Fees continued to decline in 2022, finds a new Morningstar study that analyzes costs of U.S. funds.
According to the research, the asset-weighted average expense ratio of U.S. funds fell from 0.40% in 2021 to 0.37% in 2022, for the second-largest year-over-year decline since 1994. The findings show that asset-weighted average fees continue to drop, at currently less than half of its previous 0.91% figure in 2002.
As a result, Morningstar estimates that investors saved nearly $9.8 billion in fund expenses last year.
Morningstar credits several factors for the sink in fees, including investors who now favor lower-cost funds, market competition among asset managers to cut fees, and a shift toward fee-based financial advisors with semibundled or unbundled share classes.
“We saw substantial assets wiped from expensive funds in 2022 as investors poured their money into lower-cost funds to minimize investment costs,” said Bryan Armour, Morningstar’s director of passive strategies research, in a statement. “Asset managers have responded to this trend by cutting fees to vie for market share, and the end result is a win for investors.”
Specifically, the asset-weighted average expense ratio for active funds fell to 0.59% in 2022 from 0.61% in 2021, driven mainly by large net outflows from expensive funds and share classes, Morningstar states in its report.
Asset-weighted average expense ratios for passive funds dropped 0.12% in 2022 from 0.13% a year earlier, and the equal-weighted average expense ratio—which indicates what funds charge regardless of where assets are held—fell to 0.95% in 2022 from 0.96% in 2021.
Active funds’ equal-weighted fees declined to 1.02% from 1.03%, while the equal-weighted average fee among passive funds dropped to 0.54% from 0.55%.
The Morningstar study also compares investor fees in sustainable funds versus conventional investments, finding that those who invest in the former are paying a “greenium” relative to investors in the latter.
Investors who allocated dollars to sustainable funds had a higher asset-weighted average expense ratio, at 0.50% at the end of 2022 versus 0.37% compared to traditional peers.
However, Morningstar’s report makes a note that sustainable fund fees have been falling on both an equal- and asset-weighted basis. “Over the past decade, the average fee charged by sustainable funds has fallen 35%, while the average fee paid by investors in these funds has dropped 48%,” wrote Morningstar. “This has been driven in large part by the introduction of a large number of low-fee sustainable index mutual funds and ETFs to the menu, many of which have gained favor with investors.”
Finally, among the largest asset managers, Vanguard still claims the lowest asset-weighted average expense ratio among asset managers, which was 0.08% in 2022 compared to 0.10% in 2017. Vanguard was followed by State Street Global Advisors (0.15%), iShares (0.17%), and Dimensional Fund Advisors (0.24%).
Additional findings from Morningstar’s 2022 U.S. Fund Fee Study can be found here.
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Amanda Umpierrez is the Managing Editor of 401(k) Specialist magazine. She is a financial services reporter with over six years of experience and a passion for telling stories and reporting news. Amanda received her degree in journalism and government and politics at St. John’s University. She is originally from Queens, New York, but now resides in Denver, Colorado with her partner. In her free time, Amanda enjoys running, cooking, and watching the latest drama show.