The technology associated most famously with Bitcoin, but also full of promise for other uses, backers say, is getting love from ETF providers.

Despite the 2018 bear market and blockchain often being conflated with the fortunes of bitcoin, financial and tech figures continue to search for how more institutional investors can enter the market.

Earlier this week US investment firm Invesco, in partnership with London-based Elwood Asset Management, launched The Invesco Elwood Global Blockchain UCITS ETF on the London Stock Exchange. The new ETF will tap into the earnings potential of companies using blockchain technology. The rollout suggests that the industry is becoming more comfortable with exposing investors to the technology.

Gary Buxton, Invesco head of ETFs for Europe and the Middle East, said blockchain technology’s potential to disrupt companies in virtually every industry makes it “a strong long-term investment case”. 

In simple terms, blockchain, known as distributed ledger technology (DLT), allows users to transfer assets peer-to-peer and create a tamper-proof transparent and permanent record of all transactions involving those assets. Although crypto-currencies were the first to use blockchain, assets can be any type of information flowing between parties; such as medical records or legal contracts or even physical assets moving along a company supply chain. 

Elwood CEO, Bin Ren, whose company specialises in exposing institutional investors to blockchain applications said: “We are beginning to see the technology being used by financial services companies in particular, but we expect greater application of blockchain technology across a wide range of industries.”

In terms of allocation, Elwood's ETF, which is reviewed quarterly, holds 46 per cent in information technology, 23 per cent in financials, 9 per cent in communication services and 8 per cent in both the materials and consumer discretionary sectors. The three largest geographical allocations are in the US (39 per cent), Japan (29 per cent) and Taiwan (12 per cent).

The 48 portfolio companies initially tracked favour mainstream multinationals, including tech giants Samsung and Apple, US chip makers Nvidia and Applied Micro Devices, and extraction companies Rio Tinto and Barrick Gold, but also provide a smattering of more pure play companies.

“Over time, we would expect the balance to shift naturally to companies with more significant direct exposure to blockchain-related earnings as the technology becomes more ubiquitous,” said Kevin Beardsley, head of business development at Elwood. 

In other momentum last December, the Austin Texas-based Yeoman’s Growth Capital launched a fund focusing exclusively on blockchain technology aimed at institutional investors. The fund aims to raise $200 million to support late-stage companies providing blockchain solutions. Chair Henry Liu told this newswire shortly after the launch that it was registering strong interest in Asia and the UAE, but equally it was early days in explaining to would-be investors what the technology can do.

“The interesting part right now is that all these investors, because they are first-time investors, want to learn,” Liu said.

“We are targeting new institutions and family offices that are in the $200 to $500 million [AuM range] looking to allocate 1 or 2 per cent of their assets in this new asset class, and that takes education, so we are going through and teaching them how we are going to do this, the structure we put in place and why this makes sense,” Liu continued.

Questions are typically: “What enterprises are you working with? What enterprises are solving what problems? What sorts of problems can we solve with the blockchain technology?” 

Liu said much of blockchain's utility lies in replacing the manual work of auditors on the data validation side. He pointed to data privacy issues, asking: “Do you want to give data to a centralised company or do you want to give it to a neutral blockchain solution where data is running through a protocol as opposed to one company’s database? And, if you do run data through a centralised database, you run the risk of getting hacked,” he said.

Machine data collected in peoples’ homes or data about manufacturing processes in plants are much more valuable than just emails and phone numbers, he added.

Hacker risks
Liu said companies are thinking hard now about the implications of being hacked and far more cautious about what they want to do with it, “especially in the AI and the IoT (Internet of Things) space, and blockchain is helping with a lot of those conversations.”

The US Securities and Exchange Commission has yet to approve an exchange-traded fund for crypto-currencies, citing “enormous” risk still for investors. However, a handful of blockchain-related ETFs are emerging focused more on its role as a development protocol than as a crypto wielding enabler. Most notable is The Amplify Transformational Data Sharing ETF (BLOK) actively managing around $110 million in assets, with a portfolio of companies not dissimilar to that of Invesco.

For investors seeking a more enduring upside of distributed ledger technology, these ETF vehicles are seen as a way of creating more exposure to companies using it to build a competitive edge.

“The potential for blockchain to drive real earnings is huge, but it is often hidden within companies involved in other areas,” said Chris Mellor, head of ETF equity product management for EMEA at Invesco. “This ETF offers investors access to companies with real earnings now, but with the added potential of blockchain-related earnings not reflected in their share prices.”