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Since their first introduction in the early 1990s, U.S. retail investors have embraced Exchange-Traded Funds (ETFs) as a way to diversify their investment portfolios, viewing ETFs as a pathway to better pricing, greater efficiency, better investor access and improved execution for a wide variety of assets and trading strategies. Now, as new ETF products have launched and investor demands have changed, institutional investors are playing a larger role in driving ETF adoption.
Take the recent listing of spot Bitcoin ETFs, for example. Earlier this year, after receiving approval from the U.S. Securities and Exchange Commission (SEC), eleven spot Bitcoin ETFs debuted in the U.S. market. Hailed as the most successful ETF launch in history, on its first day of trading, total spot Bitcoin ETF volumes reached over $4.6 billion. In the first four days of trading, BlackRock’s iShares Bitcoin Trust (IBIT) ETF reached $1 billion in assets, the first among the group of eleven newly launched ETFs to reach this milestone. Now the world’s largest Bitcoin fund, the ETF has garnered nearly $20 billion in total assets.
Although popular among retail investors, cryptocurrencies have received mixed reviews from institutional investors, with many rejecting the assets outright because of their potentially speculative and unregulated nature. However, in the months following the launch of spot Bitcoin ETFs, market makers and institutional investors lined up in force to price these ETFs and gain exposure to these assets – resulting in strong liquidity and high volumes on its first day of trading. This momentum continued to build, with roughly 500 institutional investors allocating funds into spot Bitcoin ETFs in the first quarter of 2024. On the Tradeweb platform, BlackRock’s IBIT ETF reached an average daily volume of $4.2 million in the first six months.
Benefits of the ETF Wrapper
While the strong volumes that played out across the market and on the Tradeweb platform over the past six months are a testament to the sophistication and preparedness of institutional firms themselves, they also underscore the attractiveness of ETFs more broadly.
A variety of characteristics make the ETF structure appealing. The most basic is that an ETF looks, feels and settles like a stock, while simultaneously managing risk efficiently and providing exposure to a wide range of asset classes. Because of this, more types of investors are willing to use ETFs in various ways, such as for cash equitization, asset diversification and tax management purposes. They also serve as hedging tools for traders wishing to express short-term tactical views on the market.
In the case of Bitcoin, though, institutional investors may be more focused on the SEC's approval than price transparency and liquidity. This important step could influence whether Bitcoin and other digital currencies become more mainstream, as many institutional investors and ETF providers – skeptical about buying and settling the asset – still reject crypto currencies in their portfolios. Now, the ETF wrapper has made these assets more appealing. Instead of avoiding Bitcoin, investors just might justify with their investment committees buying assets that are more like equity, trade on a national exchange, and have regulatory approval.
While the SEC noted that approving these spot Bitcoin ETFs was not an endorsement or approval of Bitcoin itself, the SEC emphasized the protections that would be afforded to investors by SEC regulation of the spot Bitcoin ETFs, such as full and fair product disclosure.
Democratizing Fixed Income
This is somewhat of a deja vu moment, since we’ve seen ETFs broaden an asset’s investor base before, and indeed transform a market. In fixed income, ETFs have changed the buying and selling of bonds by creating these fungible, easily tradeable proxy shares for assets that had largely been the domain of institutions and high net-worth individual investors.
Traditionally, investors were more commonly set up and familiar with trading equities rather than fixed income, making it harder to source, price, bundle and trade certain bonds. As a result, retail investors, in particular, had difficulties accessing the full breadth of the fixed income market. But in the form of ETFs, investors were able to tap into multiple areas of the bond market, bringing on a whole new level of liquidity and price transparency to the underlying assets.
That’s opened fixed income to retail investing and spawned a fixed income ETF boom over the past decade. Today, fixed income ETFs make up a $2 trillion asset class and in the U.S. alone, over 700 fixed income ETFs are currently trading, all of which are available to trade on the Tradeweb platform under the request-for-quote (RFQ) protocol. Since launching our first RFQ cash equities platform in Europe in 2018, institutional market participants have increasingly turned toward the protocol because of its advantages, including seamless integration into trading workflows, more flexibility, better pricing and increased efficiency. Moreover, we continue to report strong volumes across the ETF platform, driven by the constant expansion of electronic trade types and the introduction of new trading efficiencies. Since the launch of our institutional European ETF platform in 2012[1] and our U.S. ETF platform in 2016, we’ve reported a rise of 51% and 59%, respectively, in total average annual notional volume growth[2].
Sure, generally, the assets underlying an ETF need to be liquid already for an ETF to be successful, but if our experience watching more retail investors leaping into fixed income ETFs is a guide, we’re likely to see new kinds of investors dabbling in digital assets and institutional investors continue to make a bigger splash in areas where they hadn’t in the past, such as cryptocurrencies.
Ethereum Takes the Spotlight
With the successful launch of Bitcoin behind us, spot Ethereum ETFs are the latest to get the greenlight after the SEC approved the listing of eight spot ether ETFs in May 2024.
On the first day of trading, the eight new spot ether ETFs hit $1 billion in trading volume on their first day – a smaller number than the over $4.6 billion in total trading volume spot Bitcoin ETFs pulled in on the first day, but a significant milestone nonetheless.
What the SEC has not signaled in these narrow approvals of crypto ETFs, though, is its willingness to approve listing standards for crypto asset securities in general, citing the speculative, volatile nature of the asset. ETFs based on baskets of different crypto assets have yet to emerge, and investors hoping to broadly diversify their crypto holdings through ETFs have had to settle for shares whose underlying assets are companies that own or deal in crypto currencies – rather than the currencies themselves.
Even still, as we’ve seen in fixed income, the ETF wrapper can play a significant role in changing a market, leading the way to greater acceptance of the asset class and promoting broader interest and acceptance among investors by offering a more tax-efficient and transparent way to diversify holdings and gain exposure to a broader range of assets. These characteristics have made ETFs appealing to retail investors, who have historically pioneered ETF adoption, and institutions and high-net-worth investors, who have more recently been driving this trend. It’s a role we’ll continue to watch over time as innovation, new asset classes and technologies shape what’s next for ETFs.
[1] Tradeweb’s European ETF platform was launched in October 2012; therefore, data for 2012 does not include a full calendar year.
[2] As of July 31, 2024.
About Tradeweb Markets
Tradeweb Markets Inc. (Nasdaq: TW) is a leading, global operator of electronic marketplaces for rates, credit, equities and money markets. Founded in 1996, Tradeweb provides access to markets, data and analytics, electronic trading, straight-through-processing and reporting for more than 50 products to clients in the institutional, wholesale and retail markets. Advanced technologies developed by Tradeweb enhance price discovery, order execution and trade workflows while allowing for greater scale and helping to reduce risks in client trading operations. Tradeweb serves more than 2,500 clients in more than 70 countries. On average, Tradeweb facilitated more than $1.7 trillion in notional value traded per day over the past four fiscal quarters. For more information, please go to www.tradeweb.com.
Forward-Looking Statements
This release contains forward-looking statements within the meaning of the federal securities laws. Statements related to, among other things, our outlook and future performance, the industry and markets in which we operate, our expectations, beliefs, plans, strategies, objectives, prospects and assumptions and future events are forward-looking statements. We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. These and other important factors, including those discussed under the heading “Risk Factors” in the documents of Tradeweb Markets Inc. on file with or furnished to the SEC, may cause our actual results, performance or achievements to differ materially from those expressed or implied by these forward-looking statements. In particular, preliminary average variable fees per million dollars of volume traded are subject to the completion of management’s final review and our other financial closing procedures and therefore are subject to change. Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements contained in this release are not guarantees of future events or performance and future events, our actual results of operations, financial condition or liquidity, and the development of the industry and markets in which we operate, may differ materially from the forward-looking statements contained in this release. In addition, even if future events, our results of operations, financial condition or liquidity, and events in the industry and markets in which we operate, are consistent with the forward-looking statements contained in this release, they may not be predictive of events, results or developments in future periods. Any forward-looking statement that we make in this release speaks only as of the date of such statement. Except as required by law, we do not undertake any obligation to update or revise, or to publicly announce any update or revision to, any of the forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this release.
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