Let’s begin with a quick reminder on the ETF. An ETF, or Exchange-Traded Fund, is a method by which one can own a set of investments relatively easily and cheaply. It is one type of investment fund that is legally qualified as a security. ETFs track a collection of assets, such as an index fund, a commodity, bond or derivative. Assets can be combined, physically or synthetically, into a legal ETF wrapper, which enables retail investors to buy shares of underlying assets through their traditional brokers, who then can trade the ETFs like stocks on an exchange.

ETFs have become a popular investment tool due to a few reasons: low costs, tax efficiency, diversification, transparency, and accessibility. Most ETFs have reasonably low fees and are tax friendly due to their structure, especially compared to their counterparts, mutual funds. Another advantage is the variety within ETFs, which allows investors to buy underlying assets of different industries, countries, and sizes. They are transparent because investors know what they are buying and holdings are usually disclosed on a daily basis. Finally, ETFs are accessible — they can be bought, sold or traded at any time of the day. For these reasons we decided a list detailing the 10 ETFs worth watching within both the traditional finance and blockchain markets would be a useful tool, especially for the latter, as funds invested in blockchain technology are on the rise in 2018. Each ETF included in our list was evaluated based on a combination of factors such as expense ratio (management fee), underlying assets and liquidity.

ETFs are traded like stocks on an exchange, but are not stocks. They represent shares of underlying assets.

Traditional ETFs

1. The first ETF on our list is the world’s biggest, the SPDR S&P 500 ETF Trust (SPY) and also known as ‘spider’. Asset Under Management (AUM) are almost $277 billion, which is roughly the same GDP of Finland. In the last 30 days, It traded at about 105 million shares per day on average. To make a comparison, Bank of America — the most actively traded stock within the S&P 500 Index — only traded an average of 73 million shares in the same time period. SPY has a low management fee, and its strong trading volume, on average almost $15 billion, makes it a great investment choice for both experienced traders and beginners.

Expense Ratio: 0.09%

Underlying Assets: S&P 500 Index

Liquidity: high

2. In second place is the Vanguard Total Stock Market ETF (VTI) with $92 Billion AUM. Vanguard, a pioneer in indexing, has some of the best ETFs with high assets on the market. Like their popular mutual fund, Vanguard Total Stock Market Index, VTI tracks the Dow Jones U.S. Total Stock Market Index. The VTI takes no risky bets, tracking the entire U.S. stock market of over 3,500 stocks. It is cheap with extensive market exposure. The only disadvantage: holdings are disclosed on a monthly basis.

Expense Ratio: 0.04%

Underlying Assets: Dow Jones U.S. Total Stock Market Index

Liquidity: high

3. The ETFS Physical Swiss Gold (SGOL) was the first one to duplicate gold in an ETF and make it accessible to retail investors. SGOL tracks the price of gold and is backed by gold bars held in a Swiss vault (sounds pretty cool, right?). Upon its release in 2003, the price of gold increased sharply. Investing in SGOL makes sense for investors who do not want to actually hold or store gold themselves. An advantage of SGOL is its high liquidity in both primary and secondary markets, which allows for seamless and quick trading. A disadvantage is the relatively high management fee, at 0.39%, compared to the former two under 0.10%. Nevertheless, SGOL represented a milestone in ETFs because it was the first one to give retail investors access to commodities.

Expense Ratio: 0.39%

Underlying Assets: Gold Spot

Liquidity: high

Many crypto enthusiasts claim Bitcoin is the “new gold”. Keep an eye on the approval of the first Bitcoin ETF.

4. In fourth place for traditional ETFs is Blackrock’s iShares Global Tech ETF (IXN). IXN tracks 1200 technology stocks and has one of the highest liquidities and lowest expense ratios for its segment. Most stocks within it are comprised of high- mid to large market caps, covering nearly 70% of the world’s market cap. A majority of the stocks are U.S.- and Japan-based, with large allocations to the world’s leading tech companies. The IXN comprehensively captures the global tech market and will likely continue to do well as the technology industry is one of the most disruptive in the world.

Expense Ratio: 0.47%

Underlying Assets: S&P Global 1200 Tech

Liquidity: high

5. Finally, the fifth place winner brings us back to the pioneer of ETFs, Vanguard. Vanguard’s FTSE Developed Markets ETF, VEA, includes stocks of all market cap sizes, from developed countries outside of the U.S.. The management fee is 93% lower than funds with similar holdings, being one of the lowest in its segment. Furthermore, it provides great exposure to a diversified portfolio of developed market equities outside the U.S. and is easily accessible to retail investors due to low bid/ask spreads in the secondary market.

Expense Ratio: 0.07%

Underlying Assets: FTSE Developed All Cap (excluding US Index)

Liquidity: high

Blockchain ETFs

1. The first blockchain ETF is Reality Shares Nasdaq NexGen Economy ETF, or BLCN. It is a passive fund tracking companies that develop, research or use blockchain technologies. BLCN, backed by Nasdaq and Reality Shares, is one of the more stable blockchain ETFs because 80% of its holdings are comprised of firms with large market caps. A key component BLCN uses to evaluate potential companies is the amount of material resources the company has committed to developing and researching the use of blockchain technology. Current holdings are bolstered by investments in the Intel and Microsoft Corporations, both of which are reporting high performance in 2018.

Expense Ratio: 0.68%

Underlying Assets: Intel Corp, Microsoft Corp, Fujitsu Ltd, etc.

Liquidity: low

2. The Amplify Transformational Data Sharing ETF, or BLOK, is an actively managed fund comprised largely of global equities connected to blockchain and crypto technology. BLOK focuses its investments on companies in, “transformational data sharing technologies” and has the highest AUM among the blockchain ETFs at $163 million. Companies can be selected from any industry, country and size. Most companies in the fund are from the U.S. and Japan.

Expense Ratio: 0.70%

Underlying Assets: Alphabet Inc, Overstock.com Inc, Square Inc, etc.

Liquidity: low

Since Blockchain ETFs are a novelty in the market, they aren’t attached to indices, unlike most traditional ETFs.

3. In third place is the Innovation Shares NexGen Protocol ETF, KOIN. KOIN is a bit different from its predecessors in that it uses artificial intelligence (AI) to select the blockchain companies in which it invests. KOIN’s AI uses a proprietary algorithm that crawls data on online media platforms and databases. Companies in which KOIN invests is divided into four categories, each of which does not exceed 15 companies: cryptocurrency payees, mining enablers, solution providers and cryptocurrency users. Holdings are weighted by market cap — no company can exceed 40%, and individual companies are capped at 7%.

Expense Ratio: 0.65%

Underlying Assets: Amazon.com Inc, Visa Inc, Microsoft Corp, etc.

Liquidity: low

4. The First Trust Indxx Innovative Transaction and Process ETF, LEGR, tracks companies involved in or developing blockchain technologies. LEGR divides companies into three types of blockchain investment. “Active Enablers” are companies that develop blockchain technology, products or services for internal use or for sale. “Active Users” employ blockchain technology (usually supported by Active Enablers) and “Active Explorers” are companies that have announced their commitment to research blockchain technology and incorporate it into their business. LEGR equally invests their holdings between companies qualified as Active Users and Active Enablers. The majority of companies are U.S.-based, while Germany and Taiwan tie for second place.

Expense Ratio: 0.65%

Underlying Assets: Microsoft Corp, Accenture PLC, SAP SE, etc.

Liquidity: low

5. The final blockchain ETF to watch is REX BKCM ETF, or BKC. BKC is an actively managed fund that selects the stocks of companies that work in the blockchain and cryptocurrency ecosystems. Companies in the BKC portfolio mine, trade or promote the adoption of cryptocurrency, or develop blockchain technology. BKC indirectly invests in Bitcoin through the Bitcoin Investment Trust (GBTC) but does not invest (directly nor indirectly) in any other cryptocurrencies, Initial Coin Offerings (ICOs) or tokens. Holdings tend to be concentrated in companies with small to mid-size caps. Most companies are based in the U.S., Japan and Taiwan.

Expense Ratio: 0.88%

Underlying Assets: Overstock.com Inc, Square Inc, SVB Financial Group, etc.

Liquidity: low

Blockchain ETFs’ Low Liquidity Rates Are an Opportunity

A common trend among blockchain ETFs is their low liquidity rates, mainly due to their tendency to have lower trading volumes. The highest AUM of any blockchain ETF is $163 million, and is dwarfed by its traditional counterpart at $277 billion AUM. The stark contrast shows that blockchain ETFs could have a large market in the long-term. At the end of the day, ETFs — whether traditional or blockchain — are important investment tools. When they first entered the market, ETFs enabled retail investors to gain access to the trade of underlying assets and thus a much wider range of financial instruments. Retail investors are important players, as they represent a huge market — worth $50 trillion in the U.S., to be exact. Although blockchain may be novel to traditional finance markets, investments in the technology continue to grow due to support from retail investors, as institutional and accredited investors have been largely excluded due to legal uncertainties. Adoption by retail investors helped and continues to help put blockchain and crypto on the map, which in turn supports a growing demand for blockchain-based financial products.

Source: www.etf.com.

In September 2018, Blockstate will launch the CTF15, an investment product tracking the top 15 crypto assets weighted by market capitalisation. The CTF15 will provide balanced and diversified exposure to top performing cryptocurrencies. It is compliant with major EU regulations and will be available to both retail and institutional investors.

For more information on the CTF15, reach out to us at ctf15@blockstate.com.