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To date, volumes have already been written on whether bitcoin and other cryptocurrencies are the “new” gold. Ultimately, this is probably the most credible investment argument for their use. In particular, bitcoin, with its limited supply and broad global dissemination, could potentially become a credible alternative to gold, and in fact appears to have taken on this mantle in the past few months.

Clearly there is a lot of interest in owning and “mining” bitcoin and some spectators have likened the current popular frenzy surrounding cryptocurrency as a “digital gold rush”. Here are some reasons to consider the diversified approach of owning equities that could benefit from the rise in cryptocurrency usage through ownership of the Horizons Big Data & Hardware Index ETF (HBGD).

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What to Own During a Gold Rush?

There’s an interesting anecdote about the California and Yukon Gold rushes during the 19th century and the best way to profit during this time. Hint: it wasn’t the “Miner ‘49ers” that were the ones hitting the payload.  

Historically, the gold rushes in the Western geography of Canada and the United States, which included California, Yukon and Alaska, were probably the most important socioeconomic drivers of the expansion of the West coast, with cities like Seattle, Vancouver and San Francisco owing much of their initial mass settlement to providing goods and supplies to the associated episodic gold rushes.

Most miners failed and faced destitution, but the wealth from providing infrastructure and supplies was immense. It’s interesting to note, for example, that during the California gold rush, the adjusted price in 2017 numbers is astounding in terms of the cost of goods paid by miners, according to Smithsonian Magazine. Pans the miners used cost 20 cents before 1849 gold rush, but soon rose to $8, or $246 in 2017 dollars. Boots that cost $6 rose to $185 in 2017 dollars. A shovel went for $36, or more than $1,000 in 2017 dollars. Food was just as affected. The price of eggs rose from $1 per egg to $3, or $92.56 equivalent and rice was $8 per pound, or $246.83 in 2017 dollars.

Fantastic wealth was attained by some prospectors that largely became large-scale mining operators, but ultimately the big wealth was generated by those offering the infrastructure and supply chain goods for these gold rushes.


Source: Horizons ETFs, as at March 31, 2021.
 

Cryptocurrency and Blockchain Companies

This is the area where the largest growth has been generated in the past 12 months, as these companies get direct earnings leverage and investor interest that is highly correlated to the rising price of the cryptocurrencies. The performance of the companies held in this bucket has been astounding.

Here is the list of these companies held by HBGD. You can see substantial growth in some of these stocks, all of which were less than $100 million market-caps a year ago.  It is really the momentum from these names that has helped drive the performance of HBGD to over 300% total return for the one-year period ending March 31, 2021.


Cryptocurrency and Blockchain Technology Companies in HBGD


Source: Bloomberg, as at March 31, 2021.

Even within this bucket there is a decent amount of diversification, with companies like Riot Blockchain, HUT8 Mining and HIVE Technologies representing full-scale digital mining operations. There are also companies like Galaxy, Voyageur and Marathon that represent more traditional brokerage and asset management companies that focus on transacting and investing in diversified blockchain and cryptocurrency businesses. In either case, many of these names provide direct exposure to cryptocurrency and could see their valuation increase alongside the valuation growth for their associated underlying cryptocurrencies.

Semi-Conductors

Semi-conductors, specifically GPUs, are critical to blockchain usage and cryptocurrency mining. The use of GPUs is a super-trend that we assert transcends blockchain as they are a key component in computers, mobile devices and even automobile manufacturing. Many investors might not be aware that it is a tightly controlled market with a finite amount of supply relative to demand.

Semi-Conductor Companies Held in HBGD

The key semi-conductor stocks in HBGD as at March 31st, 2021, include NVIDIA, Intel, SKY Hynix and AMD. If you look at their control of global supply chain on processors, it’s quite telling. Lead times on getting GPUs and process components to market have never been this long given the high demand versus constrained supply, which has become even more difficult due to the supply-chain issues exacerbated by the COVID-19 pandemic. Part of this is due to supply constraints at Taiwan Semi-Conductor (TSMC), but this chart shows how reliant the major U.S. technology giants are on the large semi-conductor processor manufacturers. This shows the revenue bottleneck (yellow circle) that results from the one bottleneck at TSMC. For example, it prevents NVIDIA from following through on $480 million in order commitments. Take this further to where all of the new crypto-miners, both residential and industrial, need to own GPUs to mine, and it doesn’t take much to understand the massive demand constraints and rising prices in the sector.

Source: Bloomberg Intelligence as at March 29, 2021.


Cloud Computing and Storage
This is another mega-trend that we believe transcends the blockchain and cryptocurrencies. The cloud computing market is estimated to be about $832.1 billion by 2025, according to Analytics Insight,  largely driven by huge growth in cloud storage needs for enterprise use. Because blockchain systems exist entirely online, the amount of cloud storage space and speed needed to effectively mine cryptocurrency and validate transaction is staggering. This particular industry bucket is more or less potentially immune to the blockchain and cryptocurrency sectors’ downside volatility since the use of many of the server providers are widely used by much larger industries such as online retail and media. Key stocks as at March 31st, 2021, in this industry category include Emory, Western Digital, Digital Realty and Equinix.

The Benefits of Diversification
This is a crucial feature of HBGD’s index’s approach. Cryptocurrencies can be highly volatile and at one point between late 2019 and mid-2020, HBGD didn’t have any exposure to cryptocurrency or blockchain-focused stocks, due to their swift drop in market capitalization and subsequently being dropped from the Index. This resulted in significantly lower drawdowns than a pure-play blockchain strategy. Again, this is a crucial aspect to highlight as investors, new to the sector and looking for exposure, might not want to take on the full gamut of risk.


HBGD Performance

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Source: Morningstar Direct, as at March 31, 2021. Since HBGD inception date: 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 or income taxes payable that may be incurred in replicating the index. The rates of return shown are not indicative of future returns. The ETF is not guaranteed, its value changes frequently, and past performance may not be repeated. The index is not directly investible.

Key Features of HBGD

  1. Own key infrastructure and service companies of the blockchain and cryptocurrencies (Picks, pans and shovels!)
  2. Lower historical risk profile that owning cryptocurrency outright – semi-conductors and cloud storage are part of larger secular big data trends
  3. Eligible for ownership at most broker/dealers (no compliance restrictions) unlike cryptocurrencies
  4. Potential strong performance momentum from sizable exposure to cryptocurrency and blockchain companies
  5. Index rebalances quarterly to add/remove names and to change with rapidly changing industry trends
 

Commissions, management fees and expenses all may be associated with an investment in the Horizons Big Data & Hardware Index ETF (the “ETF”) managed by Horizons ETFs Management (Canada) Inc. The ETF is not guaranteed, its values change frequently and past performance may not be repeated. The prospectus contains important detailed information about the ETF. Please read the prospectus before investing.

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.

The financial instrument is not sponsored, promoted, sold or supported in any other manner by Solactive AG nor does Solactive AG offer any express or implicit guarantee or assurance either with regard to the results of using the Index and/or Index trade name or the Index Price at any time or in any other respect. The Index is calculated and published by Solactive AG. Solactive AG uses its best efforts to ensure that the Index is calculated correctly. Irrespective of its obligations towards the Issuer, Solactive AG has no obligation to point out errors in the Index to third parties including but not limited to investors and/or financial intermediaries of the financial instrument. Neither publication of the Index by Solactive AG nor the licensing of the Index or Index trade name for the purpose of use in connection with the financial instrument constitutes a recommendation by Solactive AG to invest capital in said financial instrument nor does it in any way represent an assurance or opinion of Solactive AG with regard to any investment in this financial instrument.

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Using TRI ETFs in a Private Corporation

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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 value changes frequently and past performance may not be repeated. Certain ETFs may have exposure to leveraged investment techniques that magnify gains and losses and which may result in greater volatility in value and could be subject to aggressive investment risk and price volatility risk. Such risks are described in the prospectus. The prospectus contains important detailed information about the ETF. 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 Daily Bull and Daily Bear ETFs (“Leveraged and Inverse Leveraged ETFs”), Inverse ETFs (“Inverse ETFs”) and our BetaPro S&P 500 VIX Short-Term Futures™ ETF (the “VIX ETF”). Included in the Leveraged and Inverse Leveraged 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 Leveraged and Inverse Leveraged 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 Leveraged and Inverse Leveraged ETF seeks a return, before fees and expenses, that is either up to, or equal to, 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 Leveraged and Inverse Leveraged 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 Leveraged and Inverse Leveraged ETFs, possibly direction from the performance of their respective Target(s) for the same period. For certain Leveraged and Inverse Leveraged ETFs that seek up to 200% or up to or -200% leveraged exposure, the Manager anticipates, under normal market conditions, managing the leverage ratio as close to two times (200%) as practicable however, the Manager may, at its sole discretion, change the leverage ratio based on its assessment of the current market conditions and negotiations with the respective ETF’s counterparties at that time. 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 publishes 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. BetaPro Bitcoin ETF (“HBIT”), and BetaPro Inverse Bitcoin ETF (“BITI”), which are a 1X ETF, and an up to -1X ETF, respectively, as described in the prospectus, are speculative investment tools that are not conventional investments. Their Target, an index which replicates exposure to rolling Bitcoin Futures and not the spot price of Bitcoin, is highly volatile. As a result, neither ETF is intended as a stand-alone investment. There are inherent risks associated with products linked to crypto-assets, including Bitcoin Futures. While Bitcoin Futures are traded on a regulated exchange and cleared by regulated central counterparties, direct or indirect exposure to the high level of risk of Bitcoin Futures will not be suitable for all types of investors. An investment in any of the BetaPro Products is not intended as a complete investment program and is appropriate only for investors who have the capacity to absorb a loss of some or all of their investment. Please read the full risk disclosure in the prospectus before investing. 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.

Horizons Total Return Index ETFs (“Horizons TRI ETFs”) are generally index-tracking ETFs that use an innovative investment structure known as a Total Return Swap to deliver index returns in a low-cost and tax-efficient manner. Unlike a physical replication ETF that typically purchases the securities found in the relevant index in the same proportions as the index, most Horizons TRI ETFs use a synthetic structure that never buys the securities of an index directly. Instead, the ETF receives the total return of the index through entering into a Total Return Swap agreement with one or more counterparties, typically large financial institutions, which will provide the ETF with the total return of the index in exchange for the interest earned on the cash held by the ETF. Any distributions which are paid by the index constituents are reflected automatically in the net asset value (NAV) of the ETF. As a result, the Horizons TRI ETF receives the total return of the index (before fees), which is reflected in the ETF’s share price, and investors are not expected to receive any taxable distributions. Certain Horizons TRI ETFs (Horizons Nasdaq-100 ® Index ETF and Horizons US Large Cap Index ETF) use physical replication instead of a total return swap. The Horizons Cash Maximizer ETF and Horizons USD Cash Maximizer ETF use cash accounts and do not track an index but rather a compounding rate of interest paid on the cash deposits that can change over time.

*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.