Blockchain ETFs Stall Despite Returns

September 05, 2019

Blockchain ETFs are having a great year in performance, delivering solid gains relative to the broader market. The trouble is, no one seems to care, despite blockchain being touted as “the next big thing.”

The biggest blockchain ETF, the Amplify Transformational Data Sharing ETF (BLOK), is up 24% year to date. The S&P 500, as measured by the SPDR S&P 500 ETF Trust (SPY), is up 18.5%. Yet investors have yanked $15 million in net assets from BLOK year to date. The fund has seen only one day of positive flows so far in 2019.

Other blockchain ETFs are also seeing negative net asset flows this year. The Reality Shares Nasdaq NexGen Economy ETF (BLCN) and the Innovation Shares NextGen Protocol ETF (KOIN) are also handily beating SPY this year (as the chart below shows), but both funds are faced with net redemptions year to date.

 

Chart courtesy of StockCharts.com

 

Good performance has done little to attract investor dollars to this corner of the market.

This apparent lack of appetite for blockchain funds, most of which debuted about a year ago, could be tied to two main factors:

No 1: Aversion To Risk

Investor appetite for riskier pockets of the market has been muted—at best—this year.

Blockchain as a segment of the equity market is perhaps the epitome of growth, as blockchain-linked companies tread the cutting edge of new technology. Many have yet to understand what blockchain is and how it works.

That’s a segment that doesn’t quite fit the overarching—prevailing—narrative this year: that investors ought to play it safe in the face of global macroeconomic and geopolitical head winds. Growth stocks are risky; technology growth stocks are particularly so.

A look at ETF asset flows this year shows an increasing aversion to risk. U.S. and international equity ETFs faced $22 billion in net outflows last month alone. Year to date, equity ETFs have attracted less than half the fresh net assets U.S. and international fixed income funds have—this has been a year for safety plays.

No. 2: Lacking ‘Proof Of Concept’

Also weighing on blockchain ETFs could be a perceived lack of “proof of concept” when it comes to blockchain’s early-on promise of revolutionizing all sorts of industries.

To many, blockchain remains the difficult-to-understand technology behind cryptocurrencies, and nothing more. That’s actually not a far-fetched perception, according to Christian Magoon, founder of Amplify.

He noted that the performance of BLOK this year has been highly correlated to price action in bitcoin, adding to that perception. Bitcoin more than doubled in value this year, and is currently sitting around $10,500 per coin.

“There’s been a lot of development in blockchain going on,” said Magoon, “but investors are looking for more projects and application beyond cryptocurrencies.”

How Will Blockchain Drive Profits?

“For blockchain to be a viable investment theme, we need two things,” he noted. “First, we need to have cryptos stabilize and rally; second, we need blockchain application for companies to become a driver of profits.”

Neither of these things is yet in place. Yes, bitcoin has rallied sharply this year, but many have been looking for a corrective move that took bitcoin off recent highs such as backing up toward support levels around $8,000. It’s a market that’s still very volatile.

On the application front, blockchain is said to be changing the global shipping industry, for example, but investors are still looking for more headline-grabbing implementation involving household-name companies doing interesting things with blockchain.

A quick glance at BLOK’s top holdings shows that a lot of companies leading implementation of blockchain are global stocks that U.S. investors may not know much about. At the top, GMO Internet and Digital Garage are Japanese internet services and infrastructure providers using blockchain technology in their tools and services.

News such as Facebook’s efforts to launch Libra would help this segment attract more investor attention.

 

 

Ahead Of Their Time?

It could, in the end, all be a matter of timing.

The big growth potential story tied to Blockchain—the same one that sent ETF issuers racing to bring first-to-market blockchain ETFs about a year ago when four funds launched within days of each other—is still intact. But it could be that these funds were ahead of their time.

It’s not unusual to see narrowly focused thematic ETFs take a few years before finding traction, and blockchain ETFs—funds accessing one of the growthiest tech edges of the market—may have been just a little too early to the party.

You can see a complete list of blockchain ETFs here.

Contact Cinthia Murphy at [email protected]

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