If you’re curious about how technology has transformed the asset management industry over the years, brace yourself—there’s more! The tokenization of funds is poised to drive another revolution in the industry, much like the rise of ETFs marked a major shift not long ago. Here’s what you need to know about tokenized fund investments and whether it is threat to the and markets.
What is tokenisation of funds?
Tokenization is the process of creating a digital representation of a real thing, as Mckinsey describes the process.
Meanwhile, tokenisation of funds is the process of representing shares in a traditional investment vehicle—such as a mutual fund, ETF, or private equity fund—as digital tokens on a blockchain. Each token represents verifiable, legally enforceable ownership of a specific fraction or unit
How it works?
Similar to traditional mutual funds, tokenized funds are valued using their net asset value (NAV). However, instead of an NAV per share, investors see an NAV per token, which is determined by dividing the fund’s total NAV by the number of tokens in circulation.
One key feature of tokenized funds is that ownership of the fund is tracked by blockchain and updated accordingly; hence, unlike traditional funds, these fund types do not need a central register of shareholders. In this setup, roles change slightly, but the fund ecosystem stays largely the same.
Growing adoption of tokenized assets
The tokenization of funds has witnessed steady growth over the past few years, with large financial institutions leading the way and regulators showing strong support. For example, in 2021, Franklin Templeton launched the first U.S.-registered fund on a blockchain, the Franklin OnChain U.S. Government Money Fund. In 2024, BlackRock introduced the BlackRock USD Institutional Digital Liquidity Fund (BUIDL), which quickly reached a market value of over $500 million within months.
An EY report also states that there is a chance that7% to 9% ofinvestors will allocate their entire portfolio to tokenized assets by 2027.
Are tokenized funds a threat to ETFs and Mutual Funds?
To understand this, let’s first look the similarities, differences, and unique advantages each asset class offers.
Price Transparency for Investors:
- Mutual funds typically operate with a delayed pricing structure, where the execution price is confirmed only at the end of the trading day
- In contrast, ETFs and tokenized funds offer much greater transparency. Their prices are updated instantly throughout the trading day based on secondary market activities
Time to Fund and Access Cash:
- Traditional mutual funds need T+2 or T+3 settlement periods.
- The process is much easier for ETFs as it allows intraday funding and access to cash during exchange hours.
- Tokenized funds go a step beyond, offering access to cash 24/7 .
Use as Underlying Assets for Derivatives:
- Mutual funds are relatively limited in their use as underlying assets for derivatives, meanwhile, some selected ETFs are used in exchange-traded options.
- Tokenized funds could significantly expand the role of underlying assets for derivatives, particularly with the advent of smart contracts.
Integration with On-Chain Money and Digital Finance:
- Built on blockchain technology, tokenized funds can offer quicker and more efficient settlement of transactions than traditional mutual funds and ETFs.
While tokenized funds offer several advantages over traditional mutual funds and ETFs, they are not necessarily a threat. In fact, a BCG survey suggests that they can complement and enhance traditional investment funds.
For example, despite overseeing roughly $58 trillion in assets and generating average annual returns of 7.1% over the last decade, mutual funds still rely on a settlement process that typically takes two to three days (T+2/T+3). This delay can reduce capital efficiency and create hurdles for developing new investment solutions. But “by solving these problems, fund tokenization could produce about 17 additional basis points of annual return for mutual fund investors, representing about US$100 billion.”