Blockchain ETFs launch after bitcoin rout

The fund industry has a propensity to roll out products just as a market trend peaks

Jan 19, 2018 @ 2:38 pm

By John Waggoner

The mutual fund industry has a long history of rolling out new specialty funds at precisely the wrong time, and the latest round of blockchain funds isn't detracting from that reputation.

Bitcoin, the most popular digital currency, saw its value peak above $19,000 in December. As of this writing, it's trading at $11,227 after dipping below $10,000 earlier this week. Among the possible worries for bitcoin investors: A plethora of rival cryptocurrencies, as well as threatened crackdowns on trading by South Korea and China.

On Wednesday, Reality Shares launched Reality Shares Nasdaq NexGen Economy ETF (BLCN). At the same time, Amplify Trust ETF launched Amplify Transformational Data Sharing ETF (BLOK). Both funds aim to invest in stocks of companies that take advantage of blockchain, the decentralized technology used to record transactions for bitcoin and other cryptocurrencies.

You won't find a bitcoin in either ETF. The top three holdings in Reality Shares Nasdaq NexGen Economy ETF are Intel Corp. (INTC), Overstock.com Inc. (OSTK) and International Business Machines (IBM). About 57% of the ETF is invested in technology stocks, and 32% is in financials. The Amplify offering's largest holdings are Taiwan Semiconductor Mfg. Co. Ltd. (TSM), Overstock.com Inc. and Digital Garage Inc. (TYO).

The Securities and Exchange Commission required both companies to remove the word "blockchain" from their ETFs' names, in part because anything with the word "blockchain" has skyrocketed. In December, Long Island Iced Tea Corporation changed its name to Long Blockchain Corporation. Its shares soared as much as 289%.

Three companies — ProShares, Rafferty Asset Management and Exchange Traded Concepts — have withdrawn applications to offer bitcoin ETFs after the SEC expressed concerns about liquidity and valuation of bitcoin futures contracts. Direxion Asset Management, never one to shy away from volatile offerings, has proposed ETFs that use leverage to multiply bitcoin performance up to 2x its daily return. The funds would be called Direxion Daily Bitcoin Bear 1X Shares, Direxion Daily Bitcoin 1.25X Bull Shares, Direxion Daily Bitcoin 1.5X Bull Shares, Direxion Daily Bitcoin 2X Bull Shares and Direxion Daily Bitcoin 2X Bear Shares.

"The fact that the SEC was reluctant to approve bitcoin ETFs and ETFs that had 'blockchain' in their names should give advisers and investors concern about the risks related to such investments," said Todd Rosenbluth, senior director of ETF and Mutual Fund Research at CFRA.

Advisers considering bitcoin or blockchain ETFs should also note the fund industry's propensity for rolling out products just as a market trend peaks. It takes a while for companies to spot new trends and to get ETFs or funds through the SEC approval process. By that time, the roller-coaster has started its downhill slide. For example, the fund industry launched 37 technology funds in 1999 during the dot-com bubble. Just five of the tech class of 1999 survive today, according to Morningstar.

More recently, fund sponsors launched numerous international funds that used hedging to minimize the effect of currency fluctuations, Mr. Rosenbluth said.

"Almost every asset manager that had an unhedged offering had a currency-hedged version," he said.

Unfortunately for those funds, the dollar's long bull market ended — and so did the popularity of hedged funds. Many of them have since closed.

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