The SEC has approved Ethereum ETFs but how should advisors be talking to clients about them?

CIO at the first Canadian issuer of an ether ETF explains how the asset behaves and outlines what the new US ETFs will do for demand

The SEC has approved Ethereum ETFs but how should advisors be talking to clients about them?

Following their approval of US-listed bitcoin ETFs earlier this year, the Securities and Exchange Commission has approved ether ETFs. Ether is the cryptocurrency used on the Ethereum blockchain platform. It has often been treated as the second core cryptocurrency, next to bitcoin. Much like the approval of US-listed bitcoin ETFs, analysts and experts expect that these ETFs will drive demand for ether and introduce new dynamics into the market for that cryptocurrency.

As advisors consider what this means for their clients’ portfolios, WP spoke with Greg Taylor, Chief Investment Officer at Purpose Investments. Purpose launched the world’s first ether ETF in 2021. Taylor explained how ether works and how it relates to the Ethereum blockchain. He offered some views as to what we can expect around price movement in the wake of this launch and how Canadian advisors might go about discussing the concept of ether with their clients.

“Ether is going to be interesting because it’s a different type of coin than bitcoin. Where bitcoin is more of a store of wealth, ether can be used for different things,” Taylor says. “Ether has also gone from proof of work to proof of stake in the last year. Inarguably it’s going to be adding a lot more demand, which should be even more powerful from a price action. I think giving more exposure to the ecosystem is going to be positive, as the coin has a lot of potential in the long-term.”

While Taylor accepts that an ether ETF won’t have the same utility as the coin itself, in terms of access to the Ethereum blockchain, he still sees the potential for price appreciation as a positive for investors.

One of the hallmarks of ether is its use of proof of stake to secure its network. Staking involves a holder of cryptocurrency units using those units to validate and secure the network. In turn, those holders are rewarded with yield. That dynamic introduces what Taylor sees as additional utility in ether which could also help drive long-term demand. Some Canadian ether ETFs have already begun staking to generate that yield. The US ETFs, Taylor says, haven’t explored the idea of staking as of yet.

As investors look at what these new ETFs could do to the price of ether, they may look to the launch of US bitcoin ETFs for instruction. The leadup to SEC approval saw a dramatic run-up in the price of bitcoin, only for the cryptocurrency to briefly fall before climbing back above record highs, with its characteristic intra-day volatility. Taylor describes that price action as somewhat typical of a major headline, where anticipation brings prices up and a sell occurs as the news breaks.

Ahead of the SEC approval last week there was a spike in the price of ether, however Taylor notes that there hasn’t been quite as much ‘hype’ around these products as there was around bitcoin.

“It’s almost impossible to call whether we see the same action with this launch,” Taylor says. “But one thing’s for sure, it’s going to open up ether investment to a whole new audience of investors. With bitcoin we saw more interest than even most optimists were expecting. If we get some of that it’s probably going to be a net positive for price action.”

While the entry of American ETF investors into any asset is novel and noteworthy, Taylor emphasizes that Canadians have had access to ether ETFs for around three years now. As advisors talk to their clients about this news, he offers a few insights and lessons learned from those years of fund management.

“This is going to be new for American investors, but we’ve already got these funds up and running in Canada. They’ve got good track records,” Taylor says. “One thing we’ve really focused on in our ether and bitcoin ETFs is controlling for counterparty risk. There’s enough price risk in crypto already, so what we’re trying to do is make it better for investors to access it and make sure we’re controlling for counterparties and protect against some of the exogenous events that can happen within crypto.”