Management fees for the mutual fund and exchange traded fund industries have been on the decline as greater competition and rising popularity of index-based strategies cause providers to slash costs to remain competitive.
According to Morningstar data, the average expense ratio for funds in 2017 when weighted for the amount the funds have in assets dipped to 0.52%, or a decline of 8% from the 2016 average, reports Ryan Vlastelica for MarketWatch.
“This is the largest year-over-year decline we have recorded since we began tracking the trend in asset-weighted average fees in 2000,” Patricia Oey, a senior fund analyst at Morningstar, said. “Consequently, we estimate that investors saved roughly $4 billion in fund expenses last year.”
The slow downward slide in fund fees has been an ongoing trend. According to the Investment Company Institute, expense ratios for U.S. equity ETFs declined by nearly a third between 2009 and 2016, dropping 32% to 23 basis points on average from 34 basis points over the period.
Morgan Stanley has also argued that fees could fall another 10% to 15% over the years ahead, fueling speculation that some broad index-based funds may even charge a zero management fee.
The cheaper fees may be a response to the increased popularity of passive funds, which just try to passively reflect the performance of an underlying index like the S&P 500. The passive nature does not require too much hand holding, compared to an actively managed fund where components are selected at the discretion of a manager or trade team.
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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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