SEC's Crypto ETF Shift and Thematic ETF Underperformance

In a pivotal move for the cryptocurrency investment landscape, the U.S. Securities and Exchange Commission (SEC) has approved in-kind creations and redemptions for crypto exchange-traded products (ETPs). This decision, announced on July 29, 2025, marks a significant departure from the SEC’s previous stance, which mandated cash-only redemptions for crypto ETFs. The change is expected to enhance the operational efficiency of these funds and align them more closely with traditional commodity ETFs. Asset managers have long advocated for this shift, arguing that in-kind transactions—where the underlying asset, such as bitcoin or ether, is exchanged directly—are standard practice in commodity ETFs. This regulatory update is anticipated to attract more institutional investors to crypto ETFs, potentially increasing liquidity and reducing transaction costs. For more details, refer to the Reuters article on this development.

Thematic ETFs Underperform Amid Market Hype

While the crypto ETF sector experiences regulatory advancements, thematic ETFs have faced challenges. A recent study by Morningstar, as reported by the Financial Times, reveals that only 20% of thematic ETFs have outperformed their corresponding benchmarks over the past five years, with an average underperformance of 8.5 percentage points. These funds, which focus on specific themes like artificial intelligence, cannabis, or defense, often launch during periods of heightened interest when valuations are already elevated, leading to subpar returns. Notably, cannabis-themed ETFs have underperformed the market by an average of 39% annually, resulting in significant closures since 2023. In contrast, defense-themed ETFs have been more successful, outperforming by 12% annually. This trend raises concerns about the viability and sustainability of thematic ETFs, prompting calls for more rigorous evaluation before investment. For a comprehensive analysis, see the Financial Times report on thematic ETFs.

Implications for Investors

The SEC’s decision to allow in-kind redemptions for crypto ETFs is a positive development for investors seeking exposure to digital assets through regulated financial products. This change is expected to improve the efficiency and attractiveness of crypto ETFs, potentially leading to increased adoption. However, the underperformance of thematic ETFs serves as a cautionary tale. Investors should exercise due diligence, critically assess the underlying themes, and consider the timing of their investments to avoid the pitfalls associated with market hype. Diversification and a focus on long-term investment strategies remain prudent approaches in navigating the evolving ETF landscape.

In conclusion, while regulatory advancements like the SEC’s recent decision offer new opportunities, the challenges faced by thematic ETFs underscore the importance of informed and cautious investment decisions. Staying abreast of regulatory changes and market trends is essential for investors aiming to optimize their portfolios in the dynamic ETF market.