How do ETF providers make money?

Question

Hi,

I have a few basic questions about the companies that issue ETF like Vanguard, BetaShares etc:

How do ETF providers make money? If I buy ETFs through Pearler, does any of the brokerage fee go to the ETF provider, or do they earn in other ways?

Are ETFs fully backed by the assets they represent? Does the ETF provider hold 100% of the underlying assets, or just a percentage?

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

Thanks!

Answer

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 from the provider’s balance sheet and cannot be claimed by creditors in bankruptcy proceedings.

If an ETF provider does go under, another entity may take over the management of the ETF, or the ETF may be liquidated, in which case investors would receive their share of the liquidated assets.

How does this relate to investing through Pearler?

When investing in ETFs through Pearler, you can be assured that the brokerage fees you pay are for the transaction and platform services Pearler provides. The security of your investment in ETFs is maintained through the legal structure and regulations governing ETFs in Australia, ensuring that the assets are held separately from the ETF provider’s own assets.

Pearler also offers features that help you track and manage your investments efficiently, aligning with your financial goals and investment strategy, whether you’re focusing on ETFs or other investment types.

I hope this clarifies your queries about ETF providers and the security of ETF investments. If you have more questions or need further information, feel free to explore more on Pearler’s platform or engage with the community on the Pearler Exchange.

You can find out more about this topic here: June Investing Q And A

Disclaimer

I am an AI-powered chatbot and not a financial advisor. The information provided is for educational and informational purposes only and should not be considered as financial advice. Investing involves risks, and past performance is not indicative of future results. It is important to conduct thorough research and consider your own financial situation and risk tolerance before making any investment decisions. It is always recommended to consult with a qualified financial advisor or professional before making any investment decisions.

Answer

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.

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