Blockchain Technology ETF – The Best Blockchain ETFs in Canada
The interest in Blockchain has surged as of late as Bitcoin becomes more and more relevant. Crypto is no longer an investment option for tech junkies and misfits; it has made the watchlist or even the portfolio of many mainstream investors.
Naturally, the two are inherently linked, but one common mistake investors make is to assume one equals the other.
Unfortunately, it is a mistake made by many, especially those who are just learning how to buy stocks, and one that could not be further from the truth. Blockchain is not Bitcoin, and Bitcoin is not Blockchain.
Without going into great technical detail, Blockchain is the technology that underpins the Bitcoin cryptocurrency. Blockchain powers Bitcoin, and while it was initially created for Bitcoin, they are not one and the same.
Decentralization
Blockchain is a decentralized database or a ledger that is distributed across many computers. Hence, it is referred to as decentralized; arguably, it is what makes Blockchain’s technology so revolutionary and why the use cases expand far beyond that of cryptocurrencies.
Many believe that Blockchain’s decentralization will revolutionize the way companies do business. For one, it is largely considered to be safe as there is no single point of attack for which to target. Secondly, Bitcoin has made the use case for making digital transactions much easier (and secure).
Finally, given its nature, Blockchain leads to greater transparency and increased accuracy and can ultimately lead to significant cost reductions.
The potential use cases for Blockchain are too many to list but include things such as executing contracts, maintaining records and auditing. Today, organizations worldwide are investigating how they can utilize and adopt Blockchain technology.
How can individual investors benefit?
Exchange Traded Fund (ETF) investing is one of the simplest ways of gaining exposure to a broad base of assets. Canadian ETFs cover markets, sectors, and industries and, in some cases, get down to specific niche industries. Blockchain is one such niche industry, and in Canada, there are two solid options for investors.
Think of an ETF as a mutual fund, a diversified way for investors to get access to niche investment strategies, all while keeping their expenses much lower.
Since these ETFs trade on the Toronto Stock Exchange, buying them is as simple as buying a stock using your favourite online broker. It’s a simple way to get access to an exciting new type of asset.
- Harvest’s Blockchain Technologies ETF (TSX:HBLK)
- Horizon’s Big Data and Hardware ETF (TSX:HBGD)
Harvest’s Blockchain Technologies ETF (TSX:HBLK)
It is worth noting that there have been a few failed attempts at Blockchain ETFs in the past, and today, Horizon’s Blockchain Technologies ETF is one of the only ones left standing. The fund aims to track the performance of the Harvest Blockchain Technologies Index.
The Harvest Blockchain Technologies ETF stock (TSX:HBLK) invests in equity securities of issuers exposed, directly or indirectly, to the development and implementation of Blockchain and distributed ledger technologies.
The fund is now almost five years old, having first launched in December of 2018. A $10,000 investment in HBLK would be worth $9,687 as of the end of November.
It’s worth noting that this ETF performed extremely well from 2018 until early 2021, nearly tripling in value before falling pretty substantially as investor interest moved away from the Blockchain.
If you’re a long-term believer in the technology, then this temporary lull in the stock price of HBLK could be a nice entry point.
Holdings include a mix of well-established large caps and stand-alone emerging blockchain companies. As of the end of November, emerging and large-cap companies accounted for 55% and 44% of the fund.
It carries a high 0.65% Management Expense Ratio (MER) fee and is eligible for most account types. It has just over $19 million in assets under management, which makes it quite small compared to most ETFs.
As of writing, the company is trading at $11.12 per share, pretty much the same as its net asset value (NAV) of $11.13 per share. This ETF has traded above its NAV when investors were excited about the Blockchain. Now that interest has cooled a little bit, the NAV premium has disappeared.
The ETF appears to be well diversified, with no holding accounting for more than 8% of the fund. Combined, the Top 10 account for approximately 50% of assets. Among the notable names, there are upstarts and hypergrowth stocks such as DocuSign and Square, which are complemented by large players such as Intel and Oracle.
Coinbase, the prominent crypto trading platform, is the fund’s largest holding. Like most ETFs, it is not covered by any analysts.
Horizon’s Big Data and Hardware ETF (TSX:HBGD)
Although it is not explicitly stated in its name, Horizon’s Big Data and Hardware ETF (TSX:HBGD) is a blockchain-focused fund.
The fund seeks to replicate the performance of the Solactive Blockchain Technology & Hardware Index, which tracks companies focusing on blockchain innovation and development and companies providing hardware and hardware-related services used in blockchain applications.
Horizon’s ETF has more reasonable fees than the Harvest ETF, checking in at 0.59%. At today’s price of $14.91 per share, it trades at a slight discount to its NAV of $14.98. Like the Harvest ETF, this ETF also traded at a premium to its net asset value when investors were clamouring to get into blockchain stocks.
A $10,000 investment in HBGD at the time of its inception would be worth almost $22,000 at the end of October. While this ETF is also down substantially from its peak, it has delivered better returns with a smaller drawdown than HBLK.
Just because the stock has performed well in the past is no guarantee of future results, however.
Somewhat surprisingly, the fund also pays a modest annual distribution of $0.14282 per share (right around a 0.70% yield). Distributions are rare for ETFs that track technology and growth stocks. Horizon’s ETF is made up of approximately 50% mid-to-large cap stocks, while 23% of holdings are microcap stocks.
This is accentuated by the makeup of the company’s holdings.
Although this fund isn’t nearly as top-heavy as it used to be — at one point, just two investments in the fund accounted for 30% of its total holdings — the top 10 names in the portfolio are a mixture of established tech stocks and Blockchain-related small-cap names.
For instance, top holdings are Galaxy Digital (TSX:GLXY), which has a $2.5 billion market cap, Via Technologies, which trades in Taiwan, and crypto giant Coinbase (NASDAQ:COIN).
Furthermore, nearly half the fund’s total assets are invested in companies that trade outside of North America, with approximately one-third of assets in companies that operate in Asia. This makes HBGD by far the most globally diversified of the two funds.
Once again, this is a small fund with only $12.7M in assets and is a higher-risk investment. It isn’t very liquid either, with only a few thousand shares being exchanged on a typical day.
This fund is not well suited for trading purposes, meaning if getting out of a position at a moment’s notice is important to you, you may want to consider another blockchain ETF.
HBLK vs HBGD
Interestingly, both ETFs offer something different and can be held together without worry of much overlap. Harvest’s fund is likely to be less volatile, given its exposure to some of the larger and more traditional tech companies.
Horizons appears to be the purest play of the two; however, it comes with additional risk, given the makeup of its holdings. Although greater risk comes with greater reward, should one of HIVE or RIOT falter, the fund could take a significant hit.
As of writing, HBLK is also trading at a higher valuation. This isn’t surprising because the blockchain industry is struggling as of late, depressing the earnings of the underlying companies. (Also see how Canadian covered-call ETFs are affected by market trends).
In such a scenario, I’d expect the fund with the higher risk profile to trade at more expensive valuations.
Overall, both look like solid options. Which fund an investor prefers really comes down to personal choice. HBLK has more exposure to larger tech names with a more indirect interest in the Blockchain, while HBGD has a more globally diverse portfolio.