2017: These ETFs Generate The Most Revenue

The largest ETFs by assets aren't necessarily the most profitable for issuers.

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Reviewed by: Sumit Roy
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Edited by: Sumit Roy

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

TickerFund NameERAUM ($B)Implied Annual Revenue ($)
EFAiShares MSCI EAFE ETF0.33%81.72269,676,000
EEMiShares MSCI Emerging Markets ETF0.70%38.12266,840,000
SPYSPDR S&P 500 ETF Trust0.09%247.8223,020,000
GLDSPDR Gold Trust0.40%34.82139,280,000
AMLPAlerian MLP ETF1.42%9.65137,030,000
QQQPowerShares QQQ Trust0.20%59.13118,260,000
VWOVanguard FTSE Emerging Markets ETF0.14%65.2591,350,000
HYGiShares iBoxx $ High Yield Corporate Bond ETF0.49%18.4790,503,000
EWJiShares MSCI Japan ETF0.48%18.4388,464,000
PFFiShares U.S. Preferred Stock ETF0.47%17.9284,224,000
IWMiShares Russell 2000 ETF0.20%41.282,400,000
IWFiShares Russell 1000 Growth ETF0.20%39.0978,180,000
IWDiShares Russell 1000 Value ETF0.20%38.1976,380,000
EZUiShares MSCI Eurozone ETF0.48%14.8271,136,000
DVYiShares Select Dividend ETF0.39%17.1166,729,000
LQDiShares iBoxx $ Investment Grade Corporate Bond ETF0.15%39.0658,590,000
IEMGiShares Core MSCI Emerging Markets ETF0.14%40.756,980,000
SDYSPDR S&P Dividend ETF0.35%15.9655,860,000
BKLNPowerShares Senior Loan Portfolio0.65%8.5355,445,000
IVViShares Core S&P 500 ETF0.04%134.8153,924,000

 

 

SPY Not At The Top

Even with all those caveats, implied revenue is still an interesting figure that can provide a sense of which ETFs are the most important to issuers' bottom lines.

As it turns out, the world's largest ETF, the $247.8 billion SPY, is only the third-biggest cash cow of all ETFs, with implied annual revenue of $223 million.

Unsurprisingly, cheaper competitors like IVV and VOO are even further down the list, at Nos. 20 and 41, respectively, with annual revenues of $53.9 million and $31.9 million.

EFA The Big Money Maker

If it's not SPY, what is the world's biggest ETF cash cow? That title goes to the iShares MSCI EAFE ETF (EFA), with implied annual revenues of $269.7 million. One of the oldest ETFs on the market, EFA was also the second-largest fund behind SPY for quite awhile before being supplanted by IVV and VOO recently.

The fund's sizable asset base of $81.7 billion and its 0.33% expense ratio make for a lucrative combination.

Today, there's plenty of competing funds offering developed, international equity exposure similar to EFA, including iShares own cheaper alternative, the iShares Core MSCI EAFE ETF (IEFA), with an 0.08% expense ratio.

But iShares keeps EFA around because it's a big money maker, and longtime investors in the fund aren’t going anywhere. It's also one of the few cases where a high expense ratio hasn't caused investors to shun a fund. Despite being relatively expensive, EFA has seen inflows of $9.5 billion this year and inflows of $31.2 billion during the past five years.

EEM Still Wildly Lucrative

It's a similar story for the second-biggest ETF cash source on the market, the iShares MSCI Emerging Markets ETF (EEM), with implied annual revenues of $266.8 million. With $38 billion in assets and a 0.70% expense ratio, EEM is extremely pricey compared with similar ETFs, including iShares' own sister offering, the iShares Core MSCI Emerging Markets ETF (IEMG), which costs only 0.14%.

But because it's bringing home the bacon for the issuer, iShares hasn't felt the need to change anything about EEM. This year, the fund has seen inflows of $3.4 billion, while it's had outflows of the same amount during the past five years.

First-Mover Advantage

Going down the list reveals more of the same―ETFs that aren't the cheapest names in their space but that are generating strong revenues for issuing firms. These funds often have the first-mover advantage. Despite being expensive, the SPDR Gold Trust (GLD) and the Alerian MLP ETF (AMLP) attracted billions in assets and tens of millions in revenues thanks to being the first ETFs to launch in their category.

Long-term investors in funds like those may be reluctant to shift over to cheaper alternatives because they don't want to pay taxes on their gains. Inertia may also play a part.

At the same time, shorter-term traders may appreciate the deep and liquid options markets these older ETFs have.  

 

Paying Specialized ETFs

Of course, launching the first ETF in a space isn't something easily replicated. Fortunately for issuers, that's not the only path to creating an ETF that lays the golden eggs.

Investors are more than willing to pay up for highly specialized funds with no direct competition, according to FactSet's Kashner. A great example of this is the ROBO Global Robotics and Automation Index ETF (ROBO), which has seen an explosion of interest this year.

The fund's assets under management increased nearly 13-fold this year even though it has a hefty expense ratio of 0.95%. With $1.8 billion in AUM, that translates into annual revenues of $16.8 million. Not bad for an ETF that only had assets of $135 million at the start of the year.

Traders Less Price Conscious

Another group that's been raking in money from high fees are leveraged and inverse ETFs. The ProShares UltraPro QQQ (TQQQ), one of the top-performing ETFs of all time, is a product that has a solid asset base and a hefty price tag.

With $2.2 billion in assets and a 0.95% expense ratio, TQQQ generates $20.8 million in implied annual revenues.

Even more shocking is the VelocityShares 3X Long Natural Gas ETN (UGAZ). It has a steep 1.65% expense ratio and $830 million in assets, generating $13.7 million per year in revenues. That's more revenue than the Vanguard Mid-Cap ETF (VO), which has nearly $21 billion in assets but a tiny 0.06% expense ratio.

Traders who use leveraged and inverse ETFs typically have shorter holding periods, so an annual expense ratio, no matter how high, simply don’t matter as much as it does to a longer-term investor.

Contact Sumit Roy at [email protected]

Sumit Roy is the senior ETF analyst for etf.com, where he's worked for 12 years. Before joining the company, Roy was the managing editor and commodities analyst for Hard Assets Investor. He lives in the San Francisco Bay Area, where he enjoys climbing the city’s steep hills, playing pickleball and snowboarding.