Welcome a giants.
I'm Joel Webber and I'm Eric Belchernas.
You know, Eric, we've never actually talked that much about revenue in the ETF industry, and Bloomberg Intelligence recently did some research about this.
Yeah. One of the things we love to look at is assets, and then of course your market share and where you rank.
In assets that we talk about that all the time totally.
But then when you compare it to like revenue and revenue share and revenue rank, you get a different order of firms, you know, like Vanguard slides down the list in revenue, other firms that sell leverage products they go up. It's really interesting. But to me, this is so useful for our clients and when we write because everyone's trying to deal with this new ETF terror dome as we call it, because it's we're all the fisher biting. But they're very picky and they love cheap, So how can
you make money? And so by studying who can actually make more money than their assets allow and vice versa, and how that works, it can help firms figure out where to launch products and how to price them.
Athan, I say Sarah Fagus at Bloomberg Intelligence who's an analyst. He's written some of this research, right.
Yeah, of the whole team, you know, I think Athan Is he's like a you know, you ever heard of that term, a musicians musician, like a band that like a lot of like velvet underground. He is really good at surprising the team with research. So I think he's like an analyst analyst, and when he does these deep dives, I'm always like wow, and like usually it has like two or three charts in there or data points that blow my mind. And you know, I live and breathe
this stuff. So this was one of those studies I thought had a lot of good nuggets like that that he unearthed.
So joining us Athanasius and Blooming Intelligence and also Katie Greyfield of Bloomberg News. It's also the co host of the new Money Stuff podcast, this time on Trillions What Pays the Bills? Athanasios, Katie, welcome back to Trillions.
Thanks for having me. I mean, after that Athanasios intro, I'm expecting.
A musicians musician, right, Athasias, what what music do you actually play?
Well?
I don't play any analysts, I don't know, like it does a terminal calendar.
Music he's in the house music house like like.
Warehouses, wow.
Outlaw parties, after hours parties where eighten hangs out. The place doesn't quote get good till like three thirty in the morning.
Oh my gosh, Okay, what did you set out to on earth with your with your researcher.
You know what actually inspired this was an article you had written about the fidelity. Yeah. That's because you know, we cover it for a while and it's great for the investor, But the end of the day, someone needs to make money, right, Like, in order to keep these products coming, all this innovation, it needs to be funded somehow.
While it's great for the investor, So like Vanguard funds for three basis points, when you look at what are the firms that are making money, it's actually really really interesting. For example, like First.
Trust, it's hard to make a buck, right, that's very way here.
Yeah, I mean just even in context, you make way less money than you do let's say in the mutual fund industry, so you're already sort of downshifting into a more cost competitive landscape. And it's kind of interesting. Like what I saw was like First Trust, for example, it has just a fraction of the assets of Vanguard makes just as much as they do, right, So basically we're just trying to identify that there are pockets that you
can make some money. It's not just you're gonna launch an ETF, you're gonna launch it for a couple of basis points and you're not going to make any money. There are some pockets that there is a potential to make some decent money.
So, Katie, did you know that you're the muse for this episode?
The musicians musicians, MWS, WOW, Triple M. So the story in question, myself and Emily GRIFFEO we saw a document that showed that Fidelity is going to impose a new
fee on ETFs issued by nine firms. Was the list that we saw, And basically it's because those firms didn't agree to participate in a maintenance arrangement with Fidelity in which they would pay Fidelity and as a result, basically investors in those products, So investors going to Fidelity's platform trying to buy ETFs from those firms would then be faced with one hundred dollars servicing charge, So basically trading
wouldn't be free anymore. So you think about that, you think about the size of trades that's being made on the platform. If you wanted to buy twenty five dollars worth of shares of Simplify, for example, was on the initial list that we saw, you'd have to pay one hundred dollars on top of that, which is just really large.
Some friction there.
Yeah, and let me give some other scale to that, because I wrote a piece on your piece to Katie, which my reaction was, I don't know if the optics are worth this tiny bit of revenue they're going to get. Because let me give you some numbers that just show how little ETFs make versus the mutual funds. So ETF's total revenue and this is an eighth and story, is fifteen billion a year. Pretty good. Sounds like a lot, But mutual funds will be north of one hundred billion,
and Fidelity alone makes twenty eight billions. So Fidelity makes two ETF industries itself. And this is a little reason why it rubbed some of the issuers the wrong way. It's like, hey, you make so much money, we're just like fighting for scraps here. Why do you have to hurt us little guys just trying to get you get something going? And this became, you know, kind of a controversial issue, which Katie scoop I think kicked off. I will see how it plays out, but I get both sides.
It was a scoop just for the record, a scoop, I think. So I'm just confirming, but no, it definitely kicked off, just a firestorm of discussion on Twitter for example, and apparently it inspired some great research as well.
Bring it back, Bring it back to Athanasius coming in late there. So what did we learn?
Well, you're gonna make less money, but Air quoted fifteen billion, but the number's gonna keep going up because funds are converting. Everything's going towards there. So yes, you can keep milking the money in the mutual fund industry. Songs of market keeps going up. But what anyone who wants to jump into the industry, you just need to realize, like there's ways you can make money, right, And it's not just you're gonna go to ETFs and you're gonna turn into
Vanguard and there's no more money. So I think it's important to like where are some of the money is coming from? Like Active is actually a really big one, right, and I think this is where there's always a lot of hesitation. Active managers don't want to convert in ETFs. But active pays a lot of the bills, right, and so I think about active might be about seven percent of the assets, but it's almost a fifth of the revenue.
That's massive, right. But I think it's also good that Vanguard is getting bigger, right, And this is something Eric has talked about a lot in the past, like the bigger they get, and the more you're saving your investors in sort of their core portion of the portfolio. You have some money to play around with, so you become less cost and sensitive. You could go to thematics, you could go to buffer. ETFs are active, right, So you can see that some of these funds are charging quite
a bit of money. But again that plays in with the Vanguard growth. You know, thematics make quite a bit of money too, and so you see it in the trends of the new launches. Anyone that's launching a new product, they're trying to get creative, they're using options, or they're doing themes. Are active because that's a place that's making some decent money. It's probably the only place you can still make some money too.
So break down the money because I mean the big three, how much money are they actually breaking it?
You know, less than half, But they have seventy five percent of the assets, right, which is amazing. I think that's still that's a good sign for the smaller guys, where I think a lot of the innovation comes from. And again, Vanguard really pulls that average down. They don't make any money. I mean, they're essentially almost like a charity.
Can I tell you how much money they yeah from your table? Because this really I did a double take. Vanguard has about two point five trillion dollars in ETF assets, and according to Athanasios's research, they make one point three billion dollars in annual revenue. I mean, that is shocking to me.
It seems so little, right, Yeah, they do.
Yeah, So let me just expand on that because on percentage terms, so they have twenty nine percent of the assets, but they make nine percent of the revenue. But when I wrote the Bogel book, I looked at all funds. When you bring in mutual funds, that gap gets crazier. It's more like twenty seven percent, but five percent because mutual funds have so many gigantic revenue generating funds, but that gap is absurd. I mean, there's nothing even close
to it. Black Rock, for example, has thirty one percent of the assets but twenty eight percent of the revenue, so they're almost like one for one, but clearly like even they're making a little less than their assets share.
Okay, so if you're not those big three, what do those numbers look like?
Uh? Yeah, so I'd say ones that really stick out. First, Trust is making quite a bit of money because they are average fees something like seventy eight basis points. The other thing is leverage the ETFs, so the pro shares the directions. I think TQQ is number five on the list of the highest revenue generating ETF. Right, it's twenty or so billion in assets at ninety five basis points, So leverage, thematics active all tend to make quite a
bit of money. And then anything over six the basis points like which seems like it's insane, like how can I sell ETF that's over fifty or sixty basis points? But money's going there. They make up a good third or so of the revenue. So I feel like when you pull it back and you look at it, it's not. It shouldn't dissuade someone from launching new product. There is ways to make money, it's not just your going head
to head with Vanguard. I think if you're getting innovated, right, if you're going to launch another S and P five hundred ETF, you can't charge more than three basis points, Like, there's not money to be made there, but there are some pockets. I think if you get creative, there's some potential that you can make some money.
It's been this race to the bottom for almost as long as we've been doing this podcast. But when you start talking fifty or sixty basis points, that is kind of a new number, right, So is this a new trend that's emerging or is it just doubling down on things that have worked for the past couple of years.
Yeah, it's a good question. I think if you're unique enough, you can charge more for it. And I think like Kathy would really expose that, right, if you're really unique, it's something that no one else offers. But I don't know, it's like can we get is gonna get so cheap that eventually just like swallows itself home, Like we start all over again, right, because now they's single stock ETFs, and so I feel like we've now we've gone so far to one end that it's now swinging back over.
And I think when you look at it total cost of ownership, right, so like you're not gonna be one hundred percent in an ARC. So if you sort of look at it in the context of your whole portfolio sort of weighted average cost, you're still lower, right, you have your vandguard allocation, your thematics, your actives, you're still saving money as an investor. So yeah, I think if it's unique enough, like you're not going to watch an SP five hundred ETF at fifty basis points, it's just
not going to sell. But I think if it's really something unique, it could be done. It's shown that it could be done. I think buffers are a really interesting case study too. They're very unique. They got something like forty billion or so in assets, and you know, the pretty decent like revenue generators for the industry.
Katie, do you know what the pop revenue generating ETF is?
I mean, is it GPTC at this point or is it GLD It's something like that.
You're close.
Oh my god, I feel like I should.
Know that those are three and four.
Oh my gosh, you're close.
It's not the cues. Yes, it's still the cues. Wow.
Yeah, this is research.
One of my favorite things.
Yeah, that's why I was gonna, you know, volleyed to you.
We're all just stepping all over each other. Yeah. The cues is amazing. I forgot what the fee is. It's like twenty basis points, right, twenty basis points.
And that's because of that trust structure.
Yeah, unit investment trust, which means that Invesco virtually sees none of that money. It's sort of like this piggy bank that they can't crack. Spy is a similar thing, and Spy is nine basis points and it's enormous. So I have to imagine it's on that list number two. Yeah, there you go. So but more some of that money stays in the door at State Street, I believe, because they're the custodian correct.
Yes, all right, thank you.
It's also Velvet Underground.
It's so wonky. Okay. So if you look at this that list that you put together, Athanasis, like, what's the big surprise on there?
Oh yeah, So we looked at the top thirty revenue drating generating ETFs. So ones that really stuck out. Jeppy from JP Morgan cracked the list, Cows from Pacer cracked the list, Mote from van k which really shocked me. So there were these really interesting ones, like I had to double check. I'm like, wow, all of a sudden, these names started getting pulled up.
To some indies in there. Yeah for sure.
Yeah, GBTC is on the list. You had mentioned. That's a conversion.
So when you look at it.
You're like, wow, there's actually a TQQQ which is like number five U. So but they have something in common, right, They're all very different. They're smart beta, they're leveraged or active or thematic. And again these are at the top of the list. So yeah, that one. Those ones definitely stuck out the most. And Q was always number two for a long time, behind Spy, and it just when he kind of recently had taken the top spot.
I will say what we're describing now, and like you say that issuers are looking more towards active thematics, et cetera as a way to make money. It sort of puts what issuers always tell us in more of a pessimistic light because I mean, especially on ETFIQ, we talked to a lot of issuers you know, coming out with active products, et cetera, and they say, you know, we're responding to client demand, client demand, it's always client demand, but it's also just a way to pay the bills.
Pay those bills. Yeah.
I think Jefpy is interesting here and Cows. These two I think should be somewhat a blueprint for how active can survive going forward. I think Cows is like, hey, let's just take this one metric cash flow and it came out like three years and nobody cared. But then when the Fed raised rais, cash flow became like a big deal and that is on the top twenty. And
jepy to me JP Morgan. We just covered this on ETFIQ. Also, Brian Lake just moved from JP Morgan to Goldman and he was I thought, turned picking expense ratios into an art form because JEP is thirty five basis points right, so it's not dirt cheap, but it's cheap enough where as an advisor you're like, Okay, it's got JP Morgan's brand name. It's a covered call strategy, so they're doing this legwork of like options they have to sort of like keep up with. Then there's a fundamental screen in
there and it's thirty five basis points. It feels fair and this is again now in the top twenty revenue generating. So what he did is made I think everybody feel like they got a fair deal for active while at the same time making good money. And so I would definitely study if I was coming out with ETFs, I'd study jepy and then on the flip side, i'd study like an ARC or a thematic ETF. So if you have a lot of active share, I think you can charge more TQQQ And the top five is also interesting.
Ethan and I frequently joke about the leverage issuers because they have to be the envy of the industry because Vanguard will never deal with them. They take a little crap from people online. It's like they're selling legs.
Those analysts who have like a red light rating system and.
All, yeah, people are like, you know, what is the social purpose of triple leverage this? But the social I mean they really they really have you know, or is this too dangerous? They definitely every now and then they just kind of get kicked around, but they make a nice little living. They account for five to six percent of the revenue even though it's like one percent of the assets, and that it's the trading tools.
I was gonna say, I do think there's a polarization. It feels like there's this existential thing that's happening where it's like, okay, super tidy, vanilla, low cost things and then assortment of trading tools that you know you have to pay for and not a small amount anymore. No, I think that's enough for people to make a living.
Yeah, I think either you're gonna shot at Walmart or like the really boutique shop, right, and that's it. You're gonna burow your essentials there and then the specialized suff and you're willing to pay for it, right, And it
seems like that's where the industry is splitting. When we look at launches by fee, the fees are actually going up on average, right, and so they're you know, launches will follow the money people willing to pay for it, and you're offering something unique, the flows are going to go there. And it's and it's showing at least so far.
And we have another term, Joel, we have another term that we call package adrenaline, like if you can make somebody feel something. And I would put the leverage single stock ETFs in there, people will pay. There's like no price sensitivity out there. Like the double leverage Navidia ETF is two billion dollars. It charges one point one percent in fees. No advisor would ever pay that much for fees,
but they would never use this anyway. This is purely for like gambling really, but I mean, I'm okay with it as long as you know what you know you use it and you know you're kind of gambul at gambling. That's a very ironic situation where the bigger vanguard and passive gets the kind of crazier and more exotic we're going to see new ETF launches get. So it's ironic, but it makes sense if you think about it.
I will say something that's interesting to me is like what this means for issuers beyond what sort of strategies that they might launch into. Because there was this city report from last year. I wrote it up in October twenty twenty three, so it probably came out a little before then, but they found that roughly one third to half of US listed ETFs right now can't cover their
annual operating costs. And you think about this big uptick that we've seen in ETF closures, and I'm wondering if this sort of dynamic and also what we're describing right now will keep those closures at this high level. I think it wasn't quite record closures last year, but it was pretty close at the same time that you had record almost record launches, and.
There's record closures this year too. They're on pace to have a record So.
I think the churn will I agree, but we'll see you in October again for the graveyard episode Spooky.
Well, for every two x Navidia that's a two billion dollars hit, there's like five of them that like nobody touched. So some of these hot sauce products is spaghetti at the wall and in Verse crammed something.
You guys, as we should have, and.
I wrote about how that was the right idea but the wrong design. They should have made it long short. They needed to make it just one direction because it kept offsetting. So to Athan's point, you got to be cheap or shiny, and the kramer was the way it was designed. It could never get shiny.
Sometimes the stars just align. Like it's just a formula that hopefully is like, Okay, where's the money going. It's going to active people willing to pay issuers are going to try it, but a lot of them are going to fail to write. There's just normal turn in the industry. Someone might take it too far, they might get a little too crazy, you know, but at least this gives you a blueprint of like what might be working in what areas should an issuer be looking to launch in.
To your point, Eric, you were saying, Jefpy perhaps will provide a blueprint to other issuers looking to launch active. A lot of issuers took that literally and just sort of came out with jeppy copycats. And it's interesting that those haven't done too well. I mean, you think about some of the big names, I believe black Rock Goldman for example, who you know just tapped Brian Lake. They I mean, they haven't exactly been able to replicate what we're seeing with Jeffy.
Yeah, it's kind of like ARC. Right after ARC was a hit, everybody came out with their innovation or disruptors ETF and none of them really took in that much money, but they somewhere over one hundred million. I mean, you know, eked out a little bit of a profit. I think with JEPPI, this train is so popular, which is the covered call trade, that if you have a salesperson going to meet advisors, you kind of need a jet by
product in your toolbox. So I think they have it there just so they have something that don't have to refer to the person to JP Morgan, but I'm with you, really the innovator definitely gets most of the spoil, and that's how it should be, I think. But there's a lesson just in Jetpy in general, which is a brand name with some legwork and a moderate fee. Forget if
it's covered call, think of something else. It's that spirit, it's that logic that I think is what could be successful, not doing another Jetpy, but just doing something that balances all that in a way that an advisor can be like feeling like they're being fiduciary and not paying too much because obviously I think over the years they felt like they paid too much for somebody to pick stocks and underperform.
Okay, so all of this just makes me think of Dave to Einhorn a little bit who has said some spicy things about passive investing this year. There's been some ongoing coverage, including recently from Bloomberg News and our colleague Glu Lang there that dove into some of that. Ethan you came up in there because one of the things that I mean, basically ein Horn feels like passive is destroying stock market value has been crushed. But you think he's over oversteps slightly.
Yeah, I mean I don't think it's iron I think it's a lot of people. Right. Every couple of years we got to deal with this. They come out with some thing about passive distorting markets. So we looked at it. We looked at all the stocks based on their passive ownership. And just to give you context, right, if you take mutual funds and ETFs together, they own about twenty four percent of the stock market and only half of that
is passive, so again a pretty small number. But then we looked at stocks with higher and lower passive ownership, and we've actually found that stocks with lower passive ownership performed better than ones with higher passive ownership. And the critics always say, well, the main premise was that stocks with higher passive ownership, they get inflated up artificially, they tend to be more viotal during drawdowns. Things like that. Wouldn't you find anything meaningful from the data that would
support that. I'm not saying that passive isn't a thing, right, maybe in some stocks, but overall, the data kind of refuted a lot of the stuff that they've been saying for for a while.
And just to be clear, what this is is the S and P five hundred stocks. There's five hundred of them. The ones that have the least amount of their shares owned by passive actually had the best performance. That kind of goes against this idea that like the stocks that do the best are the ones that index funds own the most of.
Was that surprising? I mean like that it sounds like when you actually dig it up, it's like whoa, whoa. That's like, yeah, we even talked about that before.
It was and it seems like if you're active, I would have taken this as a good thing, Like, wait, there's opportunities. There's stocks that are lower passively owned, there's more opportunity for me. They performed better, Like I feel like that's a good thing. That's giving you more on a portfolio management side. And then you know, we even looked at things like additions and deletions from the S and P. Deletions ended up doing better than the additions
and vice versa. Like, I think even the fact that there are additions and deletions to the S and P refutes all that, right, because if your argument is, if it's in the S and P, pass is going to push it up, none of these stocks should ever drop out of the S and P. They should just all keep going up. So the fact the fact that that even exists sort of like is goes against the premise of some of these arguments.
And you said that you got a lot of hate mail.
Yeah, yeah, good and bad some people. You know, as you can imagine, it's a pretty touchy thing now, you see, Like you know, there's been podcasts now off of this and a couple of articles. Yeah, it's very touchy, especially you know for active managers because the performances have not been great, right, So a lot of them can blame the SMP. But I still don't see like Apple being propped up because it's you know, the second biggest stock in the S.
And P, Like is also underperformed this year.
Yeah.
Ex example, it's like, could they just be a good company that has a lot of cash and sells a lot of iPhones? Is that why they're they're like doing so well. But we even looked at it relative to small caps, so small caps tend to have higher passive ownership than large caps. Small caps have been in like have lagged for a decade or you know, to the S and P. So that refutes it too. There's a lot of things that refuted a lot of the arguments
that you know, some big names have brought up. I think when people just take it at face value because they're a big name and it's just been hard to outperform the the S and P, and can we get there eventually? Sure? May if it's like seventy five or eighty percent passive ownership, maybe that becomes problematic. But at least right now, it just seems like it's really premature to be blaming passive for a lot of the underperformance.
Worth noting that he's also had pretty good performance during that some of this time.
A couple things on this passive number that are important. Number one is when you look at the stocks that are most known by passive. Passive also includes smart beta and like so sometimes Active sells off a stock and its price starts to go down, it's yield goes up, and there's a lot of dividend popular dividit ETFs. Because investors like yield whatever, they'll buy that stock. So it ironically some of the dump stocks by Active become pass his favorite because of smart beta. So there is a
smart beta factor in that passive number. That's I think important to point out. The other thing is I like the eye test. You know people with the eye tests are gonna just the eye test. Is this Tesla is a great example. It's a big holding. The SMP you just talked about Apple, Teslas might even be better. It has had a bad run, but then it had a good run right after that when earnings it popped back up. Navidio was like really nowhere three or four years ago.
Now it's like a top holding. It's not like index funds decided to make Navidia a big deal or decided that Tesla wasn't good. Active decided that the people trading the stocks bid up Tesla after good earnings, they dump it after bad earnings. So when I see these stocks moving up and down. I don't really that's the eye test. Someday, if stocks just stop moving because we're all just one gigantic passive blob, I think the arguments will could be stronger.
But I think until people can see it or feel it, and certainly their index funds gives them a lot of return over active funds, so they're happy with the outcome as customers, and they don't really see any problem in the market. Because stocks go up and down. That's a big problem for the warriors. You can't really see it, feel it, or touch it. Right now, it all looks like it's working fine. So I'm not saying they don't
have some points and deepen those white papers. There are some things we need to look at, but the eye test is pretty compelling that there's no problem.
So the market is not broken.
No.
I mean again, stocks go up and down all over the place. Sometimes small caps are in favor of sometimes large caps. And also the FED is a big variable, and so is the options market. There's many things that quote distort things, and I just think active that's the natural state of the market. And there was crashes and surges before index funds were invented too, So I don't know. I just don't see this as any any really big
thing to worry about in general. But Athan's numbers I think were interesting because they sort of helped give some data behind this as well that overturned some of what people like to say. But let me tell you this, Jrol, the reason the worriers get a lot of ink is because those those articles will do really well.
We've tested it.
You write something about passive worry, the readerships are amazing. People are going to click on that. If you write like, hey, nothing to worry about here, it's like crickets. So there's definitely a natural inclination to talk about anything that says there's a worry. And this is why you don't see many studies that go this other direction, because there's really not an incentive readership wise to put them out.
All right, Ethan, Katie, thanks so much for joining us on trillions.
Good, thanks for having me, Thanks.
Thanks for listening to Trillions until next time. You can find us on the Bloomberg terminal, Bloomberg dot com, Apple Podcasts, Spotify, or wherever else you'd like to listen. We'd love to hear from you. We're on Twitter. I'm at Joel Webbers Show. He's at Eric Balchunas. This episode of Trillions was produced by Magnus Hendrickson. Bye.