Fidelity Plans to Stake ETH Holdings: How Long Can Small Ethereum ETFs Last?

Fidelity plans to add staking and quarterly cash dividends to its Ethereum ETF, intensifying competition among income-generating ETFs.

Written by: Nicky, Foresight News

On August 12, CoinDesk reported that Fidelity is preparing to add a staking and quarterly cash dividend mechanism to its Fidelity Ethereum Fund (FETH). According to the revised registration statement, the fund can stake up to 100% of its Ethereum holdings without a minimum requirement, while retaining some ETH for redemption and liquidity needs.

The plan indicates that Fidelity will retain 85% of the gross staking income, with the remaining 15% allocated to the fund's sponsors, custodians, and node operators, including Blockdaemon, Figment, and Galaxy. The net staking income will prioritize covering the fund's operational expenses, with the remaining portion used for quarterly cash dividends. Fidelity also mentioned that it might sell some ETH to raise funds for dividends.

FETH is one of the key products among U.S. spot Ethereum ETFs. According to CoinGlass data, as of mid-August, FETH has approximately $1.34 billion in assets under management, ranking fourth among similar products. The top three are BlackRock's iShares Ethereum Trust ETF (ETHA) with about $7.21 billion, Grayscale's Ethereum Staking ETF (ETHE) with about $3.46 billion, and Grayscale's Ethereum Staking Mini ETF (ETH) with about $1.27 billion.

Fidelity's move is not unprecedented in the industry. Previously, Grayscale and 21Shares have added staking features to their Ethereum funds, while BlackRock opted to launch a standalone staking product, the iShares Staked Ethereum Trust ETF (ETHB). According to Grayscale's official data, its ETHE currently has a gross staking yield of 2.75%, a net staking yield of 2.11%, and a staking rate of about 80.51%, with cumulative net dollar rewards of approximately $27.3 million.

Among products that have already paid dividends, ETHE's latest dividend per share is about $0.0217, while ETHB's is about $0.0325, with dividends typically paid monthly or at least quarterly. The net staking yield for the ETH mini trust is about 2.59%, and BlackRock's ETHB has a 30-day staking reward rate of about 1.84%.

According to data from the Ethereum official website, approximately 41.85 million ETH are currently staked on the Ethereum network, accounting for 33% of the supply, with an annualized staking yield of about 2.6%. The net yield of ETF products is usually lower than this level due to deductions for staking service provider shares and management fees, and funds typically only stake a portion of their assets to maintain liquidity buffers.

Taking Grayscale's ETHE as an example, its gross yield of 2.75% drops to a net yield of 2.11% after deducting about 23% for sponsor and custodian shares. Fidelity's plan to retain 85% of the gross yield means that the actual net yield investors receive will depend on the fund's fees, staking ratio, and node operator performance, with expected net yields likely falling in the range of 1.5% to 2%.

FETH was established in October 2023 and is set to be listed on the Cboe BZX exchange in July 2024 as one of the first U.S. spot Ethereum ETFs. FETH has an expense ratio of 0.25%, with custody managed by Fidelity Digital Assets. Since its listing, the fund has participated in market competition with low fees and self-custody advantages.

Fidelity's entry may further intensify the head concentration effect in the Ethereum ETF market. Currently, products offering staking yields, such as Grayscale, 21Shares, and BlackRock, are positioned at the top of the industry, possessing strong brand recognition and liquidity advantages. The additional yields brought by staking features make these products more attractive to investors, potentially accelerating the outflow of funds from smaller ETFs that do not offer staking yields.

A similar situation has occurred in the Bitcoin ETF market. Hashdex's Bitcoin ETF DEFI, due to long-term low assets under management, closed with a management scale of about $14.7 million and announced liquidation in August this year, becoming the first U.S. spot Bitcoin ETF to be liquidated. The competitive landscape in the Ethereum ETF market is also highly concentrated; according to CoinGlass data, there are currently 12 funds in the Ethereum ETF market, with a total assets under management of approximately $13.72 billion. The top five ETFs have a combined assets under management of about $13.48 billion, accounting for 98.25% of the entire market. The top five products occupy the vast majority of market share, and funds that cannot provide differentiated yield features will face increasing survival pressure.

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