Launched: Jan. 24, 2018
Expense ratio: 0.65%
AUM: $14 million
LEGR is an index-based strategy, tracking the Indxx Blockchain Index. The decision to go the index route versus an actively managed route was deliberate, and reflected what First Trust sees as the newness of blockchain as a theme.
“We specifically sought to make this a passive fund because an active fund needs a leader in the space, a specialist to lead stock selection,” said Ryan Issakainen, senior VP and ETF Strategist at First Trust. “In a theme like blockchain, we weren’t confident there was an experienced manager out there to really add value in an active strategy.”
That relative newness is what First Trust sees as the challenge to finding pure-play companies in a theme that’s neither mature nor a bona fide industry yet. From an index perspective, investing in blockchain requires significant analysis to identify companies that belong in a portfolio.
The methodology here looks for companies that benefit from providing products and services that relate to blockchain. Companies leveraging blockchain to make their business more efficient and competitive are also considered. It’s a two-tier approach in a way.
Bucket one is what First Trust calls “active enablers”—firms akin to being pick axes to miners, as Issakainen puts it. Names here include IBM, Microsoft and NVIDIA. There are 14 companies in this bucket right now, representing 50% of the overall portfolio.
The second bucket consists of blockchain users, a larger group of companies that are sector diverse. There are more than 50 names in this part of the portfolio sharing the other 50% of the portfolio, so companies incorporating blockchain to their business in search of better efficiencies and competitiveness individually carry less weighting in the overall portfolio. Securities are equally weighted within their buckets.
According to First Trust, enablers will have bigger impact on the blockchain industry as a whole as they lead innovation and development; so, allocating more heavily to them makes sense.
Like most of these ETFs, LEGR is tech-heavy, but it also offers sector exposure to financials, consumer staples and discretionary. As blockchain, as an industry matures, sector representation should widen.
Here’s a snapshot of the portfolio today:
Source: First Trust
For a larger view, please click on the image above.
Commit Or Not Commit?
Themes take time to develop and evolve. Issuers will tell you time horizon matters in thematic investing, which also means there’s often volatility along the way. Asset flows will go in and out as investors react to that volatility.
A long-term time commitment to the theme from both an investor’s and issuer’s perspective—their willingness to stick to a fund that may see assets ebb and flow—will both be key to thematic investing in spaces like blockchain.
Contact Cinthia Murphy at [email protected]