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The amount investors pay to own funds reached a record low in 2018, according to Morningstar’s most recent “U.S. Fund Fee Study.” The average asset-weighted expense ratio for U.S. domiciled mutual funds and ETFs dropped 6 percent to 0.48 percent in 2018, down from 0.51 percent in 2017.
Average asset-weighted expense ratios are a reflection of the fees and expenses paid by the average fund investor.
According to the report, this is the second-largest year-over-year percentage decline in fund fees recorded since 2000, the inaugural year of the study. Morningstar estimates that the lower fees saved investors approximately $5.5 billion in fund expenses.
The average asset-weighted fund fee has declined every year of the study—in 2000, the average fee paid by an investor was 0.93 percent. Today, investors are paying roughly half as much as they did in 2000, 40 percent less than they paid a decade ago and 26 percent less than they did five years ago.
The report’s authors attribute most of the decline in average asset-weighted fund fees to massive asset flows away from high-cost actively managed funds and into low-cost passively indexed funds. The proliferation of low-cost passive strategies has also helped to lower the equal-weighted average expense ratio, which is a measure of the fees charged by the average fund. In 2018, the equal-weighted average expense ratio dropped to 1.05 percent from 1.10 percent in 2017.
According to Morningstar, investors in active funds are paying approximately 4.5 times the fees paid by passive fund investors on each dollar, the widest disparity in fund fees since the inception of the study. The average asset-weighted expense ratio of passive funds was 0.15 percent in 2018, versus 0.25 percent a decade ago. The average expense ratio for active funds was 0.67 percent in 2018, versus 0.86 percent in 2018.
Morningstar has also noted that funds with lower fees are experiencing greater inflows than their more expensive peers. In 2018, funds whose fees rank in the bottom quintile of their Morningstar category saw $605 billion worth of inflows, with approximately 75 percent of those inflows going to passively managed funds. In the meantime, the remaining top four quintiles of funds sorted by costs in each category saw $478 billion in outflows during 2018.
In an accompanying blog post, Ben Johnson, Morningstar’s director of passive funds research, explained four factors contributing to the continued fee compression in funds:
- Greater awareness on the part of investors seeking to minimize their investment costs;
- Intensifying competition that leads asset managers to reduce their fees;
- An evolving advice model that has stimulated demand for lower-cost funds; and
- The unbundling of fees as institutions and advisors abandon costlier share classes.
Unbundling has been particularly influential as advisors have moved away from transaction-driven services and toward fee-driven fiduciary business models. In 2018, more than $400 billion in assets flowed into unbundled share classes, while approximately $250 billion flowed out of bundled share classes.