In the past 20 years, the expense of all funds has halved, according to new research by Morningstar, reported in Financial Times. Passive funds are now at some of their lowest expense ratios, and the pressure is mounting for actively managed funds to follow suit.
The average expense ratio, which takes into account management fees and the costs of fund ownership, was 0.41% in 2020, down from 0.93% in 2000. This equates to a $6.3 billion savings for investors in fees last year alone.
Passive fund management fees for some of the broadest funds are close to or at zero, and the rate at which fees have fallen for passive funds is the lowest it has been in five years. Actively managed funds are picking up in the price reduction rate as pressure to compete with passive funds increases; in 2019, the annual expense ratio was 32%, growing to 37% in 2020.
“I think one of the things that continues to stand out is the relentlessness of the move downwards [in fees] and how acutely focused investors have been on fund costs,” said Ben Johnson, author of the Morningstar report and director of global ETFs and passive strategies research at Morningstar. “From an investor’s perspective there is lots to celebrate. They’ve been the ones with their hands on the steering wheel.”
It’s an environment where pressure from investors is creating greater competition as active fund managers follow in the footsteps of passive funds in reducing fees. However, it isn’t always an easy process for active management firms.
“Worldwide, fee compression is the norm, marking a revolution by evolutionary means,” said Amin Rajan, chief executive of Create Research, a consultancy. “While mega indexers have been able to pass on the benefits of their super scale via lower fees, active managers are forced to reboot their business models to deliver better performance at lower costs.”
Investment firm T. Rowe Price offers a suite of actively managed ETFs with competitive expense ratios from 0.34% to 0.57%. The funds’ reaches range from investing across the industries within the S&P 500 led by a team of equity analysts with the T. Rowe Price U.S. Equity Research ETF (TSPA) that has an expense ratio of 0.34%, to capturing dividends with the T. Rowe Price Dividend Growth ETF (TDVG) with a 0.50% expense ratio, and beyond.
T. Rowe Price has been in the investing business for over 80 years by conducting field research firsthand with companies, utilizing risk management, and employing a bevy of experienced portfolio managers carrying an average of 22 years of experience.
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