Managed fund fees have fallen by more than half over the first two decades of this century – in the US at least, according to the latest annual Morningstar analysis.
“In 2021, the asset-weighted average expense ratio across all mutual funds and exchange-traded funds (not including money market funds and funds of funds) was 0.40%,” the Morningstar report notes. “This is less than half of what investors paid in fund fees, on average, in 2001.”
The researcher attributes the falling fund fees to investors flocking to low-cost funds (especially passive varieties) as well as commercial pressures pushing all investment managers to cut prices.
Bryan Armour, Morningstar director of passive strategies research for North America, said in a statement: “Investors are also increasingly aware of the importance of minimizing investment costs, which we expect to continue in this down market.”
But the Morningstar study also suggests the overall costs of investing might not have shrunk quite as much with some previously in-fund financial advice expenses now redistributed outside of products.
“Changes in the economics of advice have also played a critical 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,” the report says. “Investors employing a fee-based advisor may not be pocketing the difference from lower fund fees but redirecting those dollars to cover the price of advice.”
Nonetheless, the Morningstar data shows even the modest .02 per cent decrease in total fees (as measured on an asset-weighted basis) recorded in 2021 compared to the previous year would in theory have left investors almost US$7 billion better-off.
Investors in a typical 60/40 balanced fund would see those fee-reductions compound to US$10.3 billion by 2032, the study says, assuming annual returns of 4.1 per cent over the 10-year period.
“These savings have disproportionately accrued to investors in passive funds,” Morningstar says. “The asset-weighted fund fee across all passive funds has declined 66% since 1990, landing at 0.12% in 2021. Meanwhile, the asset-weighted fee paid by investors in active funds stood at 0.60% in 2021—a 34% decline over the same period.”
The 20 per cent of lowest-cost US funds garnered over US$1 trillion of net inflows last year with the cheapest 5 per cent accounting for US$648 billion. By contrast the remaining 80 per cent of US funds in the Morningstar database pulled in just US$57 billion of net flows – representing an achievement, however, as the first positive annual inflows into the more expensive end of the market since 2013.
And the race to the bottom on index fund fees continues to accelerate, the report says.
“The rate of change in what investors pay, on average, for passive funds has been much greater than the rate at which these funds’ fees have fallen. This reflects how acutely price-sensitive investors have become in this segment of the market. Broad-based market-cap-weighted index funds have become a commodity product,” the study says. “Differences in fees (if they even charge a fee) have become razor-thin; high-fidelity index-tracking performance is table stakes. Market beta has become, for all intents and purposes, a public good.”
However, investors appear happy to pay more for funds tagged as environmental, social and governance (ESG) or sustainable.
“Investors in sustainable funds are paying a ‘greenium’ relative to investors in conventional funds. This is evidenced by these funds’ higher asset-weighted average expense ratio, which stood at 0.55% at the end of 2021 versus 0.39% for their traditional peers,” Morningstar says. “That said, this ‘greenium’ has been shrinking steadily in recent years and reached its lowest level on record in 2021.”
Despite evidence of some fees holding up in niche areas such as sustainable products, and evidence of renewed – if still weak – interest in active strategies, the report says fund costs are likely to drop further.
“The downward pressure on fund fees is unlikely to abate,” the study says. “Competition has driven fees to zero in the case of a handful of index mutual funds and ETFs. The same forces that spawned these zero-fee funds have begun to spread to other corners of the fund market, areas where there is still ample room for fees to fall further.”