Today, we’re bringing you an interview with Matt Markiewicz, Managing Director at Innovation Shares. The company has two global thematic equity ETFs that trade on NYSE Arca, one of which, KOIN, has a special focus on blockchain technology. Given our inklings in the crypto market, Matt’s activity with blockchain stocks piqued our interest.

Unlike most of the digital asset market, Innovation Shares’ business model is supported by cold hard facts (and AI). We expect that the interview will provide an interesting change of pace as well as valuable insights into how traditional market professionals navigate the space.

The Daily Bit would like to thank Matt for taking the time to discuss Innovation Shares, ETFs, risk management, and blockchain technologies.

Can you tell us about your background and how you arrived at Innovation Shares?

After spending over 6 years at iShares, the world’s largest provider of ETFs (exchange traded funds), I was looking to do something more entrepreneurial in the space. I met the partners who founded Innovation Shares last summer and I really bought in to their visionary approach to building portfolios. They were looking for someone with a broad range of ETF experience to run day to day operations of the business the rest is history.

Innovation Shares is an ETF company. For those unfamiliar, can you explain what an ETF is and how it differs from other financial instruments? What are their advantages? Disadvantages?

ETF is the acronym for Exchange Traded Funds. Essentially it is a mutual fund but it can be bought and sold like a stock on a number of US exchanges like the NYSE or NASDAQ. In general, advantages of ETFs are more apparent when comparing them to mutual funds. First of all, there are no minimums when you are buying ETFs. Secondly, you have more control over the price at which you buy or sell an ETF. Third, ETFs are usually more tax efficient than mutual funds. The most obvious disadvantage of an ETF is that you can’t make automatic investments and withdrawals into or out of them like you can for many mutual funds.

Different market conditions call for different investment strategies. Innovation Shares currently has two global thematic equity ETFs, KOIN (blockchain technology) and EKAR (electric/autonomous vehicles).

What is a global thematic equity ETF and why did Innovation Shares choose this investment strategy for your ETFs? What “innovations” do these ETFs provide for retail investors?

In terms what is a thematic equity ETF, it is a portfolio of US and international stocks that are selected on the belief that they will benefit from the support of a longer term structural trend.

The real “innovation” behind our firm is actually in our patent-pending AI driven approach to building portfolios using a natural language processing algorithm. While the technology behind our process has been used in the hedge fund world for the past 7–10 years, the retail investor has not had easy access to this powerful application. We chose to launch these two funds first because investors previously had limited choices when trying to get exposure to the themes via a publicly traded investment vehicle.

How does Innovation Shares use artificial intelligence to construct their indices? What filters are used to select companies?

One of the challenges of thematic investing is that themes cross borders and span sectors so a traditional Wall Street approach does not lend itself well to building a thematic portfolio. Therefore a different approach is required. Almost like Siri or Alexa are able to tell you tomorrow’s weather or to play a selection of current Top 40 songs when asked, our AI process is able to identify stocks that are related to a theme given certain keywords and determine whether that relationship is positive or negative. It uncovers these names by reading through tens of thousands of articles across multiple reputable news sources.

It is our goal to build a diversified basket of stocks to meet investors investment needs while balancing both size and liquidity. In order to be considered for the index, a stock must have a minimum market cap of $100 million and trade at least $1 million per day on average over the past 6 months.

Naturally, our readers have a deep interest in blockchain technologies. Can you describe how KOIN categorizes blockchain stocks and provide an example for each category?

In order for investors to understand how a stock fits into the theme, we’ve created four stakeholder categories which are unique to our approach.

Cryptocurrency As Payment: Companies that accept cryptocurrency as payment for goods or services or are developing blockchain payment solutions. American Express is working with Ripple on a cross-border B-to-B cross border payment system.

Mining Enablers: Companies that either create equipment and/or tools to enable creation of new blockchains or are mining blockchains as their main business. NVIDIA produces GPUs used by cryptocurrency miners.

Solutions Providers: Companies engaged as blockchain as service providers. They assist businesses & organizations in the creation and implementation of blockchain applications. Among other initiatives, Baidu has a blockchain as a service platform that launched earlier this year.

Adopters: Companies that primarily use blockchain technology to increase operational efficiencies, optimize settlement processes, enhance the customer experience and/or increase data security/integrity. I’m going to list a less obvious name here: AP Moller-Maersk which is a

massive Danish container logistics company. They are in a joint venture with IBM to bring the attributes of blockchain to the $4 trillion ocean shipping industry.

During Bitcoin’s bull run in late 2017, many companies plugged blockchain buzzwords into their dialogue, with some going so far as to incorporate blockchain into their company name. How does Innovation Shares prevent companies similar to Riot Blockchain and Long Blockchain from being selected for KOIN?

First, going back to our index methodology, we have rules in place to ensure holdings are of adequate size and liquidity. Again, in order to be considered for the index, a stock must have a minimum market cap of $100 million and trading volume of at least $1 million per day on average over the past 6 months.

Second, by looking at media sentiment our NLP algo is able to differentiate what is a blockchain concept stock from those companies that have a legitimate business and economic use case in blockchain technology.

Research from MarketsAndMarkets and ResearchAndMarkets expect the global Blockchain market to grow through 2022 at a compound annual growth rate of 79.6% and 42.8%, respectively. One saying applicable to these areas of high growth is “a rising tide raises all ships”.

What would Innovation Shares say to investors who wish to incorporate smaller blockchain companies with higher potential growth opportunities in an index? Has Innovation Shares considered any alternative approaches to capture these added returns?

When and if smaller blockchain companies access the public markets and list their stock, there is a potential for them to be included in the Blockchain Innovators Index (the index that KOIN tracks) provided they meet the criteria. It is about balancing risk and potential reward so we want to make sure we are constructing the portfolio with those factors in mind.

How does Innovation Shares manage risk (weighting, rebalancing, etc.)?

By building a diverse and liquid portfolio of stocks. It’s done through a rules-based approach to managing the index which we rebalance quarterly and reconstitute (add or delete names) every six months in December and June. Also, no stock can have more than a 7% weight in the index and no stakeholder category can represent more than 40% of the index.

KOIN does not include any digital currencies derivatives, one reason being that cryptocurrency ETFs have not been approved by the SEC. Does Innovation Shares foresee a future where a category for digital currency derivatives is added in the KOIN ETF? What about tokenized securities?

This is a short answer. No. Our prospectus does not allow for digital currency derivatives or tokens to be included in the fund.

What is the fee structure and tax implications of the KOIN ETF? How do these fees compare to related products? Is there a minimum balance required to invest in the KOIN ETF?

After a 0.30% fee waiver which is in effect until March 2019, KOIN currently charges an annual management fee of 0.65%. It is the least expensive management fee compared to the three other blockchain ETFs. Like other ETFs, there is no minimum, or maximum for that matter, to invest in KOIN. From a tax perspective, it is best to consult an accountant or financial advisor for implications specific to each investor. However, there are inherent tax efficiencies & advantages of ETFs in general when compared to other fund structures.

Where does Innovation Shares see short-term (1–2 years) applications of blockchain technology arising? Long-term (5–10 years)?

For the short term the more obvious applications are in industries such as financial services where settlement and payment processes stand to be revolutionized by blockchain technology. Same goes for the logistics space where the integrity of record keeping and complexity of supply chain management are expected to be made more efficient through the use of blockchain. Longer term, in the global health care sector, there is a massive opportunity for blockchain technology to transform the patient information & record keeping ecosystem as today it is quite fragmented with security vulnerabilities.

What is your opinion on Bitcoin and other digital currencies?

From a price perspective, we don’t have an opinion as we are more interested in the foundational technology of blockchain. That said, the public’s interest in digital assets and the evolution of a token economy is still in the early innings. As more apparent use cases for digital currencies continue to grow and education about the space becomes more readily available, the public’s comfort level around this confluence of technologies should also increase.

Name one piece of advice that you would give to your younger self.

Spend more time with people in senior leadership roles and absorb what they share with you as experience cannot be taught in textbooks.

For anyone who wants to incorporate the KOIN ETF into their portfolio, how can they do so?

You can trade KOIN on just about all of the online brokerage platforms and remember to always use a limit order when doing so. If you have a financial advisor or wealth manager, you can ask them if KOIN is available for trading in your account.