Tokenization Gains Ground & ETFs Have Room to Grow

In tokenization, though, ETFs have room to grow. Cerulli rates tokenized ETFs as “early” in development with “moderate” future opportunity. Money market and Treasury funds already rate as “advanced.”

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For now, the most immediate value lies in better settlement, collateral management and data systems rather than new products, the report concluded. Over time, those same back-office upgrades could help private assets fit into the model portfolios and managed accounts advisors already run.

“By improving the standardization of assets, whether private or otherwise, tokenization has the potential to make these investments easier to incorporate into model portfolios, unified managed accounts (UMAs), and separately managed accounts (SMAs) by reducing operational friction and improving portfolio integration,” said Tayfun Icten, a senior analyst at Cerulli.

Tokenization Starts in the Back Office

Some of the earliest real-world tests involve paperwork. Pilots at Morgan Stanley (MS), Fidelity Investments and other firms aim to make semiliquid products easier to access, Cerulli noted. Managers want to reduce “not in good order” trades, which stall over missing or incorrect information.

Collateral, or assets pledged to back a loan or trade, is another early use. In one test reported by The Depository Trust & Clearing Corp., a tokenized Wellington Management private fund served as collateral. In that same example, a WisdomTree, Inc. (WT) money market fund token was the borrowed asset.

Cash Funds Lead the Way

When managers launch tokenized products, they mostly start with cash. Money market and Treasury funds are the most advanced offerings and hold most tokenized fund assets, Cerulli’s research shows. Some 13% of managers use tokenization to launch registered products such as on-chain money market funds.

BlackRock, Inc. (BLK), the largest U.S. ETF issuer with more than $4.5 trillion in ETF assets, has led that push. Its BlackRock USD Institutional Digital Liquidity Fund (BUIDL) is now one of the largest tokenized Treasury funds, the report noted. It has relied mainly on institutional investors.

Franklin Resources, Inc. (BEN), which does business as Franklin Templeton, was another early mover. Its Franklin OnChain U.S. Government Money Fund (FOBXX) was the first U.S.-registered mutual fund to use blockchain for shareholder records, Cerulli pointed out.

WisdomTree aimed at a different audience. Its WisdomTree Treasury Money Market Digital Fund (WTGXX) lets retail investors in for as little as $1 through WisdomTree Prime. WisdomTree figures cited by Cerulli show the fund, launched in fall 2023, held about $765.7 million as of Aug. 10.

The firm also offers the WisdomTree 500 Digital Fund (SPXUX), a U.S. large-cap equity strategy with a 0.05% net expense ratio. That fund held about $18.8 million on the same date, according to the WisdomTree data.

Tokenized ETFs remain rare for now. Mainstream ETF issuers have developed and launched them less often than tokenized mutual funds and Treasury products, Cerulli found. Still, BlackRock, Franklin Templeton and WisdomTree are building tokenization capabilities that could eventually support ETF wrappers.

Managers see blockchain-based fund ownership as a way to improve efficiency and broaden access, the report said.

Private Markets Are Tokenization’s Bigger Prize

Cerulli sees the main strategic opportunity elsewhere. Rather than public ETFs, the firm points to private credit, private equity and other alternatives for high-net-worth and mass-affluent investors.

Private credit has the greatest future opportunity of any category, in Cerulli’s view. Tokenization could ease long-standing pain points there, from liquidity management and burdensome onboarding to manual transfers and reporting.

Apollo Global Management, Inc. (APO) offers its private credit strategy in token form through the Apollo Diversified Credit Securitized Fund (ACRED). Cerulli credits KKR & Co. Inc. (KKR) and Hamilton Lane Inc. (HLNE) with pioneering work in tokenized private equity.

The groundwork is still early, though. Only 3% of managers said they use tokenization to enable secondary market liquidity for private assets, based on Cerulli’s data.

Even when it works, tokenization can make private assets easier to transfer but cannot erase their underlying illiquidity, the report cautioned.

Where the Value May Land

Cerulli doesn’t expect the token itself to be the edge, since issuance technology may become a commodity.

“As tokenization infrastructure matures, successful firms will be those that use technology to solve client and operational challenges rather than simply offering tokenized versions of existing products,” Icten said.

Within 15 to 30 years, some executives expect investors to manage brokerage, retirement and savings accounts in one AI-guided “super app,” according to the report. That vision could invite tech-forward rivals such as Amazon.com, Inc. (AMZN) and Google, owned by Alphabet Inc. (GOOGL).

“The good news for incumbents, however, is that it will take a while to get there, if at all,” Cerulli wrote.

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