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Blockchain ETFs: 1 To Buy, 1 To Avoid

The four blockchain ETFs that are out there are very different from each other, but only one is a clear buy.

As the financial markets continue their rebound off of March 2020 lows, riskier assets have, for the most part, been the ones that have outperformed.

Tech stocks, across most subsegments, have been leaders, although outperformance has stagnated over the past six months. Cyclicals, including financials and energy, are finally powering ahead again. Next-gen technology has been one of the biggest winners.

That includes blockchain, the technology which supports bitcoin and other cryptocurrencies. With no bitcoin ETF yet in existence, blockchain ETFs have become sort of a proxy for crypto exposure, especially among those who don't want to haggle with the process of opening up a crypto wallet and handling things themselves.

There are four blockchain ETFs available to investors, but they are VERY different from each other.

Blockchain ETFs; source: ETF Action

Blockchain ETFs; source: ETF Action

The clear winner in this space so far has been the Amplify Transformational Data Sharing ETF (BLOK), which as I noted earlier this week was the best-performing ETF of February. I say that both in terms of performance and assets under management. It helps that BLOK was the first to hit the market (although all four debuted within a couple weeks of each other), but the real differentiator has been performance. Investors, quite simply, like to chase bigger returns.

In the debate of which ETF is better than another, there's much more to consider than just performance. As I mentioned, the methodologies used to construct these four portfolios are very different. Just because they all fall under the general umbrella of "blockchain" does not mean they are interchangeable.

Take a look at the overlap between these four ETFs.

Blockchain ETFs

Blockchain ETFs

None of these ETF combinations has more than 35% asset overlap with each other. With differences between what qualifies as blockchain exposure, what degree of pure blockchain exposure a company must have to qualify and whether it will focus on large-caps or small-caps are all factors that make each of the ETFs unique.

That also means that some ETFs are better than others. In my opinion, there is one clear leader among the four blockchain ETFs and one which I believe investors should stay away from.

Blockchain ETF To Buy - BLOK

Again, this has nothing to do with recent performance, although it does certainly work in its favor. This has everything to do with how the portfolio is constructed and how it's able to deliver blockchain exposure to investors.

To begin, BLOK is the only ETF in this group that is actively-managed. In an industry, such as blockchain which is evolving rapidly, you want to maintain the ability to make adjustments on the fly in response to changing conditions. If you're invested in a fund based on an index that is only reconstituting itself every quarter, a lot can happen that your fund may not be able to take advantage of or avoid. In general, I favor low-cost index funds over higher-cost active funds, but blockchain is one sector where going with the active ETF makes more sense.

The one drawback of actively-managed ETFs is that they are typically more expensive. With BLOK, however, that's not even the case. Its 0.70% expense ratio is virtually identical to those of the Siren Nasdaq NextGen Economy ETF (BLCN) and the First Trust Indxx Innovative Transaction & Process ETF (LEGR) and much lower than the fee for the Capital Link NextGen Protocol ETF (KOIN). If you can get active management for essentially the same cost as a passively-managed index fund, that's a big win for BLOK.

Blockchain ETF To Avoid - KOIN

KOIN is what you get when you include stocks that have any blockchain exposure at all. The problem here is that while many tech companies are working at developing their blockchain technology, it's such a small part of their overall business that you're getting far from any kind of pure exposure.

Consider KOIN's top 10 holdings.

KOIN Top 10 Holdings

KOIN Top 10 Holdings

If you look at KOIN's closest comps by portfolio overlap, they're all large- and mega-cap technology ETFs as you can clearly see by looking at the fund's top holdings.

If you want blockchain in your portfolio, why not go with something like BLOK that comes much cheaper and offers much more pure exposure? If you want tech in your portfolio, why would you pay 0.95% for KOIN when you can have the Vanguard Information Technology ETF (VGT) for a mere 0.10%?

I can see Capital Link wanting to get in on the blockchain revolution, but this is not the ETF that accomplishes it.

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