Investors are cheap—at least that what Morningstar found in its latest study of the always controversial low-cost index funds fees.
The Chicago-based research firm examined trends in expense ratios and investor preferences over the past 10 years through 2014. It reports in “2015 Fee Study: Investors Are Driving Expense Ratios Down,” that investors are paying less for fund management, as most fund flows have gone into lower-cost funds, while increased assets under management are pushing overall industry fee revenue higher.
Key findings of the study include:
- Investors are actively seeking lower fund management fees. During the past 10 years, 95 percent of fund flows have gone into funds in the lowest-cost quintile.
- The asset-weighted expense ratio across all funds was 0.64 percent in 2014, down slightly from 0.65 percent in 2013 and significantly lower than 0.76 percent five years ago.
- Investors continue to move away from load-based share classes to those that do not charge loads, which also tend to have lower expense ratios.
- Firms that offer lineups with lower asset-weighted expense ratios—most notably Vanguard—have gained market share during the past five years.
- While 63 percent of fund share classes and exchange-traded products examined by Morningstar reduced their expense ratios during the past five years, just 24 percent saw fees decrease more than 10 percent. Meanwhile, 21 percent of the share classes examined increased their fees.
- Industry assets under management rose 143 percent over the past 10 years, pushing estimated industry fee revenue to an all-time high of $88 billion in 2014, up 78 percent from $50 billion 10 years ago, while the asset-weighted expense ratio declined 27 percent.
“The good news for investors is that expense ratios are falling,” the report concludes. “However, investors deserve most of the credit for seeking low-cost funds because individual funds’ expense ratios and the advisor (management) component in particular have not moved much.”
See Also:
- 3 Investment Trends in 401ks That Offer a Few Surprises
- First Ever Fossil-Free Index Fund Launches in U.S.
- Zero Fee Funds Have Arrived
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.