U.S. brokerage firms and custodians may soon start charging distribution fees to ETF managers, which could significantly change the cost landscape in the $13.5 trillion U.S. ETF industry, according to a recent note by J.P. Morgan.

Reuters reports that the development comes after more than a decade of zero-commission trading, which has significantly disrupted the traditional revenue streams of brokerage firms. Firms like Robinhood Markets Inc (HOOD  ) have attracted millions of retail investors with zero trading commissions and user-friendly mobile applications, causing a significant outflow of trading volumes from traditional firms.

Zero-Commission Trading Hits Broker Revenue

In a bid to stay competitive in the market, traditional firms like Fidelity National Financial Inc (FNF  ) and Charles Schwab Corporation (SCHW  ) have reduced their ETF trading commissions to zero. While this move helped them retain clients, it significantly impacted their bottom lines, particularly as investors transferred their funds in large numbers from higher-cost mutual funds to lower-cost ETFs.

J.P. Morgan explained that brokers and custodians may turn to distribution fees charged to ETF issuers to compensate for lost revenue due to both zero-commission trading and the rapidly increasing trend of moving away from mutual funds.

The bank estimates that the current U.S. ETF management fee pool is around $21 billion. If intermediaries capture 10% to 20% of ETF expense ratios, the industry would incur an additional $2 billion to $4 billion in distribution costs each year.

J.P.Morgan further explained that possible changes in SEC rules may expedite tax-free swaps of mutual funds into ETFs.

Big Issuers Better Positioned Than Mid-Sized Firms

The impact of distribution fees is expected to be uneven. Large issuers such as BlackRock Inc (BLK  ) and Vanguard, which run massive, low-cost products like the iShares Core S&P 500 ETF (IVV  ) and the Vanguard Total Stock Market ETF (VTI  ), may be better positioned to negotiate or absorb the added costs due to their scale and market dominance.

Mid-sized managers, however, could face greater pressure. Invesco Ltd (IVZ  ), which operates the Invesco QQQ Trust (QQQ  ), as well as Franklin and Janus, may see margins tighten, particularly for actively managed or thematic ETFs where expense ratios are already under scrutiny.

What This Means For ETF Investors

• Expense ratios may stop falling for some ETFs
• Niche and active ETFs could feel pressure first
• Large, core index ETFs may remain relatively insulated