Assets under management in the Invesco Elwood Global Blockchain UCITS ETF have surged through the $750 million mark, reaching $827 million as of close of trading on 12 February.
The commercial benefits of blockchain are increasingly being realized.
The fund, which provides exposure to companies globally that generate, or have the potential to generate, earnings from blockchain technology, has experienced a twenty-fold increase in size since the beginning of 2020.
The fund’s explosive growth has been driven by stellar market performance and an unwavering flow of creations, reflecting the innovative and snowballing industry in which the fund invests.
The strategy has delivered one of the most impressive performances following the Covid-19 sell-off in February and March of last year, gaining an incredible 210.1% between 23 March 2020, when the S&P 500 bottomed out, and 12 February 2021.
This compares to a return of 49.4% for the SPDR S&P 500 ETF (SPY US) and 51.2% for the iShares MSCI ACWI ETF (ACWI US) over the same period (all performance data stated in US dollar terms).
The fund’s performance has caught the attention of investors with the ETF recording positive net inflows every month over the past year and attracting over $440m in total net new assets. This year’s bumper flows of $125m in January and $101m in February month-to-date suggest that investor interest is accelerating.
Matt Tagliani, Head of ETF Product and Sales Strategy for EMEA at Invesco, commented: “Flows into our ETF have been steady over the past year and have come from a variety of sources across Europe, from larger institutions to wealth managers and private banks investing on behalf of high-net-worth individuals. And we expect demand to continue growing as investors become more familiar with blockchain.”
Blockchain potential
Blockchain is essentially a network of computers that keep transactions secure in a decentralized database, or digital ledger, similar to a shared spreadsheet, that the network can see and must approve before it can be verified and recorded. Once recorded, no one person can change it without the agreement of others, and it is nearly impossible to tamper with.
Blockchain underpins cryptocurrencies, like bitcoin, but it has many more uses and practical applications. The technology is able to streamline diverse business processes by moving data of any kind swiftly and securely while enhancing transparency and reducing the potential for fraud.
According to a recent report published by Invesco and independently written by Keith Bear and Michel Rauchs, academics at Cambridge University’s Judge Business School’s Centre for Alternative Finance, the blockchain industry has evolved at a remarkable pace over the past 18 months, creating burgeoning opportunities for investors.
The report notes that commercial blockchain networks have now been established across multiple sectors including insurance, banking, real estate, trade financing, supply chain management, and shipping, and in many cases have now achieved scale. For instance, over 50% of the world’s total container traffic has now been committed to run on blockchain.
Many new permissionless (public) blockchain networks have been launched to address the increasing number of commercial blockchain applications, while there has also been a greater focus on the interoperability of permissionless and permissioned (private) networks. This growing infrastructure has further helped blockchain to permeate all industries of the economy.
Tagliani said: “The application of blockchain technology into commercially viable solutions has evolved at an even quicker pace than we envisioned when we launched our ETF in March 2019. It is possible the pandemic may have increased the urgency.
“Improving efficiencies and reducing costs were key objectives for early adopters but the past year has highlighted the importance of security and reliability of transacting across borders. There are now clear examples of both permissioned and permissionless systems operating at scale in a growing number of industries.”
Despite new applications for blockchain being developed daily, the focus for the technology is still primarily on the financial sector where it is currently revolutionizing the space through digital fiat currencies, digital securities that are modernizing capital markets, and broader tokenization of existing physical assets.
Some major commercial banks, such as JP Morgan, are already developing their own stablecoins (cryptocurrencies that peg their market value to an external reference) while fintech firms, other payment service providers, and technology titans have also expressed interest.
According to the report, Facebook’s 2019 announcement of its own stablecoin – Libra (recently rebranded to Diem) – prompted central bankers from all continents to take action. Stablecoins are now the subject of systemic risk considerations, and central banks are actively exploring the issuance of central bank digital currencies as a public-sector alternative to privately-issued forms of digital money, with the People’s Bank of China taking the lead.
Keith Bear, Fellow at Cambridge Judge Business School’s Centre for Alternative Finance, commented: “The crescendo of activity on central bank digital currency, stablecoins, and tokenized assets points to major new means of facilitating trade, payments, and investments in the evolving digital economy. What has largely been a retail-driven market is now becoming more institutional, as ‘unicorns’ and start-ups, brokerages, custodians, institutional trading platforms, and global banks build a range of digital asset products and services.”
Despite the growing proliferation of blockchain technology, capturing the true blockchain investment opportunity may still be tricky as Invesco notes there are few pure-play blockchain companies available in the market. Instead, most companies with the potential to generate earnings from blockchain have well-established businesses in other areas, and blockchain merely presents an additional source of revenue. This hidden potential may provide an opportunity for investors if they can find it.
Chris Mellor, Head of EMEA ETF Equity and Commodity Product Management at Invesco, said: “The challenge facing any investor who wants to gain exposure to the blockchain theme is how to do it effectively. There’s not a ‘blockchain sector’ in which to invest. Instead, companies generating revenues from the technology – or with the potential to do so – are spread across multiple industries and range from start-ups to huge conglomerates. They are often not obvious. We launched the Invesco Elwood Global Blockchain UCITS ETF to provide investors with diversified exposure to an index constructed by experts in digital assets.”
Index methodology
The ETF is linked to the Elwood Blockchain Global Equity Index which was developed in partnership with Elwood Asset Management, an investment firm owned by hedge-fund billionaire Alan Howard which specializes in providing institutional investors with exposure to digital assets and blockchain technology.
Driven by insights from Elwood, companies from both developed and emerging markets are assigned a ‘Blockchain Category Score’ based on that firm’s percentage of corporate value attributable to blockchain technology.
In determining a firm’s score, Elwood examines the company’s involvement in several blockchain-related business areas including cryptocurrency mining hardware and technology operations; energy and token investments; financial services and payment systems; and blockchain technology solutions, consulting, or communication services.
Scores range from 5 (‘core’ blockchain companies with over 50% corporate value attributable to blockchain) to 1 (companies that currently do not conduct any blockchain-related business activities, but have assets, expertise, or technology with blockchain growth potential).
Constituents are selected starting with the highest scores, then progressively including lower-scoring companies until a total of 75 securities is met. Stocks are weighted based on their Blockchain Category Scores, adjusted for liquidity to ensure tradability. The index is reviewed and rebalanced quarterly.
Stocks listed in the US (34.2%) and Japan (25.6%) dominate the index’s exposure with the next largest country weights being South Korea (9.3%), Canada (8.2%), and Taiwan (7.2%).
Not surprisingly, the index has a strong sector leaning towards information technology stocks which account for half (50.5%) of the index weight, followed by financials (27.6%) and communication services (12.7%).
Realizing potential
The fund comes with an expense ratio of 0.65% and is available to trade on the London Stock Exchange in US dollars (BCHN LN) and pound sterling (BCHS LN), on Xetra (BNXG GY) and Borsa Italiana (BCHN IM) in euros, and on SIX Swiss Exchange (BCHE SW) in US dollars.
Commenting on how investors may deploy the ETF within their portfolios, Tagliani concluded: “Thematic investments such as blockchain are often used to complement core equity exposure. In fact, when our ETF was launched, it behaved much like any other global equity portfolio for its first year but has since outperformed as the blockchain potential is being realized. Just cast your mind back to the birth of the internet. Nobody then could have imagined just how transformative it would be. Well, blockchain can do the same for the transfer of assets, and it is only in its infancy.”
Invesco is not entirely alone in tapping the potential of this space. First Trust also offers a blockchain ETF in Europe which the firm introduced in April 2018. The First Trust Indxx Innovative Transaction and Process UCITS ETF (BLOK LN) tracks the Indxx Blockchain Index, providing exposure to companies that actively invest resources into products or services that enable and use blockchain technology. The fund, which also costs 0.65%, currently has around $60 million in AUM.