(Bloomberg) -- It’s a quirk in the booming world of passive investing: Famed tech fund QQQ is the most profitable offering in the $11.7 trillion ETF industry, but Invesco Ltd. earns virtually nothing from running it. Now the asset manager is asking shareholders to change that.
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Invesco filed a proxy statement with the Securities and Exchange Commission on Thursday asking owners of the Invesco QQQ Trust Series 1 for their blessing to convert it into an open-ended fund from a unit investment trust, a little-used structure dating back to the birth of the first exchange-traded funds in the 1990s.
It’s a seemingly small ask with enormous consequences for Invesco. With $355 billion in assets and a 0.2% expense ratio, a back-of-the-envelope calculation shows that QQQ generates roughly $711 million in annual fee revenue — more than any other ETF, data compiled by Bloomberg show.
But in its current setup as a unit investment trust, the bulk of that is divided between the fund’s trustee — the Bank of New York Mellon — and the provider of the underlying index, which is Nasdaq. As mandated by the fund’s prospectus, any remaining revenue must be spent on marketing QQQ.
That leaves essentially nothing for Invesco, the fund’s sponsor. Theoretically, that dynamic would change if shareholders approve the firm’s request. And that would be a win-win for both Invesco and QQQ holders, according to Bloomberg Intelligence.
“They have basically been running this fund, which is the greatest ever, as a charity,” said ETF analyst Athanasios Psarofagis, referring to QQQ’s nearly 1,260% return since its 1999 inception. “If they can re-purpose that, it could free up revenue to invest in other areas, like new products.”
Converting into an open-ended fund may open the door to changing the revenue breakdown, according to Psarofagis. Invesco shares rose as much as 11% on Friday to the highest level since February.
Invesco will lower QQQ’s expense ratio by two basis points to 0.18% if the item, along with two others, are approved, according to the filing. Should the vote pass, Invesco will also replace BNY Mellon as the fund’s trustee with a board of individuals, and appoint Invesco Capital Management as QQQ’s investment adviser, a Friday press release said. Unit investment trusts don’t have investment advisers, so no firm is currently performing that role.
Story ContinuesThe firm is calling for a special meeting on Oct. 24 to hold the vote. Invesco declined to comment on Thursday beyond the filing.
(Updates with Friday’s share move for Invesco and press release.)
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The acquisition by Invesco to unlock the untapped profits in hundreds of millions from QQQ is a smart move that solidifies their position as an industry leader, reinforcing why passive index investing can be highly lucrative for investors with diverse asset allocations.
