LEGR: Not Your Average Blockchain and Crypto ETF
Stock Analysis & Ideas

LEGR: Not Your Average Blockchain and Crypto ETF

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Here’s why LEGR, a blockchain-focused ETF, is investing in companies like Nvidia, Amazon, Microsoft, and Deutsche Telekom.

It’s easy to take a quick look at the First Trust Indxx Innovative Transaction and Process ETF’s (NASDAQ:LEGR) top couple of holdings and think, “Hey, wait a minute, isn’t this supposed to be a crypto ETF?” Its top three holdings are Nvidia (NASDAQ:NVDA), Amazon (NASDAQ:AMZN), and Microsoft (NASDAQ:MSFT). Still, it very much is a crypto and blockchain ETF, albeit one with a very different approach from the status quo.

Here’s what makes LEGR an interesting and unique ETF within the crypto and blockchain space. 

What Does the LEGR ETF Do?

LEGR is an ETF from First Trust with about $110 million in assets under management (AUM). It seeks to replicate the results of its underlying index, which invests in companies that are “either using, investing in, developing, or have products that are poised to benefit from blockchain technology,” according to First Trust. Furthermore, the index “seeks to include only companies that have devoted material resources to the use of blockchain technologies.”

LEGR’s ticker is a nod to distributed ledger technology, which is essentially a record of all transactions or contracts maintained across a decentralized (or distributed) network of computers. 

As a quick refresher, blockchain technology is a distributed database that enables secure, transparent, and tamper-proof transactions. It uses a decentralized ledger that records transactions across multiple computers.

Blockchain technology is transparent in that anyone can look at the blockchain or ledger and see any of the transactions that have ever taken place on it. It is a key part of the foundation that Bitcoin (BTC-USD), Ethereum (ETH-USD), and other cryptocurrencies are built on. The use of this promising technology is also being pioneered across a variety of other applications, such as supply-chain management, financial services, and healthcare.

LEGR’s Portfolio Composition

Because it is investing in companies that utilize, develop, and invest in blockchain technologies, LEGR’s holdings go well beyond the usual suspects that one typically finds in a crypto- or blockchain-themed ETF, like Coinbase Global (NASDAQ:COIN) and a handful of Bitcoin miners.

LEGR casts a wide net and is well-diversified, particularly in comparison to many other crypto ETFs. It holds 100 stocks, and its top 10 holdings make up a mere 16.2% of the fund. See below for an overview of LEGR’s top 10 holdings using TipRanks’ holdings tool.

One benefit of this approach is that LEGR has investments in plenty of blue-chip companies, like Nvidia, Microsoft, and Amazon, that can continue to be successful without cryptocurrency and blockchain technology, but where it would be an added bonus to their top and bottom lines, as opposed to companies that are 100% reliant on it. 

Why are these types of companies included in LEGR’s portfolio? Semiconductor companies like Nvidia and Advanced Micro Devices (NASDAQ:AMD) provide the graphic processing units (GPUs) that crypto miners use to mine for Bitcoin and other cryptocurrencies. 

Amazon and Microsoft have both invested in blockchain technology and experimented with using it in a variety of ways. Amazon’s AWS offers Amazon Managed Blockchain, which can help customers to track supply chains, while Microsoft is working with a Web3 company it invested in to provide real-time blockchain data on its Azure Cloud.

Beyond these top positions, other holdings include Tesla (NASDAQ:TSLA), which is notable for holding Bitcoin on its balance sheet, and Deutsche Telekom (OTC:DTEGY), which has invested in the proof-of-stake crypto Polkadot (DOT-USD).

Deutsche Telekom also provides node-running infrastructure to Polkadot stakers (people who lock up their crypto in order to support a blockchain) in addition to providing infrastructure support to a number of blockchains, and the company is a significant investor in another cryptocurrency called Celo.

Is LEGR Stock a Buy, According to Analysts?

Turning to Wall Street, LEGR has a Moderate Buy consensus rating, as 63.89% of analyst ratings are Buys, 31.2% are Holds, and 4.91% are Sells. At $44.25, the average LEGR stock price target implies 12% upside potential.

High Expenses

I like LEGR’s strong group of holdings and its differentiated approach of investing in companies that are using and investing in blockchain technologies rather than just the usual suspects like Coinbase and a group of Bitcoin miners. However, LEGR’s one downside that should be pointed out is its fairly high expense ratio.

LEGR’s expense ratio of 0.65% is fairly steep within the overall world of ETFs. On the other hand, it’s in the middle of the pack when it comes to crypto ETFs, which seem to all charge above-average fees. For example, two other notable crypto-themed ETFs, the Amplify Transformational Data Sharing ETF (NYSEARCA:BLOK) and the Bitwise Crypto Industry Innovators ETF (NYSEARCA:BITQ), have even higher fees of 0.75% and 0.85%, respectively. 

Still, LEGR’s high fees are something that investors need to consider. An investor putting $10,000 into the fund now would pay $65 in fees in year one, but over the course of a 10-year investment, the total fees paid would balloon to $810 on a cumulative basis.  

Investor Takeaway: Expensive but Intriguing  

Aside from its high fees, LEGR is a pretty intriguing investment opportunity. I like the differentiated, wide-reaching approach that it takes to investing in blockchain and distributed ledger technology, with investments in a lot of blue-chip technology, healthcare, and financial stocks that you won’t find in other crypto ETFs.

While the fund isn’t necessarily a pure play on crypto and thus likely won’t move in lockstep with the price of Bitcoin and other cryptocurrencies, this isn’t necessarily a bad thing, as these stocks have solid businesses in other areas while still giving investors plenty of exposure to the growth of cryptocurrency and blockchain technology. 

LEGR started in 2018, so it predates many of the other popular crypto ETFs and has compiled a bit more of a track record. As of the end of the most recent quarter in June, LEGR has a one-year total return of 15.9%, a three-year annualized total return of 11.8%, and a five-year annualized total return of 8.2%. Since its inception, the fund has returned 6.7% on an annualized basis.

While these returns lag the broader market, they are still positive returns, and they are better than those of many other crypto ETFs which have lost money since inception. 

As an added bonus, LEGR also stands out from many of the other cryptos in another way. Not only does it pay a dividend, but it yields a solid 2.3%. The high expense ratio gives me some pause, but overall, this seems like one of the best-in-class ETFs in the crypto space based on its strong holdings, solid dividend, and comparatively decent track record.



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