BLOK - BLOK: When The Bear Dust Settles This ETF Will Be On My Short List To Buy

2023-10-19 16:12:37 ET

Summary

• BLOK is an ETF that focuses on blockchain technology and is considered a long-term buy once market conditions allow.
• Blockchain technology is a shared, immutable ledger that tracks transactions and assets, with potential for growth in the global market.
• BLOK is a high-beta ETF that can be used as a complementary position in a portfolio, with potential for future bull market holdings.

The Amplify Transformational Data Sharing ETF ( BLOK ) is a fund I expect to give serious consideration to in a stronger market. Given its penchant for high volatility versus the S&P 500, I will look at it as a small, “tail” position in it, to complement bigger positions in my portfolio. In the 7-ETF portfolio model (the most detailed of the 3 I run), it is a prominent ticker on the watchlist. But it will probably take a new bull market to make it more than a trading/tactical position.

With the average S&P 500 stock roughly flat the past two years, it is hard to find much in the equity market that I can consider for more than a trade. So instead, I’m creating a short list of niche ETFs that I expect to focus on as long-term buys, once I believe that conditions allow for that. Among the 200 ETFs I cover, BLOK is near the head of the class in that respect.

The current bear market has gradually led to declining consumer demand for traditional goods and services. However, the demand for innovation, technology, and entertainment within the digital/online world continues to grow. This includes so-called ”blockchain technology.”

The blockchain: translation from tech-speak to English

BLOK’s fund site describes blockchain as follows:

“A peer-to-peer shared, distributed ledger that facilitates the process of recording transactions and tracking assets in a business network.”

I read that and said…huh?!

So here’s a plain-English translation, for those who, like me, seek to profit from the group of blockchain stocks in BLOK, not earn a PhD in digitization. I took this from a company that used to be considered as cool as Blockchain-related businesses are now: IBM , and added some of my own words in brackets where I thought it was helpful to further simplify.

Blockchain overview

Blockchain is a shared, immutable ledger (that is, it can’t be changed, ever) that facilitates the process of recording transactions and tracking assets in a business network. An asset can be tangible (a house, car, cash, land) or intangible (intellectual property, patents, copyrights, branding). Virtually anything of value can be tracked and traded on a blockchain network, reducing risk and cutting costs for all involved.

Why blockchain is important: Business runs on information. The faster it’s received and the more accurate it is, the better. Blockchain is ideal for delivering that information because it provides immediate, shared and completely transparent information stored on an immutable ledger that can be accessed only by permissioned network members. A blockchain network can track orders, payments, accounts, production and much more. And because members share a single view of the truth, you can see all details of a transaction end to end, giving you greater confidence, as well as new efficiencies and opportunities.

Global blockchain market: bigtime potential, but patience required

According to a report in Fortune Business Insights , the global blockchain technology market size is projected to grow from $17 billion in 2023 to more than $400 billion by 2030. This growth is fueled by the relentless conversion in daily life from traditional methods of doing, well, just about everything. Digital approaches have taken over, particularly when it comes to many types of financial transactions. Online payment platforms are now the standard, rather than the upstart. And the blockchain is an ever-expanding driver of those platforms.

Blockchain versus Crypto

I want to be very careful to distinguish my views on the blockchain from those regarding cryptocurrency. I believe in the massive future potential of the blockchain, but I am highly skeptical of much of the cryptocurrency industry. I’m not one to turn down a short-term profit opportunity, and so I have traded ETFs that track Bitcoin both on the long and short side. But when it comes to allocating serious capital to digital currencies, I have virtually no interest in that. Investing in businesses setting themselves up to benefit from the blockchain makes sense to me, just as investing in semiconductors did 30 years ago (yes, I’m that old). But when it comes to the blockchain’s “cousin,” I’ve seen enough of Sam Bankman Fried and the others to determine there are many, many market segments I’d invest in before taking on the opacity of the coin business.

And that brings me to BLOK, one of a small number of ETFs that invests in Blockchain technology. It does so through a portfolio of approximately 50 companies, which is fairly concentrated, as 25 stocks account for more than 75% of assets. I like that degree of concentration, since it helps me track what I own inside of the ETF.

ETF size, performance, and key features

BLOK’s net assets are currently $416 million. The ETF is up 33% in 2023, but that might be the most misleading thing I could say about it. That’s because it has been a year-to-year roller coaster ride for this group of stocks. This year is a recovery from 2022’s 62% loss, which was about three times that of the S&P 500. The three prior calendar year returns (2021, 2020, 2019) were gains of 31%, 90% and 30% respectively.

That speaks to the hype surrounding blockchain as a futuristic industry, as well as to the potential for giant profits. But I’m not yet at the point where I’m sold on the ability for this slice of the market to take off amid a broader equity environment that is at best stagnant, and at worse a calamity waiting to happen.

BLOK is not a passive, index-based ETF. It is an active fund with human managers deciding what to buy and sell. For full disclosure, I know two of the managers through my extensive professional network and active presence in the ETF research industry. But to be clear, that does not impact my views on this ETF one way or the other. It does explain why I knew about it and used it on occasion for trading purposes (buying, selling, and put/call options on it) before many investors knew about it.

Within the world of digital currency, online payments, and blockchain technology and innovation, it’s easy to see the range of versatility BLOK has, even within the top 10 holdings. Companies that mine bitcoin and trade crypto currency are represented here, as are businesses that innovate and invest in new technology. Those include a focus on Artificial Intelligence, cloud computing, clean energy, and infrastructure for the digital universe. BLOK also has holdings in companies who also invest in or, are partnering with companies that work directly with blockchain. The ETF is primarily invested in US-based businesses (66%), but the other third of current exposure is to businesses based outside the US. That may be a benefit once the US Dollar eventually reverses course.

Holdings analysis

You can find BLOK's top 10 holdings on its Seeking Alpha ticker page. But I found it interesting to remove the company names and just list what types of business the top 10 holdings are involved in. I think that helps us better understand what this modern industry covers via BLOK. Here they are:

1. Trading cryptocurrency

2. AI apps for business and cloud-native technologies

3. Information communication equipment and computer software

4. Edge computing, sustainability, AI, Blockchain, cloud, digital engineering and manufacturing

5. Bitcoin mining company

6. Holistic financial platform spanning three complementary operating businesses: Global Markets, Asset Management, and Digital Infrastructure Solutions

7. Market leader for domain names and web hosting services in Japan, also online advertising and media, Internet financial services, mobile entertainment, and cryptocurrency.

8. Online payments system

9. Digital banking platform and digital financial services in Brazil, Mexico, Colombia, and internationally.

10. Bitcoin mining and clean energy infrastructure

Investment Opinion

BLOK is an ETF I expect to give serious consideration to in a stronger market, where I can use it as a way to “leverage” a new bull market, but without using actual leverage. It is a very high beta ETF, and thus by taking a small, “tail” position in it, it can play a nice complementary role. Specifically, in a portfolio of 7 ETFs, BLOK would be considered for a position of roughly 5-10% of the total portfolio. Compare that to an “anchor” holding such as a broad-based equity ETF, where the position size might be 20-30% or more.

Conclusion

These high tech holdings are exciting to the futurist in me. However, it remains to be seen whether or not BLOK, like other ETFs that hold cryptocurrency-related stocks, will be able to escape being more than just a proxy for what Bitcoin’s price is doing. I am optimistic that the market will come to separate the two ideas, and so BLOK is on my short list for a future bull market portfolio holding. Until that time, it is a trading tool, no different than, say an Emerging Markets or Commodities ETF.

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