Innovation Shares’ thematic AI-driven blockchain ETF hits the market

Jan 31st, 2018 | By | Category: Equities

The first ETF to use artificial intelligence (AI) to identify and invest in blockchain innovators and adopters has launched on NYSE Arca.

Innovation Shares thematic AI driven blockchain ETF to start trading today

Innovation Shares’ thematic AI-driven blockchain ETF hits the market

The Innovation Shares NextGen Protocol ETF (KOIN US), devised by index provider Innovation Shares and brought to market through white-label ETF provider Exchange Traded Concepts, provides investors with a thematic play on developments in blockchain technology.

A blockchain is a public shared ledger that is not controlled by a central authority, such as a bank. Blockchain can be used to transfer value online, in the form of digital currency or information, from point A to point B without the need for a trusted third party.

“Blockchain is a highly innovative technology, and we’re applying an innovative approach to identifying the stocks leveraged to the theme,” said Matt Markiewicz, managing director with Innovation Shares. “Our proprietary patent-pending AI-based process allows us to better capture a full range of publicly traded companies that are developing, investing in and utilizing this new protocol.”

The index underlying KOIN – the Innovation Labs Blockchain Innovators Index – chooses and categorises stocks based on four criteria: cryptocurrency as a payment, mining enablers, solutions providers and adopters.

The first category comprises companies that accept cryptocurrency payments for goods and services or are developing solutions to do so the future. The second category, mining enablers, create equipment and/or tools to enable the creation of new blockchains or are mining blockchains as their main business. Companies that act as blockchain service providers by assisting businesses and organizations in the creation and implementation of blockchain applications make up the third category. The final category, adopters, is reserved for companies that use blockchain to increase operational efficiencies, optimize settlement processes, enhance the customer experience and/or increase data security and integrity.

The index is constructed using a proprietary algorithmic stock selection methodology. To start with, a universe of companies are chosen that meet a defined set of criteria. For instance, the stocks must be listed on a major exchange in either an emerging or developed market and have a market capitalization of no less than $100 million. The stocks making up the universe are also screened for liquidity, needing an average daily trading volume over the last six months of at least $1m. The universe constituencies are also filtered such that all companies have at least 10% of shares publicly available for purchase on a stock market.

A natural language processing algorithm is then employed to screen the universe for global stocks that are believed to have a current or future economic interest in blockchain technology based on the four categories previously mentioned. By harnessing the power of textual analysis and artificial intelligence, companies are uncovered that might otherwise be overlooked by traditional analytical research.

A defined set of rules then overlays the remaining universe to limit overconcentration into one of the four categories.

The ETF aims to have at least a 95% correlation to the underlying index and may invest up to 20% of its assets in companies that fall outside the scope of the index universe.

The ETF has an expense ratio of 0.65% due to a contractual fee waiver in place until at least 31 March 2019. Its gross expense ratio is 0.95%.

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