On average, investors paid less in fund expenses in 2016 than ever before, as assets continue to flow into lower-cost index mutual funds, ETFs and institutional share classes, according to Morningstar’s annual fund fee study.
The study evaluates the cost of US mutual funds and exchange-traded funds (ETFs) in Morningstar’s database.
“Investors have been voting with their feet for low-cost funds. In particular, there has been strong demand for passive funds, the average cost of which is 0.17 per cent, much lower than the average 0.75 per cent for active funds. We see the trend toward low-cost funds as positive, since mutual fund costs have a dollar-for-dollar impact on the returns investors ultimately realise,” says Patricia Oey, senior manager research analyst for Morningstar.
“Flows out of active funds reached a cumulative USD586 billion in 2015 and 2016. However, the outflows were all from expensive active funds. Low-cost active funds saw positive, albeit small, inflows over the same time period.”
The study reveals that the asset-weighted average net expense ratio of all US funds was 0.57 per cent in 2016, down from 0.61 per cent in 2015 and 0.65 per cent three years ago. The decline was primarily driven by asset flows into lower-priced vehicles, namely, passive funds and less-expensive share classes.
In addition, in 2016, the asset-weighted average expense ratio was 0.17 per cent for passive funds, compared with 0.75 per cent for active funds. With such a large fee gap, rising flows into passive funds contributed to industry-wide falling asset-weighted average expense ratios.
Active funds, meanwhile, saw a cumulative USD586 billion in outflows in 2015 and 2016. However, the outflows were all from expensive active funds. Over the same time period, low-cost active funds saw positive, but small, inflows of USD41 billion.
US equity funds have seen the biggest migration to passive from active funds, with the former drawing in USD458 billion of inflows and the latter experiencing USD525 billion of outflows over the past three years. During the same time period, US equity funds’ asset-weighted average fees fell a cumulative 17 per cent to 0.50 per cent, the largest change of any asset class.
ETFs saw a sizeable decline in asset-weighted average fees from 0.29 per cent in 2013 to 0.24 per cent in 2016.
Vanguard has the lowest asset-weighted average expense ratio at 0.11 per cent, followed by SPDR State Street Global Advisors at 0.19 per cent and Dimensional Fund Advisors at 0.36 per cent. During the past three years, Vanguard’s asset-weighted average fee declined 21 per cent, the most significant decline among the 10 largest fund providers.
Large inflows to Vanguard’s low-cost passive funds had a notable impact on the industry’s declining asset-weighted average expenses. From 2013 to 2016, the industry-wide asset-weighted average expense ratio fell from 0.65 per cent to 0.57 per cent. Excluding Vanguard, the expense ratio decline would have been less, from 0.69 per cent to 0.62 per cent.