It’s no mystery how ETF issuers make money: they charge a fee on the assets they manage. For the most part, EFs have been an unfetterd good for investors, and indeed, I’d wager that for almost any given exposure, an ETF is probably the cheapest, most efficient way to get access. And, it’s gotten better and better over time. Here, for example, are the asset-weighted fees of ETFs over the last decade:
Bar chart of ETF industry fee averages from 2015 to 2026
The gravy train of fee-reductions largely stopped in 2023, and the average fee collected has been rising slowly ever since. This isn’t necessarily a catastrophe and there was no stealth fee hike in your favorite ETF. Rather, it just shows that ETFs are no longer just vehicles for “cheap beta”. There’s an ETF for everything at this point.
Where the Fees Are
First, lets talk about where the money is actually going. Here’s my preferred metric for following the money:
Chart of assets, flows, and revenue by asset class
The first thing I’d point out is the active/passive split. Just looking at the bottom-line totals, year-to-date, active funds have pulled in 36% of all new money, bringing their share of the total ETF pie to 13.3%. Based on the entire pool of existing assets, the implied revenue for the industry is about $29.5 Billion (that’s the expense ratio times the AUM of every fund). If we limit that to just new revenue—implied annualized revenue from new flow into ETFs—it’s about $3.5 Billion. Thats the net-growth of the revenue pie for the whole ETF industry.
And 70% of it’s going to the active managers.
Passive still has plenty of market share: that “% Active (Flows)” column suggests 80% of U.S. equity flow and over 70% of U.S. bond flow is going to cheap, passive products. But cheap products don’t make money, so the active folks are scooping up 60% or more of every fee-dollar generated, with total dominance in international bonds, income products and alternatives.
Who’s Bankin’
While the percentages may be sliding towards upstart active managers, its worth noting that the big names we all know are still making the vast majority of the money. Here’s the top 10 ETF Brands by their implied fee-generation, and you’ll note, that while the top 4 are the same by assets or revenue, from there it diverges quickly:
Brand league table by implied revenue for the top 10 issuers
Here it’s easy to see the strategic differences: Vanguard may be second in AUM (just barely behind iShares, based on this data pull), because their funds are so cheap. Their implied “take” is only 4.1 bps of revenue across their entire complex. The State Street SPDR complex comes in at 12, iShares at 16, and then the gloves come off.
Number 4 here is First Trust, which out-earns Vanguard.
Let that sink in.
I’ll be honest, a lot of folks forget First Trust is even in the ETF business because they’re not taking out retail ads on TV. They’re dominated by the Vest line of Buffered ETFs and dozens of other long-running products with interesting quirks… and higher than average fees. Would you have put First Trust ahead of Vanguard on any list? Honestly?
And by the time we get down to the bottom half of the list, we’re loaded up on the leverage and inverse players like ProShares and Direxion, niche quality players like VanEck and more recent entries like Cap Group, all of whom aren’t playing the “cheap beta” game.
The Fat Pockets
But even those firms are positively charitable compared to the take rates from smaller niche retail companies. Here’s the top 10 by average bps earned:
Chart of the top 10 earning brands by revenue
None of this is a real surprise: YieldMax charges the highest fees in the industry for retail return-of-capital products I don’t think anyone should be buying. Grayscale is hanging on for dear life to the most expensive crypto trusts in existence. The rest of these firms have a claim to their higher fees—a better mousetrap, a hot-hand manager, a wild income promise, leverage, alts, all of which you’ll have to make your own decisions about.
The Terrordome
Eric Balachunas over at Bloomberg calls the ETF market the “Terrordome” because fee competition is so brutal. He’s right, of course. It’s very difficult to make money in this business.
Bar chart of number of US ETFs broken down by implied annual revenue bands from under $100K to over $100M.
This is its own K-shaped economy. The top 47 funds earning over $100mm a year are taking 44% of the entire pool of industry revenue. Meanwhile, the median ETF collects about $500k a year. There are 1,470 ETFs—about a quarter of the industry—that are earning under $100k (far less than it costs to keep the lights on). And, of the 1,140 funds launched so far in the U.S. this year, the median fund has an implied annual revenue of just $30k.
I’m certainly not asking you to pour one out for your poor ETF manager. Ultimately, I want my asset managers to make a reasonable profit. I don’t want to play literally nothing for my index fund, because I want some reason to believe the issuer is doing a good job and running an error-free, quality shop. That takes some revenue.
The challenge for us lowly investors and advisors at the bottom of the food chain remains, as always: finding relative value. Just how much are you willing to pay for that doggy in the window?
