Expense ratios are a matter of concern when investing mutual funds and exchange traded funds (ETFs); the cheaper, the less it erodes your returns over time. But how much are investors handing over?

In a report by Lipper Inc., mutual fund expense ratios declined from 0.748% in 2007 to 0.712% in 2008, reports Sue Asci for Investment News. This amounted to $3 billion less than investors would have paid compared with 2007’s expense ratios.

Asset-weighted average total expense ratio for fixed-income funds also dropped to 0.455% in 2008 from 0.481% in 2007. But asset-weighted average total expense ratio for equity funds increased to 0.94% in 2008 from 0.937% in 2007.

On the other hand, ETFs had an average expense of 0.262% in 2008 compared to 0.263% in 2007. Index fund expense ratios are likely to remain constant in 2009 while expense ratios for many actively managed mutual funds are expected to increase in 2009.

Mutual fund expense ratios are coming in lower but are these lower expense ratios enough? They can’t go too low, otherwise how would they pay their managers? No matter what, ETFs are still significantly cheaper on average, but it’s nice to see the low-fee competition heating up.

Calculate the impact fees have on your returns here.

Tags: Mutual Funds