Four Reasons Ether ETFs Have Underperformed

ETH ETFs haven't gained the same traction as BTC ETFs, even seeing net outflows this week. Tom Carreras investigates why.

Four Reasons Ether ETFs Have Underperformed

output: ETH ETFs haven't gained the same traction as BTC ETFs, even seeing net outflows this week. Tom Carreras investigates why.

Many investors have been disappointed by the performance of spot ether (ETH) exchange-traded funds (ETFs).

While spot bitcoin (BTC) ETFs processed nearly $19 billion in inflows over 10 months, ether ETFs, which began trading in July, have failed to generate the same level of interest.

To make matters worse, Grayscale's ETHE, which existed as an ether trust prior to its conversion into an ETF, has suffered massive redemptions, and demand for other ether funds has failed to offset them.

That means ether ETFs have, to date, experienced $556 million in net outflows since their launch. Just this week, the products have bled out a net $8 million, according to Farside data.

So why are ether ETFs performing so differently? There are a few possible reasons.

Putting inflows into context

First off, it's important to note that ether ETFs only look bad in comparison to bitcoin ETFs. The bitcoin products have broken so many records that they're arguably the most successful ETFs of all time.

For instance, the ETFs issued by BlackRock and Fidelity, IBIT and FBTC, collected $4.2 billion and $3.5 billion each in their first 30 days, smashing the previous record, which was held by BlackRock's Climate Conscious fund, that had garnered $2.2 billion in its first month (August 2023).

While ether ETFs failed to replicate these kinds of earth-shattering results, three of the funds are still among the top 25 best performing ETFs of the year, according to ETF Store President Nate Geraci.

BlackRock's ETHE, Fidelity's FBTC and Bitwise's ETHW have vacuumed up nearly $1 billion, $367 million and $239 million in assets, respectively – not bad at all for two-and-a-half-month-old funds.

“Spot ether ETFs were never going to challenge spot bitcoin ETFs in terms of inflows,” Geraci told CoinDesk. “If you look at the underlying spot markets, ether is about one-fourth the market cap of bitcoin. That should be a reasonable proxy of where spot ether ETF demand ends up longer-term relative to spot bitcoin ETFs.”

The problem is that Grayscale's ETHE has drowned out these funds' performances with its large outflows.

Spun up in 2017 as a trust, ETHE was originally designed, for regulatory reasons, in a way that didn't permit investors to redeem their ETF shares – the money was stuck in the product. That changed on July 23, when Grayscale won approval to convert its trust into a proper ETF.

At the time of conversion, ETHE had roughly $1 billion in assets, and while some of those assets were moved by Grayscale itself to another of its funds – the ether mini ETF – ETHE has suffered from nearly $3 billion in outflows.

It's worth noting that Grayscale experienced the same thing with its bitcoin ETF, GBTC, which has processed more than $20 billion in outflows since its conversion in January. However, the stellar performances of BlackRock and Fidelity's spot bitcoin ETFs have more than offset GBTC's bleedout.

Lack of staking yield

One of the big differences between bitcoin and ether is that investors can stake ether – essentially locking it into the Ethereum network to earn a yield paid out in ether.

But in their current form, ether ETFs don't allow investors to gain exposure to staking. So holding ether through an ETF means missing out on that yield (currently about 3.5%) – and paying a management fee to issuers that can range from 0.15% to 2.5%.

While some traditional investors won't mind giving up that yield in exchange for the convenience and safety of an ETF, it makes sense for crypto-natives to find alternative ways of holding ether.

“If you're a competent fund manager with even a basic understanding of the crypto market and you're managing someone’s money, why would you buy an ether ETF right now?” Adam Morgan McCarthy, an analyst at crypto data firm Kaiko Research, told CoinDesk.

“You pay to get exposure to ETH (and the underlying is custodied at Coinbase) or you buy the underlying yourself and stake it with the exact same provider in return for some yield,” McCarthy said.

Marketing Ethereum to clients

Another hurdle for ether ETFs is that it can be difficult for some investors to understand the core use-case for Ethereum because it seeks to lead in several, diverse areas of crypto.

Bitcoin was created with a hard cap on supply: There will never be more than