The latest installment of Morningstar’s annual fund fee study found that the average expense ratio paid by fund investors is half of what it was two decades ago, and fees fell 27% over the past decade.
Between 2000 and 2020, the asset-weighted average fee fell to 0.41% from 0.93%. Investors have saved billions as a result.
Much of the decline documented in the asset-weighted fees paid by investors can be attributed to the fact that they’ve been allocating more of their investment dollars to low-cost index mutual funds and ETFs and that those same funds have been slashing their expense ratios.
“The fact that fees have been reduced to either nothing or next to nothing among broad-based index funds is only natural,” Ben Johnson, Morningstar’s director of ETF and passive strategies research, said in a statement. “Given these funds’ commodity-like nature, it seems inevitable that their prices would be pushed down to the marginal cost of managing them and that assets would consolidate in the hands of a few large-scale manufacturers.”
Key takeaways
- The average expense ratio fell to 0.41% in 2020 from 0.44% in 2019. As a result, we estimate investors saved nearly $6.2 billion in fund expenses last year.
- The average expense ratio for active funds fell to 0.62% in 2020 from 0.65% in 2019, driven mainly by large net outflows from expensive funds and share classes and, to a lesser extent, inflows to cheaper ones.
- The average expense ratio for passive funds fell to 0.12% in 2020 from 0.13% in 2019, thanks to steady flows into the lowest-cost funds.
- Low-cost funds generally have greater odds of surviving and outperforming their more expensive peers. In 2020, the cheapest 20% of funds saw net inflows of $445 billion, with the remainder suffering outflows of $293 billion. The cheapest 5% of funds alone received $412 billion of inflows.
- The evolution of the economics of the advice business is shaping flows and fees. Bundled share classes have been in outflows for the past 11 years while semi-bundled and unbundled share classes have seen steady inflows.
- Although its competition continues to gain ground, Vanguard still claims the lowest asset-weighted average expense ratio among asset managers, which was 0.09% in 2020.
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.