A tokenized ETF is a fund unit represented as a token on a blockchain. Here is how it works, and what the risks are.
A tokenized ETF is a digital representation of a unit in an exchange-traded fund. The investor owns a token in a wallet on a blockchain, while a regulated party holds the actual fund unit with a custodian.
That creates two layers. The token tracks the value of the fund unit, and the fund unit tracks the value of the stocks, bonds or commodities the fund owns.
At fund level, the price is kept close to the real value through the usual creation and redemption of units. At token level, investors can profit from price gaps between the token and the fund unit, and that trading pulls the token price back toward the fund's value.
Issuers of tokenized funds include Ondo Finance, which has been by far the largest, Backed Finance and Dinari.
BlackRock chief executive Larry Fink has said the next generation of securities markets will be tokenized. Securities should be able to move directly, without intermediaries that have to confirm every step. BlackRock itself has a tokenized money market fund on several blockchains.
In 2026, Nasdaq received permission from the US securities regulator to trade tokenized versions of stocks and index funds in the same order book as the regular securities.
In Europe, the market is split across many countries, each with its own systems for settlement and ownership registration. That makes cross-border trading more expensive and slower.
Exchanges see tokenization as a way to make settlement more efficient. Shorter time from trade to settlement can improve liquidity across markets.
With two layers between the investor and the underlying assets, the token price can drift away from the fund's real value. Thin trading on the blockchain and slow arbitrage are typical causes. The extra custodian layer also makes the chain of parties longer.
The market is still small and dominated by a few issuers. Operational problems or regulatory action against one player could therefore hit the whole segment.
The industry itself points to regulation, not technology, as the biggest obstacle. Many tokenized funds are currently offered mainly to investors outside the US, and it is unclear how they fit into European fund rules.
Traditional custodian banks are seen as the type of player most challenged by the development, because tokenization can automate much of the settlement and ownership registration they handle today.