How To Make Money In The ETF Business

February 09, 2017

Expense Ratio

The last bucket I was curious about was headline expense ratio. It’s been clear for several years now that the majority of flows, month after month, year after year, have gone into low-cost beta ETFs. But does this pan out when it comes to revenue? Put another way, if you were trying to make real money in ETFs, is it better to capture all that low-cost, simple beta money? Or to find a niche where investors are willing to pay more?

 

This is the chart that actually surprised me. While almost 65% of the assets are in funds charging less than 0.20%, that enormous chunk of assets accounts for less than 30% of the revenue. In fact, if you’re looking to get rich quick in the ETF business, it’s clear that you’ll do it a lot faster by charging north of 40 basis points, where the revenue/AUM ratios are well over 2:1.

Smart-Beta ETF?

Well, what about smart-beta ETFs? That was supposed to be a kind of panacea for investors and issuers—generating larger revenue streams while delivering better results for investors.

Using the FactSet “Strategy” designation, we can look at a wide variety of nonvanilla strategies and see how they work out.

 

 

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