how do etfs make money

ETFs generate revenue through management fees, expense ratios, spreads, trading volume, securities lending, cash fees, and the underlying asset appreciation.

Oct 10, 2024 at 10:24 am

How ETFs Make Money

Management Fees:
ETFs charge annual management fees to cover the costs of fund management, including research, trading, and administration. The fees typically range from 0.05% to 0.75% of the fund's assets under management (AUM).
Expense Ratio:
The expense ratio of an ETF is a broader measure of the fund's ongoing operating expenses, which includes management fees, administrative costs, and other incidental expenses. The expense ratio is expressed as a percentage of the AUM.
Spread:
When trading ETFs, there is a small difference between the price you buy or sell a share at and the net asset value (NAV) of the underlying securities. This spread compensates market makers for facilitating trades.
Trading Volume:
ETFs generate revenue through trading volume, as they receive commissions from broker-dealers for executing trades. Higher trading volume leads to increased revenue for the ETF.
Securities Lending:
Some ETFs borrow securities from their own portfolios and lend them out to borrowers in the market. In return, the ETFs receive interest payments, which contribute to their income stream.
Cash Fees:
ETFs may charge cash fees for certain services, such as currency conversion or specialized investment strategies. These fees are typically a small percentage of the transaction value.
Underlying Asset Appreciation:
While not directly a revenue stream, the appreciation of the underlying assets in the ETF contributes to the growth of the fund's AUM, which can result in higher management fees and expense ratios.

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