It is no secret that the ETF industry has been wildly successful in recent years, taking in hundreds of billions of dollars and being embraced by both cost-conscious buy-and-holders and more active investors. This rise in popularity has made ETF issuers attractive assets to some investors; acquisitions of iShares, Claymore, and Rydex over the last year have highlighted the desire of major financial institutions to claim a piece of the ETF pie.
But what isn’t quite so obvious is exactly who is making money in the ETF industry. ETFs have become so popular in part because of the competitive expense ratios offered relative to traditional actively-managed mutual funds. But it can obviously be challenging to turn a profit in a business built around low expense ratios. By some estimates, only 13 ETF companies are pulling in more than $10 million in expense-driven revenues each year, with several that fall below that line operating at a loss.
The business plans implemented in the ETF industry are all over the board; some firms, such as Vanguard and Charles Schwab, have positioned themselves to compete as the lowest of the low cost options. Others offering more targeted and exotic exposures are much higher on the expense ratio spectrum, a position arguably justified by the complexity required in delivering the relevant basket of assets.
Given the big size discrepancies between ETFs, it isn’t surprising that top line revenue from individual products is all over the board. But even among the industry’s big dogs, revenues vary wildly; within the ten largest ETFs by total assets, the deviation in annual revenue is significantly greater than the discrepancies in assets:
|Ticker||Assets (In Millions)
||Expense Ratio||Annual Revenue (In Millions)
|As of 5/31/10. Asset data from nsx.com|
1. SPDR S&P 500 (SPY): The largest ETF on the market, SPY is also one of only a handful of ETFs to offer a single-digit expense ratio. As such, it comes in behind several much smaller funds in terms of total revenues, and comes in at only about 25% of the fees generated by EEM.
2. SPDR Gold (GLD): The gold SPDR has seen assets surge in recent months, and could potentially overtake SPY as the largest ETF by total assets this year (see Why GLD Will Overtake SPY). GLD currently generates about $200 million in fees annually, making it the second biggest earner among U.S. ETFs.
3. iShares MSCI-Emerging Markets (EEM): iShares’ EEM is one of two ETFs offering exposure to the MSCI Emerging Markets Index, and currently generates more revenue than any other ETF. With an expense ratio of 0.72%, annual revenues approach $250 million.
4. iShares MSCI EAFE Index Fund (EFA): This ETF, which seeks to replicate the performance of the MSCI EAFE Index, is also a cash cow; with more than $30 billion in assets annual revenues top $100 million.
5. Vanguard Emerging Markets ETF (VWO): Vanguard’s VWO is the other ETF tracking the MSCI Emerging Markets Index. Because its expense ratio is significantly lower than EEM–there’s a 45 basis point gap between the two–annual revenue is just a fraction of the iShares fund.
6. iShares S&P 500 (IVV): Like SPY, this ETF also follows the S&P 500 Index and charges an expense ratio of 0.09%. But IVV generates less than $20 million in annual revenue, a relatively small sum for one of the largest ETFs on the market.
7. iShares Barclays TIPS (TIP): The largest bond fund by total assets, TIP falls into the Inflation-Protected Bonds category. With an expense ratio well below the industry average, this ETF generates about $40 million annually.
8. PowerShares QQQ (QQQQ): Invesco PowerShares’ largest fund, QQQQ, seeks to replicate the NASDAQ-100 Index. With almost $20 billion under management, this fund accounts for nearly half of PowerShares total ETF assets. But thanks to a low expense ratio, it’s contribution to total company revenue is likely much smaller.
9. Vanguard MSCI Total Market (VTI): This ETF tracks the MSCI US Broad Market Index, and until recently was the cheapest ETF available to U.S. investors (see Schwab Declares ETF Price War). Although assets are approaching $15 billion, VTI’s annual run rate is only about $10 million, or about 4% of EEM’s annual revenue.
10. iShares Russell 2000 (IWM): The last ETF on the top ten assets list, IWM generates more than three times the revenue of VWO.
The annual revenues for these ten funds are all over the board, ranging from $239 million, down to just $10 million. EEM’s dominance in the total revenue rankings may come as a surprise to some investors. While it has less than half the assets of SPY, EEM realizes revenue nearly four times that of SPY. On the opposite end of the spectrum, VTI holds over $13 billion in assets, but pulls in annual revenues of only $10 million, the smallest of any of the top ten ETFs. VTI, in fact, pulls in the lowest revenues of any of the top twenty-five largest ETFs, even though it is the ninth largest fund on the market.
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Disclosure: No positions at time of writing.