Why Grayscale’s fees for its $10bn Ethereum ETF are a ‘nonstarter’ for investors
The results are in: Grayscale Investments will keep charging a 2.5% fee to holders of its Ethereum trust when it converts into an exchange-traded fund.
That’s a massive fee compared with other potential Ethereum ETFs — which are all set to launch on July 23.
“Grayscale isn’t lowering its fees at all,” Bloomberg Intelligence ETF analyst Eric Balchunas wrote on X, pointing out that the firm’s ETF will be roughly 10 times more expensive than its competition.
“Probably will cause some outrage flows,” Balchunas added.
By comparison, the Ethereum ETFs issued by BlackRock and Fidelity Investments will each have a 0.25% fee, VanEck and Bitwise will each charge 0.20%, and Franklin Templeton 0.19%.
Inflows and outflows
Grayscale’s case is unique in that it isn’t spinning up a new fund from scratch, but converting its existing Ethereum Trust — ticker ETHE, which holds almost $10 billion in assets — into an ETF.
The trust was designed in such a way that investors could create new shares, but not redeem them. Even so, the trust was popular for a long time because it was one of the only ways for Wall Street investors to get exposure to Ethereum.
And because it was the only game in town, Grayscale could get away with its 2.5% fees.
But once the trust converts into a fund — at the same time all other Ethereum ETFs launch — investors will be able to finally redeem their shares.
And because other Ethereum ETFs will launch imminently, Grayscale risks seeing outflows from its fund to cheaper alternatives.
The same thing happened with spot Bitcoin ETFs: Grayscale has seen more than $18 billion in outflows since it converted its Bitcoin trust into an ETF in January.
BlackRock and Fidelity’s Bitcoin ETFs, meanwhile, have amassed over $30 billion in assets between the two of them.
Grayscale didn’t respond to a request for comment.
High fees and no yield
Alongside ETHE’s conversion, Grayscale is launching a separate spot Ethereum ETF, called the mini Ethereum ETF. The mini fund will process smaller fees — 0.25% — and will be seeded with 10% of ETHE’s assets upon launch.
The move “should help alleviate some of the likely Grayscale outflows,” Bloomberg Intelligence ETF analyst James Seyffart posted on X.
But not everyone is convinced.
“There’s one massive idiosyncratic factor with Ethereum that will affect demand and that’s staking,” Adam Morgan McCarthy, an analyst at crypto data firm Kaiko Research, told DL News.
When using crypto infrastructure, Ethereum holders can lock their Ether in the network — a process called staking — to receive a 3% yield. But the Ethereum ETFs won’t give holders that opportunity.
“The value proposition for a crypto-native fund holding ETHE is hard to see when these funds can redeem shares and buy Ether to stake in return for yields — as opposed to paying high fees to stick around in Grayscale’s fund,” McCarthy said.
“Even paying 0.2% without the staking element seems like a nonstarter to me,” he added.
McCarthy pointed out that, because Ethereum enabled staking relatively recently, in 2022, some ETHE investors are likely still waiting to exit the fund and lock their Ether in staking protocols.
“Expect outflows from ETHE and some reallocation into new funds which are launching with waivers and low fees,” McCarthy said.
“But a decent chunk of outflows will exit the market altogether,” he added.
Tom Carreras is a markets correspondent at DL News. Got a tip about Grayscale and Ethereum ETFs? Reach out at [email protected]
