BLOK ETF: Only For The Brave

This analysis covers the Amplify Transformational Data Sharing ETF (NYSEARCA:BLOK), otherwise known as “BLOK”. I thought it would be productive to discuss BLOK in light of its more than 10% year-to-date surge.

The Nasdaq has spiked by approximately 4% since the turn of the year, which has provided systemic support to assets such as BLOK as it’s a high-beta play on the index.

I’m not fully sold on a tech stock rally during 2023. However, I think BLOK provides a good option if you’re bullish on the technology sector; here’s why.

Portfolio Update

BLOK operates an actively managed portfolio, meaning its constituents will likely be a whole lot different in a few months’ time than they are now. Nevertheless, the ETF’s portfolio reveals that it has shifted its weight towards larger capitalization stocks with more robust income statements. I assume Amplify’s management has done this to combat the risk-off market sentiment while remaining committed to its thematic mandate.

Let’s run through a few of the constituents’ key metrics to elaborate on my “more robust income statement’ claim. I want to place emphasis on EBITDA margins as it presents a helpful indicator of tech company profitability by phasing out subjective amortization elements. In addition, I want to focus on ROE (return on equity) as a means of measuring investors’ residual value.

As visible in the diagram below, Amplify hosts numerous stocks with tremendously sound income statements, allowing it to throw some defense on the field until the financial markets become more high-beta conducive.

Stocks	EBITDA Margin	ROE
IBM (IBM)	19.84%	6.51%
Accenture (ACN)	16.96%	32.55%
MicroStrategy (MSTR)	5.06%	-10x
CME Group (CME)	66.80%	9.48%
Silvergate Capital (SI)	46.45% (net income)	9.95%

Click to enlarge

Source: Seeking Alpha

Despite its recent shift toward ‘defensive tech’, the ETF still holds numerous VC-Esque assets in its portfolio as it is more than 40% exposed to small-cap securities, many of which are secured by blockchain mining companies. I mention the latter because of the negative sentiment surrounding the industry, with some analysts calling it a “crash”.

Whether you think the ETF’s innovation-linked exposure is risky is down to your personal risk appetite. I believe the vehicle is an excellent intermediary between risk-tolerant investors and embryonic stage investment opportunities. However, I urge you all to keep in mind that the ETF possesses significant beta risk, which will almost certainly add risk to your general investment portfolio.

BLOK’s Managerial Performance

I was surprised to see that BLOK possesses a few promising risk-return metrics. The fund’s active return/risk shouldn’t be considered as it is unconstrained. However, positive return skewness and respectable Sharpe and Sortino ratios suggest BLOK’s managerial skill is better than most might think.

It is necessary to remember that the blockchain space plummeted during 2022’s bear market due to its cyclical characteristics. However, if a market recovery unfolds, the opposite might occur, which would significantly improve the fund’s portfolio management metrics.

Valuation and Dividends

Relative valuation doesn’t carry much weight when it comes to growth stocks. However, it does contextualize whether an asset has been oversold or not. In my opinion, a portfolio price-to-book ratio of only 1.54x and a price-to-earnings ratio of merely 10.58x suggests various of the ETF’s holdings are oversold.

Although Amplify’s BLOK didn’t distribute any compensation in 2022, the vehicle has a history of lucrative dividend yields. However, the tech sector’s (and blockchain in particular) recent retracement could delay dividend distributions until we experience a significant global macroeconomic recovery.

Concluding Thoughts

BLOK provides a lucrative high-beta opportunity to investors that are bullish on a tech sector recovery. Given the circumstances, the ETF is extremely well managed, and its valuation metrics suggest that many of its constituents might be oversold.

As revealed by its daily standard deviations and losses in 2022, this ETF is a high-risk asset. However, significant outperformance is possible if a broad-based market recovery occurs.