Don’t bet on Ether ETFs to catch fire with advisors, says Cerulli

After the SEC took the pivotal first step of approving spot-price Ether ETFs for listing on exchanges, it’s now a matter of when, not if, the crypto fund products will be brought to market. But a new report from Cerulli suggests demand for Ether ETFs, particularly among advisors, is still likely to be disappointed.

In its latest US Monthly Product Trends report, Cerulli said ProShares' Bitcoin Strategy ETF has amassed over $2 billion in net assets – as of March 31, 2024, it had $3.05 billion in net assets – while its Ether Strategy ETF has struggled to reach even $100 million.

Another challenge, the report said, stems from the fact that Ethereum held by funds cannot be staked, which means they’re not eligible to collect staking rewards with an annual percentage yield of 2 to 7 percent. This limitation makes Ether ETFs, which are poised to be approved within the month, less attractive compared to directly investing in Ether in a portfolio.

“[T]he convenience and ability to hold [an Ether ETF] in an IRA still may be enough to make some investors happy despite the lower total return,” it noted.

While many saw the approval of regulated products such as futures-based and spot-based digital asset ETFs as a crucial hurdle for financial advisors to consider these options, Cerulli said its recent polling points to still-tepid advisor interest.

The survey of over 1,500 financial advisors, updated in April 2024, revealed minimal changes in their stance on cryptocurrency, according to the report.

"Only 2.6 percent of advisors recommend cryptocurrency to their clients, while another 12.1 percent will use or discuss it at the client’s discretion, up from 1.2 percent and 10.3 percent, respectively, a year earlier," it said.

Despite those slight increases, nearly three-fifths (58.9 percent) of advisors still do not expect to use or ask about cryptocurrency with their clients, the survey found.

Broker-dealer advisors are the most hesitant about incorporating cryptocurrency, the report noted, whereas RIA channels are currently the most frequent users of these products, pointing to an imbalance in acceptance and integration of these products across advisory sectors.

Another piece of research by the Digital Assets Council of Financial Professionals, in partnership with Franklin Templeton Digital Assets, takes a glass-half-full view of the situation. In a separate poll of financial advisors published in May, it found more than a third (35 percent) are planning to recommend digital assets in the next six months, a 70 percent rise from another survey snapshot taken in December.

Things could change with further industry developments. While a broader regulatory framework around digital assets has yet to be built, Cerulli said the Financial Innovation and Technology for the 21st Century Act recently passed by the House of Representatives, which SEC Chair Gary Gensler spoke out against shortly thereafter, could mark significant progress if it gains Senate approval and is ratified by the president.

Aside from designating an overseer for certain digital assets, potentially the CFTC, establishing a definitive test to classify them as commodities or securities could be just the regulatory tipping point many advisors need to consider investments in digital assets, the report said.