BLOK - BLOK: Better Than Peers For Blockchain Exposure

2023-07-24 07:41:01 ET

Summary

• Blockchain-themed ETF BLOK has not seen major inflows despite renewed interest in blockchain and cryptocurrency investments; its inflows were mainly concentrated in January 2021.
• BLOK is an actively managed ETF investing in companies involved in blockchain technologies, with top 10 holdings taking up more than 40% of the fund's total weight.
• Despite similar exposures to the blockchain industry, BLOK has lower historical volatility compared to its peers, and has outperformed traditional equities year-to-date, but lagged behind its peers.

Blockchain and cryptocurrency have long been a hot topic over its popularity among young retail investors and its potential to revolutionize traditional finance. With SEC accepting 6 Spot Bitcoin ETF proposals for review, including one from BlackRock, the prospect of investing in blockchain and cryptocurrency have reignited. However, a blockchain-themed ETF such as Amplify Transformational Data Sharing ETF ( BLOK ) has yet to see any major inflows following the developments as its inflows were still mainly concentrated back in January 2021. Hence, it's worth looking into BLOK to further understand its investment characteristics.

According to the fund manager, BLOK is "an actively managed ETF that seeks to provide total return by investing at least 80% of its net assets in equity securities of companies actively involved in the development and utilization of blockchain technologies" . Unlike many ETFs, it is not tracking any index but rather fundamentally assessed by the research team at Amplify. As there are not many blockchain-related stocks, the portfolio is fairly concentrated with its top 10 holdings taking more than 40% of the fund's total weight. However, this composition can already be considered as well-diversified compared to its ETF peers focusing on the blockchain industry.

While the fund manager aims to diversify allocation based on the blockchain industry value chain, they would all still be subjected to similar risks due to their active involvement and participation in blockchain.

Performance Review

Year-to-date, BLOK has actually outperformed traditional equities, including the broad market ( SPY ) and technology sector ( XLK ) which have both already exceeded expectations. However, BLOK lagged behind its peers, such as BITO which seeks to provide Bitcoin-linked returns and BKCH which has similar objectives as BLOK but with a much more concentrated portfolio.

Since January 2022, BLOK did not lose as much as its peers (BKCH and BITO) despite still lagging behind the broad market. The downside/ drawdown protection may actually be more important when gaining exposure to an already volatile and emerging sector. Hence, I think BLOK has an edge on performance compared to its peers.

Risk Analytics

Despite having similar exposures to the blockchain industry, BLOK has much lower historical volatility compared to its peers. BLOK has an annualized volatility of ~45% where BITO is close to 60% and BKCH at a stunning 80%.

The 5Y Bollinger chart below also visualizes the price volatility of BLOK on a 3-month rolling basis, where it has been trading close to its +1 sigma above the rolling mean - indicating a potential overbought in recent periods.

Meanwhile, the rolling Alpha for BLOK relative to SPY has been mostly positive across most periods in the year and gaining some positive momentum lately. Meanwhile, its rolling Beta used to be high above 1 (more sensitive to movements in SPY) but has been getting closer to 1 - which indicates that BLOK may have been gaining better risk-adjusted returns than SPY.

Fundamental Deep Dives

It is difficult to decompose the underlying fundamentals of blockchain companies where business models are usually still immature and growing. The ETF does not have a P/E ratio as many of its holdings are yet to be profitable. The chart below reflects exactly that, where most of BLOK top holdings have strongly negative returns, and surprisingly even for revenue growth.

The street seems to have priced the blockchain companies in very different ways, with price targets running from 43.7% upside for BITF to 99.6% downside for COIN . Thus, it is clear that this space is still new and emerging and there is generally no consensus around it. Any investor with strong belief in the industry should then take the opportunity to invest as market sentiment is yet to be built up.

Conclusion

BLOK proves to be an effective ETF with a relatively diversified portfolio and strong track record with better-than-peers risk-adjusted return. However, any prospective investor should be aware that this ETF is actively-managed (hence exposures may be different than what you expect from a typical cap-weighted index fund), and the underlying fundamentals of blockchain companies remain weak and messy.

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