Paul MacDonald, CFA
Chief Investment Officer
While Bitcoin has been grabbing headlines as it breaks through the US $50,000 barrier, it is the blockchain processes behind digital currencies that deserve as much, if not more, investor attention.
That was the message delivered by Harvest Portfolios Group’s Chief Investment Officer, Paul MacDonald during a recent webinar, discussing blockchain technology and updating the Blockchain Technologies ETF (TSX: HBLK).
While miners and cryptocurrency companies are in the limelight, a story as big is the implementation of blockchain networks and applications. These applications are spreading globally in all parts of the economy.
They include government services, drug manufacturing and tracking, shipping and logistics delivery, travel and tourism and insurance. Other examples include medical records, reducing insurance fraud and validating digital content ownership.
So, while crypto currency-related holdings make up one-third of Harvest’s blockchain ETF, the other two-thirds are in areas where the technology is being applied.
“Bitcoin has been crowned ‘King of Crypto’, but the growth of blockchain in just about every sector has been as phenomenal,” Mr. MacDonald said.
Harvest launched the Blockchain Technologies ETF (TSX: HBLK) in 2018. It was Canada’s first Blockchain ETF and holds a cross section of large capitalization technology companies and emerging stand-alone blockchain companies. The ETF had a powerful 2020, ending the year as the fourth best performing Canadian ETF, with the unit price rising 158%.
For investors interested in blockchain, there are two questions, Mr. MacDonald said. The first is: How do these companies make money? The second is: What is the best way to invest?
“These are the same questions we asked ourselves three years ago when we launched the fund,” he said.
In 2018, when Harvest launched the ETF, Blockchain was a promising idea. There was a lot of conjecture about how the technology would unfold and some pilot projects were underway. But it was still in its infancy without large scale applications.
The number of companies engaged purely in blockchain applications was limited. Many tended to be small and did not have the size and scale Harvest looks for. So, Harvest opted to include both “pure play” emerging companies and large capitalization companies in the broader technology field. As the dedicated companies matured and met strict criteria, they would be added and more mature companies with less of a blockchain focus removed.
The ETF holds 35 stocks with the 10 large cap holdings representing 33% equally and the 25 focused companies representing 65% as at February 17, 2021..
“This strategy has been a good way to get exposure to a technology we know is going to change our lives.”
Mr. MacDonald said many of companies have been making money by offering consulting services that help their customers improve their efficiencies or satisfy regulatory requirements. Other areas include payment processing businesses including crypto currency processing. Large cap names in the fund, including Accenture plc, Microsoft Corp., Infosys Ltd. and Oracle Corp. have benefitted, as has DocuSign Inc., which allows companies to manage electronic agreements.
Pure play holdings include EPAM Systems Inc., an IT systems developer helping build peer to peer payment systems for banks. Marathon Pattern Group Inc., the largest single holding in the ETF, is a patent and patent rights company with a growing business as a data verifier. This includes running various algorithms to validate that blockchain transactions are real and true.
Quisitive Technology Solutions Inc., a Canadian company, is a small component of the portfolio. It is a digital technology consultant, specializing in blockchain and transformative technologies and implement Microsoft cloud solutions and is also developing a pay system.
“The universe of companies is significantly expanding and we expect that to continue to be the case,” Mr. MacDonald said. “It’s really exciting to see these companies starting to surface. There is growth within the sector and there is growth within the theme.”
For more on Harvest products click here.