The latest fees survey from Morningstar for the US ETF industry finds that the average expense ratio paid by fund investors is half of what it was two decades ago.
Between 1999 and 2019, the asset-weighted average fee fell to 0.45 per cent from 0.87 per cent. Investors have saved billions as a result, Morningstar says.
There are several factors that have driven fees lower according to the report. Investors are increasingly aware of the importance of minimising investment costs, which has led them to favour lower-cost funds. Intensifying competition among asset managers has resulted in many cutting fees to vie for market share. Changes in the economics of advice have also played a role. The move toward fee-based models of charging for financial advice has been a key driver of the shift toward lower-cost funds, share classes, and fund types – most notably exchange-traded funds.
Falling fees have saved investors an estimated USD5.8 billion in fund expenses last year, Morningstar says. The asset-weighted average expense ratio for active funds fell to 0.66 per cent in 2019 from 0.68 per cent in 2018, driven mainly by large net outflows from expensive funds and share classes and, to a lesser extent, inflows to cheaper ones.
The asset-weighted average expense ratio for passive funds fell to 0.13 per cent in 2019 from 0.14 per cent in 2018, thanks to steady flows into the lowest-cost funds and fee cuts for widely held broad market index funds, Morningstar says.
The equal-weighted average expense ratio – which indicates what funds charge irrespective of where assets are held – fell to 1.01 per cent in 2019 from 1.03 per cent in 2018. Active funds saw a slight decline, while the equal-weighted average rose slightly among passive funds.
In 2019, the cheapest 20 per cent of funds saw net inflows of USD581 billion, with the remainder suffering outflows of USD224 billion. The cheapest 10 per cent of funds alone received USD526 billion of inflows, according to Morningstar figures.
The dividing line between the cheapest 10 per cent of funds and the rest has fallen 43 per cent over the past 15 years, while the line between the most expensive 10 per cent and the rest has come down just 19 per cent.
The evolution of the economics of the advice business is shaping flows and fees, Morningstar says: “Looking through the lens of Morningstar’s service fee arrangement attribute, we can see that bundled share classes have been in outflows for the past 10 years while semibundled and unbundled share classes have seen steady inflows”.
Turning to strategic-beta funds, also known as smart beta, Morningstar states that they are an alternative to higher-cost actively managed funds. In 2019, the asset weighted average fee for strategic-beta funds was 0.20 per cent, which was slightly higher than traditional index funds’ fees of 0.12 per cent but significantly lower than active funds’ fees of 0.66 per cent.
Although its competition continues to gain ground, Vanguard still claims the lowest asset-weighted average expense ratio among asset managers, which was 0.09 per cent in 2019, Morningstar comments.
Investors paid lower fund expenses in 2019 than ever before, Morningstar says: “Our study of US open-end mutual funds and exchange-traded funds found the asset-weighted average expense ratio across funds was 0.45 per cent in 2019, a 6 per cent decline from 2018. This is the third-largest year-over-year decline we have recorded dating back to 1991.”
Compounding investors’ 2019 fund fee savings at a rate of 4.93 per cent over the next 10 years would equate to USD9.4 billion more in investors’ pockets come 2030, the firm says.