Best Blockchain ETFs (Updated November 2022)
There is little doubt that blockchain has the potential to be a revolutionary technology. As an investment, blockchain stocks have followed the familiar boom/bust cycle common to many new products and technologies. After stagnating for a couple of years, blockchain stocks really took off after the COVID recession. During the 11 months following the March 2020 low, var Amplify Transformational Data Sharing ETF (BLOK) got more than 360%.
Of course, the bear market in 2022 has had its way with more speculative technology companies and the blockchain space was not spared. BLOK is currently around 65% below its all-time high and could drop even lower before all is said and done. Some ETFs have made it even worse. Blockchain will continue to evolve as a disruptive innovation in the defi space, but 2022 is a good reminder that as an investment it will remain highly volatile until the industry matures more and price discovery is done.
The blockchain ETF space has grown about as fast as blockchain itself. The first four blockchain ETFs debuted within days of each other in early 2018 (fun fact: none of them have “blockchain” in the name because the SEC was concerned that it was too hot a buzzword at the time and would attract speculators who did not understand what they bought). BLOK was the first to launch and to this day is easily the largest ETF in the sector with assets of more than $500 million.
Today, there are more than 20 ETFs that fall under the blockchain umbrella in one way or another. The original funds focused on blockchain stocks, but now you have some that also diversify into crypto or crypto futures exposure. It has become one of those groups where you really need to dig into the fund to find out how it works and what it is invested in. As much as almost any other market segment, blockchain ETFs can look VERY different despite that they have similar names. They are far from interchangeable and some homework is required!
Ranking of Blockchain ETFs
The variety of ETF choices makes it a bit challenging to separate the best from the rest. You’ve probably heard most financial experts talk about focusing on funds with low expense ratios. That can certainly be a big factor in deciding which ETF to go with (it’s probably the most important factor, in my view), but there are a lot of things that can go into making the right choice.
That’s where I’ll try to make things easier for you. Using a methodology that I have developed that takes into account many of the factors that should be considered and weights them according to their perceived level of importance, we can rank the universe of available ETFs to help identify the best of the best for your portfolio.
Now, this certainly won’t be a perfect ranking. The data will of course be objective, but judging what is more important is very subjective. I simply draw from my many years of experience in the ETF space to help investors create smart, cost-effective portfolios.
Methodology and factors for rating ETFs
Before we dive in, let’s establish some ground rules.
First, all the data used comes from ETF Action. They have gone through the ETF universe to identify and categorize the ETFs used here. There are many who qualify, and we will use their categorization as a starting point. Many thanks to them for opening up their vast database for my use.
Second, let’s run down the factors I used in the ranking methodology.
- Expense ratio – This is perhaps the most important factor as it is the one thing investors can control. If you choose a fund that charges 0.1% per year rather than a fund that charges 1%, you automatically come out with 0.9% annually. You cannot control what a fund gives, but you can control what you pay for the portfolio. Lower expense ratios equal more money in your pocket.
- Spreads – This is linked to how cheaply you can buy and sell shares. Generally speaking, the larger the fund, the lower the spreads. Larger funds usually have many buyers and sellers. Therefore, it is easier to find stocks to trade, and that makes them cheaper to trade. On the other hand, small funds tend to trade fewer stocks and investors often have to pay a premium to buy and sell. Considering expense ratios and spreads together usually gives you a better idea of total cost of ownership.
- Diversification – Generally speaking, the broader a portfolio is, the greater chance it has of reducing the total risk. A fund, such as the Energy Select Sector SPDR ETF (XLE), is a good example. 45% of the fund’s total assets go to just two stocks – ExxonMobil and Chevron. By buying XLE, you are putting a lot of faith in just these two companies. An equally weighted fund, such as the Invesco S&P 500 Equal Weight Energy ETF (RYE), will score higher on diversification than XLE.
- FactSet ETF Score – FactSet calculates its own proprietary ETF rankings for efficiency, marketability and fit. They are basically designed to tell us if an ETF is doing what it aims to do. I’m not going to copy and paste the work they do, but there is some leverage there to make sure my rankings are on track.
There are a few other minor factors thrown into the mix, but these are the main factors considered.
One thing that is not considered is historical returns. Most ETFs are passively managed and simply try to track an index, not outperform. ETFs should not be penalized for low returns just because the index they track is currently out of favor.
I rank ETFs based on more fundamental structural factors. Are they cheap to own? Are they liquid? Do they minimize trading costs? Do they maintain risk-reducing diversification benefits?
Being in the bottom half of the list does not automatically make a fund “bad”. It simply means that due to a low asset base, a high expense ratio, a concentrated portfolio or some other factor, it poses additional costs or downside risk.
Best Blockchain ETF Rankings
The blockchain ETF space consists of just a couple of big players and a number of other issuers trying to gain traction. Three of the four original blockchain ETFs are the only ones with more than $100 million in assets, but they land in very different places on the list.
Best Blockchain ETFs
BLOK, despite landing at #3 on this list, is still my favorite for blockchain investing. I have maintained this position for quite some time and the logic for doing so is simple – it is an actively managed fund at the price of a passively managed one in a very dynamic industry. Active management sometimes gets a bad rap. People complain that it is too expensive and has a long history of not keeping up with standards. That’s mostly fair, but there are times when it makes sense. Blockchain investment is one of them. The industry is changing so quickly that you want your investments to be able to respond accordingly. Some index funds only rebalance or reconstitute every 3 or 6 months. If there is some type of major legislation passed or development, will you be stuck with the existing portfolio for another few months without being able to make changes? I want an active fund that can respond right away. BLOK does, and it has become the face of the blockchain ETF group.
However, the number 1 spot goes to Schwab Crypto Thematic ETF (STCE). It is not often that a fund that is only two months old immediately moves to the top of the rankings, but that is the case here. Cost is an important factor. The expense ratio of just 0.30% is at least 20 basis points cheaper than almost every other fund on this list. The tiny $8 million asset base would normally result in wider spreads and higher trading costs, but that’s actually not so much the case here. STCE has one of the narrower spreads in this group, and that combination of relatively low costs and low trading fees is a win for shareholders. The fund’s investments include companies engaged in mining, trading, banking or implementing applications of blockchain technology.
The Siren Nasdaq NextGen Economy ETF (BLCN) was the second blockchain ETF to launch, but it has fallen well off the pace of the best funds out there. It obviously lost the advantage that BLOK enjoyed, and while there is a larger asset base here compared to its peers, the cost structure doesn’t really stand out from the pack.
The Capital Link Global Fintech Leaders ETF (KOIN) is a good example of how a fund’s goals and strategy do not produce the right end result. The methodology is reasonable enough – it uses AI to determine industry involvement and weights components according to their ranking and perceived exposure – but the final portfolio does not, in my opinion, provide enough exposure to pure blockchain. Top entries include IBM, Mercedes, Visa, Samsung, Oracle and Salesforce. These are companies that develop blockchain solutions, but it is such a small part of the overall business model. This ends up looking more like a generic tech fund than a blockchain fund. KOIN switched indices at the end of last year, which resulted in a somewhat less focus on blockchain specifically, but I think there are better options out there.
The Bitwise Crypto Industry Innovators ETF (BITQ) deserves a mention. Bitwise is the world’s largest crypto index fund manager, which means you may not find a company better suited to run a blockchain ETF than this one. It weighs more heavily towards pure innovators, which is a clear advantage, but much of the portfolio is market value-weighted and linked to an index. There are pluses and minuses, but having Bitwise managing BITQ should probably bump it up a few notches from where it is.
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