Investing in exchange traded funds is now cheaper than ever in an increasingly competitive fund industry.
According to Morningstar’s annual U.S. fund fee study, fund fees are now half as much as they were two decades ago, with the asset-weighted average expense ratio of all U.S. open-end mutual funds and exchange-traded funds down to 0.45% in 2019 from 0.87% in 1999, Barron’s reports.
In 2019, the average fee ratio dipped 3 percentage points, helping investors save $5.6 billion in fund expenses, as increased competition across the industry from passive, index-based ETFs helped drag down costs.
According to XTF data, there are 2,320 U.S.-listed ETFs with an average 0.55% expense ratio. Looking at the breakdown of investment philosophies, passively managed or traditional index-based ETFs have an average 0.54% expense ratio, enhanced or smart beta ETFs have an average 0.53% expense ratio, and actively managed ETFs have an average 0.65% expense ratio.
Investors have also been investing with their wallets in mind, steering toward cheaper fund products. Specifically, the cheapest 20% of funds enjoyed net inflows of $581 billion in 2019 where 70% of the money went into passive funds and 30% went to active ones. Meanwhile, the most expensive 80% of funds have suffered outflows for five consecutive years, losing $224 billion in outflows over 2019.
The shift toward fee-based financial advisory businesses may have also contributed to this shift in investment habits.
“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,” Ben Johnson, Morningstar’s director of ETF and Passive Strategies Research, said in the report.
Johnson added that fees are a reliable predictor of future returns since low-cost funds typically have a greater chance of surviving and outperforming more expensive competitors.
Furthermore, a prolonged bull market has also made it harder for stock pickers to generate alpha.
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