Joining the frenzy over blockchain technology, Innovation Shares has partnered with Exchange Traded Concepts in launching a new blockchain-related ETF backed by a patent-pending, institutional-level investment methodology.
On Tuesday, Innovation Shares launched the Innovation Shares NextGen Protocol ETF (NYSEArca: KOIN), which has a 0.65% expense ratio.
The NextGen Protocol ETF is the first ETF to incorporate a patent-pending artificial intelligence-driven process to identify and invest in blockchain innovators and adopters.
Specifically, the new ETF tries to reflect the performance of the Innovation Labs Blockchain Innovators Index, which is comprised of companies that that use or are involved in the blockchain technology, according to a prospectus sheet.
“The approach we are taking is very different from the normal indexing methodology,” Matt Markiewicz, Managing Director at Innovation Shares, told ETF Trends in a call. “We take a lot of the security bias out of the selection process.”
A blockchain is a decentralized database shared across all users that facilitates the process of recording transactions and tracking assets across a business network. This foundational technology is expected to pave the way for significant disruptions across many industries.
The underlying index follows a proprietary algorithmic stock selection methodology that begins with companies listed in developed and emerging markets countries; have a minimum marke capitalization of $100 million and a minimum average daily traded value for the last 6 months greater than or equal to $1 million; and have a minimum free float market capitalization equivalent to 10% of shares outstanding.
From this initial basket of companies, companies are then screened based on a natural language processing algorithm, which reads through a large volume of textual data on online media platform and databases and identifies those strongly tied to blockchain technology. The strongly-tied screened companies are then grouped into four so-called Stakeholder categories, including “Cryptocurrency Payees” or companies that accept cryptocurrency as payment and are developing blockchain payment solutions; “Mining Enablers” or companies that create hardware to enable creation of new blockchains or are mining blockchains; “Solutions Providers” or companies that assist organizations in the creation and implementation of blockchain applications; and lastly “Adopters” or those that primarily use blockchain technology.
Each of the four Stakeholder categories are allowed a maximum 15 company components and each individual weighting is capped at 7% at the time of reconstitution. The ETF’s underlying index is reconstituted on a semi-annual basis in June and December, and it is rebalanced on a quarterly basis to their original weights.
Potential investors should be aware that due to its indexing methodology, KOIN may include companies with minimal ties to blockchain. Additionally, the fund itself will not invest in initial coin offerings or crytpocurrency directly.
Innovation Shares is also working on the Innovation Shares NextGen Vehicles & Technology ETF (EKAR), which they intend to launch in the coming weeks.
The two NextGen ETFs are “multi-decade themes,” Markiewicz added. “It is not our plan to stop at past these two themes.”
For more information on new fund products, visit our new ETFs category.