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BY: HANS ALBRECHT, CIM®, FCSI, VICE-PRESIDENT, PORTFOLIO MANAGER AND OPTIONS STRATEGIST, HORIZONS ETFS

Horizons ETF’s Blockchain Technology and Hardware Index Fund (“ETF”) is up 36.98 per cent year-to-date*. In the past, I’ve said that this ETF is a great basket that will likely do well regardless of how cryptocurrencies and blockchain, per se, perform.

This ETF has a group of securities/companies that have exposure to many of the things we see in Industry 4.0, the next industrial revolution that involves technologies like artificial intelligence, big data, cloud computing and robotics. Blockchain resides among these technologies as its building blocks are comprised of things like data storage and cloud computing.  Importantly, blockchain is no longer under the radar; it is consistently being adopted in various shapes and forms by firms.

  • • Shubert, the biggest theatre operator on Broadway, is piloting a mobile ticketing platform built on IBM’s blockchain to fight ticket fraud. IBM, one of the world’s top 10 largest tech companies, has its own blockchain department that has launched a payment network working in 72 countries
  • • Sumitomo, one of Japan’s largest business groups, recently completed testing of a blockchain trade finance payment system
  • • In Europe, Ford is piloting a blockchain-based system for tracking fuel usage; as vehicles enter low-emission zones, they would automatically switch to an electric driving mode and zero-emission driving miles are documented
  • • Ernst & Young has launched a blockchain-based tool to help governments track spending
  • • West Virginia has a blockchain-based voting platform that helps military personnel deployed overseas to vote remotely by storing the ballot on a distributed ledger
  • • Vanguard Group has launched a blockchain platform that allows asset managers to trade currencies without going through investment banks
  • • In Canada, Toronto-based SecureKey is working with big banks like CIBC, RBC, TD and Scotiabank to verify online identities using blockchain

Blockchain can also help to improve public health by promoting business accountability with regards to companies delivering packaged goods to consumers. For example, Walmart is piloting a safe-food project that traces shrimp sourced in India and shipped to the U.S. The idea is to increase customer trust and elevate India as a source of safe seafood by holding farmers accountable with transparency and traceability.

At the same time, crypto probably isn’t going anywhere. Fidelity Investments, the US$2.8 trillion asset manager, is rolling out a crypto custody platform. That is a strong push for legitimacy, as one of the challenges with bringing crypto into the mainstream is that it seems sketchy. Buying in this sector is difficult and involves heavy slippage.

Importantly, storing it can be risky; in one high-profile example, earlier this year, QuadrigaCX owed customers $250 million after its founder died and no one else had the passwords to access most of the company funds. Companies like Coinbase also offer a cryptocurrency exchange, but who has heard of them besides die-hard crypto heads?

For now, people need a safe place to keep it. Fidelity started a blockchain department for fun, but now sees it as a way to potentially turn a profit.

So, will bitcoin become a realistic, widespread means of payment one day? I doubt it. But some cryptocurrency might, and in that event Fidelity wants to be well-positioned in the right place at the right time.

Blockchain use cases are endless

Blockchain is being used in many areas of finance, IoT (“Internet of Things”), healthcare and entertainment. There are important identity use cases for passports, birth certificates, weddings, death certificates and smart property uses.

Blockchain can help to reduce errors in processes and promote transparency, and its encryption properties allow for assets to become insurable at better rates. The decentralized ledger can become a system for recording and managing property rights, thus increasing trust and efficiency while reducing fraud and costs in real estate. It can improve many areas of healthcare by making it possible to share important research and results in a secure and confidential way.

However, many of the companies in our ETF portfolio aren’t just focused on blockchain. Nvidia, one of our holdings, is a gaming, autonomous car, artificial intelligence, IoT and just about everything else driving Industry 4.0 company. It just so happens that crypto and blockchain are also areas of focus for them, when it matters.

Are Lattice Semiconductor, Rambus, AMD, Western Digital, Equinix and Digital Realty, Dropbox, Oracle, and Xilinx—all in BKCH—blockchain companies?  No.  But they help to supply many areas of 4.0, and are integral to things like data storage/chipsets, devices, and cloud usage, which also happen to be important to blockchain and cryptocurrencies. 

These are the companies of the present and future, and many are not found in the Nasdaq 100. BKCH can help to give you exposure to these trends.

  1 Month   3 Month   6 Month  YTD 1 Year Inception**
BKCH 0.35% 5.39% 17.51% 36.98% 25.38% -3.66%
Solactive Blockchain Technology & Hardware Index 0.42% 5.93% 18.72% 40.17% 27.61% -1.44%
 

* Source: Bloomberg, as at November, 2019.
** Since BKCH’s inception on June 20, 2018.

The indicated rates of return are the historical annual compounded total returns, including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Additionally, index returns do not take into account management, operating or trading expenses that may be incurred in replicating the index. The rates of return above are not indicative of future returns. The ETF is not guaranteed, its values change frequently, and past performance may not be repeated. The indices are not directly investible.

The views/opinions expressed herein may not necessarily be the views of Horizons ETFs Management (Canada) Inc. All comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.

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Commissions, management fees and expenses all may be associated with an investment in exchange traded products managed by Horizons ETFs Management (Canada) Inc. (the "Horizons Exchange Traded Products"). The Horizons Exchange Traded Products are not guaranteed, their values change frequently and past performance may not be repeated. The prospectus contains important detailed information about the Horizons Exchange Traded Products. Please read the relevant prospectus before investing.

The Horizons Exchange Traded Products include our BetaPro products (the “BetaPro Products”). The BetaPro Products are alternative mutual funds within the meaning of National Instrument 81-102 Investment Funds, and are permitted to use strategies generally prohibited by conventional mutual funds: the ability to invest more than 10% of their net asset value in securities of a single issuer, to employ leverage, and engage in short selling to a greater extent than is permitted in conventional mutual funds. While these strategies will only be used in accordance with the investment objectives and strategies of the BetaPro Products, during certain market conditions they may accelerate the risk that an investment in shares of a BetaPro Product decreases in value. The BetaPro Products consist of our 2x Daily Bull and 2x Daily Bear ETFs (“2x Daily ETFs”), Inverse ETFs (“Inverse ETFs”) and our BetaPro S&P 500 VIX Short-Term Futures™ ETF (the “VIX ETF”). Included in the 2x Daily ETFs and the Inverse ETFs are the BetaPro Marijuana Companies 2x Daily Bull ETF (“HMJU”) and BetaPro Marijuana Companies Inverse ETF (“HMJI”), which track the North American MOC Marijuana Index (NTR) and North American MOC Marijuana Index (TR), respectively. The 2x Daily ETFs and certain other BetaPro Products use leveraged investment techniques that can magnify gains and losses and may result in greater volatility of returns. These BetaPro Products are subject to leverage risk and may be subject to aggressive investment risk and price volatility risk, among other risks, which are described in their respective prospectuses. Each 2x Daily ETF seeks a return, before fees and expenses, that is either 200% or –200% of the performance of a specified underlying index, commodity futures index or benchmark (the “Target”) for a single day. Each Inverse ETF seeks a return that is –100% of the performance of its Target. Due to the compounding of daily returns a 2x Daily ETF’s or Inverse ETF’s returns over periods other than one day will likely differ in amount and, particularly in the case of the 2x Daily ETFs, possibly direction from the performance of their respective Target(s) for the same period. Hedging costs charged to BetaPro Products reduce the value of the forward price payable to that ETF. Due to the high cost of borrowing the securities of marijuana companies in particular, the hedging costs charged to HMJI are expected to be material and are expected to materially reduce the returns of HMJI to unitholders and materially impair the ability of HMJI to meet its investment objectives. Currently, the manager expects the hedging costs to be charged to HMJI and borne by unitholders will be between 10.00% and 45.00% per annum of the aggregate notional exposure of HMJI’s forward documents. The hedging costs may increase above this range. The manager will publish, on its website, the updated monthly fixed hedging cost for HMJI for the upcoming month as negotiated with the counterparty to the forward documents, based on the then current market conditions. The VIX ETF, which is a 1x ETF, as described in the prospectus, is a speculative investment tool that is not a conventional investment. The VIX ETF’s Target is highly volatile. As a result, the VIX ETF is not intended as a stand-alone long-term investment. Historically, the VIX ETF’s Target has tended to revert to a historical mean. As a result, the performance of the VIX ETF’s Target is expected to be negative over the longer term and neither the VIX ETF nor its target is expected to have positive long-term performance. Investors should monitor their holdings in BetaPro Products and their performance at least as frequently as daily to ensure such investment(s) remain consistent with their investment strategies.

*The indicated rates of return are the historical annual compounded total returns including changes in per unit value and reinvestment of all dividends or distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. The rates of return shown in the table are not intended to reflect future values of the ETF or returns on investment in the ETF. Only the returns for periods of one year or greater are annualized returns.