SPDR S&P 500 ETF (SPY), Schwab U.S Broad Market ETF (SCHB), State Street Corporation (STT), Invesco (IVZ), Wisdom Tree (WETF), BlackRock (BLK), ETF investing, ETF's, benefits of etfs,
But first, maybe you are wondering what an ETF operator does and how do they make money?
Plan and simply an ETF operator sponsors and runs an exchange traded fund. ETF's are either managed or unmanaged. Managed would mean someone is actually deciding which investments to hold in the ETF in order to gain the highest return. Unmanaged ETF's are ones that simply track a corresponding index; such is the case with the SPDR S&P 500 ETF (SPY) which tracks S&P 500.
An ETF operator makes its money by charging a fee to manage the ETF. These fees are usually displayed as a percentage. These fees or the annual expense ratio, as it is often called, can range in amounts from as little as 0.04% which is the case with the Schwab U.S Broad Market ETF (SCHB), up to more than 3% with some of the exotic funds. Managed funds always carry a higher expense ratio as they require daily monitoring by the managers. Whereas with unmanaged funds a manager only has to make changes when the index the fund tracks changes, which is not usually very often. Think of it this way, managed means constant attention baby-sitting while unmanaged means no to little baby-sitting and the more baby-sitting, the higher the price.
So now that we know how they operate and were the revenue comes from let's take a look at a few ETF operators.
State Street Corporation (STT), which owns State Street Global Advisors, the manager of SPDR family of funds. Today STT is the second largest ETF manager based on assets under management ($2.37 trillion) and also manages the third largest ETF based on assets, the SPDR S&P 500 ETF (SPY) which currently has over $176 billion in assets. With the help of the fees STT charges for managing its ETF's, State Street recently announced an increase to its quarterly dividend from $0.30 per share to $0.34 per share. If the new dividend amount is paid for the whole year, STT will now have a dividend yield of 1.9%. That’s not too bad for a company that has seen its share price rise by more than 84% over the last five years while the S&P 500 is up just 73%.
The next company is not only a publicly owned investment management firm but also the operator of the well-known PowerShares line of ETF's. Invesco (IVZ) currently offers over 100 equity PowerShares' ETF's, 19 alternative ETF's and 14 fixed income ETF's. The company currently has a market capitalization of over $14.5 billion, pays a dividend of $1.08 per share, yielding 3% and is trading at a trailing price to earnings of 14.25 and a forward P/E of just 11.37. Investors need to remember that Invesco has its hands in a few different pots, so if they are looking for direct exposure to benefit from the increasing numbers of ETF investors, IVC may not be the most appropriate choice.
Despite shares falling sharply since mid-August, the next ETF operator, Wisdom Tree (WETF) has been a big winner for shareholders. Over the past 12 months, the stock is up more than 48%, while the S&P 500 lags behind at a negative 3.9%. More so, the stock was up more than 100% in early August since being cut in half. Most market participants blame the move on the U.S. Dollar Index moving since Wisdom Tree is the largest issuer of hedged currency exchange traded funds. But Wisdom Tree is now becoming a battle ground stock for Wall Street analysts, with one slapping a buy rating on it and another a sell rating. Personally, if the share prices movement has been simply due to currency fluctuations, then I would have to agree with the WETF bulls.
And lastly we have the largest ETF manager based on assets under management is BlackRock (BLK). Most ETF investors will know the 'iShares' name, which is BlackRock's family of ETF's. But what they may not know is that BLK stock has been a rock star over the last five and ten years, shares up 94% and 210% respectively, compared to 73% and 59% for the S&P 500. Furthermore, BlackRock is currently paying pout a 2.61% dividend and trading at 14.8 times trailing 12 months earnings and 13.1 times expected 12-month earnings. Lastly, BlackRock run by Mr. Laurence (Larry) Fink, a highly intelligent finance professional. Very few individual can say they can move markets, but Fink has the power to do so, not only because he oversees more than $4 trillion in assets, but because he is extremely intelligent and highly respected. When you are looking for great companies, start by finding great leaders and Larry Fink is one of the greats.
Disclosure: This contributor did not hold shares of any company mentioned above at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.