“Before costs, beating the market is a zero-sum game. After costs, it is a loser’s game.” That’s how investing legend John Bogle described the challenge facing investors when they had to deal with fees. Thankfully, the fees paid by fund investors continue to fall.
The average asset-weighted fees charged by exchange-traded fund and mutual funds hit fresh record lows in 2022, falling to 0.37% from 0.40% in 2021. As a result, Morningstar estimates fund investors saved $9.8 billion. (An asset-weighted fee or expense ratio measures how much is invested in each fund and weights larger funds more heavily in the calculation.)
The findings coincide with Morningstar’s 2022 “U.S. Fund Fee Study,” which examined the trend in costs for both ETF and mutual fund products.
Over the past 20 years, the average expense ratio paid by fund investors has dramatically declined. In 2022, the asset-weighted average expense ratio of U.S. open-end mutual funds and ETFs was 0.37%, compared with 0.91% in 2002.
The biggest beneficiaries of lower fund fees, besides happy shareholders, have been the investment firms with the lowest fees.
In 2022, funds with the least expensive quintile of funds vacuumed in over $1.1 trillion more than the remaining 80% of funds, as the cheapest 20% saw net inflows of $394 billion. Meanwhile, the remaining 80% of funds experienced $734 billion in outflows. It’s a telltale sign fund investors are voting with their money in favor of cheaper funds.
Actively managed funds with competitive costs have benefited from fee cuts, too.
The expense ratio for active funds fell to 0.59% in 2022 from 0.61% in 2021, a decline driven by the sizable outflows from expensive funds. For passive funds, the asset ratio dipped to 0.12% in 2022 from 0.13% a year earlier.
Despite the fact that the costs are already at rock bottom, the fee wars in the ETF industry continue.
On August 1, State Street Global Advisors slashed the total expense ratios on 10 of its SPDR ETFs.
Among those that saw fee cuts were the SPDR Portfolio S&P 500 ETF (SPLG), the SPDR Portfolio Developed World ex-US ETF (SPDW) and the SPDR Portfolio High Yield Bond ETF (SPHY).
In total, the cuts affected about $77 billion in assets under management and made the SPDR Portfolio ETF suite the lowest cost, or among the lowest cost, ETF offerings in their respective peer groups.
Among U.S. asset managers, Vanguard still claims the spot for lowest asset-weighted average of 0.08% in 2022, according to Morningstar.
The evolution of commission-free trading is another factor that’s led to significant cost savings for ETF investors.
In 2019, Charles Schwab eliminated brokerage commissions on U.S. stocks and ETFs. The unexpected move sent shock waves throughout the financial services industry. Other firms like Fidelity, Interactive Brokers and TD Ameritrade responded by slashing commissions to zero.
Although ETF investors must still deal with frictional trading costs like bid/ask spreads whenever they buy or sell funds, they no longer need to worry about incurring brokerage commissions on major brokerage platforms.
So what’s the message for advisory clients?
Advisors can reassure them of two things: 1) Lower fund costs are benefiting their bottom lines; and 2) today’s fund industry is much more shareholder friendly than it was in the past.