Ethereum ETFs Debut — What You Need to Know

On Tuesday, July 23rd, spot Ethereum (ETH-USD) ETFs made their long-awaited debut in the United States in a significant victory for the crypto industry and Ethereum itself, as well as potentially for everyday investors and ETF issuers. Here’s what you need to know about these new ETFs. 

Not Digital Gold, But a Decentralized Global Supercomputer 

Ethereum is the second-largest cryptocurrency, with a market cap of $418 billion, trailing only Bitcoin (BTC-USD). 

While Bitcoin is a decentralized currency with a fixed supply that is often thought of as a store of value or “digital gold,” Ethereum’s value proposition is a bit different but still compelling. 

Ethereum is a smart contract platform and the largest proof-of-stake cryptocurrency. Jay Jacobs of BlackRock (BLK), one of the ETF issuers, describes Ethereum as “a global platform for applications that run without centralized intermediaries,” while Kyle DaCruz of VanEck compared it to an open-source app store. 

Thinking of Ethereum as a decentralized global supercomputer may be simplifying it a bit for crypto-natives, but overall, it’s a good high-level introduction to the asset.

The Ethereum blockchain powers decentralized applications, including non-fungible tokens (NFTs) and decentralized exchanges (DEXs) like Uniswap ($UNI-USD), where crypto traders trade meme coins and other assets, lending protocols, and more. 

Now, while this is all exciting, it should be noted that Ethereum is certainly not the only blockchain that offers these types of applications. It has plenty of competition from rival blockchains like Solana (SOL-USD), which currently boasts faster transaction times and lower transaction fees. 

Still, Ethereum is currently the 800-pound gorilla in the room when it comes to the smart contract space. It currently has $60.5 billion in total value locked (TVL) (a common metric used by crypto investors to compare blockchains. It measures the USD value of value staked or locked into a crypto platform), over 10 times higher than Solana’s TVL. 

It’s also clearly an asset that institutional investors and traditional financial giants are comfortable throwing their support behind, hence the launch of the Ethereum ETFs.

What’s the Big Deal About Spot ETH ETFs?   

There were already Ethereum futures ETFs and several other Ethereum-related products trading on U.S. exchanges. However, the new spot Ethereum ETFs are notably different in that they invest in the underlying asset, Ethereum itself, as opposed to Ethereum futures. 

ETFs based on futures can deviate from the price of the underlying asset for various reasons. Spot Ethereum ETFs will directly hold Ethereum rather than Ethereum futures, so their prices should correlate fairly closely with the price of Ethereum. Additionally, futures ETFs are typically more expensive than ETFs that invest directly in an asset and can introduce additional complexity into the equation.

The launch of these ETFs is also a big deal for investors, as they will enable them to gain direct exposure to Ethereum through a familiar financial product via their normal brokerage accounts for the first time. For investors who have been intrigued by crypto but who haven’t yet invested in it for a variety of reasons, an easy-to-buy Ethereum ETF is a compelling option for getting started.

Ethereum ETFs also allow investors to gain exposure to Ethereum through their individual retirement accounts (IRA). Furthermore, as regulated financial products trading on major U.S. exchanges, they should also be viable options for institutional investors who want to invest in the second-largest cryptocurrency. 

The ETFs benefit investors by giving them more choices and ways to invest in cryptocurrency in ways that they are comfortable and familiar with. The ETFs should also benefit Ethereum itself over the long term by enlarging the pool of potential buyers for the asset. 

Who Are the Major Players?

Spot Bitcoin ETFs have been an emphatic success, and most of the key players who launched spot Bitcoin ETFs have unsurprisingly thrown their hat into the ring for spot Ethereum ETFs.

So far, the ETFs include the Invesco Galaxy Ethereum ETF (QETH), 21Shares Core Ethereum ETF (CETH), Fidelity Ethereum Fund (FETH), Franklin Ethereum ETF (EZET), and the VanEck Ethereum ETF (ETHV), all of which are listed on the CBOE, and the BlackRock’s iShares Ethereum Trust (ETHA), which is trading on the Nasdaq (NDX) exchange.

Then, you have the Bitwise Ethereum ETF (ETHW), Grayscale Ethereum Trust (ETHE), and Grayscale Ethereum Mini Trust (ETH), all listed on the NYSEARCA exchange.

Note that the Grayscale Ethereum Trust is an existing product that is converting from a trust to an ETF. At the same time, the Grayscale Ethereum Mini Trust is essentially a spin-off from the larger Grayscale product that will charge a lower fee and hold a fraction of the Ethereum that ETHE holds (and should trade at a lower price point, which could be attractive to some smaller retail investors).

Cost Comparison

While investors have many choices, choosing an ETF to invest in isn’t as complex as it may initially seem. That’s because these ETFs are all similar in terms of their mechanics and the exposure they will offer to Ethereum.

The main difference really comes down to fees, and in this regard, most of the ETFs are fairly similar as well. All of the ETFs offer reasonable expense ratios of 0.25% or lower, with the exception of the Grayscale Ethereum Trust, which charges a considerably higher fee of 2.5%. However, this is partially because it existed as a trust that predated these new ETFs and faced little competition before it launched. Still, Grayscale has indicated it has no plans to lower the fees for this product.

Many of the ETFs are currently offering lower fees, or waiving them entirely, for the first six months to one year or until they hit a certain threshold of assets under management (AUM) as they try to attract investors.

With the fees in the same ballpark, it may be worthwhile for investors to look to the offerings from BlackRock and Fidelity — the iShares Ethereum Trust ETF and the Fidelity Ethereum ETF, which both feature expense ratios of 0.25% and currently have fee waivers in place.

BlackRock and Fidelity’s Bitcoin ETFs have by far attracted the most assets under management and volume. So, assuming that the Ethereum ETFs follow suit, these ETFs will be appealing choices for investors. Higher volumes mean that bid/ask spreads for these ETFs will be lower and that they will have more liquidity.

Plus, Fidelity and BlackRock are blue-chip asset managers with plenty of experience managing ETFs and significant resources behind them. Given their significant size and scale, they could potentially lower their fees in the future to beat the competition if the need arises.

Taking It All In

The launch of spot Ethereum ETFs on major U.S. exchanges is an exciting moment for the crypto and ETF industries. It’s also exciting for everyday investors, who now have a new, seamless way to gain exposure to the world’s second-largest cryptocurrency, which has significant long-term potential as a global, decentralized smart contract platform and “app store.”

The availability of these ETFs should also be a positive for Ethereum itself over the long term as it expands the potential pool of buyers well beyond tech-savvy crypto natives.

The iShares Ethereum Trust and the Fidelity Ethereum ETF look like attractive ways for investors to invest in Ethereum via ETF, given their issuers’ sterling reputations, reasonable expense ratios, and the volume and assets under management they are likely to attract. These should give them scale advantages over smaller competitors, as discussed above.

Disclosure