Summary Volatility Shares' 2x Ether ETF aims to produce double the daily returns of Ethereum. Due to daily rebalancing and high management fees, the fund will decay over time and ultimately underperform the 2x goal. Ethereum itself has a strong fundamental setup with a commanding share of market TVL, stablecoins, and settled value. The Volatility Shares' 2x Ether ETF ( ETHU ) is a newly launched leveraged product that aims to produce twice the daily returns of Ethereum USD ( ETH-USD ). In this article, we'll go over the details of the fund, risks associated with leveraged products, the bull case for Ethereum, and whether buyers of the fund since inception have been better off holding the fund or Ethereum directly. ETHU Fund Details Details ETHU Inception 6/4/2024 AUM $111.1 million Net Expense Ratio 0.94% 30-Day SEC Yield N/A Source: Volatility Shares, *First Year Fee The fund was launched in early June with a 12-month expense ratio fee waiver. The gross expense ratio is actually 1.85%. This is slightly higher than the 1.33% gross expense ratio of the ProShares Ether Strategy ETF ( EETH ), but it should be noted that EETH isn't a leveraged fund. From a holdings standpoint, ETHU utilizes futures contracts rather than spot ETH: ETHU Holdings (Volatility Shares) Since the fund utilizes futures contracts rather than the underlying asset, the constant need to rollover contracts every month theoretically makes the fund more expensive than would otherwise be the case if the asset could be directly held and staked on-chain for passive yield. Risks with Leveraged ETFs I've covered a few leveraged ETFs for Seeking Alpha in the past. Most recently, the Direxion Daily S&P 500® Bear 3X Shares ETF ( SPXS ) in early July. The biggest risk with leveraged funds is the fact that they are rebalanced daily. In the instance of ETHU, which is a 2x long fund, when the underlying asset that the fund seeks to leverage is in a sustained uptrend, the leveraged fund shares can maximize gains very well. If the fund works as designed, on days when Ethereum increases by 1%, ETHU should increase by 2%. The opposite is also true to the downside. If the price of Ethereum goes down, ETHU shareholders will feel double the pain that is felt by EETH or Grayscale Ethereum Trust ( ETHE ) shareholders. Since funds like ETHU are rebalanced daily, long periods of market chop will also result in poor returns. Here's a visual that I've shared with a few of the other leveraged ETFs that I've covered in the past: Projected Returns (Author's Calculations) In the table above, I'm showing how quickly the fund underperforms versus its 2x goal if the market isn't in a clearly defined uptrend. After just twenty sessions, ETHU's leverage only produces a 70% additional return over ETH rather than the 100% goal. And this is if the trader who enters the position gets a gain on the first day after entry. Projected Returns (Author's Calculations) In the table above, I'm showing how the fund behaves with chop after a negative return on the first day following an opened position. Here we again see underperformance against the stated goal with ETHU returning more than 2x the negative return of ETH to the downside. Essentially, without daily gains ETHU will underperform both to the upside and to the downside over time. 2x Ether ETF Performance Of course, the tables in the section above are just hypothetical scenarios. Even though ETHU is still a new fund, we have more than a month of real sessions to gauge how the ticker has performed against the underlying asset: Data by YCharts Since the inception of ETHU in early June, Ethereum has returned negative 6.2% while the fund has returned negative 18.7%. This is partially because Ethereum can be traded during the weekend and ETHU can't, but the primary reason for the underperformance against the 2x goal is the decay from rebalancing. The Case for Ethereum None of this is to say investors shouldn't look to ETH itself as an investable idea. I shared some of the good and the bad about the current setup for Ethereum with Seeking Alpha readers recently : For long-term crypto investors, Ethereum is still a must. Despite the price of ETH lagging significant improvements in the usability of the EVM ecosystem, future growth in on-chain activity should propel ETH higher, as it is still the gas that keeps the engine going. Despite the proliferation of the layer 1 blockchain networks, ETH is still clearly the top dog in the decentralized finance landscape: Total Value Locked (DeFi Llama) On mainnet, Ethereum has a commanding share of the DeFi ecosystem at nearly 60% of the total. But this actually doesn't do Ethereum justice because when factoring in all of the networks that exist solely to scale Ethereum, that share of market TVL is even larger and closer to 70%. Stablecoin Share (DeFi Llama) Shifting to stablecoins, we can again see a large share of the total market going to Ethereum, though an admittedly smaller share at 48.5%. Ultimately, figures like TVL and stablecoin share are important things to have, but they only really matter if it leads to settlement on-chain. And this is where Ethereum really shines: Average Daily Settlement (Money-Movers) With $34.6 billion in daily settlement over the last 30 days, Ethereum is still the standout in settled value and by a wide margin compared with other networks. As the "gas" for all of this network activity, ETH has an organic bid provided the blockchain continues to have utility. Closing Thoughts If a prospective investor is bullish on Ethereum, the best way to express that idea is probably just longing for ETH directly. There is a time and a place for leveraged ETFs. ETHU can be a terrific vehicle for short-term speculations by experienced traders. However, as a long term investment, it will perform very poorly over time due to decay from management fees and daily rebalancing. Despite my thoughts on ETHU as a poor long term investment, I'm going to rate the fund a "hold" today because I believe ETH will appreciate between now and the end of the year. Depending on how high ETH goes, ETHU could certainly end the year higher than the current $12 per share. However, even if ETHU does appreciate between now and the end of 2024, the fund will likely lag the 2x goal over the long haul. In my view, if you like ETH, just buy ETH.
