First Trust brings its blockchain ETF strategy to Canada

Mar 26th, 2018 | By | Category: Equities

First Trust Portfolios Canada has launched the First Trust Indxx Innovative Transaction and Process ETF (BLCK CN) on Toronto Stock Exchange. The fund provides rules-based exposure to a basket of companies globally that are associated with blockchain technology.

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BLCK provides exposure to firms globally which have devoted material resources to the use or development of blockchain technologies.

Blockchain is essentially a network of computers that keep transactions secure in a decentralized database, or digital ledger, similar to a shared spreadsheet, that the network can see and must approve before it can be verified and recorded.

Once recorded, no one person can change it without the agreement of others and it is nearly impossible to tamper with.

Blockchain is the technology that underpins so-called cryptocurrencies, like bitcoin, but it has many more possible uses with the potential to move data of any kind swiftly and securely. A growing number of industries and institutions are looking to embed blockchain technology into their day-to-day processes.

Karl Cheong, head of distribution at First Trust Canada, commented, “Although blockchain is still in its early stages, it promises to disrupt a variety of industries, potentially improving efficiency and security, while also reducing or removing the need for intermediaries. This ETF enables investors to gain exposure to a diversified portfolio of companies that are involved in this cutting edge innovation.”

The underlying reference for the ETF is the Indxx Blockchain Index, created and administered by New York-based Indxx.

The index construction process sorts the companies into categories based on their exposure to blockchain technology and selects only those companies which have devoted material resources to the use of blockchain technologies or are actively investing resources into products or services that use blockchain technology.

Eligible securities are classified into the following three categories:

Tier One: Active Enablers – Companies actively developing blockchain technology products or systems for their own internal use and for the sale and support of other companies; companies that are direct service providers for blockchain technology; or, companies that have business models that rely on delivering products or services that use blockchain technology. Companies in this category are assigned a score of 1.

Tier Two: Active Users – Companies that are using blockchain technology that is generally supported by an Active Enabler or have at least one use or test case of using blockchain technology. Companies in this category are assigned a score of 2.

Tier Three: Active Explorers – Companies that have publicly disclosed that they are active in exploring the incorporation of blockchain technology into their business or have a press release on their website or a news article stating that they have started working on the blockchain technology space. These companies do not have at least one use case or test case on blockchain technology and are not currently directly incorporating blockchain technology into their business. Companies in this category are assigned a score of 3.

Companies with a score of 1 or 2 are selected for the index and weighted with Active Enablers receiving 50% and Active Users receiving 50%. The selected companies are weighted equally within each category, and the index is capped at 100 constituents. Reflecting the early stages of the blockchain technology theme, there are currently only 67 constituents in the index.

A maximum weighting of 0.5% is applied to constituents in the Active Enabler category with a market cap of less than $500 million, as well as a 20-day and three-month average daily turnover volume of less than $3 million. The index is rebalanced and reconstituted semi-annually.

The US is by far the largest country exposure in the index with a weight of 41.4%, followed by China (7.5%), Germany (6.7%), Taiwan (6.6%) and Japan (4.1%). Dominating the sector exposures are information technology with over two-thirds (67.3%) of the total exposure, followed by financials with 24.2%.

The fund will obtain its required exposure by investing in the US-listed First Trust Indxx Innovative Transaction & Process ETF (LEGR US), which launched on Nasdaq Exchange in January 2018.

BLCK charges a management fee of 0.15% per annum but investors in the fund must also bear the costs of BLCK’s underlying investment – LEGR – which charges 0.65% in fees. Therefore the total management fee cost is 0.80%.

While blockchain-themed ETFs are becoming relatively common in the US, the space is still being developed in Canada. The first ETF in Canada to offer targeted exposure to the theme of developing blockchain technology was the Blockchain Technologies ETF (HBLK CN), launched by Harvest Portfolios Group in February 2018. HBLK tracks an index created in-house by Harvest Portfolios, and the fund charges 0.65% in management fees.

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