We're on the verge of a surge in crypto ETFs. Here's how to navigate and differentiate them.

When Bitcoin ( BTC -0.64%) and Ethereum ( ETH -0.66%) were first introduced, few could have imagined the current landscape, where a wide variety of crypto investment products are accessible to all types of investors. Initially, crypto futures exchange-traded funds (ETFs) appeared. This was followed by spot Bitcoin ETFs, and then spot Ethereum ETFs entered the scene.

Lately, we've witnessed the emergence of several altcoin ETFs, as well as funds that include a mix of different cryptocurrencies. But this is only the beginning. With recent updates to Securities and Exchange Commission (SEC) regulations, a wave of new cryptocurrency ETFs is expected to hit the market. Spot ETFs for leading altcoins such as Solana ( SOL -2.49%), XRP ( XRP -3.06%), Cardano ( ADA -3.48%), and others are likely on the horizon.

ETFs simplify crypto investing for both individuals and institutions by packaging digital assets in a familiar and easily accessible format. They also eliminate the need to worry about storage, so investors don't have to open accounts with crypto exchanges or manage digital wallets.

How to select the best crypto ETF for your needs

There are several aspects to weigh when picking a crypto ETF. As we’ll discuss, fees are important. However, the most crucial factor is how well the ETF aligns with your investment approach—especially your risk tolerance.

1. What does the fund contain?

The ETFs awaiting regulatory approval include single-asset funds for specific altcoins as well as portfolios that combine multiple cryptocurrencies. Review which digital assets are included and how the fund is organized. Spot crypto ETFs directly hold the underlying coins, while futures ETFs invest in derivative contracts. Some funds might also include other ETFs or cash-like assets alongside crypto holdings.

For those new to crypto, it's wise to start with Bitcoin and Ethereum, as these are the most established and liquid digital currencies. Bitcoin is increasingly seen as a digital alternative to gold, while Ethereum powers a wide range of decentralized finance (DeFi) and stablecoin initiatives. These two also received SEC approval for ETFs first, so you can review their performance history.

If you're interested in ETFs that include smaller cryptocurrencies, be sure to read the whitepapers and focus on projects with real-world use cases, strong leadership, and a clear vision. While smaller coins can offer higher potential returns, they also come with much greater risk.

Staking is another factor to keep in mind. Certain cryptocurrencies, including Ethereum and Solana, use a proof-of-stake system to validate transactions and secure their networks. Investors who participate in staking can earn regular, interest-like rewards. The SEC may soon allow ETFs that distribute staking earnings to investors.

2. What are the fees and expense ratios?

When trading on a crypto exchange, your main expense is the transaction fee. With ETFs, you pay an ongoing management fee, known as the expense ratio, which covers all fund-related costs—including custody fees.

The expense ratio is deducted from the fund’s assets, so you don’t pay it directly. Leading Bitcoin ETFs currently have expense ratios ranging from under 0.25% up to 1.5%. For example, if you hold $5,000 in Bitcoin, your annual fee could be anywhere from $12.50 to $75, depending on the fund.

3. Who issues the ETF and who is responsible for asset custody?

Choosing a well-known ETF provider like BlackRock, Fidelity, or Grayscale has its advantages. These companies are less likely to discontinue their funds, which can otherwise cause inconvenience and tax complications.

Experienced issuers also tend to have fewer tracking errors, meaning the ETF’s price is more closely aligned with the value of its underlying assets. Their funds are generally more liquid and have higher assets under management (AUM), making it easier to buy or sell shares and often resulting in tighter bid-ask spreads.

For spot crypto ETFs, check which firm is handling custody and what security measures are in place. At present, Coinbase ( COIN 2.12%) is a leading choice for custody, known for its robust security and reliable track record. Still, relying on a single custodian carries some risk. As crypto ETFs mature, it would be beneficial to see more custodial options become available.

Are crypto ETFs safer now that the SEC has updated its rules?

The SEC’s stance on crypto ETFs has changed significantly over the past year. On Sept. 17, the agency announced it would permit generic listing standards for certain exchange-traded products (ETPs) that hold commodities and digital assets.

Previously, each crypto product required an individual review. Now, the SEC has introduced broader guidelines to speed up approvals, such as requiring trading on regulated markets or having futures contracts available for at least six months.

However, these new procedures don’t necessarily make crypto investments safer; they simply make it easier to launch new products. Cryptocurrencies—especially altcoins—remain relatively new, volatile, and speculative investments. The SEC has previously been cautious about approving altcoin ETFs due to risks like market manipulation, artificial price inflation through wash trading, and fraud. Unfortunately, these risks still exist.

The anticipated approval of more crypto ETFs is exciting and could provide new ways to diversify your investments. Still, it’s wise to keep crypto as only a small portion of your overall portfolio, no matter which ETFs you choose.