Demand is still slow for US Ethereum ETFs one month after debut – here’s why

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The nine US exchange-traded funds (ETFs) tracking the spot price of Ethereum (ETH) have struggled to attract new capital since their strong start in late July.

Exits from Grayscale Ethereum Trust contributed heavily to the day’s negative performance, with sluggish demand for other competing ETFs also playing a role.

In this article, we discuss the current challenges Ethereum spot ETFs face, how they compare to Bitcoin spot ETFs, and how they can succeed with increased institutional adoption and regulatory developments.

Get Ethereum ETF Performance: A Snapshot

According to data from Farside Investors, Grayscale’s Ethereum fund, also known as ETHE, has seen more than $2.6 billion in net outflows since it was converted to an ETF.

Grayscale has maintained a 2.5% fee for its Ethereum ETF, which is about ten times more expensive than other newcomers. Competitors like BlackRock and Fidelity charge around 0.25%, while others like VanEck and Franklin Templeton charge even less.

However, the fee structure is not the only factor that matters. Grayscale has offered a low-cost version of ETHE, but it’s still far from competing with BlackRock’s Ethereum ETF.

BlackRock’s iShares Ethereum Trust (ETHA) has seen net inflows of over $1 billion since launch. However, its performance has stagnated recently as it has not recorded streams for four consecutive days.

Three Ethereum ETFs following BlackRock’s ETHA are Ethereum’s FETH, Bitwise’s ETHW, and Grayscale’s BTC, with net inflows of $397 million, $314 million, and $242 million, respectively. Excluding Grayscale’s ETHE, the rest also reported minor gains a month after their trading debut.

The stake could be a big deal that is missing

Staking has become an integral part of the Ethereum ecosystem after its landmark transition from Proof-of-Work to Proof-of-Stake consensus mechanism. But the Securities and Exchange Commission’s (SEC) perceived stance on crypto staking has discouraged ETF issuers from including this feature in their spot Ethereum ETF offerings.

As a result, all Ethereum products went live without staking. The lack of staking rewards may diminish the appeal of investing in Ethereum through ETFs for some, if not many, investors.

“An institutional investor looking at Ether knows there are returns to be had,” CoinShares’ McClurg said. “It’s like a bond manager saying I’m going to buy the bond but I don’t want the coupon, which is the opposite of what you’re doing when you buy bonds.”

Similarly, Chanchal Samadder, head of product at ETC Group, said that owning an ETF without staking returns is like owning stocks without receiving dividends.

Samadder believes that the lack of staking rewards may deter some investors from Ethereum ETFs, as they essentially become like “a bond with no yield.”

Not all experts see the absence of staking in spot Ethereum ETFs as a major problem.

There is a belief that the overall demand for Ethereum will continue to increase due to the introduction of these ETFs, even without the reward stake. The emergence of Ethereum spot ETFs is expected to attract a wide range of investors, including those who have not previously engaged with crypto directly.

Nate Geraci, president of the ETF Store, believes that participation in Ethereum ETFs is a matter of “when, not if” as the regulatory environment evolves.

The right product, challenging moment?

US spot Ethereum ETFs come at a difficult time when the crypto market has entered a sharp correction.

According to data from TradingView, Ether has fallen about 30% since the launch of spot Ethereum ETFs, from about $3,500 on the debut date to $2,400 at press time.

The recent crypto market downturn and Wall Street stock sell-off created additional pain for crypto assets and thus had a significant impact on Bitcoin and Ethereum ETFs.

Since September 4, US spot Bitcoin ETFs have gone on a 6-day losing streak, reporting more than $800 million withdrawn during the period, Farside data shows.

Potential for future growth

On the plus side, Ethereum ETF exits are not completely unexpected. Indeed, Bloomberg ETF analyst Eric Balchunas previously estimated that Ethereum ETF inflows would be lower than Bitcoin’s, based on different market characteristics and dynamics.

Research firms Wintermute and Kaiko also forecast that Ethereum ETFs could see lower-than-expected demand, expecting just $4 billion in flows over the next year. Since the start of trading, the U.S. Ethereum spot product group, excluding Grayscale’s ETHE, has captured more than $2 billion in flows.

Although the initial performance of these funds has been mixed, their success may be realized in the future, especially as the crypto market recovers and investors become more comfortable with this asset class.

As long as Ethereum maintains its position as the leading blockchain platform, long-term Wall Street adoption could drive the growth of Ethereum ETFs.

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