Blockchain technology has been hailed by its boosters as the “next internet revolution,” a shift that will transform financial services, logistics and other industries that make transactions and keep records.
It’s perhaps best known as the tech that underpins cryptocurrencies such as bitcoin. But it’s also known as a distributed ledger technology (DLT), because that’s what it offers business and consumers, says Spencer Barnes, associate vice-president of mutual funds and exchange-traded fund (ETF) strategy with Raymond James Ltd. in Toronto.
“Once written onto that ledger, data can’t be easily manipulated” without all parties knowing it’s been changed, he says. Consequently, as a source of record it’s strong and secure, he says.
All told, blockchain could improve data transparency, reliability and security, presumably at a much lower cost than current methods used for record keeping and validating transactions.
“Initially, the financial services industry stands to benefit the most from this technology,” says Christopher Bednarz, an analyst at Gravitas Financial Inc. in Toronto.
According to a 2017 study from the consulting firm Accenture, blockchain could reduce costs for many of the world’s largest investment banks by 30 per cent, he adds.
But blockchain’s potential extends beyond the financial services industry to include any company with supply-chain management needs, such as the food sector, because it can help track products from source to endpoint in real time.
“Blockchain can also be used in health care to manage electronic medical records as well as expedite medical diagnostic test results in a safe and secure manner,” says Mr. Bednarz, who writes on blockchain technology for Smallcappower.com.
Predictions aside, whether blockchain could change the world as fundamentally as the internet has – even giving rise to the next Amazon – remains to be seen, says Craig Maddock, senior portfolio manager with MD Financial Management in Ottawa. “At this point you’re really speculating that somehow this new technology will be massively transformative and, therefore, value-generating and profit-maximizing for somebody.”
For this reason, he adds, his firm does not have an investment strategy regarding blockchain. “But if you want to get in early, buying a basket of these companies makes a heck of a lot more sense than trying to pick a winner.”
Investors have plenty of choices. Blockchain has given rise in the past year to ETFs tracking businesses involved one way or another in the technology. Additionally, because no particular blockchain ETF can cover all the possible ways the technology may prove profitable, buying several would also spread risk and cast the “widest net possible,” Mr. Maddock argues.
Here are some of the options out there.
This fund offers a middle-of-the-road approach to investing in the technology with both large- and small-cap exposure. The ETF holds “10 core large technology companies engaged in blockchain, such as Visa and Accenture PLC,” Mr. Bednarz says. Yet more than half of the portfolio is invested in emerging companies, including Mogo Finance Technology Inc., a Vancouver-based fintech startup. All told, the fund has 21 positions and even pays a modest dividend yield of 0.79 per cent. Having traded for less than a year, the fund has no management expense ratio (MER) but charges a management fee of 0.65 per cent.
This fund invests mostly in large-cap firms that could benefit most from blockchain technology. About three quarters of its holdings are large multinationals that are integrating the technology into their business models. “It’s a nice diversifier within a core equity portfolio,” Mr. Barnes says. While investors probably own many of the larger names in the fund – such as Verizon Communications Inc., Walmart Stores Inc. and Thomson Reuters Corp. – the ETF is a low-cost, low-risk and simple way to boost exposure to large-cap leaders in blockchain and in turn reap the added returns the technology brings over the long term. The fund’s management fee is 0.75 per cent.
This fund leverages other emerging technologies – artificial intelligence and machine learning – to create an index of companies that hold the most blockchain patents. “Somewhat surprisingly, key holdings are companies that are among the world’s largest financial companies,” Mr. Barnes says. Like other ETFs holding larger firms, LDGR is a low-cost, buy-and-hold strategy for the sector. But because it holds a number of very small, pure-play blockchain companies it might also offer more upside in the short term should the markets become euphoric about blockchain similar to the way they reacted to the cannabis industry. LDGR’s management fee is 0.64 per cent.
Traded on the Nasdaq, this fund is one of the most diversified ETFs covering this segment of the market. It offers access to companies involved in blockchain, from its development and research to manufacturing hardware that supports it. It also offers plenty of “international exposure to companies developing blockchain solutions to improve their businesses,” especially large-cap stocks on the fast-growing Asian market, Mr. Bednarz says. To that end, more than 35 per cent of its holdings are companies based in Asia. As well, the fund is an elder statesmen of ETFs in this sector, having been around for more than a year with a MER of 0.68 per cent.