Five Surprising Facts About The ETF Industry

by on April 14, 2010 | Updated April 15, 2010 | ETFs Mentioned:

As ETFs have transitioned from a closet industry to a mainstream investment vehicle, a growing number of investors has become familiar with the exchange-traded structure and the nuances of of the industry. Most advisors now recognize the “super tickers”–SPY, GLD, EEM, etc.–and have a good feel for the size and scope of the industry. But there are some interesting stats about the industry that may surprise even the most experienced ETF investors. Below, we present five surprising ETF stats (for more ETF features, sign up for our free ETF newsletter):

1. Expense Ratios Under 0.02% And Above 4%?

Going by the official numbers, VTI has the cheapest expense ratio in the ETF industry at 0.07%. GSC and MES come in at the most expensive (excluding acquired fund fees) at 1.25% and 1.00%, respectively. But the expense methodology employed by the line of HOLDRS products from Merrill Lynch throws a wrench in to these rankings. HOLDRS charge an annual custody fee of $2 for every round lot of 100 shares, meaning that the effective expense ratio depends on the market value. At about $126 per share, the Oil Services HOLDR (OIH) works out to an expense ratio of about 0.016%. But for the B2B Internet HOLDRS (BHH), which are currently trading around $0.50 per share (see why here), the computed expense ratio is above 4%. It’s important to note, however, that any expense in excess of dividends received from the underlying holdings is waived, meaning that this figure represents a maximum possible fee.

2. New Product Success

Some following the ETF industry are under the impression that most good ideas have already been unveiled, and that new ETFs follow quirky strategies struggle to attract assets. While some ETFs haven’t exactly come flying out of the gates, many of the recent additions to the industry have done pretty well.

At the end of March, there were 173 ETPs trading in the U.S. that weren’t around a year earlier. While some have lamented the surge in the number of ETFs as an indication of saturation in the industry, the success rate of new ETFs has been pretty impressive. These 173 ETFs have aggregate assets of about $11.1 billion, or a per-fund average of just about $65 million.

3. Active ETF Assets: $1 Billion And Counting

The future of active ETFs has been a hot topic recently in the industry, with analysts divided on whether widespread adoption is inevitable or utterly unlikely (see Handicapping The Active ETF Race). When discussing “active ETFs,” most investors and advisors are generally referring to actively-managed stock and bond funds that seek to beat, rather than match, the performance of an index. These funds, hailed as a gamechanger when they were first introduced, have been slow to gain assets, with most languishing under the $10 million level (although a couple active equity ETFs have broken through in recent months).

So it might be surprising to hear that active ETF assets currently exceed $1 billion. And perhaps more surprising to learn that WisdomTree is the largest issuer of active ETFs. WisdomTree is well known within the industry as the firm behind earnings-weighted and dividend-weighted equity ETFs. So a lot of investors are surprised to learn that WisdomTree is also the largest issuer of actively-managed ETFs, with $1.3 billion in assets spread across eight actively managed funds (EU, JYF, BNZ, CYB, BZF, ICN, SZR, and CEW). None of these ETFs tracks a benchmark, allowing for greater flexibility in pursuing returns reflective of foreign money market rates and movements in certain exchange rates.

4. Biggest Earner: EEM

Most investors with any knowledge of the ETF industry know that the largest U.S.-listed ETF by total assets is the S&P 500 SPDR (SPY), which AUM currently exceeding $70 billion. But from a revenue generation standpoint, SPY doesn’t even come close to generating the most fees, the result of its sub-10 basis point expense ratio. The combination of AUM and expense ratio currently yielding the highest gross expense ratio belongs to the iShares MSCI Emerging Markets Index Fund (EEM).

At the end of the first quarter EEM had total assets of $35 billion, meaning that annual expenses charged by the fund could be somewhere in the neighborhood of $250 million (EEM’s expense ratio is 0.72%). That’s significantly more than the $70 million SPY would pull in at its asset current level of about $78 billion.

5. ETF Exposure: Some Holes In The Exposure Map

ETFs are often praised for offering investors cheap and easy exposure to every corner of the global economy. While ETFs have certainly made international equity exposure a lot simpler, they might be getting too much credit. Four of the world’s 30 largest economies (according to the 2009 CIA World Factbook and adjusted for PPP) don’t have a dedicated ETF listed on a U.S. exchange: Iran (#16), Saudi Arabia (#22), Argentina (#23), Pakistan (#27). This isn’t all that surprising, since there are obviously some extenuating political circumstances standing in the way of ready access to these capital markets. But it’s an interesting fact nonetheless.

The smallest economy to have its own U.S.-listed ETF? Israel (#49), which is available through EIS, edges out Singapore, which can be accessed through EWS.

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Disclosure: No positions at time of writing.