Since their introduction in the early 1990s, Exchange-Traded Funds (ETFs) have become a popular investment tool among U.S. retail investors for their ability to provide better pricing, greater efficiency, and improved access to various assets and trading strategies. With evolving investor demands and new ETF products, institutional investors are now significantly contributing to the increasing adoption of ETFs.
A prime example is the recent debut of spot Bitcoin ETFs. After receiving approval from the U.S. Securities and Exchange Commission (SEC), eleven spot Bitcoin ETFs entered the U.S. market. This launch was the most successful in ETF history, with trading volumes reaching over $4.6 billion on the first day. BlackRock’s iShares Bitcoin Trust (IBIT) ETF was the first among these to reach $1 billion in assets, becoming the world’s largest Bitcoin fund with nearly $20 billion in total assets.
Despite initial skepticism from institutional investors regarding cryptocurrencies due to their speculative and unregulated nature, market makers and institutional investors have shown substantial interest in pricing and gaining exposure to these ETFs. This enthusiasm led to strong liquidity and high trading volumes from day one. In the first quarter of 2024, about 500 institutional investors allocated funds into spot Bitcoin ETFs, with BlackRock’s IBIT ETF averaging a daily volume of $4.2 million over six months on the Tradeweb platform.
The ETF structure's appeal lies in its efficient risk management and exposure to a wide range of asset classes, making it a versatile tool for various investment strategies, including cash equitization, asset diversification, and tax management. ETFs are also useful for traders seeking to hedge or make short-term tactical market views. For institutional investors, the SEC's approval of Bitcoin ETFs, despite not endorsing Bitcoin itself, offers regulatory protections that make these assets more attractive.
The trend of ETFs transforming markets is not new. Fixed income ETFs have democratized bond investing by creating easily tradeable proxy shares for assets traditionally reserved for institutions and high-net-worth individuals. This innovation has made fixed income more accessible to retail investors, contributing to the $2 trillion fixed income ETF market and over 700 fixed income ETFs trading in the U.S. alone.
Following the success of Bitcoin ETFs, spot Ethereum ETFs received SEC approval in May 2024, with eight spot ether ETFs achieving $1 billion in trading volume on their first day. While smaller than Bitcoin ETFs' debut, this milestone is significant for the cryptocurrency market.
However, the SEC remains cautious about approving listing standards for broader crypto asset securities, citing volatility and speculative risks. Consequently, ETFs based on diversified crypto asset baskets are yet to emerge, leaving investors to rely on shares of companies involved in cryptocurrency rather than the currencies themselves.
As seen with fixed income, the ETF wrapper has the potential to change markets, promoting broader acceptance and interest among investors by offering a tax-efficient and transparent way to diversify holdings and gain exposure to new asset classes. This trend, driven initially by retail investors and now increasingly by institutions, highlights the transformative impact of ETFs on the investment landscape.
