ETF Industry Revenue Challenged By Fee Wars

January 12, 2017

We often talk about the impressive growth of the ETF industry—the nearly 2,000 U.S.-listed ETFs in a market that now commands more than $2.6 trillion in the U.S. alone. What we don’t often talk about is how much money this industry makes.

Revenue potential for ETF issuers is often put face-to-face with an ongoing race to the bottom when it comes to investment costs. Every time an ETF issuer slashes the expense ratio on an ETF, that issuer is giving up revenue often in the hopes of attracting more assets to make up for the difference.

Last October, Dave Nadig, CEO of ETF.com, first offered a peek into the ETF market’s revenue potential. In his analysis centered on ETF fees, he estimated the nearly $2.5 trillion in ETF assets equate to about $6.0 billion a year in revenue. That’s the size of the overall ETF industry, he said.

He also offered a detailed look at what a round of ETF fee cuts last fall meant to a firm’s bottom line. You may want to check that out.

BlackRock Earns Lion’s Share Of Profits

Data through the end of 2016 shows that when it comes to making money as an ETF provider, no one is capturing more than—you guessed it—BlackRock’s iShares.

iShares is not only the largest ETF provider, with 334 ETFs in the market commanding $983.5 billion in total assets at the end of 2016, it’s also the biggest money maker. The firm raked in about $2.5 billion in annual ETF revenue—nearly half of the entire industry revenue in 12 months—and more than double the revenue made by the second-place ETF issuer, State Street Global Advisors.

As Eric Balchunas, ETF analyst for Bloomberg Intelligence, recently put it, “If the ETF market is a jungle, then BlackRock is king.”

Here’s a look at how ETF issuers rank in terms of revenue and assets under management: 

Issuer 2016 Implied Revenue ($,M) December 2016 AUM ($,M) # of Funds Rank in AUM Rank in Revenue
BlackRock

2,444.25

983,453.11

334

1

1
SSGA

911.56

503,066.07

149

3

2
Vanguard

543.34

611,692.19

70

2

3
Invesco PowerShares

433.27

110,968.85

144

4

4
First Trust

280.54

41,187.67

114

6

5
ProShares

220.99

26,152.95

142

10

6
WisdomTree

197.74

39,937.06

94

7

7
Van Eck

160.84

30,117.40

58

9

8
Guggenheim

122.69

31,566.63

76

8

9
Direxion

103.82

10,725.93

80

15

10
ALPS

97.33

13,064.01

20

12

11
UBS

69.24

6,525.48

42

17

12
Deutsche Bank

54.51

13,395.33

59

11

13
Barclays Capital

53.48

6,760.68

81

16

14
Charles Schwab

52.69

59,801.55

21

5

15
PIMCO

51.36

12,597.37

14

13

16
Credit Suisse

44.22

3,147.53

24

22

17
Northern Trust

43.38

11,771.67

25

14

18
US Commodity Funds

37.61

4,647.94

11

20

19
JPMorgan

36.62

4,865.49

12

19

20
Global X

21.69

3,791.54

55

21

21
IndexIQ

17.22

2,225.64

19

24

22
Exchange Traded Concepts

15.63

2,156.35

20

25

23
AdvisorShares

13.44

1,072.23

22

28

24
Millington Securities Inc

11.09

1,039.22

12

29

25
ETF Securities

9.99

2,139.42

7

26

26
Fidelity

7.56

5,192.14

21

18

27
Columbia

7.50

922.81

14

30

28
ETF Managers Group

6.72

893.33

13

32

29
Goldman Sachs

6.36

2,711.87

9

23

30
OppenheimerFunds

6.29

1,597.98

9

27

31
Virtus

5.75

596.94

9

35

32
CitiGroup

5.23

466.25

5

39

33
Teucrium

4.73

154.75

5

44

34
Pacer Financial

4.60

735.18

5

33

35
The Principal Financial Group

3.68

546.40

6

36

36
Victory Capital Management

3.31

908.68

11

31

37
Swedish Export Credit

2.96

394.00

7

41

38
John Hancock

2.76

657.69

12

34

39
Highland Capital Management

2.64

479.25

1

38

40
FQF Trust

2.56

435.82

10

40

41
Franklin ETF Trust

2.31

525.52

7

37

42
Cambria

2.01

328.78

9

42

43
KraneShares

1.81

246.25

5

43

44
Alpha Architect

1.07

135.28

4

46

45
Arrow Investment Advisors

0.90

109.46

3

50

46
Janus

0.76

138.52

10

45

47
Elkhorn

0.64

119.67

15

48

48
Lattice Strategies

0.53

104.03

5

51

49
ARK

0.48

65.68

5

55

50
Merk

0.45

112.07

1

49

51
Recon Capital

0.44

78.23

4

53

52
Legg Mason

0.43

132.26

7

47

53
US Global Investors

0.40

65.99

1

54

54
Reality Shares

0.39

46.23

4

58

55
Morgan Stanley

0.31

50.05

5

57

56
Academy Funds

0.29

36.53

1

59

57
Nuveen

0.24

86.86

7

52

58
AlphaMark Advisors

0.22

24.57

1

61

59
Montage Managers

0.22

54.49

1

56

60
Aptus Capital Advisors

0.21

26.08

1

60

61
Validea Capital Management

0.18

22.44

1

62

62
Royal Bank of Canada

0.11

12.32

2

66

63
Renaissance Capital

0.09

14.27

2

64

64
ACSI Funds

0.08

12.20

1

67

65
Natixis

0.07

13.45

1

65

66
Amplify

0.07

10.62

3

68

67
CSOP

0.06

8.51

3

69

68
Premise Capital

0.05

5.13

1

73

69
LocalShares

0.04

8.06

1

70

70
TrimTabs Asset Management

0.04

6.10

1

71

71
USCF Advisers

0.03

5.62

2

72

72
AlphaClone

0.03

2.86

1

74

73
Diamond Hill

0.02

16.86

1

63

74

 

What’s also noteworthy is that nearly half of iShares’ 334 ETFs are categorized by the firm as “strategies,” meaning smart-beta ETFs, currency-hedged funds, equity income and ESG-focused funds, and the like. These ETFs often have a higher average expense ratio than plain-vanilla funds.

iShares also has more than twice the number of ETFs that SSgA offers, and almost five times as many ETFs as Vanguard has. So the firm is making the most money among ETF issuers, but it’s in great part thanks to a footprint that vastly exceeds that of its closest competitors.

In the end, the story here is that fee compression means revenue compression unless, of course, these increasingly attractive price tags for ETFs translate into more new investors piling into ETFs like never before, bringing in loads of new assets to ETF issuers’ hands.

“Everyone is focused on the booming flows and asset growth into ETFs, but the revenue growth is lagging behind thanks to the fee war and investor cost migration,” Balchunas said. “Looking at this data offers a sneak peek into the future of asset management, which looks more like a jungle than a country club.”

To Nadig, all of this means we’re headed for a “bifurcation” of the ETF market:

“On one hand, we’re going to have a lot of assets in a small number of very low-cost plain-vanilla products, which, on a dollar by dollar basis, are relatively unimportant to the bottom lines of their issuers. On the other end of the barbell, we’ll continue to see a raft of relatively high-cost ETFs chasing themes, factors, fundamentals, niche markets and using leverage, which can be enormously important to the bottom line.”

Contact Cinthia Murphy at cmurphy@etf.com

 

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