Summary Nine spot ETH ETFs have been approved in the US, including seven new offerings and two from Grayscale. Most funds are offering 0.00% fees through waivers, with Grayscale Ethereum Mini Trust having the lowest fee at 0.15%. Fidelity's self-stored approach for ETH custody may make FETH the best option for long-term investment. Since the assets in the funds are not staked on-chain, there is a possible opportunity cost in longing ETH through the ETFs. It's been a bit of a strange road for the approval of the spot Ethereum ( ETH-USD ) ETFs in the United States. For most of the last couple years it seemed as though the spot ETH funds were a long way from approval. This sentiment has been, at least in part, because the U.S. Securities and Exchange Commission has had a highly combative stance on cryptocurrencies from the perspective of many in the industry. But as we've seen this summer, things can happen fast in the world of politics and the spot ETH ETFs have officially arrived. The New Funds Beginning July 23rd, there are nine different spot ETH ETFs that investors can choose from; seven of which are brand new offerings: Franklin Ethereum ETF ( EZET ) VanEck Ethereum ETF ( ETHV ) Bitwise Ethereum ETF ( ETHW ) 21Shares Core Ethereum ETF ( CETH ) Fidelity Ethereum Fund ( FETH ) iShares Ethereum Trust ( ETHA ) Invesco Galaxy Ethereum ETF ( QETH ) In addition to these seven new funds, investors also have the opportunity to invest in two different funds from Grayscale. Grayscale's previously closed end Ethereum Trust ( ETHE ) has been converted to an ETF. Additionally, Grayscale is spinning out part of the ETHE fund into a new smaller trust called the Grayscale Ethereum Mini Trust (ETH). As was the case during the Bitcoin ( BTC-USD ) spot ETF approvals earlier this year, a major factor in deciding which fund to buy is the management fee. Fees and Waivers Given that all of these ETFs are straightforward Ethereum funds, there is very little difference between them regarding how they are structured. Similar to what we see with the BTC ETFs in January, the overwhelming majority of these fund managers are using Coinbase ( COIN ) for asset custody: Name Starting Fee Post-Waiver Waiver Duration AUM Limit Custodian Grayscale Ethereum Mini Trust 0.00% 0.15% 6 months $2 billion Coinbase Franklin Ethereum ETF 0.00% 0.19% Through 1/31/25 $10 billion Coinbase VanEck Ethereum ETF 0.00% 0.20% 1 Year $1.5 billion Gemini Bitwise Ethereum ETF 0.00% 0.20% 6 months $0.5 billion Coinbase 21Shares Core Ethereum ETF 0.00% 0.21% 6 months $0.5 billion Coinbase Fidelity Ethereum Fund 0.00% 0.25% Through 12/31/24 Unlimited Fidelity iShares Ethereum Trust 0.12% 0.25% 1 Year $2.5 billion Coinbase Invesco Galaxy EThereum ETF 0.25% 0.25% N/A N/A Coinbase Grayscale Ethereum Trust 2.50% 2.50% N/A N/A Coinbase Source: Bloomberg/James Seyffart At time of launch, there are six different funds that are offering 0.00% fees through a waiver promotion. The length and AUM limit of those waivers vary, but most of them will end in 6 months when those waivers expire assuming AUM limits are not reached first. If there is robust demand for ETH through these ETF products, we could see waivers expire quicker than 6 months. In that scenario, the Franklin Ethereum ETF may have the best waiver due to its $10 billion AUM limit. I don't personally believe we'll see that much demand for these products combined let alone for a single ETF and I detailed my logic on that in a previous Seeking Alpha article : Perhaps the more logical way to estimate ETH investment flow following spot ETFs would be to assume the 27% ETH to BTC AUM ratio that preceded the spot BTC approvals. If we take the $16.7 billion of net capital flow into spot BTC ETFs year to date and assume 27% of that figure will be allocated to spot ETH ETFs upon approval, we get an investor demand figure closer to $4.5 billion. Regardless of how long fee waivers take to expire, the Grayscale Ethereum Mini Trust will have the lowest fee at 0.15% when its all said and done. This is a large departure from the Grayscale Ethereum Trust which has notably been a high fee offering since its inception as a closed end fund. Frankly, I'm surprised Grayscale isn't simply lowering the ETHE fee rather than spinning out some of the fund into ETH. BTC ETF net flows (BitcoinTreasuries data, Author's table) We've already seen how investors reacted to the Grayscale Bitcoin Trust ( GBTC ) fee following conversion and it wasn't pretty as the fund's AUM measured in Bitcoin has fallen by over 56% since mid-January. In fact, the iShares Bitcoin Trust ( IBIT ) now has more BTC than Grayscale's flagship fund. Fees aside, one of the primary things that I'm looking for with these funds for long term holding is how custody is managed. As was the case with the company's spot BTC ETF, we again see Fidelity's offering as the standout because Fidelity is self-storing its ETH through a subsidiary business. This may not matter today. But in my view, it will matter over time. I believe longer term the Fidelity fund may become the cheapest of the bunch due to this self-stored approach. Coinbase generates most of its revenue from transaction fees. However, retail traders have been a larger driver of revenue for COIN than institutions. The latter of which is a comparatively microscopic margin. Retail volume percent (TheBlock) Despite the drastically smaller margin, we've seen Coinbase's volume growth come primarily from the institutional buyer rather than the retail buyer. Retail share of volume has fallen from roughly 70% during the first half of 2018 to just 18% in Q1-24. Coinbase is now arguable competing against these ETFs even though its the custodian for more than half of them. Since it's so much cheaper for retail investors to buy BTC (and now ETH as well) through the ETF products, I suspect we'll see Coinbase attempt to raise custodian fees from asset managers to make up the difference on any lost revenue from migration to ETFs rather than direct ownership. And again, Fidelity doesn't have this long term dynamic because it's taking the self-custody approach with the assets under management. This is the biggest reason why I view FETH as the best ETH ETF for long term 'set and forget' holder. Of course, everything has a tradeoff and ETH ETFs are no different. Opportunity Cost There is a fundamental difference between Bitcoin and Ethereum that investors should consider before longing any ETH ETF, in my view. As a proof of work blockchain that relies on mining for transaction validation, there isn’t a mechanism for generating in-kind BTC yield directly on-chain. Thus, there is no real opportunity cost in longing BTC through the ETF rather than through self-storage. This is not the case for Ethereum which utilizes proof of stake consensus. ETH Staking 1yr (StakingRewards) Either directly or through staking protocols, ETH holders can generate staking yield when taking custody of the asset on-chain. As currently constructed, the Ethereum spot ETFs do not stake the assets managed by the funds. This means there is an opportunity cost in longing ETH via the ETFs rather than owning and staking directly. Currently, the yield from direct-staking on Ethereum is 3.5%. It's perhaps less important to stake ETH when the asset is deflationary. However, since the Dencun upgrade, ETH has flipped back to slightly inflationary. Thus, there is theoretically purchasing power decay on-chain that is eliminated by the real yield that staking generates. Final Takeaways If an investor simply wants exposure to ETH in a tax-advantaged account, the opportunity cost from exposure to un-staked assets is far less significant and arguably nullified by the simple fact that fund shareholders wont owe taxes on staking yield or capital gains. Today if one simply wants to buy ETH and hold for a possible rally through the end of the year, EZET is probably the best option because the fee waiver takes you through January and has a AUM limit that I highly doubt will be reached. For more long term-minded investors who just want to buy and hold, I think FETH is the best for long term investment due to the self-custody of the asset and the ability to keep fees low even in the event third party custodians like Coinbase decide to extract value from the ETF products.
