How To Make Money In The ETF Business

February 09, 2017

We cover flows all the time, but you might be surprised where the revenue actually is in ETFs.

ETF flows tell us a lot—mostly about investor sentiment. Big flows mean enough buyers were in the market long enough to trigger creations. But with expense ratios as low as .03%, is anyone actually making any money in the ETF business?

Don’t get me wrong, I’m not asking to pour one out for the ETF industry, I just think it’s interesting to ask the question: Is anyone getting rich here?

I’ve run analyses like this before, usually focused on the question of which issuers were cleaning up. The methodology is pretty simple: You take the total assets under management in every fund, multiply that by that fund’s expense ratio, and you have what I call “implied annual revenue” from the fund.

Back-Of-The-Napkin Math

That’s not, of course, 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. Still, as a back-of-the-napkin exercise, I think there are some interesting insights to be gleaned.

So here are some ways to break out the implied annual revenue of the U.S. ETF market. There’s not all that much at the top of the list. BlackRock, with almost 39% of the $2.6 trillion in ETF assets, takes almost 40% of the implied $6.443 billion in implied revenue for the U.S. ETF industry. 


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