These ETFs Generate The Most Revenue

November 16, 2017

ETF expense ratios are dropping like rocks off a cliff as the intense “ETF fee war” between issuers rages on. This year has featured eye-popping declines in the annual cost of holding exchange-traded funds, with single-digit expense ratios quickly becoming commonplace.

In some cases, those single-digit expense ratios are even considered relatively expensive, such as the 0.09% charged by the SPDR S&P 500 ETF Trust (SPY), which is more than double the amount charged by competitors.

All this is unequivocally great news for investors, but for ETF issuers―not so much. As expense ratios drop, so do revenues generated for issuers. In most cases, there's nothing they can do about it. Failure to lower fees can lead to hefty outflows, as increasingly cost-conscious investors, along with advisors adhering to the new fiduciary rule, gravitate to cheaper funds.

Case in point: The aforementioned SPY has outflows of $11 billion so far this year, compared with inflows of $13.6 billion for the Vanguard S&P 500 Index Fund (VOO) and $28.2 billion for the iShares Core S&P 500 ETF (IVV), two cheaper funds targeting the same index.

'0.20% Is Now Expensive'

It's not just SPY that's losing out to low-priced competitors. According to Elisabeth Kashner, FactSet's director of ETF research, it's happening across the board.

"In market segments where funds compete by strategy, market share increased for cheaper funds, and decreased for pricier ones over 96.8% of the asset base in October," she wrote in a recent report.

According to Kashner, a mere 13 ETFs took in 50% of all new money during the month of October. The median expense ratio for the funds was 0.14%.

"An expense ratio of 0.20% is now expensive in the U.S. ETF landscape," Kashner said bluntly.

Implied Revenue

Just as in any price war, even the victors are taking hits. Ultra-cheap ETFs may be raking in assets, but in most cases, that is being more than offset by the decline in fees.

In fact, on the list of the biggest ETF cash cows for issuers, there are only a handful of funds that can be considered ultra-cheap, while there's a bunch more that are downright pricey by ETF standards. The table below lists the 20 ETFs with the highest “implied revenue,” an approximation of how much cash an ETF is generating for its issuer. It's derived by multiplying an ETF's assets under management by its expense ratio.

As Dave Nadig, CEO of ETF.com, pointed out in an article earlier this year, it's not an exact figure.

Implied revenue isn't "exactly how much each fund contributed to the P&L of the issuer. Funds have expenses to pay, and some funds have acquired expenses to contend with, which really explodes the bottom-line expense ratio. And of course, funds have inflows and outflows, and markets go up and down," Nadig said.

Furthermore, the expense ratio used in the calculation doesn't completely represent an investors' experience either.

"Some funds can 'earn back' a lot in securities lending, which would help investors and put money in issuers' pockets," he said. 

 

20 Biggest ETF Cash Cows

Ticker Fund Name ER AUM ($B) Implied Annual Revenue ($)
EFA iShares MSCI EAFE ETF 0.33% 81.72 269,676,000
EEM iShares MSCI Emerging Markets ETF 0.70% 38.12 266,840,000
SPY SPDR S&P 500 ETF Trust 0.09% 247.8 223,020,000
GLD SPDR Gold Trust 0.40% 34.82 139,280,000
AMLP Alerian MLP ETF 1.42% 9.65 137,030,000
QQQ PowerShares QQQ Trust 0.20% 59.13 118,260,000
VWO Vanguard FTSE Emerging Markets ETF 0.14% 65.25 91,350,000
HYG iShares iBoxx $ High Yield Corporate Bond ETF 0.49% 18.47 90,503,000
EWJ iShares MSCI Japan ETF 0.48% 18.43 88,464,000
PFF iShares U.S. Preferred Stock ETF 0.47% 17.92 84,224,000
IWM iShares Russell 2000 ETF 0.20% 41.2 82,400,000
IWF iShares Russell 1000 Growth ETF 0.20% 39.09 78,180,000
IWD iShares Russell 1000 Value ETF 0.20% 38.19 76,380,000
EZU iShares MSCI Eurozone ETF 0.48% 14.82 71,136,000
DVY iShares Select Dividend ETF 0.39% 17.11 66,729,000
LQD iShares iBoxx $ Investment Grade Corporate Bond ETF 0.15% 39.06 58,590,000
IEMG iShares Core MSCI Emerging Markets ETF 0.14% 40.7 56,980,000
SDY SPDR S&P Dividend ETF 0.35% 15.96 55,860,000
BKLN PowerShares Senior Loan Portfolio 0.65% 8.53 55,445,000
IVV iShares Core S&P 500 ETF 0.04% 134.81 53,924,000

 

 

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