult for investors to bet on the new technology. Blockchain-focused companies such as San Francisco–based Chain aren’t public. For large public companies, blockchain is still in the pilot or experimental phase.
As a result, “these funds are investing in companies where you really require an extension of the imagination,” says R.A. Farrokhnia, executive director of the Columbia University Fintech Program. “At best they are tangentially touching blockchain.”
Yet smaller companies have found that their stocks often rise substantially simply by adding the word “blockchain” to their name, a phenomenon that has drawn the attention of the Securities and Exchange Commission. Indeed, the SEC apparently wouldn’t let the blockchain ETFs use the word “blockchain.” “The day before launching everybody was rushing to change the names to please the SEC,” says Kian Salehizadeh, senior analyst at Reality Shares, which named its product Reality Shares Nasdaq NexGen Economy ETF (BLCN). The SEC had no comment.
The regulator was onto something: Blockchain can cause irrational exuberance. “It’s already our biggest fund by a wide margin, and it’s been out a little over a week,” Salehizadeh said. “That gives you a sense of how hot the space is right now. Unfortunately one issue is that a lot of people misconstrue blockchain as meaning specifically cryptocurrency.”
So what’s in the Reality Shares ETF? Among the top holdings is an intriguing upstart called Intel (INTC).
The Reality Shares ETF, a passive fund that charges 0.68% in fees and gets rebalanced twice a year, had attracted $93 million in assets under management by Friday. Including Intel, the holdings in its fund are weighted toward big tech names like IBM (IBM), Cisco Systems (CSCO), and Microsoft (MSFT). While those companies have been developing blockchain-related software and hardware, the technology isn’t a major income driver yet. Overstock.com (OSTK), currently the largest holding, is still making money in retail, but it has been developing a platform to trade digital coins that resemble bitcoin.
The other ETF, Amplify Transformational Data Sharing ETF (BLOK), is actively managed and charges 0.7% for the first year. It recently held $170 million in assets. Mike Venuto, the chief investment officer of Toroso Investments, is subadvising the fund. He thinks a fund like this needs to be actively managed because blockchain technology is moving so quickly. “I don’t think this is an industry that you can track passively, because just changing a name can move a stock a thousand percent,” Venuto says.
AMPLIFY IS ALSO WEIGHTED toward tech stocks, and is making a more direct bet on companies that profit from cryptocurrency mining and trading. Its largest holding is Taiwan Semiconductor Manufacturing (TSM), whose chips are used by companies that mine digital coins. “In any gold rush, everybody selling a shovel makes money,” Venuto says.
Much of the portfolio is more vanilla. Goldman Sachs Group (GS), which is experimenting with blockchain, gets a nearly 3% weighting, for instance. But there are other quirky choices, including Eastman Kodak (KODK), which announced a confusing new blockchain endeavor that quickly drew skeptics. Salehizadeh criticizes these choices as too risky. “Our methodology weeds those out,” he says.
If none of these options look appealing, investors will soon have more from which to choose. First Trust also launched a blockchain ETF on Wednesday, and Innovation Shares plans another ETF next week.
The word blockchain won’t be in their names, of course. But that won’t stop investors from riding the blockchain wave.