| | Good morning. Who's a good boy? Fund issuer 21Shares launched a spot ETF tracking Dogecoin, the cryptocurrency inspired by the meme of a shiba inu. Dogecoin was never meant to be serious, debuting in 2013 as a parody, but the internet embraced it anyway. Now, images of the wide-eyed dog speaking in broken English have circulated for more than a decade, and Elon Musk was even impressed enough to name a pseudo-government agency after it. Since launch, Dogecoin has surged roughly 22,000%, albeit from a fraction of a penny to about 12 cents today. TDOG began trading on the Nasdaq last week, with 21Shares hoping to tap into that ironic enthusiasm. Or as Doge might say: Much investment. Very returns. | | | | | | | | Now that dual share classes are a reality, what's next for ETFs? Some say tokenization. The $18 billion issuer F/m Investments took a major step toward such a future last week by filing an application with the Securities and Exchange Commission seeking to tokenize shares of its F/m US Treasury 3 Month Bill ETF (TBIL). The move would allow TBIL, which invests in a single three-month Treasury bill and cash equivalents, to trade on both traditional brokerage platforms and digital-first ones without changing the fund's existing structure. The move is the first by such a company to ask the agency directly for permission to move shares onto the blockchain, according to the firm. "Grander plans would be to do this for a broader set of ETFs and to offer more interesting, innovative solutions," F/m Investments CEO Alex Morris told ETF Upside. "But first things first, this is going to be a long road of making the process we have in front of us work out, and we're going to stay narrowly focused on that goal." You Would Never Break the Chain The tokenization process would allow for trading at all hours of the day and instantaneous settlement, which advocates say would help bring down trading costs while improving liquidity. Other firms have also expressed interest, with BlackRock reportedly prioritizing the project and JPMorgan rolling out a tokenized money market fund. But F/m's product would be the first ETF to hit the blockchain, enabled by the NYSE's newly announced plan for a 24-hour trading platform for tokenized securities, which is still pending regulatory approval. "To [some] extent, it's the same as a dual share class," said Aisha Hunt, founder of Kelley Hunt Law and F/m's general counsel. Adding mutual fund shares to ETFs gave issuers access to the 401(k) distribution channel, she added. "Similarly, we're asking to add a tokenized ETF share to get access to the digital native investor preferences." But experts say opening up tokenization to a broader swath of investors could mean increased volatility for the products, since retail investors, as opposed to institutional investors, are more likely to panic-sell. According to a recent report from the Federal Reserve Bank of New York: - Tokenized funds are prone to risks because their shares can be redeemed on demand.
- The authors wrote that tokenization may also "increase interconnectedness between the traditional financial system and digital asset ecosystem, thereby amplifying existing financial stability risks."
  In Tokens We Trust: Morris thinks some investors may be hesitant to jump immediately into the deep end with tokenization, but that eventually, it will become the norm. "When bitcoin first came on the scene … early on, the first users were miscreants and criminals," he said. "When it's just a token that was born of electrons and exists only of electrons, there's this trust element … I think that divide has been hard for people to overcome." Written by Lilly Riddle | | | | | | Active management isn't just about picking the winners in the asset class; it is also about using fundamental research to avoid names that could potentially deteriorate, something that passive indexes do not have the ability to do. Passive indexes can be more prone to these relatively bigger loss makers as they tend to favor higher-value companies with likely higher debt levels. This may lead to a lack of diversification. Meanwhile, active ETF managers may seek additional returns through off-benchmark investments not available to index funds. The ability of active high yield managers to avoid the biggest losers, in addition to identifying the biggest winners, is one reason they have historically outperformed passive high yield ETFs. Learn more about Goldman Sachs Active ETFs.  | | | | | Sometimes, you just have to let it go. Leveraged exchange-traded products have been all the rage in recent months, with almost 60 new filings for funds that track companies like Google, Robinhood and Uber coming online in October alone. Total assets in leveraged US equity ETFs hit $125B as of Dec. 25, up from $106B at the end of 2024, according to Morningstar Direct. Across the pond, three of the top 10 most traded ETPs on the London Stock Exchange featured 3X leverage strategies, including the top traded fund in December: the Leverage Shares 3x Tesla ETP. Now, a UK securities regulator is raising red flags. The Financial Conduct Authority recently released data on how the products are being used by advisors and retail investors alike, and (you guessed it) most investors aren't using them as intended. "Some consumers may intentionally hold these products longer as part of their investment strategy," the authors of the report wrote. "But others may not fully understand the recommended holding periods, or the risks involved." We're Leveraged Out The review of 11 firms, including wealth managers and direct-to-consumer platforms, found 82% of trades were held longer than the recommended one-day window. In other words, investors forgot to read the fine print, just skimmed it or treated it like directions on assembling an Ikea coffee table. Some other problem areas included: - Some advisory firms lacked detail on total expenses for clients, focusing on their service fees, without assessing the impact of product costs.
- Few firms had processes in place to identify or address the potential for poor outcomes for clients.
To be sure, the regulator has no plans to ban the products, but it does expect firms to be far more intentional about who gets access to them. If harm is identified, the FCA said it expects firms to take proactive steps rather than wait for regulators to come knocking. "Complex ETPs that are held longer than intended are particularly susceptible to tracking errors due to daily price resets, increasing the potential for unexpected losses," the FCA wrote. "Distributors should define and regularly review their target market for complex products at a granular level." Hold On a Sec: While there are 3X funds trading in the states, US regulators aren't thrilled with the flood of new highly leveraged products. The Securities and Exchange Commission sent warning letters to nine issuers in December — including Direxion, GraniteShares and ProShares — effectively stopping the review process for new funds with more than 2x exposure. "Regularly review the value your products provide," the FCA wrote. "Where you identify issues or poor outcomes, we expect firms to take appropriate action, such as adjusting pricing or restricting access where necessary." Written by Sean Allocca | | | | | | | | | Would excluding China from a rare-earth-elements ETF make it even rarer? A forthcoming ETF from Sprott Asset Management poses that question. Earlier this month, the company filed the Sprott Rare Earths Ex-China ETF (REXC), a fund that could launch by April, trading on the Nasdaq. It would add to a line of critical materials and energy transition exchange-traded funds the company already offers, with the nuance being that it avoids exposure to the world's largest source of rare earth elements. "This is a niche offering that is playing on the combination of the demand for ex-China offerings and the US's push for less reliance on China for rare earths," said David Carey, equity strategies analyst at Morningstar Research Services. "The vast majority of rare earth materials are made in China, so by excluding some of those big players, you're left with a smaller pool that's [composed] of mostly small- and mid-cap companies." Sprott Price The rise in demand for rare earth elements comes amid rising energy usage globally, driven by electrification, and a jump in the sprawling data centers tech companies are building to support their AI efforts. As Sprott notes on the site for its critical materials ETFs, more than 100 countries have committed to net-zero emissions by 2050, which is shifting energy reliance from fossil fuels to renewables. President Trump has essentially canceled the US's net-zero commitments and is pushing for more energy from coal and wider use of oil. At the same time, the big tech companies with ever-increasing appetites for energy have acknowledged that the heightened demand will likely be met by a diversity of sources, including wind, solar and nuclear. "Ex-China fund launches over the past few years have exploded, particularly in the diversified emerging market Morningstar category," Carey said. "The geopolitical tensions between the US and China have driven modest demand for these funds over the past few years, though they've been slow to garner many assets." A couple of the existing rare-earth element ETFs on the market: - The $2 billion VanEck Rare Earth and Strategic Metals ETF (REMX) has returned 109% over a year.
- Sprott's $380 million Critical Materials ETF (SETM) returned 114% over a year.
May Encounter Turbulence: Notably, Sprott already has a line of seven US ETFs focused on the energy transition, and the forthcoming one adds an extra flavor. "I think they're taking an existing product and putting a different spin on it," said Todd Sohn, senior ETF and technical strategist at Strategas Securities. "They're taking the long game on this one. It will be volatile." Written by Emile Hallez | | | | | - EM Boom. BlackRock's emerging markets ETF pulled in nearly $6 billion this month, its biggest monthly inflow since 2012.
- Fixer Upper. More clients are incorporating fixed-income ETFs into their portfolios because of advisor recommendations.
- Sky's the Limit. Nasdaq is moving to scrap position limits on bitcoin ETF options in a proposal that went into effect last week.
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