A domino just fell in the crypto ETF market.

As of today, Morgan Stanley no longer places restrictions on which clients can invest in digital asset ETFs. Until now, the firm had limited access to risk-happy clients with investable assets of at least $1.5 million, a source familiar with the matter confirmed to ETF Upside. The shift follows a string of developments in the broader digital-asset ETF market, including the SEC recently paving the way for exchanges to quickly list spot-price crypto ETFs of many flavors. The biggest fund, the iShares Bitcoin Trust (IBIT) is the fastest-growing exchange-traded product in history, and it’s nearing $100 billion in assets. Investors, meanwhile, got a painful reminder last week of how volatile Bitcoin can be, with prices dropping 12%. Amid all that, Morgan Stanley’s change in policy is a massive development, said Ric Edelman, founder of the Digital Assets Council of Financial Professionals.

“It shows that the wirehouses now recognize the strong advisor and investor demand for crypto, and they are using crypto to attract new AUM and clients,” he said. “Morgan Stanley is demonstrating its leadership in this space, and its competitors will have no choice but to accelerate their crypto activities in order to catch up.”

No Blocking the Blockchain

Times are changing. Even one of the biggest skeptics, Vanguard, recently indicated it is reevaluating its policy against crypto ETFs. But the category has plenty of nonbelievers, including Massachusetts Secretary of State Bill Galvin, who has long taken issue with crypto assets. Last week, Galvin wrote to several US senators, urging them to revise sections of the Responsible Financial Innovation Act, which splits aspects of crypto oversight between the Securities and Exchange Commission and the Commodity Futures Trading Commission.

Having tens of thousands of advisors suddenly able to work with more clients on crypto will contribute to the flood of assets into the category’s ETFs, Edelman said. Among other consequences he cited:

• That could help buoy prices to increasingly high levels.
• Advisors who aren’t up to speed won’t get new clients with a specific interest in crypto, and they risk losing clients who want some exposure to the asset class.

Crypto Keepers: The warming to crypto (or at least the idea of providing access to it) didn’t happen overnight. “They’ve been doing due diligence at many of these firms and receiving a fair amount of pressure and demand from advisors and clients,” said Christian Magoon, CEO of Amplify ETFs. “It’s an established asset class.” Morgan Stanley’s change will put pressure on Wells Fargo, UBS, Merrill Lynch and others, he added. “It’s only going to speed up.”

When markets tumble, everyone starts looking for a suspect, and leveraged ETFs could be next in the police lineup.

JPMorgan analysts blamed levered ETFs for Friday’s stock selloff, which resulted in the S&P 500’s biggest one-day loss since April, in a research note published Monday. JPMorgan Managing Director Bram Kaplan said leveraged products will “likely trigger further systematic selling flows this week, leaving markets fragile.” Although the drop was triggered initially by President Donald Trump’s threat of new tariffs against China, the note estimated that roughly $26 billion of selloffs from leveraged ETFs worsened the decline.

While experts agreed on the dangers posed to individual investors by leveraged funds, not everyone was convinced of their widespread risks. “I wouldn’t say that leveraged ETFs wholesale create systemic issues,” said Bryan Armour, Morningstar’s director of ETF and passive strategies. “But there definitely have been instances where they make things worse.”

Swap-A-Thon

Leveraged ETFs are still relatively new to the scene, but the role they play in shaping macroeconomic trends might be outsized. Leveraged ETFs typically hold swaps instead of options. Because of the structure and high liquidity of swaps, their price can swing wildly, particularly in leveraged products, which promise 2x or 3x returns on underlying holdings. “Forced buying and selling when everyone knows roughly what they’re going to have to do can be very problematic,” Armour said. “It can increase volatility [and] hurt investors in the leveraged ETF, because then they have to sell lower and buy higher each day.”

Still, there is reason to believe levered products aren’t all to blame:

• Leveraged ETFs account for just 1% of the ETF industry’s $12 trillion in assets in the US, according to a Reuters report.
• If the S&P 500 can return to its previous level, a “positive gamma” environment — where price changes help investors in their current positions, rather than forcing them to change — will return.

Ultimately, Armour doesn’t think the amount of assets these ETFs currently hold is significant enough to have much of an impact. The largest 3x leveraged product is the ProShares UltraPro QQQ (TQQQ), which only has around $29 billion in AUM, according to VettaFi data.

Doesn’t Ring a Bell. The hope is that individuals will recognize the risks of these funds before buying into them, said Morningstar research analyst Lan Anh Tran. “It’s hard to tell where investors are interested in putting their money next,” she said. “With these leveraged or inverse leveraged ETFs, they blow up every once in a while, and then the next year, it seems people are going through a collective amnesia. They forget that that ever happened.”

Another longtime mutual fund manager has found the call of ETFs impossible to resist.

Baillie Gifford, the Edinburgh-based firm that manages $264 billion globally, filed for its first US exchange-traded funds last week. The actively managed suite of five products will include assets from existing mutual funds. It’s the latest industry holdout to make such a move, as sales have widely favored ETFs over mutual funds, particularly in active management. As part of the expansion, the firm recently hired Jamie McGregor, who until August led Goldman Sach’s portfolio implementation and capital markets team in its ETF Accelerator program.

“Even with the abundance of ETF options within broader asset classes, the selection is limited for investors who are seeking an active, growth-focused approach, with a genuinely long-term horizon,” McGregor said in an announcement. “Of 235 international large cap equity ETFs, only 11 offer active long-term growth strategies, leaving a clear opportunity for active solutions.”

Timing Isn’t Everything

It’s notable that Baillie Gifford, like Lazard, First Eagle, Parnassus, Praxis, Thornburg and Tweedy, Browne, is breaking into the ETF business at a time of significant change. The Securities and Exchange Commission is set to approve the first dual-share-class requests by asset managers, including one from Baillie Gifford. When Vanguard’s patent on the ETF share class structure expired last year, “it looked like the best thing since sliced bread,” said Cindy Zarker, relationship manager at Fuse Research Network. “But as firms dug deeper into it, they realized it’s another tool in the toolbox, but not necessarily the only tool.” Even Vanguard, for example, has recently launched or prepped active ETFs that are separate from its mutual funds.

There are at least a couple hurdles for firms rolling out ETF share classes:

• Unless they already run ETFs, they have to expand their capabilities by hiring more staff and spending on technology, or they can work with third-party trusts.
• The distribution case for more ETFs is murky, as broker-dealers may be slow to approve them for their platforms.

Active Cultures: Baillie Gifford, whose US assets under management total $116 billion, is prepping funds that will target Emerging Markets, International Alpha, International Concentrated Growth, Long Term Global Growth and US Equity Growth. Sales have been difficult recently for the firm, despite its strong reputation as a manager, Zarker noted. Its success in ETFs may hinge on improving performance and putting resources into distribution and marketing, she said.

“Even if you take a mutual fund and convert it to an ETF or hang a [new] share class off of it, that’s not going to guarantee that it will get flows into the ETF,” she said. “It’s still an extraordinarily competitive market.”