Research behemoth Morningstar found the average mutual fund expense ratio dropped from 0.48% to 0.45% in 2019.
This seemingly small fraction is actually a 6% year-over-year decline, and the third-largest on record dating back to 1991, which saved investors nearly $6 billion in fund fees in 2019.
“Investors are increasingly aware of the importance of minimizing investment costs, which has led them towards lower-cost funds and share classes,” Ben Johnson, Morningstar’s director of ETF and passive strategies research, said in a statement. “There has also been intensifying competition among asset managers, who have cut fees to appeal to cost-conscious investors.
Another factor, according to Johnson, has been changes in the way financial advice is delivered and paid. As advisors move away from transaction-driven compensation models and toward fee-based models, fund share classes that have fewer embedded advice or distribution costs are seeing more flows.
Important findings
- The asset-weighted average expense ratio for active funds fell to 0.66% in 2019 from 0.68% in 2018. For passive funds, it fell to 0.13% in 2019 from 0.14% in 2018, thanks to steady flows into the lowest-cost funds and fee cuts for widely held broad market index funds.
- Investors favor low-cost funds, but recently have begun to reject more costly funds. In 2019, the cheapest 20% of funds saw net inflows of $581 billion, with the remainder suffering outflows of $224 billion. The cheapest 10% of funds alone received $526 billion of inflows.
- Cheap funds have become significantly cheaper, while expensive funds’ fees remain high. The dividing line between the cheapest 10% of funds and the rest has fallen 43% over the past 15 years, while the line between the most expensive 10% and the rest has come down just 19%.
- As compensation models have evolved in the advice business, fund share classes with fewer embedded advice or distribution costs are seeing more flows. Using Morningstar’s service fee arrangement attribute, bundled share classes have been in outflows for the past decade while semi-bundled and unbundled share classes have seen steady inflows.
- Strategic-beta funds remain an attractive alternative to higher-cost actively managed funds. In 2019, the asset-weighted average fee for strategic-beta funds was 0.20%, which was slightly higher than traditional index funds’ 0.12%, but significantly lower than active funds’ 0.66%.
- Investors have benefitted from a competitive landscape and an ever-wider menu of cheaper options. Although BlackRock/iShares, State Street Global Advisors, and others continue to gain ground, Vanguard still claims the lowest asset-weighted average expense ratio of 0.09% in 2019.
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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.
