
ETFs
bring
awareness
but
are
less
effective
than
private
funds
as
an
ETH
investment
vehicle.
With
the
recent
approval,
launch
and
success
of
spot
bitcoin
ETFs,
all
eyes
have
turned
to
the
possibility
of
spot
ETH
ETF
regulatory
approval,
an
outcome
we
believe
to
be
unlikely
under
the
current
administration.
Additionally,
an
ETH
ETF
will,
at
least
initially,
lack
a
staking
reward
component,
a
key
aspect
of
ETH
total
return.
We
see
the
primary
value
of
crypto-ETFs
being
the
normalization
of
crypto
investing
for
traditional
finance
allocators.
Large
ETF
providers
entering
the
space
license
their
legitimacy,
allowing
allocators
to
invest
in
crypto
without
taking
career-risk.
However,
for
all
the
industry
benefits
of
a
spot
ETH
ETF,
the
return
characteristics
are
not
as
attractive
as
total
return
options.
At
the
time
of
writing,
rewards
from
staking
eth
are
over
3%
per
annum,
according
to
CESR,
the
benchmark
composite
ether
staking
rate.
In
other
words,
if
an
investor
invests
into
an
ETH
ETF,
they
may
be
at
a
disadvantage
compared
to
someone
investing
in
a
staked
investment.
CESR
has
been
as
high
as
8%
in
the
trailing
twelve
months.
You’re
reading
Crypto
Long
&
Short,
our
weekly
newsletter
featuring
insights,
news
and
analysis
for
the
professional
investor.
Sign
up
here
to
get
it
in
your
inbox
every
Wednesday.
ETH
ETFs
—
A
liquidity
mismatch
due
to
staking
Mechanically,
staking
reduces
liquidity
due
to
the
validator
entry
and
exit
queues.
In
the
summer
of
2023
the
entry
queue
rose
to
45
days
due
to
a
surge
in
activity.
As
a
network
security
activity,
staking
is
not
designed
with
the
liquidity
needed
for
securitization
in
mind.
Due
to
the
immense
liquidity
demands
of
an
ETF,
issuers
will
struggle
to
deliver
liquidity
and
ETH
total
return,
including
staking
rewards.
Structural
Underperformance
Passively
holding
unstaked
ETH
is
akin
to
holding
unneeded
fiat
currency
for
long
periods
in
a
demand
deposit
account
with
zero
interest.
Said
another
way,
passively
holding
unstaked
ETH
will
create
structural
underperformance
and,
if
compared
to
a
total
return
benchmark,
persistent
negative
tracking
error.
From
any
angle,
that
is
an
untenable
position
for
an
investor.
Private
Fund
Solution
For
accredited
investors,
private
funds
offer
an
effective
solution
to
achieve
total
return
ETH
exposure.
Buying
and
staking
ETH
through
a
private
fund
structure
does
not
face
regulatory
challenges.
Managers
can
also
match
the
liquidity
of
the
fund
to
stake
and
unstake
ETH
on
behalf
of
investors.
With
a
thoughtful
operational
setup,
there
are
limited
tradeoffs;
a
private
fund
can
be
audited,
benchmarked,
and
keep
assets
in
qualified
custody.
Disclosure:
Methodic
partnered
with
CoinDesk’s
index
affiliate,
CoinDesk
Indices,
on
a
private
fund
that
uses
the
CoinDesk
Ether
Total
Return
Index,
a
combination
of
the
CoinDesk
Ether
Price
Index
(ETX)
and
the
Composite
Ether
Staking
Rate
(CESR),
calculated
by
CoinDesk
Indices
and
administered
by
digital
asset
manager
CoinFund.