Economics of ETFs

An established ETF operator can make a small profit by offering a new ETF that brings in as little as $100,000 in annual revenue because those established firms can spread out a number of operating costs across many other funds. Companies just entering the business will need to generate at least $250,000 in annual fees.

 

ETF observers generally agree that an ETF is “successful” if it gathers at least $100 million in assets; funds that attract < $50 million may be in danger of closing. These same observers believe that the ETF market has “reached a maturation point.” For the seven months of 2013, over 42 ETFs went out of business (vs. 17 for the same period in 2012). Eleven of the 52 fund companies that opened their first ETFs in 2007 or later have since closed (source: Credit Suisse).

 

As of July 2013, there were 1,474 ETFs listed on U.S. exchanges; these fund collectively managed $1.4 trillion, up 25% from a year earlier (source: Index Universe). The country’s largest ETF is the SPDR S&P 500 ($134 billion), which is expected to generate around $130 million in fees over the next 12 months.

 

ETFs vs. Mutual Funds  [June 2013]

 

	ETFs	Mutual Funds
Assets under management	$1.4*	$10.1*
Number of products and funds	~ 1,500	~ 7,600

                    *Trillion