ETF Expert Corner

Innovation Shares’ Matt Markiewicz Explains NextGen Protocol ETF (KOIN)

May 8th, 2018 by ETF Store Staff

Matt Markiewicz, Managing Director at Innovation Shares, explains their NextGen Protocol ETF (KOIN) and offers the investment case for blockchain technology.



Transcript

You can listen to our interview with Matt Markiewicz by using the above media player or enjoy a full transcription of the interview below.

Nate Geraci: The ETF we're spotlighting this week is the Innovation Shares NextGen Protocol ETF, ticker symbol KOIN, and joining us via phone from New York to discuss this ETF is Matt Markiewicz, Managing Director of Innovation Shares. Matt, a pleasure to have you on the program today.

Matt Markiewicz: Good morning, guys. Thanks for having me.

Nate Geraci: Matt, let's just dive right in here. KOIN is one of four blockchain ETFs currently available to investors. Walk us through the methodology. How is this ETF constructed?

Matt Markiewicz: Sure. I appreciate you having me on. The challenge of building a thematic investment portfolio is that themes span borders and they cross sectors. And also, themes don't necessarily show up in 10Qs and 10Ks. Therefore, using a traditional Wall Street, fundamental approach to building a thematic blockchain portfolio doesn't really lend itself to doing it in an efficient manner. So we take a much different approach to building our indexes. We have a cutting edge, patent pending index methodology which is driven by artificial intelligence. It uses a natural language processing algorithm to read through tens of thousands of reputable news stories to identify stocks related to the theme given particular keywords. And again, this is a completely different approach than what your listeners are probably used to and the algorithm is also able to determine how strong and how positive the sentiment is for those stocks associated with the theme. And that's kind of how we build... that's the engine by which we build the portfolios. And we follow a rules-based approach, meaning that we have to have 100 million market cap minimum for each stock in the portfolio. There's a seven percent maximum weight per stock. We rebalance the portfolio quarterly, and reconstitute, which is when stocks are added or deleted, semi-annually in December and June. And also we take a unique approach from the standpoint of we've separated the fund into four stakeholder categories. And these are how we believe investors should look at stocks that are related to blockchain technology. So the four categories, I'll just kind of list them first and then we can go quickly into them. Cryptocurrency as payment, mining enablers, solutions providers, and adopters. And again, because you can't really put thematic investing in certain sectors or certain geographies, this is how we feel investors should be looking at the space. So cryptocurrency as payment, these are companies that accept cryptocurrency as payment for goods or services, or developing blockchain payment solutions. Mining enablers are companies that are creating equipment and/or tools to enable creation of new blockchains or mining blockchains as their main business. The third category, solutions providers, these are companies that are engaged as blockchain, as service providers. So they're assisting and building blockchain applications for companies and helping them create and implement them in their business models. The fourth category are the adopters, and these are stocks that are primarily using blockchain technology to increase operational efficiencies, optimize a settlement process, enhance the customer experience, or using blockchain to increase data security and integrity.

Nate Geraci: And Matt, in total, how many holdings are in this ETF?

Matt Markiewicz: There are 42 holdings currently in the ETF. We have a rule that there can be a maximum of 15 stocks in each category, so at most the portfolio can hold 60 stocks. And each category cannot represent more than 40% of the index.

Nate Geraci: Can you maybe give us an example or two of a company involved in blockchain that might surprise some people?

Matt Markiewicz: Sure. Right now, the portfolio holds a Danish stock. It's the container shipping giant, Maersk. And they’re using distributed ledger technology built by IBM actually to help digitize their global trade processes and increase visibility in their supply chain. More than $4 trillion in goods are shipped each year with 80% of consumer goods carried by the ocean shipping industry. And blockchain technology will help companies like Maersk reduce documentation and administration costs, which should help them improve margins. Another stock that's in the portfolio that people might not associate as having blockchain exposure is the energy giant British Petroleum, or BP. And they have invested in a peer-to-peer blockchain oil and gas trading platform, which is expected to be fully operational by the end of the year. There are opportunities for some massive cost savings and security improvements in the global energy trading landscape by harnessing the power of blockchain, so this is definitely an interesting play in terms of a company that you wouldn't think of that's involved in blockchain.

Jason Lank: Matt, this is Jason Lank. As I review the ETF, what catches my eye, the secret sauce is the artificial intelligence algorithm. I'm curious, without getting too technical into the weeds and the math behind it, I'm always interested in how you separate the data from the false positives. And I'll give you an example. We're seeing a lot of change, a lot of innovation in the blockchain space. For example, last year, a company is making ice tea, this year they're the blockchain tea company and probably why they changed their name to blockchain, I don't know, but how does the algorithm separate the signal from the noise?

Matt Markiewicz: Good question, Jason. So one of the attributes of using this patent pending process that we have is that the algorithm is able to read below the headlines and look into news stories, as I mentioned, by reputable media sources. And it's able to discern sentiment and how positive the mentions and the stories are around each stock that's identified as having exposure to blockchain technology. So in your example, the algorithm is actually able to avoid including concept stocks like that in the index because the media is able to, I don't want to say sniff it out, but there's some skepticism involved around companies who may be putting blockchain in front of their name, or announcing a pivot in strategy. This technology that we have - and the use of a natural language processing algorithm has been commonly used in the hedge fund space for the past 7 to 10 years - we're bringing it to the retail investor at a very reasonable price point. A lot of hedge funds, however, use this technology to put on short-term trades. But we're using it to build a diversified portfolio for longer-term investing. And again, the algorithm is able to actually separate the wheat from the chaff, if you will.

Nate Geraci: Our guest is Matt Markiewicz, Managing Director of Innovation Shares. We're spotlighting the Innovation Shares NextGen Protocol ETF, ticker symbol KOIN. Matt, I'm curious, tell us a little bit about your background. How did you get involved in this space?

Matt Markiewicz: I was at a small ETF provider called iShares, you may have heard of that.

Jason Lank: Right.

Matt Markiewicz: For over six years - and had a great experience there - wanted to do something a little more entrepreneurial in the exchange traded funds space, and I met a few partners who had this extremely interesting technology. As I mentioned, our NLP algo - and they had a great idea to launch indices and build ETFs utilizing this very powerful technology - and I thought it was a great idea and a completely unique approach to building indexes and the indexing world is definitely ready to be turned on its head, and that was the start of things. And I was able to leverage a lot of my background from iShares and kind of the pedigree there to help the partnership here and to build Innovation Shares.

Nate Geraci: Alright, well let's talk about the investment thesis here. Give us the overall investment case for blockchain.

Matt Markiewicz: This is an early stage theme - that's the first thing to remember - where the positive impact and the full effect of this transformational technology has really still yet to play out. So think about it as the internet, 20, 25 years ago. You didn't really have much of an idea what it would mean to your everyday life back then, but now, of course it's nearly impossible to live without it. That's where we think blockchain is right now. And there are applications that haven't even been developed yet that you're going to end up taking for granted 10 to 15 years down the road. A lot of the applications right now are more from a business-to-business, or B2B standpoint. And they may not necessarily be impacting your everyday life, but you're going to see this transformational technology start to creep into your everyday life. And companies are going to be using blockchain, not only to help drive revenue, but to increase operational efficiencies, again, which should lead to an increase in margins and hopefully the companies that are using blockchain versus their competitors are going to be able to show that they're more valuable to that extent.

Nate Geraci: Matt, sort of on that note, we have spotlighted some of the other blockchain ETFs previously, and with all of them, I know one of the main criticisms is that they don't really provide direct exposure to blockchain. So if you look at the top holdings in KOIN for example, there are companies like Visa, Microsoft, Amazon, BP, where blockchain, at least right now, is a small piece of what they do. I'm just curious, how do you respond to that sort of criticism?

Matt Markiewicz: It's a criticism we've heard often. And again, these are companies that have the war chests right now to be developing from an R&D standpoint blockchain applications to be able to deploy in their operations. And these are the public companies that we're seeing and they are using blockchain, but there are many companies that should be accessing the capital markets in the years ahead. The smaller companies, more of the pure play companies that are going to be coming to market, and it's our hope that they'll be included in our index from that standpoint. The thing that I want to point out is a lot of these larger cap companies, they have the resources to be able to build out blockchain applications right now. And that's why they're the more obvious ones, as compared to say some of the smaller cap companies. So that's where the state of the industry, or the theme is right now. That's not to say that the portfolio's going to look similar in a year to 24 months.

Nate Geraci: Matt, we have just a couple of minutes left here. I think most people are probably familiar with blockchain primarily because of bitcoin - though, I think as you've highlighted, obviously there are many potential uses for blockchain outside of bitcoin and other cryptos. But if for whatever reason the crypto market were to completely melt down, how big of a risk do you think that is for blockchain-related companies?

Matt Markiewicz: Of course, there's always some headline risk, but if you actually look at, again, these companies that are in our portfolio, there has not been a high correlation to the decline in cryptocurrency prices to the movement of the ETF since we launched it on January 30th. And so I really don't see much of an overlap at all, because again, the cryptocurrency space is quite separate from how a lot of the companies in the portfolio are harnessing the power of blockchain.

Jason Lank: Matt, this is Jason again. We're just down to just a minute or so. Something interesting I noted in the ETF is that from a country standpoint, you're really only around 60, 65% United States, and that signals to me that blockchaining's - by no means does the United States have a monopoly on that. This is a worldwide phenomenon. Is that a fair statement to make?

Matt Markiewicz: Yes, Jason, that's a very fair statement. And I would expect over the coming years for the exposure to US companies to actually decline as developers across the world continue to build out applications for blockchain, and that's coming from all regions, whether it be Europe, Asia, Latin America. So that's a very fair statement, and again, that's kind of where our process lends itself to really building a diverse portfolio for investors, not only from an industry perspective, but from a geographical perspective as well.

Nate Geraci: Matt, 30 seconds. Where does this ETF fit in an investor's portfolio?

Matt Markiewicz: We view it as fitting very well into an international or global equity portion of the portfolio where you may be looking for slightly higher growth in terms of your outlook for the stocks in the basket. And it's been resonating well with investors. So again, so it's more of a global equity, growth sleeve. That's where you would want to allocate KOIN.

Nate Geraci: Well Matt, we'll have to leave it there. Great spotlight. Congratulations on the ETF and best of luck to you.

Matt Markiewicz: Nate, Jason, thank you very much for having me on.

Nate Geraci: That was Matt Markiewicz, Managing Director of Innovation Shares. Again, the ETF is the Innovation Shares NextGen Protocol ETF and you can learn more about this ETF by visiting innovationshares.com.