ETF Profits: How Much Money Are Providers Making?

The pricing wars in the exchange-traded fund (ETF) market have risen to a fever pitch over the past few months. The increasingly low fees that are charged by the major ETF providers have some wondering whether it is possible to make money in this market. So how can we examine the profits ETF providers reap? In most cases, the total revenue that is generated by a given fund can be derived simply by multiplying its total assets under management by the expense ratio, but not all fund fee structures are alike. Some expense ratios float with the fund, while a few even charge 12b-1 fees.

But if you use the basic equation and apply it to the $2.4 trillion that ETFs had under management as an asset class as of the end of September 2016, then the ETF industry is currently generating about $6 billion as a whole. BlackRock Inc.'s iShares is clearly the leader here, generating about $2.4 billion from its share of the ETF market. State Street Global Advisors comes in a distant second with current revenue of just under $880 million, and Vanguard is third with current revenue of about $525 million. These are followed by Invesco, First Trust, ProShares and Wisdom Tree. (For more, see: iShares Family of ETFs to See Lower Fees.)

BlackRock’s recent announcement to cut fees on 15 of its funds will lead to a loss in revenues of around $75 million. The reason that BlackRock is lowering some fees is to better position itself for the expected tidal wave of assets that are expected to flow into ETFs as a result of the new Department of Labor fiduciary rule. This rule will require many brokers who work on commission to start recommending lower-cost products to their clients in order to meet their fiduciary duty.

And increasingly popular smart beta ETFs represent a relatively small slice of the ETF market, but they will generate a disproportionate amount of revenue given their higher fee structures. These funds invest in specialized niches in the markets such as specific themes, factors or fundamental portfolio weightings. (For more, see: The 5 Cheapest iShares ETFs to Date in 2016.)