By Matt Hougan
The ETF industry gets a lot of hype, but if you look at revenues on a firm-by-firm basis, it’s clear that most ETF issuers are losing money.
That’s not true of everyone: Firms like BlackRock (BLK) and ProShares are making money hand over fist. But a solid majority of firms are probably operating in the red, and that could be laying the ground for a shakeout or consolidation sometime in the near future.
To examine the health of the ETF industry, I took the simplest possible measure of revenues, multiplying assets under management for every ETF and ETN listed in the U.S. by each fund’s expense ratio. I then added up all the revenues for each issuer.
The data, in its simplicity, is inherently flawed. It ignores money that issuers make from securities lending, licensing fees or other external costs associated with running an ETF. It doesn’t break out partnership revenues either, so funds like the WisdomTree Dreyfus currency ETFs or the PowerShares DB commodity ETFs are over-counted. Finally, all the data are based on a static snapshot of assets as of June 4, 2010; in reality, fluctuating assets will cause revenues to change over the course of a year.
Still, despite the caveats, my calculation is in the ballpark.
BlackRock, it should surprise no one, leads all ETF issuers, earning $1.4 billion per year in annual expenses. That’s almost half of the total $2.9 billion in revenues gathered throughout the industry.
State Street (STT) Global Advisors comes in a distant second, with $440 million in annual revenues.
ProShares earns the No. 3 slot, with $238 million in revenues, just edging out PowerShares at $237 million. Vanguard is a distant fifth with $176 million. ProShares’ accomplishments are impressive considering it has one-half the assets of PowerShares and one-quarter the assets of Vanguard. It goes to show that the 0.95 percent expense ratios at ProShares add up. (Vanguard, on the other hand, has a blended average expense ratio of just 0.17 percent).
The No. 9 company—WisdomTree (WSDT.PK)—is also worth noting. Because it’s a stand-alone publicly traded company, we know a lot about WisdomTree’s finances. It posted a first-quarter loss of $3.6 million, despite its impressive showing in the revenue league tables. Still, the loss was narrower than the $5 million it lost in the 2009 fourth quarter.
That’s not to say that all issuers below WisdomTree in the table are losing money. WisdomTree is an ambitious firm that has engaged in a significant corporate build-out. Many competitors operate on a leaner structure.
Still, it’s worth noting that only 13 ETF companies are pulling in more than $10 million in expense-driven revenues each year, while 28 companies fall below the $10 million mark. Moreover, 25 earn less than $3 million per year. Never say never, but I find it hard to imagine that many of those companies are turning a profit.
I wouldn’t avoid ETFs from the smaller firms. Many are just starting out, and have scope in their business plans to grow. But unless revenues increase soon, I’d expect to see increasing takeovers among ETF issuers, with the weakest firms and the most attractive being acquired. We’ve seen a bit of that recently, mostly at the high end, where iShares, Rydex and Claymore have all been sold in the past year. I wouldn’t be surprised to see more activity at the bottom of the table if current asset trends persist.
It’s all part of the long-term growth path for ETFs.
|ETF Expense Ratio Revenue League Table|
|Issuer||Estimated 1-Year Cash Flow||AUM||Avg. Realized Ratio|
|US Commodity Funds||$26,746,362||$4,859,799,000||0.55%|
|Emerging Global Shares||$970,520||$114,178,850||0.85%|
|U.S. One Trust||$12,582||$2,467,108||0.51%|
|Assumes static AUM at 6/4/2010|