Fee compression in ETFs and mutual funds may be accelerating.
The cost of U.S. mutual funds and ETFs dropped by 8 percent in 2017, according to Morningstar’s annual fund fee study. It was the largest year-over-year decline in fund fees recorded by the Chicago-based investment researcher.
While the actual percentage point increase was small, investors enjoyed significant savings in 2017. According to Morningstar, the average cost of U.S. mutual funds and ETFs decreased to 0.52 percent in 2017, down from 0.56 percent in 2016. Yet these four basis points accounted for more than $4 billion in fund fees saved in 2017.
In the past three years, average fund fees have declined 11 basis points from 0.63 percent in 2015 to 0.52 percent in 2017.
The largest contributing cause for the record-breaking decline was investor preference, said Morningstar, as assets flowed from expensive funds to lower-cost funds.
"This trend toward lower-cost funds should have an exponentially positive impact on investors' returns in the future because costs compound over time and eat into investors' nest eggs," said Patricia Oey, senior manager research analyst for Morningstar, in a release comment. "Our data shows that the cheapest 20 percent of funds raked in nearly $1 trillion last year while the rest of the industry saw net outflows of approximately $250 billion. The message investors are sending is crystal clear—cost counts."
The average fees paid by investors, measured by asset-weighted average expense ratio, fell to 0.15 percent in 2017 from 0.16 percent for passive funds in 2016, a seven percent decline. Simultaneously, the asset-weighted average expense ratio for active funds dropped to 0.72 percent from 0.75 percent in 2016, a 4 percent decline and the largest annual decrease for active products in more than a decade.
The average fees charged by asset managers, measured by equal-weighted average expense ratios, fell to 0.30 percent in 2017 from 0.31 percent in 2016 for passive funds, a 3 percent decline. Among active funds, the equal-weighted average expense ratio fell to 0.85 percent in 2017 from 0.87 percent in 2016, a 2 percent decline. Morningstar attributes much of this decline to aggressive fee reductions touched off by Vanguard and followed by BlackRock, Schwab and Fidelity. In active products, a higher proportion of funds experienced fee reductions in 2017 compared to 2016, and fewer funds raised fees.
Morningstar attributes some of the decline in both active and passive products to asset flows away from more expensive funds towards the lowest-cost funds, and to fee reductions in some widely held, broad index funds. For example, a “price war” between several providers of passive index funds, including Schwab, BlackRock and Vanguard, has led to expense ratios as low as 3 basis points for some U.S. ETFs and mutual funds.
In 2017 the cheapest 20 percent of funds, ranked by fees by category group, took in $949 billion in new assets, with most of that going to passive funds. The remainder of the industry experienced $251 billion in net outflows. In 2017, 83 percent of fund assets resided in mutual funds and ETFs in the cheapest 40 percent of funds.