Low-cost ETFs might be good for investors, but they aren't exactly great for their issuers' bottom line.
Bargain-price ETFs have drawn the bulk of new investment dollars, even though older, more expensive products are the ones actually making money for issuers, finds a new report by Bloomberg's Senior ETF Analyst, Eric Balchunas.
According to the report, more than 100 ETF issuers made just $7 billion in revenue from their funds last year—some $1 billion more than ETF issuers made in 2016, the last time we looked at these figures (read: "ETF Industry Revenue Challenged By Fee Wars").
That's a pittance compared with the $315 billion of net inflows that went into ETFs in 2018, the industry's second-highest-flows year ever (read: "2018's $315B ETF Inflows 2nd Largest Ever").
| Top 15 ETF Providers, By Annual Revenue | ||||||
| Issuer | 2018 ETF Revenue ($M) | Total AUM ($M) | Total 2018 ETF Inflows | Number Of ETFs | Revenue/ ETF ($M) | Revenue Rank 5 Yrs Ago |
| BlackRock | 2,906 | 1,350,403 | 134,266.19 | 344 | 8.45 | 1 |
| State Street Global Advisors | 950 | 568,772 | -648.35 | 140 | 6.79 | 2 |
| Vanguard | 634 | 855,657 | 84,757.46 | 80 | 7.93 | 4 |
| Invesco | 571 | 167,652 | 5,868.41 | 251 | 2.27 | 3 |
| First Trust | 403 | 61,394 | 9,986.38 | 139 | 2.90 | 7 |
| ProShares | 218 | 26,996 | 3,335.31 | 137 | 1.59 | 5 |
| WisdomTree | 162 | 35,224 | -5,126.04 | 84 | 1.93 | 8 |
| VanEck | 162 | 34,535 | 4,147.60 | 58 | 2.79 | 6 |
| Rafferty Asset Management | 103 | 11,175 | 2,225.16 | 81 | 1.28 | 10 |
| Schwab | 95 | 115,430 | 28,362.95 | 22 | 4.32 | 21 |
| ALPS | 88 | 11,966 | -300.09 | 20 | 4.39 | 9 |
| Pimco | 77 | 18,319 | 3,906.48 | 15 | 5.11 | 11 |
| Northern Trust | 53 | 14,152 | -0.58 | 26 | 2.06 | 15 |
| Mirae Asset Global Investments | 47 | 8,142 | 1,772.69 | 66 | 0.72 | 17 |
| Deutsche Bank | 39 | 10,670 | -961.08 | 38 | 1.01 | 27 |
Older Funds Make More $
What's more, the bulk of that revenue is made by older, more expensive ETFs, like the $244 billion SPDR S&P 500 ETF Trust (SPY), which generated in $226 million in revenue for 2018. For comparison, the iShares MSCI Emerging Markets ETF (EEM), the second-biggest revenue generator, made just under $200 million in revenue.
| Top 10 ETFs, Ranked By Revenue | ||||
| Ticker | Fund | Total AUM ($M) | Expense Ratio | Rank In Assets |
| SPY | SPDR S&P 500 ETF Trust | 239,063 | 0.09 | 1 |
| EEM | iShares MSCI Emerging Markets ETF | 29,012 | 0.69 | 23 |
| EFA | iShares MSCI EAFE ETF | 61,868 | 0.32 | 6 |
| GLD | SPDR Gold Shares Trust | 32,793 | 0.40 | 19 |
| QQQ | Invesco QQQ Trust | 60,027 | 0.20 | 7 |
| IWM | iShares Russell 2000 ETF | 40,064 | 0.20 | 14 |
| IWF | iShares Russell 1000 Growth ETF | 38,687 | 0.20 | 15 |
| VWO | Vanguard FTSE Emerging Markets ETF | 55,209 | 0.14 | 9 |
| IWD | iShares Russell 1000 Value ETF | 37,723 | 0.20 | 16 |
| EWJ | iShares MSCI Japan ETF | 15,312 | 0.49 | 47 |
Fee Wars Compress Revenues
Over the past five years, assets in ETFs have doubled to just under $3.4 trillion. Yet the revenue earned by issuers on those ETFs has risen only half as fast, at 56%, found Balchunas. Why? Fee wars.
Investors have poured into cheap ETFs, which has not only pressured existing issuers to lower their fees to stay competitive, but compelled many industry newcomers to debut with ultra-cheap funds, so as to attract market share.
However, each fee cut means issuers are sacrificing potential revenue in hopes of attracting more assets (read: "Here's How Much Money The ETF Industry Makes").
No wonder, then, that older ETFs are kept afloat, even after the launch of newer, cheaper versions that cover practically the same index. Take the iShares Core MSCI Emerging Markets ETF (IEMG), which, at a 0.14% ratio, is more than 0.50% cheaper than its predecessor, the iShares MSCI Emerging Markets ETF (EEM). Yet EEM brought in the second-highest amount of revenue in 2018.
Simply put, older funds like EEM are too profitable to close.
