Ethereum ETFs Lag Behind Bitcoin ETFs in First Week

Ethereum Exchange Traded Funds’ (ETF) first week of trading was underwhelming.

Ethereum ETFs had net outflow of $341 million on their first week of trading, compared with inflows of $1.31 billion for Bitcoin ETFs’ first seven days, according to Farside Investor data.

Daniel Cheung, co-founder of Syncracy Capital, a cryptocurrency investment management firm, expressed frustration with the underwhelming inflows.

“If you had told me we were going to have an ETH ETF and that inflows would be good — would not have expected ETH to be flat / down with SOL outperforming,” he said. “In disbelief right now.”

Last week spot Ethereum ETFs hit the market with much fanfare, as the Securities and Exchange Commision (SEC) finally gave the green light to S-1 applications from financial giants including BlackRock, Fidelity, VanEck, Bitwise, and Grayscale.

High Volume Vs. Net Outflows

From Tuesday to Friday, Ethereum ETFs recorded $342 million in net outflows and generated $4.05 billion in trading volume. In comparison, Bitcoin ETFs logged $1.25 billion in net inflows and $11.81 billion in volume during their first four days of trading.

ETH ETFs generating 36% of the trading volume that BTC ETFs recorded last week was higher than analysts estimates of 10-20%. But the fact that the funds had net outflows ultimately means the new instruments didn’t contribute to the ETH price in the way holders may have hoped.

BlackRock’s ETF ETHA, was the most popular fund, with $442 million in inflows last week, followed by Bitwise’s ETF ETHW at $265 million. Fidelity’s FETH brought in $219 million. VanEck and Invesco posted $35.4 million and $14.2 million respectively, while Franklin’s EZET managed $23.3 million and Grayscale Mini ETH reported $164 million inflows.

Grayscale Trust Drives Outflows

Just like in the case of Bitcoin ETFs, Grayscale’s Ethereum trust accounts for flows being net negative.

Grayscale’s ETHE now saw a massive outflow of $1.15 billion in the last three days, slashing its assets under management (AUM) to $7.85 billion from $9 billion. At this rate, ETHE could deplete its assets within a month.

Similarly, from their launch on January 11 until May 2, GBTC recorded continuous outflows totaling $18.78 billion. It was only after May that the GBTC began to show signs of some relief.

Ryan Lee, Chief Analyst at Bitget Research attributes Grayscale’s struggle to high management fees and lower-cost alternatives offered by new competitors.

“This fee disparity may prompt investors to seek more cost-effective options, leading to the outflows,” Lee told The Defiant.

ETHE has a management fee of 2.5%, which is substantially higher than other Ethereum ETFs on the market, such as those offered by BlackRock and Fidelity, with fees as low as 0.12% to 0.25%.

In response, Grayscale launched Mini Trust ETH, featuring a lower management fee of 0.15% and waiving fees for the first six months or until assets reach $2 billion. This move is aimed at attracting investors back and mitigating further outflows from ETHE.

In May, JPMorgan noted that investors are likely opting for cheaper alternatives or taking advantage of increased liquidity in the ETF market compared to the older trust structure.

Lack of Staking Yield

Other than Grayscale’s ETHE driving outflows, analysts believe a major concern for investors considering Ethereum spot ETFs is the SEC’s decision to exclude staking, a crucial component of the Ethereum blockchain.

According to an analysis by SoSoValue, not allowing staking is a big reason for the lackluster performance of spot Ethereum ETF.

“For the Ethereum Spot ETF, due to regulatory restrictions on staking, holding ETFs results in 3%-5% less risk-free annual yield compared to directly holding Ethereum…,” the platform wrote in a commentary. “Therefore, holding Ethereum ETFs for portfolio purposes will result in at least 3% less annual yield than directly holding Ethereum.”

Fidelity, BlackRock, and Franklin Templeton applied for regulatory approval to add staking to their spot ETH ETFs, only to have their requests denied by the SEC.

Staking allows users to deposit their ETH into a validator node, earning rewards from network fees. Annual rewards for staking are about 3.2%, according to Ethereum Foundation’s data.

Despite the rocky start, analysts remain hopeful. Lee believes that the market has not yet fully priced in the impact of the spot ETH ETFs.

“Currently, the market has not fully digested the potential impact of ETH ETFs, particularly in the short term with Grayscale’s ongoing selling,” Lee explained. “However, the increased institutional adoption brought by ETFs could lead to a significant rise in Ethereum’s price over the long term.”