Digital Asset Funds Are Gaining Popularity – But Advisors May Be Missing the Biggest Risks

The digital asset funds category is becoming more popular. It has been a top category for net inflows, and it stands out for the trajectory of its interest. Following the approval of spot bitcoin exchange-traded funds in January 2024, assets in the category climbed from less than $40 billion to around $100 billion in mid-June 2026, after briefly approaching $200 billion in late 2025. 

That rapid expansion has made access easier than ever. But accessibility and understanding don’t always move at the same pace. For financial advisors, that gap matters. As client interest continues to grow, the challenge is no longer whether digital assets can fit into portfolios – it’s whether their implementation is fully understood. 

This article highlights several critical insights from Morningstar’s latest research report, “Decrypting the Digital Assets Category,” about digital asset funds. Get the full report now. 

The launch of spot bitcoin ETFs catalyzed one of the fastest category expansions in recent fund history. Early inflows were strong, with tens of billions flowing into the category in its first year. 

But by 2026, that pace has slowed. Flows were positive in May but have turned negative in June, yet far more sensitive to underlying crypto performance. 

This pattern is familiar. Rather than reflecting steady allocation-driven demand, flows into digital asset funds have largely mirrored price movements in the underlying tokens. Periods of strong performance tend to draw capital in; downturns often trigger outflows. 

For advisors, that has two implications:

• Investor behavior remains highly sentiment-driven 
• The category is more exposed to timing risk than traditional asset classes 

One of the most important – and easily overlooked – characteristics of this category is how much variation sits beneath a single label. 

Funds that are all described as “crypto ETFs” can differ meaningfully in how they generate returns. Some hold digital assets directly. Others rely on derivatives. Still others layer on income strategies or use leverage to amplify daily moves. 

For advisors, this creates a different kind of risk: not just volatility in the underlying asset but misunderstanding of the investment vehicle itself. 

Two funds tied to bitcoin, for example, can produce very different outcomes depending on their structure – affecting return profiles, downside behavior, and cost. 

Despite the rapid proliferation of digital asset funds, investor capital remains highly concentrated. 

As of May 2026, approximately 96% of assets are invested in funds tracking bitcoin and ether. The remaining portion – spread across dozens of altcoins – accounts for only a small share of total assets. This divergence between product availability and actual usage highlights a key dynamic: adoption is driven less by innovation and more by liquidity, familiarity, and institutional acceptance.

At first glance, digital asset funds – particularly spot bitcoin and ether ETFs – can appear relatively inexpensive. Many carry expense ratios around 0.25%, placing them below many actively managed equity funds. 

But the headline fee is only part of the total cost. 

Like all ETFs, digital asset funds also involve: 

• Bid-ask spreads 
• Potential deviations between market price and underlying value 

These costs are incurred in trading – not disclosed as line items in a fund’s expense ratio. Large, liquid funds tend to trade efficiently. But outside that core, trading costs can rise quickly – sometimes becoming a more meaningful driver of total cost than the fee itself. 

Digital assets are often framed as a small satellite allocation – but their impact on portfolio risk can be significant. 

Because bitcoin and ether have historically been more volatile than traditional assets, even modest allocations can contribute disproportionately to total portfolio risk. For example, a 5% allocation to ether contributed roughly 37% of a portfolio’s overall risk when funded from equities.  

At the same time, digital assets have not consistently acted as a strong diversifier. Over time, their correlation with equities have increased, particularly during periods of market stress. Bitcoin and ether have declined alongside equities in roughly two-thirds of down months over the last decade. 

Taken together, these characteristics suggest digital assets behave less like a diversifier and more like a high-beta extension of equity risk.

As digital asset funds become more accessible, using them effectively has not necessarily become easier. 

Three questions can help frame the decision: 

1. Do I fully understand how this fund generates returns? Structure matters, and it can materially change outcomes. 
2. What are the true costs of owning and trading this fund? Expense ratios tell only part of the story. 
3. How much risk is this adding to the portfolio? Even small allocations can have outsized effects. 

Digital asset funds have lowered many of the barriers to entry. Investors no longer need to manage wallets or navigate exchanges. The ETF wrapper has made the category far more accessible. 

But accessibility should not be confused with simplicity. 

Beneath the surface, digital asset funds vary widely in structure, cost, and behavior. As the category continues to evolve, understanding those differences is essential – particularly for advisors responsible for integrating them into diversified portfolios. The question is no longer just whether digital assets belong in a portfolio. It’s whether the chosen implementation aligns with the intended role.