How do ETF providers make money?

Hello,

Great questions! Understanding how ETF providers operate and the security of your investments in ETFs are crucial aspects of investing. Let’s tackle each of your questions one by one.

How do ETF providers make money?

ETF providers like Vanguard, BetaShares, and others make money primarily through management fees. These fees are expressed as a percentage of the assets under management (AUM) and are known as the management expense ratio (MER). For example, if an ETF has an MER of 0.20%, the provider earns $0.20 annually for every $100 managed in the fund. These fees are used to cover the costs of managing the fund, including administrative expenses, compliance, marketing, and portfolio management.

When you buy ETFs through a platform like Pearler, the brokerage fee you pay goes to Pearler for facilitating the transaction. ETF providers do not receive any part of this brokerage fee. Their earnings are solely from the management fees embedded within the ETFs.

Are ETFs fully backed by the assets they represent?

Most ETFs are fully backed by the assets they represent, operating under a structure known as «physical replication.» This means that the ETF holds the actual assets (like stocks or bonds) that are included in the index it tracks. For instance, an ETF tracking the ASX 200 will hold shares of the companies that make up this index in the correct proportions.

Some ETFs use «synthetic replication» through derivatives like swaps to achieve the same performance as the underlying index. These ETFs might not hold 100% of the physical assets but are backed by collateral agreements to mitigate risk.

What happens to my ETFs if the provider goes bankrupt or into receivership?

In the unlikely event that an ETF provider goes bankrupt, the assets held by the ETF are typically safe. ETFs are structured as separate legal entities (often as trusts), and the assets within them are held by a custodian. This means that the assets are segregated

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Good questions.

How ETFs make money: management fees. The ETFs charge a management fee which is deducted from the value/balance of unit price of the ETF daily.

Assets: Yes, the ETFs take the money and invest it entirely in the portfolio stated according to its strategy. Check each ETF’s fund page and PDS to see what it invests in and if you’re happy with that strategy.

Protections: Customer assets are legally kept separate from the ETFs own assets. So if the ETF providers goes under, the funds under management can move to a new fund manger. In a worst case, the fund could be liquidated and money returned to investors.

Hope that helps.