The cost of holding ETFs has fallen for years amid an intense “ETF fee war” among issuers.
It’s now commonplace to see single-digit expense ratios, and in some cases, those expense ratios are even considered relatively expensive, such as the 0.09% charged by the SPDR S&P 500 ETF Trust (SPY), which is triple 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 fiduciary rules, gravitate to cheaper funds.
Case in point: The aforementioned SPY has had outflows of $4.7 billion over the past five years, compared with inflows of $113.2 billion for the Vanguard S&P 500 ETF (VOO) and $95.3 billion for the iShares Core S&P 500 ETF (IVV), two cheaper funds targeting the same index.
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 are many 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, chief investment officer at ETF Database, points out, 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 added.
20 Biggest ETF Cash Cows
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 $429.9 billion SPY, is only the second-biggest cash cow of all ETFs, with implied annual revenue of $386.9 million.
Unsurprisingly, cheaper competitors like IVV and VOO are even further down the list, at Nos. 11 and 17, respectively, with annual revenues of $99.2 million and $84 million.
‘QQQ’ The Big Money Maker
If it's not SPY, what is the world's biggest ETF cash cow? That title goes to the Invesco QQQ Trust (QQQ), with implied annual revenues of $421.3 million. One of the oldest ETFs on the market, QQQ has been a hit in today’s tech-fueled market.
The fund's sizable asset base of $210.6 billion and its 0.20% expense ratio make for a lucrative combination.
Today, there are plenty of competing funds offering exposure to technology stocks in a more targeted way and for much lower cost, but that hasn’t stopped QQQ from being wildly popular.
It's one of the few cases where a high expense ratio hasn't caused investors to shun a fund. Despite being relatively expensive, QQQ has seen inflows of $17.1 billion this year and inflows of $47.8 billion during the past five years.
Traders Less Price Conscious
Another product benefiting from the rabid interest in tech stocks is the ProShares UltraPro QQQ (TQQQ), a 3x-leveraged version of the aforementioned QQQ.
With $20.7 billion in assets and a 0.95% expense ratio, TQQQ generates $196.7 million in implied annual revenues.
Traders who use leveraged and inverse ETFs typically have shorter holding periods, so an annual expense ratio, no matter how high, simply doesn’t matter as much as it does to a longer-term investor.
Going through 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 iShares MSCI Emerging Markets ETF (EEM) attracted billions in assets and hundreds 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 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 egg.
Investors are more than willing to pay up for specialized funds with some sort of perceived “secret sauce.” A great example of this is the ARK Innovation ETF (ARKK), which is a darling among retail investors.
The fund's assets under management increased dramatically last year even though it has an expense ratio of 0.75%—high by index ETF standards, but reasonable for an active product. With $17.8 billion in AUM, that translates into annual revenues of $133.4 million.
Follow Sumit Roy on Twitter @sumitroy2