If you’re considering investing in mutual funds, ETFs, or getting help from a financial advisor, you’ll likely come across the term “assets under management” or AUM. Basically, AUM is a way for firms or entities to measure the amount of money they’re managing through a fund or other means. Understanding how AUM is calculated and how it affects your fees is important.
Assets under management: What it means and how it’s calculated
Assets under management refers to the total market value of the investments that a firm or fund is managing. For instance, if a wealth management firm has an AUM of $2 billion, it indicates that they manage $2 billion on behalf of their clients.
Individual mutual funds or ETFs may also refer to AUM, which is a measurement of the amount of money managed in that specific fund. AUM levels may change as new money is added to the fund or investors withdraw money. Additionally, changes in the value of the underlying investment also impact the assets.
AUM and fees
Wealth management firms, financial advisors, and investment funds often charge a management fee that is based on the amount of assets being managed. For example, if a wealth management firm has $2 billion of assets under management and a 1% annual management fee, the firm will earn $20 million in revenue.
Financial firms and funds frequently advertise their high AUM to entice new investors by demonstrating that many others have already entrusted them with their money. However, the situation is more complex than that. One way investors can benefit is by investing in funds with higher assets, which can result in lower expense ratios. This applies specifically to index funds that use broad indexes like the S&P 500.
Having more assets may not be beneficial for actively managed funds trying to outperform the market. Even though a higher AUM allows the investment manager to receive higher fees, the investment choices for the fund will become limited as the level of assets increases. For example, if a $50 billion fund wants to invest in a company with a $500 million market cap, it may not be possible due to the fund’s size. According to the message, for the company to account for only 1 percent of the fund’s portfolio, the entire company would need to be purchased. This aligns with Warren Buffett’s belief that investment performance is negatively impacted by the size of the investment.
Both firms and funds use the term “assets under management” to refer to the amount of money that they manage for their clients and investors.
As of March 31, 2023, Vanguard managed a total of $7.6 trillion in assets and provides a variety of investment options to investors globally, including hundreds of different funds.
In the first quarter of 2023, Blackrock’s assets under management totaled $9.1 trillion. The company provides multiple types of funds and reportedly assists over 35 million Americans in saving for retirement.
SPDR S&P 500 ETF Trust
As of May 17, 2023, the total value of assets managed by the SPDR S&P 500 ETF Trust was $383.9 billion. This fund is designed to align with the performance of the S&P 500 Index and has an expense ratio of 0.095 percent.