The latest addition to the growing roster of ETFs focused on blockchain technology offers a unique twist in its methodology. The Innovation Shares NextGen Protocol ETF (KOIN) tracks an index that relies on artificial intelligence to select its components.
KOIN comes with an expense ratio of 0.65% and lists on the NYSE Arca exchange.
“One of the tough things about identifying stocks in thematic investing is that themes often don’t show up in financials. They’re not very apparent in 10-Ks or 10-Qs,” said Matt Markiewicz, head of ETF sponsor Innovation Shares. “Themes also span borders and cross sectors, so the traditional fundamental and analytical process is sort of tough to employ when you’re building an index looking to capture a certain theme. With the process that we take and employ, by using an algorithm, we’re able to harness the power of AI.”
The selection universe consists of equities listed on the major stock exchanges of developed and emerging markets that have at least $100 million in market capitalization and a six-month average daily traded value of at least $1 million, as well as sufficient free float.
From there, the methodology relies on a natural language processing algorithm that uses keywords to identify companies that support, develop or use blockchain and related technologies and have strong ties to the space, the prospectus says.
Essentially, the artificial intelligence used by the firm “reads” through an immense amount of information, including news articles. It gauges the strength of the relationships between and the sentiment around the companies that are uncovered and the various keywords.
“What you’re doing is taking away some of the bias in securities identification,” said Markiewicz.
The methodology sorts companies into four stakeholder buckets: cryptocurrency payees, mining enablers, solutions providers and blockchain users. None of the index’s components can be cryptocurrencies or the derivatives based on them.
Companies are scored based on the strength of their relationship with the blockchain theme and then ranked within their respective buckets, with up to 15 stocks selected for each stakeholder bucket. Components of the index are weighted by market capitalization, but individual weights are capped at 7% of the index, and stakeholder category weightings are capped at 40%, the document says.
The prospectus notes that the index had 42 components as of late January. The benchmark is reconstituted twice a year and rebalanced quarterly.
Contact Heather Bell at [email protected]