Fund Fees Fall Again, Marking Two Decades of Decreases

An annual fee study evaluating trends in the cost of U.S. open-end mutual funds and exchange-traded funds (ETFs) finds that the asset-weighted average expense ratio dropped to 0.45% in 2019.

 

Morningstar’s 2019 U.S. Fund Fee Study released June 8 found that the asset-weighted average expense ratio of all U.S. open-end funds and ETFs has been nearly cut in half over the past two decades, from 0.87% in 1999 to 0.45% in 2019. 

Across U.S. funds, the asset-weighted average expense ratio dropped to 0.45% in 2019, down from 0.48% in 2018. This 6% year-over-year decline is the third largest recorded dating back to 1991, the firm observes. 

 

For active funds, the asset-weighted average expense ratio 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, due to steady flows into the lowest-cost funds and fee cuts for widely held broad market index funds. 

 

Most of the flows into these low-cost funds has gone to index mutual funds and exchange-traded funds, which has been driven by a variety of factors, the report notes, including shifting investor preferences, the changes in the financial advice industry and the ascendance of TDFs as the default investment option in retirement plans.

 

Overall, investors saved nearly $6 billion in fund fees in 2019, the study found. “Investors are increasingly aware of the importance of minimizing investment costs, which has led them towards lower-cost funds and share classes,” says Ben Johnson, Morningstar’s director of ETF and passive strategies research, and coauthor of the report. “There has also been intensifying competition among asset managers, who have cut fees to appeal to cost-conscious investors.” 

 

As for changes in the financial advice industry, Johnson explains that as advisors move away from transaction-driven compensation models and toward fee-based ones, fund share classes that have fewer embedded advice or distribution costs are seeing more flows. Using Morningstar’s service fee arrangement attribute—which classifies funds based on their service-fee arrangements between asset managers, distributors, advisors and investors—the report notes that bundled share classes have been in outflows for the past decade while semi-bundled and unbundled share classes have seen steady inflows. 

 

However, the lowering of fund costs doesn’t necessarily mean that the total costs borne by investors have followed in lockstep, Johnson further observes, nothing that while some costs have diminished, others have taken new shape. For example, the cost of advice has increasingly been stripped out of funds’ fees and resurfaced in the form of advice fees, he writes. 

 

 

In 2019, the cheapest 20% of funds saw net inflows of $581 billion, with the remainder experiencing outflows of $224 billion. The cheapest 10% of funds alone received $526 billion of inflows, Morningstar notes. 

 

Meanwhile, 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 for how low fund fees can go, Johnson writes that they “expect that the bar will go even lower, as the downward pressure on fund expenses is unlikely to abate.” He notes that competition has driven fees to zero in the case of a handful of index mutual funds and ETFs, further observing that the same forces that produced these zero-fee funds have begun to spread to other corners of the fund market.