U.S. ETF Distribution Fee Restructuring: Industry Analysis Report

This analysis is based on the Reuters report [1] published on February 3, 2026, which reported that J.P. Morgan has identified a potential structural shift in the $13.5 trillion U.S. exchange-traded fund market, with brokerage firms and custodians seeking to charge distribution fees directly from ETF managers. This development represents a strategic response to a decade of commission-free trading that has significantly eroded traditional revenue streams for financial intermediaries. The proposed fee structure, targeting 10-20% of total expense ratios, could generate an estimated $2-4 billion annually in new industry costs. While large ETF managers such as BlackRock and Vanguard possess sufficient scale to negotiate favorable terms, mid-sized providers including Invesco, Franklin, and Janus Henderson face disproportionate competitive pressure that may accelerate market consolidation.

The U.S. ETF industry has undergone remarkable transformation over the past decade, growing from approximately $3 trillion in assets under management in 2016 to the current $13.5 trillion milestone [1][2]. This expansion reflects fundamental shifts in investor preferences toward low-cost, transparent, and liquid investment vehicles. The average expense ratio for index equity ETFs has declined to approximately 0.14%, driven by intense competition among providers and the proliferation of zero-expense-ratio products [3]. However, this competitive pressure on management fees has simultaneously compressed the revenue available to distribute throughout the investment value chain.

The commission-free ETF trading revolution began in 2019-2020, initially pioneered by fintech platforms such as Robinhood and subsequently adopted across the industry by legacy brokerage firms including Fidelity, Charles Schwab, and E*TRADE [4]. While this transformation delivered meaningful cost savings to retail investors, it simultaneously eliminated a traditional revenue stream that had supported brokerage operations for decades. The dual pressure of zero-commission trading and the secular migration of assets from actively managed mutual funds to passive ETFs has created what J.P. Morgan characterizes as a “costly transition” for financial intermediaries [1].

J.P. Morgan’s research indicates that brokerage firms and custodians are seeking to capture distribution fees representing 10-20% of total expense ratios from ETF managers, which would translate to approximately $2-4 billion in new fees assessed across the industry annually [1]. This redistribution of value represents a fundamental reconfiguration of the ETF ecosystem’s economics. The timing of this initiative reflects several converging strategic factors that have created urgency for revenue replacement.

The revenue replacement imperative has intensified as ten years of zero-commission trading have substantially diminished brokerage commission income. Traditional commission revenues that once offset operational costs and supported distribution networks have largely disappeared, forcing firms to identify alternative income sources. Additionally, the continued flow of assets from mutual funds to ETFs has reduced fee income that traditionally supported distribution networks, as ETFs’ fee structures are inherently lower than mutual funds’ complex multi-class pricing models.

Regulatory anticipation has also influenced timing decisions. Expected SEC rule changes facilitating tax-free mutual fund-to-ETF conversions could accelerate asset shifts from higher-fee mutual fund structures to lower-cost ETF vehicles [1]. This anticipated acceleration has prompted intermediaries to act preemptively in establishing new revenue arrangements before the regulatory landscape shifts further.

The distribution fee restructuring creates a differentiated impact across market participants based on their scale, competitive positioning, and negotiating leverage. Large ETF managers including BlackRock and Vanguard possess significant structural advantages in the emerging fee negotiation environment [1]. Their substantial assets under management, diversified product lines, and brand recognition provide negotiating leverage that smaller competitors lack. These industry leaders can absorb new costs while maintaining competitive expense ratios, or alternatively, pass through fee increases in a manner that maintains their market position.

Mid-sized managers face substantially greater competitive pressure. Invesco, Franklin, Janus Henderson, and similar providers lack the scale to absorb new distribution costs while remaining price-competitive on expense ratios [1]. The proposed fee structure could accelerate consolidation in the mid-tier ETF provider market as smaller managers seek scale through merger or exit. This dynamic may reduce competitive diversity and increase concentration among the largest providers.

Brokerage and custodial firms stand to benefit from a new revenue stream that partially offsets accumulated commission losses. However, competitive dynamics will influence their ability to extract maximum fees, as managers with strong alternative distribution channels or direct-to-investor capabilities will possess negotiating leverage. The ultimate fee rates achieved will reflect the balance of power in individual relationships rather than uniform industry pricing.

Investors may face higher overall costs if ETF managers pass distribution fees through to expense ratios. However, the extent of pass-through remains uncertain and will vary by manager strategy, competitive positioning, and relationship dynamics. Commission-free trading protections remain intact, but the total cost of ETF ownership may increase as distribution fees propagate through expense ratios.

The introduction of distribution fees represents a fundamental reallocation of costs within the ETF value chain. Upstream effects will likely include pressure on index providers, as ETF managers seek to reduce licensing costs—which can comprise up to 25% of expense ratios for some index funds—to offset new distribution fees [3]. Technology and infrastructure providers including custodians and trading platforms will serve as key intermediaries in fee collection and distribution arrangements.

Downstream effects will manifest through potential changes in financial advisor product recommendations as fee structures shift across the industry. Retail investors will face potential increases in total cost of ownership, though commission-free trading protections remain. Institutional investors may negotiate better terms given their scale and direct relationships with managers, potentially creating a bifurcated cost structure between retail and institutional channels.

The ETF distribution fee restructuring may deliver unexpected competitive relief to the mutual fund industry. Active management has progressively lost cost competitiveness versus passive ETFs as expense ratios have converged. If distribution fees materially increase ETF expense ratios, active managers may regain some relative attractiveness, particularly in categories where active strategies have demonstrated meaningful alpha generation.

This development reflects broader industry maturation as participants adapt to a post-commission environment. The transformation represents an evolutionary rather than revolutionary change, building upon existing relationship structures and fee arrangements while fundamentally reallocating value. How these fees are implemented—uniformly or differentially based on manager scale and relationship strength—will significantly shape competitive dynamics in the coming years.

: The distribution fee structure creates existential pressure for mid-sized ETF providers lacking scale to absorb new costs while maintaining competitive positioning [1]. This dynamic may reduce market diversity and increase concentration risk within the industry.

: Total expense ratios may rise as managers pass through distribution fees, partially negating the cost advantages that have driven ETF adoption over the past decade [3]. While commission-free trading protections remain, the overall cost of ETF ownership could increase meaningfully.

: The fee arrangements will likely attract regulatory scrutiny regarding fiduciary obligations and disclosure requirements. Compliance costs and potential regulatory constraints may limit implementation flexibility.

: The ultimate fee rates achieved will depend on negotiating dynamics that remain fluid. Excessive fee demands could trigger flow diversion to alternative distribution channels or lower-cost competitors.

: Large managers with strong bargaining positions may strengthen their competitive moats as smaller competitors face margin pressure or consolidation incentives.

: The fee restructuring may accelerate development of direct-to-investor distribution channels that bypass traditional broker relationships, creating opportunities for cost-efficient alternatives.

: Managers may pursue innovation in fee structures and product features that justify premium pricing, creating opportunities for value-added propositions beyond pure cost competition.

: Financial advisors may enhance their value proposition by navigating the complex fee landscape and identifying cost-efficient solutions for clients.

The U.S. ETF market faces a structural transformation as brokerage firms seek to recover revenue lost through commission-free trading by charging distribution fees from ETF managers. The $13.5 trillion market, which has grown substantially through investor preference for low-cost, transparent investment vehicles, is adapting to a post-commission environment that has compressed traditional revenue streams. J.P. Morgan’s analysis indicates fees targeting 10-20% of expense ratios could generate $2-4 billion annually in new industry costs [1].

Large managers including BlackRock and Vanguard possess structural advantages to navigate this transition, while mid-sized providers face disproportionate competitive pressure that may accelerate market consolidation [1]. The timing reflects convergence of revenue replacement needs, asset migration pressures from mutual funds to ETFs, and anticipation of regulatory changes facilitating further conversion activity. Implementation will likely be gradual and differentiated based on manager scale and relationship strength, with significant implications for competitive dynamics, investor costs, and industry structure over the one-to-five-year horizon.

The transformation requires careful attention from industry participants regarding distribution relationships, cost structures, and competitive positioning. Total cost of ownership assessments should look beyond expense ratios to encompass all costs of ETF ownership, while monitoring expense ratio changes as managers adapt to new cost structures [3].

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[1] Reuters - “US brokers may charge fee from ETF managers as commission-free trading takes a toll”
URL: https://www.reuters.com/business/us-brokers-may-charge-fee-etf-managers-commission-free-trading-takes-toll-2026-02-03/
Published: February 3, 2026

[2] AInvest - “WisdomTree’s AUM Surge: A Conviction Buy for the ETF Structural Tailwind”
URL: https://www.ainvest.com/news/wisdomtree-aum-surge-conviction-buy-etf-structural-tailwind-2601/
Accessed: February 2026

[3] Financer - “ETF Fees in 2025: Expense Ratios, Spreads & Broker Costs”
URL: https://financer.com/invest/etf-fees
Accessed: February 2026

[4] BrokerChooser - “Best Brokers for Free Stock Trading in 2026”
URL: https://brokerchooser.com/best-brokers/best-brokers-for-free-stock-trading
Accessed: February 2026