When markets are down, it’s bad. When expense ratios are down, it’s good.
Just how far the latter has fallen in the past two decades is detailed in a new report from the Investment Company Institute (ICI).
Titled “Trends in the Expenses and Fees of Funds, 2019,” it found that equity mutual fund expense ratios averaged 0.52% in 2019 compared with 1.04% in 1996—a 50% decrease.
Similarly, bond mutual fund expense ratios averaged 0.84% in 1996, falling to 0.48% in 2019.
“Investors’ increasing use of lower-cost funds and fund share classes has contributed to the trend of declining average expense ratios,” Shelly Antoniewicz, ICI’s senior director of industry and financial analysis, said in a statement. “As the fund industry continues to meet the demands and needs of cost-conscious investors, competition pushes down the expense ratios of mutual funds and exchange-traded funds.”
Expense ratios for active funds continued to decrease in 2019
ICI’s report shows that asset-weighted average expenses for both actively managed and index equity and bond mutual funds have fallen from their levels in 1996.
In 2019, the average for actively managed equity mutual funds was 0.74%, compared with 1.08% in 1996.
Similarly, the average for index equity mutual funds was 0.07% in 2019, compared with 0.27% in 1996.
This trend is fueled by investor interest in lower-cost actively managed and index equity mutual funds, as well as asset growth and the resulting economies of scale.
Actively managed and index bond mutual funds have also seen a decline over the same period. Between 1996 and 2019, the average for actively managed bond mutual funds fell from 0.84% to 0.56%.
The average for index bond mutual funds fell from 0.20% in 1996 to 0.07% in 2019 (see Figure 13 in the report).
Inflows to active and index funds go to lower-cost funds
Fund investors continued to favor lower-cost funds in 2019, according to the report.
For example, the report shows that only actively managed world equity funds with expense ratios among the lowest 5% saw inflows in 2019.
Among actively managed bond and hybrid funds, those with expense ratios in the lowest quartile saw inflows, which were most concentrated among funds with expense ratios in the lowest 5%.
Among index funds—including domestic equity funds, world equity funds, and bond and hybrid funds—those in the lowest quartile all received inflows.
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.
