Tokenised ETFs gaining ground over traditional counterparts, new research finds

Continuous trading and automatic settlement are seeing professional investors replace traditional ETF allocations with tokenised alternatives, global research from ST0x, new global research from ST0x, the onchain trading infrastructure for tokenised securities issued by S01 Issuer GmbH, under an EEA base prospectus approved by the FMA Liechtenstein, shows.

Two-fifths (40 per cent) of the 200 institutional investors and wealth managers surveyed actively invest and trade tokenised ETFs, while 39 per cent are currently running pilot programmes or paper-trading them.

More than a fifth (21 per cent) are actively researching tokenised ETFs but have not deployed capital and just 2 per cent have no current plans to look into tokenised ETFs, the research across North America, the UK, continental Europe, the Middle East and Asia Pacific found.

Looking to the next 10 years, 26 per cent of respondents say tokenised ETFs will completely replace traditional ETFs for core holdings, while 44 per cent predict they will run as a parallel book for specific 24/7 or cross-border strategies.

Almost one-fifth (18 per cent) believe they will be used sparingly, restricted to niche or alternative asset classes, while 7 per cent say they will be fully integrated into a single unified “digital-first” asset trading desk. Just 6 per cent say tokenised ETFs will fail to gain meaningful traction compared to traditional T+1 ETFs.

When asked the primary operational benefit driving their interest in trading tokenised ETFs over traditional ETFs, more than a third (35 per cent) say 24/7/365 trading availability outside of legacy market hours, and 34 per cent highlight automatic settlement (near-instantaneous delivery vs. payment).

One-fifth of study participants say tokenised ETFs benefit from deep fractionalisation allowing highly precise capital allocation which enables investors to invest exactly the amount of money they want rather than having to buy whole ETF units. 

One in 10 favour reduced transaction, clearing, and traditional custody fees. Finally, 3 per cent point to enhanced composability with decentralised finance (DeFi) protocols meaning tokenised ETF or other tokenised asset can be used within other blockchain-based financial applications, rather than simply being held or traded.

Nick Magliocchetti, Director, S01 Issuer GmbH and Director, ST0x Group, says: “Tokenised ETFs are increasingly being viewed not simply as digital versions of traditional funds, but as a way to rethink how investors access and manage diversified market exposure. The appeal of 24/7 trading and near-instant settlement is particularly powerful for institutions managing global portfolios, while fractionalization can give investors much greater precision over how capital is deployed. The fact that almost three-quarters of investors expect tokenised ETFs either to replace traditional ETFs for core holdings or operate alongside them for specific strategies suggests that this is becoming an evolution of ETF investing rather than a short-lived experiment.”

Looking at underlying asset classes to which a tokenised ETF structure would be most valuable, 34 per cent of respondents say global equities; 29 per cent say traditional fixed income; 23 per cent highlight illiquid assets; 12 per cent say digital assets and cryptocurrencies; and 3 per cent say physical commodities.

In terms of portfolio construction, 44 per cent of professional investors surveyed say tokenised ETFs are a much safer, regulated wrapper to gain blockchain-adjacent exposure compared to traditional blockchain assets.

More than a third (34 per cent) say tokenised ETFs are a direct substitute for certain physical or spot digital assets, while one-fifth see them as a complementary tool purely for cash management and instant yield.

While there is clear growing appetite for tokenised ETFs, survey participants say they are still obstacles to investment. 

More than half (51 per cent) say regulatory ambiguity and conflicting international compliance laws is the single greatest deterrent preventing them from scaling up trading volume in tokenised ETFs. 

Just under a quarter (24 per cent) highlight technical vulnerabilities such as smart contract risks or bridge hacks as a deterrent, while 16 per cent point to fragmented liquidity across different blockchains and venues. Six per cent say the lack of robust secondary markets and market makers is a deterrent to tokenised ETF investment.

When evaluating a tokenised ETF issuer the majority of respondents (44 per cent) say regulatory status and jurisdiction of the token issuer is the most vital issue to ensuring institutional safety. More than a quarter (26 per cent) say it is daily third-party audits of the underlying assets held in reserve. 

More than a fifth (21 per cent) cite the specific blockchain used and its historical uptime/security record as the most important issue. One in 10 (9 per cent) say bankruptcy remoteness of the special purpose vehicle (SPV) holding the assets is the most important issue.

Nick Magliocchetti adds: “Tokenised ETFs could become an important bridge between traditional portfolio construction and the emerging digital-asset ecosystem. The attraction is that investors can access the potential benefits of blockchain infrastructure through a familiar, diversified and regulated investment wrapper, with global equities emerging as a particularly compelling use case. But institutional adoption will depend on trust. Investors want clarity over the regulatory regime, confidence in the assets held in reserve and independent verification that those assets are there. Getting these foundations right will be essential to turning interest in tokenised ETFs into meaningful institutional trading volumes.”