Why Tokenize an ETF?

What You Need to Know:

• Tokenization introduces new benefits and opportunities to the established global ETF industry.
• Tokenized securities are usually wrapped tokens representing existing assets or natively issued tokens functioning as the actual security.
• Benefits include 24/7 trading, fractional ownership and more, but require new operational solutions.
• European platforms are launching tokenized U.S. stocks and ETFs for EU investors, while North American access is mainly through crypto and blockchain-focused ETFs.
• Regulatory clarity, new structures for tokenized and on-chain ETFs, and expanded access to private assets are set to reshape the ETF landscape.
• Stronger safeguards are needed, but ETFs may soon offer both traditional and digital shares, modernizing financial infrastructure and broadening investor access.

Why Tokenize an ETF?

The ETF (exchange traded fund) industry today is highly efficient and operating well. An investor can press a single button and buy exposure to a diversified basket of global securities. These ETFs can be replicated across the world, allowing global investors to get exposure to the same basket in their locally listed ETFs. So why are ETFs even in the conversation of tokenization? Are there any additional benefits to ETF investors buying a tokenized ETF?

Tokenization may be a challenging concept for investors to grasp, especially when it comes to ETFs. With tokenization spreading quickly and ETFs in the mix, this week's report will focus on essential aspects and advantages of tokenization, developments within the fund industry and emerging possibilities in the ETF sector.

What is a Tokenized Security?

Tokenization falls into two main categories: wrapped securities and natively issued securities.

Wrapped Securities

Wrapped structures represent existing exposure to an underlying security through tokens. Often, an unaffiliated third party with custody of securities issued by another entity might issue a new tokenized security tied to the securities it holds, or may tokenize the “security entitlements” that investors hold against the custodian. Wrapped securities often adopt one of the following models:

• American Depositary Receipts (ADR) Model: With this common model, a custodian holds the underlying equity and issues tokens providing economic exposure.
• Special Purpose Vehicle (SPV) Model: An SPV acquires or holds stock, then issues tokens representing interests in that vehicle. This method can be employed to give offshore retail investors exposure to large private companies with tokens tied to SPV claims rather than directly to the issuer’s registered equity. This model works well if the underlying company remains private, but it becomes more complex if the company later goes public.
• Short-Sale / Synthetic Model: Tokens reference a public company’s stock without direct underlying exposure. Some overseas markets lack clear regulations regarding companies and organizations selling tokens short. This is particularly relevant for short-sale–exempt securities and markets that prohibit redemption for the underlying shares. Since naked shorts can occur in this model, there is increased counterparty risk.

Natively Issued Securities

Natively issued tokens function as the actual security. Issuers or transfer agents maintain uncertificated ownership records and facilitate transfers on a digital ledger.

• Transfer-Agent–Led Fungibility: Two companies have enabled tokenization of their shares through transfer agents letting investors hold securities either in traditional brokerage accounts or as tokens. These tokens match traditional shares in rights: dividends, voting and ownership, and can be moved between personal wallets and brokerage accounts. Transfer agents manage records, handle lost tokens and perform compliance checks. Currently, wallet-to-wallet transfers are possible, but trading requires converting back to traditional stock. Crypto companies expect direct decentralized trading to arrive soon.
• Exchange-Embedded Tokenization: Nasdaq proposed tokenized securities that remain fungible with standard ones, sharing Committee on Uniform Securities Identification Procedures (CUSIP) numbers and rights. Trades would be cleared and settled by the Depository Trust & Clearing Corporation (DTCC), which mints tokens for registered digital wallets, maintaining existing rules and protections. DTCC is working to tokenize all its securities on the Ethereum blockchain, aiming for modernization without decentralization, although specifics on operational changes are still unclear. The Nasdaq-DTCC model remains in its initial stages of development and currently has a limited scope.

More resources

The Global Market Structure team recently published a detailed report explaining the concept of tokenized securities.

You can also hear further details on the current tokenization landscape in new podcast episodes of Bid Out with Peter Haynes covering the tokenization of equities; part 1 covers the basics of equities tokenization and part 2 goes deeper into the long-lasting effects of tokenization on the equities market.

Benefits of ETF Tokenization

Many participants in the ETF industry may question the necessity of tokenized ETFs given the high liquidity associated with most conventional ETFs. Nevertheless, tokenized ETFs present several advantages over their traditional counterparts, many of which are applicable not only to ETFs but also to a broad range of asset classes including debts and equity securities. Furthermore, ETF issuers may find additional incentives to introduce tokenized ETFs due to the extensive retail investor base, and synergistic opportunities may arise as issuers expand their offerings to include multiple tokenized funds.

Around the Clock Trading and Global Accessibility

• Conventional ETFs only trade during stock exchange hours, while tokenized ETFs offer continuous global trading on blockchain venues. Stock exchanges may add extended hours to match this accessibility.
• Moving to 24/7 ETF trading brings challenges in liquidity, technology and operations. Tokenized ETFs can trade at any time, but their underlying assets might not, leading to wider spreads when markets are closed. This timing mismatch could become commonplace with more 24/7 ETF trading. To adapt, asset managers need advanced data systems, constant monitoring and efficient trade routing, while market makers will require round-the-clock staff to manage arbitrage.

Fractional Ownership

• As equity markets rise, unit prices for popular ETFs have increased significantly. Tokenized ETFs facilitate fractional ownership, enabling investors to acquire portions of a share, thereby lowering the barrier to entry.

Atomic Settlement

• The move from T+2 to T+1 settlement in the U.S. has boosted efficiency, but tokenization could enable atomic settlement and near-instant clearing, further reducing counterparty risk and improving capital use. However, instant settlement often requires prefunding, which may reveal trading intentions and sensitive market information.
• Atomic settlement simplifies cash flow transfer into ETFs, potentially allowing for more frequent distributions. Tokenization could make it easier for issuers to distribute dividends, possibly enabling daily payouts instead of the current monthly or quarterly schedules.

Potential Cost Saving:

• Tokenization streamlines asset management by enabling programmable ownership and transfer, reducing costs through automation, efficiency and fewer intermediaries. Distributed ledger technology (DLT) replaces traditional custodians with a unified ledger, lowering fees and simplifying processes, though some intermediaries remain necessary for risk transfer.
• Smart contracts handle tasks like dividends and compliance automatically, cutting manual errors and delays. Tokenization boosts liquidity by making assets tradable in smaller units and broadens market access. Blockchain enables near-instant settlements and standardizes procedures, improving efficiency sector-wide.

Transparency

• Holdings and net asset value (NAV) : Tokenized ETFs enable more precise, frequent, and transparent NAV calculations through real-time on-chain pricing. Unlike traditional daily NAVs, tokenized ETFs can update values continuously, offering a promising future for the industry.
• Ownership: Tokenized ETFs let investors hold shares directly, giving issuers clearer visibility into their shareholder base and making voting processes easier. Instant settlement and transparent ownership also allow tokenized ETFs to serve as collateral in DeFi and TradFi without off-chain delays. However, increased transparency may expose large trades, revealing market movements. Solutions to address this are likely to emerge as adoption grows, but transparency remains a key benefit.

Current Landscape of Fund Tokenization

Several European platforms now offer tokenized units, with platforms launching tokenized U.S. stocks and ETFs for EU investors in 2025. These products aren’t available in the U.S. or Canada. Major asset managers are piloting blockchain-based funds, using permissioned systems for secure, fast transactions and on-chain recordkeeping. One on-chain U.S. government money fund in particular issues tokens across multiple blockchains, allowing instant transfers between whitelisted wallets, while private investor data remains off-chain.

Although direct access to tokenized funds remains limited for U.S. and Canadian investors, they can participate in the rapid expansion of tokenization through Crypto ETFs. Canadian ETFs now offer investment opportunities in Bitcoin, Ether, XRP and more, giving investors exposure to various cryptocurrencies. The selection in the U.S. is even more extensive, including assets like Bitcoin, Ether, XRP, DOGE and HBAR. In addition to crypto ETFs, there are also ETFs in Canada and the U.S. that target blockchain technology.

What's Next for ETF Tokenization

Whenever investors consider tokenized securities, their primary concern tends to be regulations. At present, the Securities and Exchange Commission (SEC) is drafting a clear taxonomy for tokens. Recently, SEC's Investor Advisory Committee convened to discuss tokenized securities. We believe that the SEC’s progress will ultimately benefit both crypto platforms and online brokers.

Nonetheless, tokenization is expected to introduce considerable regulatory hurdles. The Economist notes that many industry experts advocate for applying the same standards used in conventional financial markets to tokenized assets. Regulators should prioritize consistency by assessing risks according to their actual nature rather than how they’re presented. For instance, whether on a blockchain or not, a bond should still be treated as a bond. Furthermore, innovation calls for protective measures, which include clear buyer safeguards to ensure security and transparency, strong counterparty risk controls to limit disruption across multiple platforms and digital identity checks so users can trade and invest with confidence, much like using credit cards or wire transfers.

Tokenization typically follows two paths: a company might tokenize its own securities (for example, converting shares into tokens), or a third-party holding securities could issue tokenized versions or related entitlements. These strategies have the potential to transform the ETF landscape.

• ETFs as Wrappers of Tokenized Assets: As tokenized assets gain traction, ETFs may package these tokens together, making private investments such as venture capital, real estate or art and collectibles more accessible via brokerage accounts. Upon making these once-illiquid assets tokenized, an ETF can wrap these assets with intraday liquidity. Imagine the possibility of owning an ETF comprised of masterpieces by Vincent van Gogh!
  
  A further example is private asset ETFs, an area experiencing notable growth. The tokenization of private assets for blockchain trading would enable ETFs to efficiently hold these assets while ensuring ongoing pricing and liquidity. In this regard, tokenization offers a solution to the challenges ETFs face when including traditionally illiquid assets such as private assets.
• Tokenized ETFs (both traditional and tokenized shares within one ETF): Here the ETF maintains its usual structure but also exists as a blockchain token. This model features two options: a Base option where standard ETF shares are kept in transfer agent records, and a Token option in which blockchain tokens are backed one-to-one by shares held by a custodian.
  
  At present, two companies have implemented tokenization of their shares through transfer agents, allowing investors to hold securities either within conventional brokerage accounts or as digital tokens. Looking ahead, this approach may enable ETFs to reach a broader client base. Investors who favor traditional units may continue to utilize brokerage accounts, while those who prefer tokens can purchase and store tokenized ETFs using their digital wallets.
• Fully On-chain ETFs: These ETFs operate exclusively on blockchain networks. Unlike typical ETFs managed off-chain by banks or asset managers, fully on-chain models utilize smart contracts and blockchain technology to manage every part of the fund—from creation and trading to settlement and dividend payments—entirely on the blockchain. All transactions, ownership details and value flows are open, permanent and verifiable, reducing reliance on intermediaries and potentially lowering costs while broadening access for investors worldwide.
  
  On-chain ETFs can function across multiple blockchains; for example, one digital liquidity fund started on Ethereum and later expanded to Aptos, Arbitrum, Avalanche, Optimism, Polygon and other cryptocurrencies. Despite these advantages, on-chain ETFs still face certain blockchain risks and vulnerabilities.

Key differences between traditional ETFs and fully on-chain ETFs

ETF Tokenization Is Still an Emerging Option

In the future, ETFs may offer both traditional and tokenized shares, expanding investor options. As digital wallets become common, fully on-chain ETFs could transform the industry, streamlining custodians’ roles and changing how brokers operate. Fund issuers will gain new opportunities but may face lower fees and evolve into hybrid or fully on-chain managers. Tokenization can modernize financial infrastructure and broaden market access, but it also requires stronger safeguards. Despite challenges, ETF tokenization offers significant investment potential for investors.