The digital revolution underway includes a process that promises to be revolutionary for the industry: the tokenization of assets, including ETFs. This is a process by which shares of a traditional exchange-traded fund are converted into unique digital tokens on a blockchain network. Each token represents a fraction or the entirety of the underlying ETF’s value and maintains direct backing.
At State Street Global Advisors, they recall that the ETF sector has been characterized by improving access, transparency, liquidity, and efficiency for both investors and issuers, and that, therefore, tokenization should be considered as “the next step in that evolution,” in addition to the “real” possibility that, as a “wrapper,” it could end up being the optimal choice for investment solutions.
A similar opinion is expressed by Laure Peyranne, Head of ETF for Iberia, Latin America & US Offshore, who asserts that the tokenization of ETFs could “add a new layer of efficiency” to a vehicle that already stands out for its liquidity, transparency, and scalability. In short, it could represent a significant evolution in the fund industry’s infrastructure, “beyond a simple change in product format,” and rather than replacing the traditional ETF structure, “it can contribute to its evolution toward a more digital, automated model connected to new distribution systems.”
Meanwhile, Dovile Silenskyte, Director of Digital Assets Research at WisdomTree, clarifies that tokenization will not alter the economic exposure of an exchange-traded fund, but it could modernize the infrastructure through which ETF shares are issued, transferred, settled, and managed. “Currently, the post-trade process involves multiple parties, each maintaining records and reconciling positions. Tokenization has the potential to create a more synchronized record of ownership and automate elements of this process,” she notes, highlighting that, in practice, “the short-term model is likely to be hybrid: regulated market infrastructure will remain fundamental, while distributed-ledger technology will improve specific workflows.”
The Benefits
The future tokenization of ETFs will bring advantages for investors as well as for the broader industry. In this regard, Peyranne points out that tokenization can facilitate greater accessibility to certain investment vehicles by enabling fractional ownership, with the resulting reduction in minimum access amounts. “It can also contribute to greater operational efficiency by allowing more agile and transparent property records and transfers. It could even enable new functionalities for certain investor profiles, such as using tokenized assets as collateral, provided regulatory frameworks permit it,” she states.
Silenskyte, for her part, sees it as feasible that ETF tokenization will mean fewer manual processes, less need for reconciliation, lower management costs, and greater visibility of distribution activity for issuers. She even ventures to predict the possibility that tokenization could create a new gateway to the market, offering issuers a way to present diversified investment products to digital-native investors who currently “hold a substantial portion of their assets in highly volatile crypto-assets.”
At State Street Global Advisors, they point out that tokenization opens the doors to expanding investor access, broadening ETF distribution, and reducing operational friction. For investors, the firm notes, tokenization could make ETF shares more transferable and easier to utilize through digital wallets, including in collateral, treasury, and financing applications.
Initial Phase
The future holds great opportunities for the ETF industry, but the fund tokenization process still has a long road ahead. Peyranne notes that, according to estimates, tokenized funds in the market stand at around $30 billion to $35 billion, including money market funds, credit funds, and other investment strategies.
“Momentum is building, as many of the world’s largest asset managers and market infrastructure providers are actively investing in tokenized fund initiatives,” State Street Global Advisors points out, though the firm notes that ETF tokenization remains in an initial phase. “The next stage will consist of proving demand from institutional investors, interoperability with existing market infrastructure, and quantifiable improvements in distribution and efficiency,” they explain.
Silenskyte reveals that the sector has moved beyond the proof-of-concept phase, and tokenized funds are already operational across several jurisdictions, with major asset managers and market infrastructure providers allocating capital to this technology. However, she is aware that large-scale adoption remains far off, citing technical limitations as well as hurdles such as the legal treatment of digital securities, platform interoperability, integration with existing custody and settlement systems, the availability of institutional-scale tokenized cash, and consistent cross-border regulation.
In her view, the next phase of the process will determine whether tokenization “becomes a significant enhancement to the ETF operating model or remains a collection of isolated digital structures.”
