Yahoo Finance Consider a Blockchain ETF as an Alternative to Bitcoin
As a portfolio manager with an active investment strategy, I always found investing in exchange-traded funds somewhat unexciting. On the other side of the aisle was crypto, which is not for the faint of heart and not an asset class that I wanted to include in my investment portfolio. It was when I was doing research on the blockchain segment of the market that I stumbled upon an exotic ETF, different from any other currently available and I added it to my portfolio almost right away.
Blockchain technology is complex and has a wide array of use cases, but it can be best defined as an immutable shared ledger that allows transparent processing of transactions (data, information, assets, etc.) on a business network.
Amplify Transformational Data Sharing ETF (BLOK) is an ETF that invests in this specific niche, blockchain. With a moderate expense ratio of 0.75%, a dividend yield of 1.20% per annum and an average price-earnings ratio of its holdings of 12.85, the ETF is an attractive position to own in a portfolio to have exposure to blockchain. The total addressable market for blockchain by 2030 is estimated at $469.49 billion, more than 40 times times the value of the space in 2022. I believe this ETF to be an attractive medium- to long-term play.
What investors are actually buying
The reason I find the ETF attractive is that, despite its correlation with bitcoin, which also operates on a blockchain , it is much more diversified than one would believe.
I found it highly interesting that, when dissecting these top 15 holdings (the ETF currently holds 52 assets), these were some of the sectors Amplify had exposure to:
Crypto mining and crypto exchange
Business intelligence and data analytics
E-commerce
Payments systems
Internet infrastructure
Online advertising and media
The list of tech segments the ETF has exposure to can go on and on, just like the use cases of blockchain technology. For this reason, for the investors who are not overly attracted by crypto, this ETF is an excellent alternative. And even if you have crypto exposure, Amplify is about blockchain, which will further diversify away from crypto.
With a relatively higher beta than the overall market (the ETF has a beta of 1.5), Amplify is an attractive play if you believe in the bullish case for bitcoin due to the halving this year and for the stock market overall with the monetary pivot by the Federal Reserve.
Correlation with bitcoin and attractive valuation support my rating
Despite the diversity of its holdings, Amplify has been highly correlated to bitcoin since its 2018 inception. By comparing the performance chart of Grayscale Bitcoin Trust (GBTC), now a bitcoin ETF, we can observe the high correlation between Amplify and bitcoin.
A number of Amplify's portfolio companies derive a partial, substantial or total portion of their revenue directly or indirectly from bitcoin. Because of this indirect exposure to the cryptocurrency, the ETF could be weeks from a technical breakout in price, leading to a new all-time high somewhere in the fourth quarter of 2025. Indeed, a price gap has formed since November, as we can observe in the chart, and a technical catch-up cannot be excluded.
Furthermore, Amplify is also intrinsically undervalued. The Nasdaq, a tech-heavy U.S. index, has as of Jan. 12 a price-earnings ratio of 25.30. Amplify, on the other hand, has a price-earnings ratio of 12.85, approximately half price relative to the index. Holding the ETF with a 2030 horizon in mind, where blockchain's addressable market value is estimated to be 40 times the 2022 value, is an attractive long-term play given it additionally pays a 1.20% dividend yield per year. These are the reasons I have added the ETF to my portfolio and believe it is an attractively undervalued asset to own.
Key risks
I have identified three key risks to a long-term investment in Amplify. The first one would be the interruption of blockchain technology's adoption by the markets. In the technology sphere, a specific technology can become obsolete if a newer, more efficient and disruptive technology is invented. In my view, this is unlikely to happen given blockchain is the disruptive technology of the moment, with wide use cases and fast adoption by corporate giants such as Visa (NYSE:V), Mastercard (NYSE:MA), Alibaba (NYSE:BABA) and MercadoLibre (NASDAQ:MELI) (all four are part of the ETF's holdings). In my opinion, this risk has a low rating given how unlikely it is to occur.
Another key risk is when a sector displays high growth and wide margins, other players enter the scene. New ETFs with a lower expense ratio, higher dividend yield or better performance could snap a significant portion of the 40 times growth estimated by 2030. However, given the large estimated total addressable market in 2030, Amplify's first-mover advantage and increasing brand recognition, this risk is not particularly high. In my opinion, this risk has a rating of medium, as it is difficult to mitigate.
The last key risk is more of a technical nature: with its relatively high beta of 1.5, a prolonged bear market (induced for example by a macroeconomic recession) could significantly harm the position in the short term. However, if you spread your investment in the ETF over a long and regular period of time, you should be able to have an attractive price entry in this long-term hold. This risk has a rating of low, given the mitigant measure every investor can apply.
Bottom line
In the short term, with a beta of 1.50, Fed rate cuts approaching as inflation slowly seems to return to 2% and with the bitcoin 2024 halving, Amplify is an attractive play for any portfolio in 2024-25 thanks to its crypto exposure. For the longer term, though, it is likely that the ETF will decouple from bitcoin as the blockchain technology broadens its use cases and continues expanding to other sectors of the economy.
For any investor seeking to gain exposure to this high-growth potential tech niche that is blockchain, owning Amplify is a smart move and the 1.2% dividend yield is a reward for the investors' patience in the meantime. This justifies the inclusion of this ETF in my portfolio given the long-term opportunity for a high return.
This article first appeared on GuruFocus.
