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Blockchain ETFs are on a steep climb up – but it may take a while for disillusioned investors to return

January 2018 saw the first four blockchain ETFs break onto the scene in quick succession in the US. They were somewhat of a novelty, tracking the share price of 20 to 50 companies developing or using blockchain in some capacity, for an average 0.75% management fee. Investors flocked to them, pumping in hundreds of millions, hoping to nab a piece of a pie predicted to save banks between $15 billion and $35 billion a year according to consulting firm Bain.

However, a snapshot review at the start of 2019 looked less than promising. Between their inception and January, the value of the 6 major ETFs all dropped between 5% and 22%. In particular, the flagship Amplify Transformational Data Sharing ETF (BLOK) dropped 20%. As a result, investors retreated, with the ETF’s combined net investment assets (AUM) losing more than $21 million in combined net outflows, or ~7% of the combined funds brought into the products in 2018. One blockchain ETF even closed in January.

But today, things look a little different as winter turns to spring. Analysing the performances of 3 of the biggest (by AUM) Blockchain ETFs in the last 6 months, things are on the upswing. These graphs, in order of AUMs, illustrate their steady rise in value between January and today. KOIN was the best performing fund up over 22% YTD.

The trend looks to be far-reaching, even across more recent ETFs. For instance, the Invesco Elwood blockchain ETF, listed in London and geared at institutions, is also up in its first 2 months.

Once bitten, twice shy

Still, investors remain cautious. The three ETFs above are still having lower or equivalent AUMs than in January 2019. For instance, BLOK’s AUM stood at $118 million then, and has dropped to $110 million today. 

But Matt Hougan, Global Head of Research at Bitwise Asset Management, says he’s surprised that blockchain ETFs hadn’t seen more outflows.

“While blockchain ETFs have posted positive returns this year, they’ve substantially lagged the broader tech industry,” he told The Block, pointing to the 25.7% rise in the Select Sector SPDRs Tech ETF (XLK) over the same 6 month period.

“It’s hard to get investors to pay the 0.70% or 0.68% expense ratio for BLOK or BLCN when XLK charges 0.13%, is more liquid, and has delivered better returns.” Still, it’s good to keep things in proportion. Relative to the S&P 500’s 15.8% return year-to-date, BLCN and BLOK both trump it, with a 21.1% and 19.7% rise respectively.

It’s also worth noting blockchain ETFs don’t necessarily expose investors to pure blockchain companies. Indeed, most firms included in the index have only a peripheral interest or business-plan around the technology.

Still, Hougan added that it was a healthy first step for those curious about the industry and wanting to learn more.

“I’m glad these ETFs exist as they open up conversations about blockchain technology with professional investors, and I think eventually there will be enough pure-play companies to have real, pure play blockchain equity ETFs. But right now, the industry is too new to make that a reality.”

Eric Ervin, CEO of Blockforce Capital, formerly known as Reality Shares which launched the BLCN ETF, echoed similar comments to The Block.

“Over the past six months, the group of blockchain related ETFs on average are up about 15%, yet assets on average are flat. This would infer about 15% outflows.”

Ervin did preface that this type of behaviour is not atypical for newly launched ETFs geared towards the most hyped innovation.

“Often times we find investors both institutions as well as retail, flock to the funds and sectors with the most hype, only to grow complacent and sell out of it after the hype has died down but before the real performance can be recognized.  Case in point, right now we are seeing significant flows into Pot stock ETFs.”

“Just like the Gartner hype cycle demonstrates, investors typically miss out on the most important building period of disruptive innovation, which happens after the hype subsides,” Ervin concluded.
Ryan Todd contributed to this report.