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Furthermore, passive index funds are much cheaper to operate, so the end user costs will naturally be lower.
According to Morningstar data, active funds had an average 0.72% fee, compared to the 0.15% average fee tacked onto passive funds. The fees are also lower when compared year-over-year, with active funds charging 0.77% on average in 2017 while passive funds showed a 0.18% expense ratio.
Low fees have also been a major contributing factor in investor asset flows. Over the past year, $159 billion was funneled into passive U.S. stock funds while $205.6 billion was yanked out of actively managed strategies, according to Morningstar data. Looking at the passive strategies, the cheapest 20% of funds have enjoyed the lion’s share of inflows.
“Investors’ move to lower-cost active and passive funds has been a key driver of falling costs,” Oey added. “In 2017, fee reductions by the asset-management industry for active funds had a larger impact on investors’ falling fund expenses, relative to recent years.”
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