A recent hyper-focus on fees from plan sponsors, participants and lawyers belies the fact that expense ratios, at least, have been declining for 20 years.
This includes equity, hybrid, and bond mutual funds—including both actively managed and index mutual funds in these asset classes—according to a new research report from the Investment Company Institute (ICI).
In 2017, investors paid, on average, 43 percent less for equity mutual fund expense ratios than in 1996, ICI reports.
The trend reflects investor interest in lower-cost funds, as well as industry competition and economies of scale driven by asset growth.
Investors in target-date mutual funds, in particular, which usually invest through a fund-of-funds structure, paid an average expense ratio of 0.44 percent in 2017, compared with 0.50 percent in 2016 and 0.67 percent in 2008.
A fund’s expense ratio is the total annual expenses expressed as a percentage of its total net assets.
“This research shows an overall decline in the expense ratios of actively managed and index mutual funds for more than two decades,” Shelly Antoniewicz, ICI’s senior director of industry and financial analysis, said in a statement. “Industry competition continues to push down the expense ratios of mutual funds and exchange-traded funds, as the fund industry meets cost-conscious investors’ demand for lower cost funds. This demand is driven by a major shift in the industry’s business model, as increasingly investors pay directly for investment advice and assistance from investment professionals, rather than through fund fees.”
For the first time, the report, “Trends in the Expenses and Fees of Funds, 2017,” examines the net new cash flow to mutual funds and net share issuance of exchange-traded funds (ETFs) by expense ratio ranges, for both actively managed and index funds.
In 2017, inflows to these funds were concentrated in relatively low-cost funds.
Inflows to actively managed and index funds are concentrated in lower-cost funds
Not surprising, fund investors showed strong demand for lower-cost funds, in both actively managed and index funds, in 2017.
ICI reports that the 5 percent of actively managed domestic equity funds with the lowest expense ratios received a total of $3 billion in inflows.
For index domestic equity funds, the report finds that more than 90 percent of net inflows were concentrated in funds with expense ratios below the 25th percentile.
Although overall flows between actively managed and index domestic equity funds contrasted starkly in 2017, it is important to note that investors continued to purchase, on net, actively managed domestic equity funds with the lowest expense ratios.
Actively managed mutual fund expense ratios continued long decline in 2017
In 2017, the average expense ratio of actively managed equity mutual funds fell to 0.78 percent, from 0.82 percent in 2016, and the average expense ratio for actively managed bond mutual funds fell to 0.55 percent, from 0.58 percent.
Over the same period, the average expense ratios for index equity mutual funds and for index bond mutual funds remained unchanged at 0.09 percent and 0.07 percent, respectively.
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.