Open-ended refers to the fund’s ability to continuously issue and redeem shares, allowing investors to easily enter and exit their positions based on the market price of the ETF.

Getting to Know Ethereum ETFs

Ethereum ETFs work by collaborating with an issuer and a custodian to securely store Ether. When the ETF launches, the issuer uses initial investor capital to purchase real Ether, which the custodian holds securely. Based on the amount of Ether in storage, the ETF issuer creates shares of the ETF, each representing fractional ownership of the Ether held in custody.

Like common stocks, these shares trade on exchanges under a specific ticker symbol. You can buy and sell them during market hours through most brokerage accounts. Like other ETFs, Ethereum ETFs charge an expense ratio, which is a percentage fee deducted over time and expressed annually to cover the fund’s operating costs.

It’s important to note that Ethereum ETFs have both market prices and net asset values (NAV). You purchase shares at market prices, and behind the scenes, the ETF issuer works with authorized participants to create or redeem shares, ensuring that the market price stays close to the NAV.

History of Ethereum ETFs

The journey of what we now know as Ethereum ETFs began in 2017 with the launch of the Grayscale Ethereum Trust. However, when it was launched in December 2017, it was not an ETF but a closed-end trust.

Unlike ETFs, closed-end trusts can trade at significant premiums or discounts to their NAV, as they lack the open-ended creation and redemption mechanism that keeps an ETF’s market price aligned with its NAV. Nonetheless, at that time, the Grayscale Ethereum Trust was the only way for investors to become familiar with Ether without custody.

The next milestone in the evolution of Ethereum ETFs occurred in October 2023 with the launch of the ProShares Ether Strategy ETF. This ETF was a true open-ended ETF, but it came with one limitation: at that time, ETFs were still not permitted to hold spot cryptocurrencies.

To address this issue, it instead held Ethereum futures. These are derivatives that allow investors to speculate on the future price of an asset or hedge existing positions.

The ProShares Ether Strategy ETF was exposed to price changes of Ethereum without holding physical Ether, making it a liquid and easily packaged ETF. It wasn’t until January 2024 that the SEC finally approved real Ethereum ETFs, providing investors with nine different options for direct access to Ether.

What to Know Before Buying an Ethereum ETF

If you’re considering adding a spot Ethereum ETF to your investment portfolio, there are a few key points to keep in mind before proceeding.

Be aware of high volatility. Like most cryptocurrencies, the price of Ether can experience significant fluctuations, even more so than ordinary stocks. Since Ethereum ETFs hold Ether directly, the price of their shares will also be highly volatile.

Expect a price discrepancy between the spot price of Ether and the market price of the ETF. This can occur due to expense ratio drag and because Ether trades 24/7 while Ethereum ETFs are limited to trading during market hours.

Many Ethereum ETF providers offer fee waivers, but these may be temporary. Waivers often come with time limits (e.g., only for the first month), assets under management (AUM) limits (e.g., only for the first $1 billion in AUM), or both. Be sure to read the fine print before investing.

Example of an Ethereum ETF

In July 2024, investors in the Grayscale Ethereum Trust received a tax-free spin-off in the form of shares of the Grayscale Ethereum Mini Trust. The new ETF was a cheaper version with a significantly lower expense ratio, making it more accessible for a wider range of investors. As shown below, potential investors can easily check the important details provided on its webpage.