Fidelity adds Ethereum staking to FETH ETF

Fidelity is seeking to turn staking rewards into quarterly cash distributions for shareholders of its $1.34 billion Fidelity Ethereum Fund, a proposed change that would give FETH a potential income component alongside Ethereum price exposure.

A revised registration statement dated Aug. 12 would allow the fund to stake anywhere from none to all of its ETH holdings, while reserving enough assets to meet share redemptions and other liquidity needs. The filing also sets out how staking rewards would be divided and establishes a mechanism for distributing net income in cash every quarter.

FETH would retain 85% of gross staking rewards under the proposed arrangement. The other 15% would go to the fund’s sponsor, custodian and staking providers, including Blockdaemon, Figment and Galaxy. Fidelity Digital Assets serves as the fund’s custodian.

Net rewards would first pay FETH’s operating expenses. Any income remaining after those costs could be distributed to shareholders quarterly, according to the filing. The structure permits the fund to sell ETH if it needs cash to make a distribution, meaning payments would not necessarily be funded solely from immediately available staking rewards.

A staking model designed around liquidity

Fidelity’s proposal leaves the staking rate deliberately flexible. Although the filing permits staking up to 100% of the fund’s Ethereum, the fund would need to balance reward generation against the liquidity required to process redemptions and cover operating needs.

That trade-off is central to the economics of a spot Ethereum ETF that stakes its holdings. Ethereum committed to staking cannot be treated as instantly available cash, and a fund facing redemptions may need a reserve of unstaked ETH or cash. As a result, the percentage of a fund’s assets actively earning staking rewards can remain below the maximum permitted by its prospectus.

The Ethereum website reported that roughly 41.85 million ETH was staked as of mid-August, representing about 33% of Ethereum’s supply. It placed the network’s annualized staking yield at about 2.6%. A fund’s realized return would generally be lower after revenue-sharing arrangements, service-provider costs, management fees and liquidity reserves.

FETH charges a 0.25% expense ratio. Even if the fund stakes a large proportion of its ETH, its eventual distribution rate would depend on the amount staked, validator performance, the level of Ethereum network rewards and how much of the income is consumed by fund expenses.

Based on the proposed 85% share of gross rewards and the range of fund-level yields reported by comparable products, the materials estimate that FETH’s net staking yield could fall around 1.5% to 2%. That is an estimate rather than a promised payment rate, and quarterly distributions could vary as staking returns and fund expenses change.

Comparable funds show the gap between gross and net yield

Grayscale’s Ethereum Trust, ETHE, offers a useful comparison for how staking rewards can be reduced before reaching shareholders. Grayscale reported a gross staking yield of 2.75% for ETHE and a net staking yield of 2.11%, while staking about 80.51% of the trust’s Ethereum. The trust had accumulated roughly $27.30 million in net dollar rewards, according to Grayscale.

The difference between ETHE’s gross and net yield illustrates the effect of provider revenue sharing and fund-level costs. In that example, about 23% of gross rewards was removed before the reported net yield.

Grayscale’s latest ETHE distribution was approximately $0.0217 per share, while BlackRock’s ETHB paid about $0.0325 per share, according to the supplied fund data. Products in the segment have generally used monthly or quarterly distribution schedules rather than promising a fixed annual payment.

Grayscale’s Ethereum Mini Trust reported a net staking yield of about 2.59%, while BlackRock’s ETHB reported a 30-day staking reward rate of about 1.84%. The differing figures reflect variations in staking participation, timing, service arrangements, fee structures and the methodology each issuer uses to present rewards.

For FETH shareholders, the practical result would be exposure to two changing variables: Ethereum’s market price and the cash income generated from the fund’s validator activity. The distributions could provide a periodic return without requiring shareholders to sell shares, though they would not eliminate the volatility of the underlying ETH price.

FETH would join an increasingly concentrated market

FETH was formed in October 2023 and began trading in July 2024 on Cboe BZX as part of the first U.S. wave of spot Ethereum ETFs. With about $1.34 billion in assets under management as of mid-August, it ranked fourth among U.S. spot Ethereum funds in the supplied market data.

BlackRock’s ETHA led the segment with approximately $7.21 billion in assets, followed by Grayscale’s ETHE with about $3.46 billion. Grayscale’s Ethereum Mini Trust held around $1.27 billion.

CoinGlass data cited in the materials placed total assets across 12 U.S. Ethereum funds at roughly $13.72 billion. The five largest products controlled about $13.48 billion, or 98.25% of the category, leaving limited room for smaller issuers to compete on scale alone.

That concentration puts more weight on product design. A large issuer such as Fidelity can use staking distributions to differentiate FETH from a basic spot ETH vehicle, while keeping the fund’s core mandate tied to holding Ethereum. The proposed quarterly payout also creates a more familiar framework for brokerage-account holders accustomed to funds that make periodic cash distributions.

The filing does not establish a fixed distribution amount or guarantee that FETH will make payments in every quarter. It instead gives the fund a route to pass through staking-derived income after expenses, with ETH sales available when cash is required. That structure would make FETH’s payouts dependent on the same operational decisions—staking levels, liquidity buffers and validator arrangements—that determine how much yield the fund can capture in the first place.