When it comes to investing in mutual funds, ETFs or working with a financial advisor, you may see references to assets under management, or AUM. Assets under management is a way to measure the amount of money that is managed by a firm or entity such as a fund.
Here’s what you should know about AUM including how it’s calculated and what it means for your fees.
Assets under management: What it means and how it’s calculated
Assets under management measures the market value of the investments managed by a particular firm or fund. For example, a wealth management firm may have $2 billion in AUM, which means they manage $2 billion on behalf of their clients.
You may also see individual mutual funds or ETFs reference AUM, which measures the amount of money that is managed in that particular fund. The level of assets will fluctuate as new money enters the fund and as some investors withdraw money out of the fund. Assets also change due to changes in the value of the underlying investment.
AUM and fees
Many financial advisors, wealth management firms and investment funds charge a management fee based on assets under management. If a wealth management firm manages $2 billion and charges a 1 percent annual fee, the firm will bring in $20 million in revenue.
Financial firms and funds often like to tout high levels of AUM as a way to attract new investors. They’re trying to show that a lot of people have already entrusted them with their money and that’s why you should too. But the reality is more complicated. Investors may benefit from investing in funds with large amounts of assets if it leads to lower expense ratios for investors. This can sometimes be the case with index funds based on broad indexes such as the S&P 500.
However, for actively managed funds that are attempting to outperform the market, more assets aren’t necessarily a good thing. While higher AUM allows the investment manager to earn higher fees, the fund’s investment universe shrinks as the level of assets grows. Think of a $50 billion fund that wants to invest in a company with a $500 million market cap. The fund would need to buy the entire company just for it to account for 1 percent of the fund’s portfolio. As legendary investor Warren Buffett has often said, size is the enemy of investment performance.
Assets under management is a figure used by both firms and funds to measure the amount of money they manage for clients and investors.
Vanguard had $7.6 trillion in assets under management as of March 31, 2023. The fund giant offers hundreds of different funds to U.S. and international investors.
Blackrock ended the first quarter of 2023 with $9.1 trillion in assets under management. Blackrock offers a variety of funds and says it helps more than 35 million Americans save for retirement.
SPDR S&P 500 ETF Trust
The SPDR S&P 500 ETF Trust had $383.9 billion in assets under management as of May 17, 2023. The fund aims to match the performance of the S&P 500 Index and charges an expense ratio of 0.095 percent.