What is the significance of self-custody when ETFs are available?

The emergence of Exchange-Traded Funds (ETFs) has provided a convenient and efficient way for investors to gain exposure to a diversified set of assets. ETFs offer democratized access to markets, liquidity, and ease of transactions, suitable for both retail and institutional investors. Despite these benefits, self-custody still holds significant importance for certain kinds of assets, especially digital assets like cryptocurrencies, and here’s why:
Control and Ownership: Self-custody ensures that the investor has full control and direct ownership of their assets. With ETFs, an investor owns shares of the fund, not the underlying assets, which means they rely on the fund manager’s custody and risk management practices.
Security and Privacy: Self-custody, especially with cryptocurrencies, relies on secure storage practices such as using hardware wallets, which are less vulnerable to hacking compared to centralized exchanges or custodians managing ETFs. Additionally, self-custody allows for greater privacy since third parties do not have access to the investor’s holdings.
Elimination of Third-party Risk: Holding assets directly eliminates dependency on third parties. ETF investors must trust the fund’s management to maintain and secure assets on their behalf, introducing counterparty risk.
Access to Innovations: Some new financial products, particularly in the crypto space, might not be immediately available through ETFs. By holding assets directly, investors can participate in innovative and emergent financial activities such as staking or liquidity mining.
Regulatory Implications: Self-custody can offer more flexibility in jurisdictions where regulations might limit or complicate ETF dealings. Investors interested in holding assets that might be restricted from ETFs due to regulatory compliance issues can utilize self-custody as an alternative.
Crisis Management: In times of financial instability or crises, having direct access to and control over one’s assets can be advantageous. Investors may encounter fewer barriers to asset liquidation or transfer compared to relying on ETF structures or fund operators.

Therefore, while ETFs offer numerous benefits, the hands-on control, security, and flexibility provided by self-custody remain critical for investors who prioritize direct ownership and management of their assets, especially in dynamic and decentralized markets.