One of the hottest Exchange Traded Funds (ETFs) right now is the Invesco Elwood Blockchain ETF (LSE: BCHN). In February this year, the ETF exceeded its assets under management to over $ 1 billion through strong performance and inflows in 2020 and through 2021.

Interactive investor clients contributed to these inflows, with the ETF ranking third in the top ten best-selling ETFs in February.

Investors in this ETF have achieved excellent returns so far. Between January 2020 and March 10, 2021, the ETF returned almost 160% in sterling terms. Over the course of 2020, the ETF achieved a return of almost 90%.

In my view, the hype surrounding Bitcoin and other cryptocurrencies is what is driving these inflows. As readers will be aware, the price of Bitcoin and some other lesser-known cryptocurrencies has risen since mid-2020, and Bitcoin has hit several new highs.

Meanwhile, institutional support for the cryptocurrency appears to be gaining ground, and Tesla (NASDAQ: TSLA) recently announced that it has bought coins. The defensive investment trust Ruffer (LSE: RICA) Also, it was recently announced that its portfolio had 2.5% Bitcoin exposure at the end of 2020.

As the tech enthusiast may point out, the ETF’s name suggests that it is focused on blockchain rather than Bitcoin. While Bitcoin uses blockchain technology, many companies that have little or nothing to do with Bitcoin or cryptocurrencies have developed applications for blockchain in recent years. In simple terms, blockchain is a system in which a record of transactions is kept on multiple computers connected on a peer-to-peer network. One of the supposed main advantages is that records cannot be tampered with or changed.

This is true. While the name of the ETF suggests that its focus is on blockchain companies, the ETF tracks the Elwood Blockchain Global Equity Index. The literature of the index shows that companies are also included that are explicitly involved in cryptocurrencies. For example, the index describes itself as exposure to “listed companies that participate in or have the potential to participate in the blockchain or cryptocurrency ecosystem”.

As a result, the ETF has significant exposure to bitcoin and cryptocurrency. In this latest quarterly review of the index, Elwood analysts explicitly cited Bitcoin price as the driver of the index’s return. They noted, “The index had a strong quarter due to the appreciation in cryptocurrency prices.”

Elwood listed the companies that contributed most to the performance of this topic. For example, they note that MicroStrategy (NASDAQ: MSTR) made a huge contribution, driven by its “raw bitcoin exposure”.

This company appears to have been included in the index in 2020 for precisely this reason. Last year, the company announced that it had introduced Bitcoin as its “primary cash reserve asset” and acquired several thousand coins for hundreds of millions of dollars.

The latest quarterly report also found that Monex (not listed under ii), owned by Coincheck, a Japan-based bitcoin exchange operator, was a big contributor to late 2020 performance. The Ethereum Miner Hive (TSX: HIVE), the Bitcoin Miner Hut 8 (TSE: HUT) and the German Bitcoin Exchange Bitcoin Group (XETRA: ADE) were also mentioned.

Looking at the list of stocks, you can easily spot several other companies that are part of the Bitcoin and cryptocurrency theme. For example, the US financial services company Square (NYSE: SQ), founded by Twitter’s Jack Dorsey, is part of the portfolio. This company, like MicroStrategy, has used corporate funds to get a bitcoin exposure on its balance sheet. Another holding is GMO Internet (not listed under ii), a Japanese technology company that is partially involved in cryptocurrency mining.

The ETF’s largest holding on March 10 was Canaan Creative (NASDAQ: CAN), which accounted for over 11% of the portfolio. This company creates and sells the computer parts needed for cryptocurrency and bitcoin mining. Thanks to the rise in cryptocurrency prices, and thus crypto mining, the company’s share price has risen over 300% since the start of the year. The ETF rebalances itself regularly, so that participation will eventually decrease again.

In a comment on Canaan Creative in January 2020, analysts at Elwood noted that it is “a pure cryptocurrency company and revenue can be very volatile as many mining companies only commit to new business during times of sharp cryptocurrency price increases”.

So it’s clear that the ETF is sure to be exposed to ample bitcoin and cryptocurrency risks. However, it is by no means a bitcoin or crypto currency “pure play”. As both the ETF and index literature make clear, it also includes companies that are believed to have the potential to participate in the “blockchain ecosystem” but that have no direct involvement in Bitcoin or cryptocurrencies.

As a result, the portfolio has exposure to seemingly more conventional companies that are developing some sort of blockchain-based component of their business. For example, it is exposed to Oracle (NYSE: ORCL), Mitsubishi (NYSE: MUFG), Santander (LSE: BNC) and Rio Tinto (LSE: RIO). It should be noted, however, that these companies’ stock prices are likely to be largely uncorrelated with general sentiment around blockchain or bitcoin. While their blockchain application development could one day benefit them if the adoption of blockchain is seen as the norm for businesses, their stock prices are currently being influenced by very different factors.

The Invesco ETF isn’t the only one looking at the blockchain issue. The First Trust Indxx Innovative Transaction & Process UGAW-ETF (LSE: BLOK), which tracks the Indxx Blockchain Index, is also available on ii.

My guess is that this ETF has proven to be less popular than the Invesco fund, partly because the name doesn’t include a blockchain. However, it also has a much more conventional exposure. Unlike the Invesco ETF, it is not severely affected by cryptocurrency miners, crypto exchanges, companies with Bitcoin-filled balance sheets, or other such direct cryptocurrency games.

Instead, the index focuses much more on companies developing business applications for blockchain technology. So it’s more of a straight thematic game with blockchain than a combination of blockchain and cryptocurrencies.

As a result, much of the ETFs holdings are conventional technology companies. For example, the ETF has the Chinese technology giant Baidu (NASDAQ: BIDU). Often referred to as the Google of China, this company is China’s most popular search engine. However, the company also has a blockchain service for businesses called Xuperchain, which explains its presence on the index. What it doesn’t have, however, is direct exposure to Bitcoin.

Another large participation is Möller Maersk (not listed under ii). This company has partnered with Microsoft (NASDAQ: MSFT)which is also included in the index to process marine insurance using blockchain technology. Mining giant BHP (LSE: BHP) is also in the portfolio. The company appears to be using blockchain to track environmental, social and corporate governance (ESG) attributes and verify supplier identities.

Semiconductor manufacturers and banks are also on the list.

All of this has resulted in a much more mixed performance. Over the course of 2020, the ETF achieved a sterling return of around 15%. Not bad, but way behind the Invesco ETF. This is mainly because the company had no exposure to the kind of high-flyers related to bitcoin that can be found in the Invesco ETF.

However, the number of banks in the portfolio was also likely an obstacle to performance. This makes sense from a thematic point of view. Banks have tried to develop blockchain applications, and financial services are generally integrating new technologies faster than other sectors. In a year like 2020, however, this has hurt performance as bank stocks are very cyclical.

Other holdings contributed to performance, but also for reasons that weren’t blockchain. For example, the ETF has a large number of semiconductor companies. Semiconductor chips are important components in electronics and computers and were in high demand in 2020. For example Taiwan Semiconductor Manufacturing (NYSE: TSM)As a member of the index, the share price rose by around 50% in 2020.

This further underscores the point that many of the companies in the index are developing blockchain applications, but their prices are driven by other factors.