Lawsuits aside, investors paid less on average in fund expenses in 2016 than ever before, as assets continue to flow into lower-cost index mutual funds, ETFs, and institutional share classes, Morningstar reported Tuesday.
“Investors have been voting with their feet for low-cost funds,” Patricia Oey, senior manager research analyst for Morningstar, said in a statement. “In particular, there has been strong demand for passive funds, the average cost of which is 0.17 percent, much lower than the average 0.75 percent for active funds.
The firm also sees the trend toward low-cost funds as positive, since mutual fund costs have a dollar-for-dollar impact on the returns investors ultimately realize.
“Flows out of active funds reached a cumulative $586 billion in 2015 and 2016,” Oey added. “However, the outflows were all from expensive active funds. Low-cost active funds saw positive, albeit small, inflows over the same time period.”
The asset-weighted average net expense ratio of all U.S. funds was 0.57 percent in 2016, down from 0.61 percent in 2015 and 0.65 percent three years ago. The decline was primarily driven by asset flows into lower-priced vehicles, namely, passive funds and less-expensive share classes.
In 2016, the asset-weighted average expense ratio was 0.17 percent for passive funds, compared with 0.75 percent for active funds. With such a large fee gap, rising flows into passive funds contributed to industry-wide falling asset-weighted average expense ratios.
Active funds saw a cumulative $586 billion in outflows in 2015 and 2016. However, the outflows were all from expensive active funds. Over the same time period, low-cost active funds saw positive, but small, inflows of $41 billion.
U.S. equity funds have seen the biggest migration to passive from active funds, with the former drawing in $458 billion of inflows and the latter experiencing $525 billion of outflows over the past three years. During the same time period, U.S. equity funds’ asset-weighted average fees fell a cumulative 17 percent to 0.50 percent, the largest change of any asset class.
ETFs saw a sizeable decline in asset-weighted average fees from 0.29 percent in 2013 to 0.24 percent in 2016.
Vanguard has the lowest asset-weighted average expense ratio at 0.11 percent, followed by SPDR State Street Global Advisors at 0.19 percent and Dimensional Fund Advisors at 0.36 percent. During the past three years, Vanguard’s asset-weighted average fee declined 21 percent, the most significant decline among the 10 largest fund providers.
Large inflows to Vanguard’s low-cost passive funds had a notable impact on the industry’s declining asset-weighted average expenses.
From 2013 to 2016, the industry-wide asset-weighted average expense ratio fell from 0.65 percent to 0.57 percent. Excluding Vanguard, the expense ratio decline would have been less, from 0.69 percent to 0.62 percent.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
