Asset manager competition and fee-based models keep slashing investor fees, according to independent research firm Morningstar. The group’s annual fund fee report, which evaluates trends in the cost of U.S. open-end mutual funds and exchange-traded funds, found that the asset-weighted average expense ratio of U.S. funds fell to 0.40% in 2021 from 0.42% in 2020. Here’s what you need to know about how much less it costs to invest in a mutual or exchange-traded fund than it used to cost.
A financial advisor can steer you towards the least expensive funds that match your goal, timeline and risk profile.
The Main Reason Fund Fees Are Heading South
Morningstar credits “acutely price-sensitive” retail investors with the savings. The firm said last year’s cost reduction was driven mainly by large net outflows from expensive funds and share classes and, to a lesser extent, inflows to cheaper ones. In 2021, the cheapest 20% of funds saw net inflows of $1.05 trillion, with the remaining 80% amassing $57 billion in inflows, the first year of collective inflows for pricier funds since 2013. The cheapest 5% of funds alone received $648 billion of inflows.
“Intensifying competition among asset managers and changes in the economics of advice are two factors driving fees lower,” said Bryan Armour, director of passive strategies research for North America. “Investors are also increasingly aware of the importance of minimizing investment costs, which we expect to continue in this down market.”
Retail investor choices also affected the cost of active funds. Strategic-beta funds are an alternative to higher-cost actively managed funds and last year the asset-weighted average fee for strategic-beta funds was 0.17%, which was slightly higher than the figure for traditional index funds (0.12%) but significantly lower than for active funds (0.60%).
Other Factors Tamping Down Fund Fees
There are two other causes of lower fund costs. The shift away from transaction-driven business models and toward fee-based ones has led advisors to recommend lower-cost funds to their clients to, in part, make more room for their own fees, which are often charged as a percentage of client assets under management.
Secondly, target-date funds have experienced significant growth as they are now the default investment option in many retirement plans. The majority of target-date fund assets are now in target-date series composed exclusively of low-cost index mutual funds.
Tallying the Gains
The primary beneficiaries of the trend have been passive fund investors. The asset-weighted fund fee across all passive funds has declined 66% since 1990, landing at 0.12% last year. However, the asset-weighted fee paid by investors in active funds stood at 0.60% in 2021, a respectable but more modest 34% decline over the same period.
Last year’s reduced fund fees saved investors an estimated $6.9 billion, not counting money market funds and funds of funds. Compounding investors’ 2021 fund fee savings at a rate of 4.1%, which is Morningstar’s 10-year expected return for a 60/40 stock/bond portfolio, over the next 10 years would equate to $10.3 billion more in investors’ pockets come 2032.
The 21st century has been kind to investors who put their money into mutual and exchange-traded funds (ETFs), at least from the perspective of costs. Morningstar found that last year the asset-weighted average expense ratio of U.S. open-end mutual funds and ETFs was 0.40% – roughly half the 2001 level of 0.87%. The trend is expected to continue. “Competition has driven fees to zero in the case of a handful of index mutual funds and ETFs,” according to Morningstar. “The same forces that spawned these zero-fee funds have begun to spread to other corners of the fund market, areas where there is still ample room for fees to fall further.”
Tips on Investing
- It’s important to keep an eye on investing costs so finding a financial advisor whose fees fit your budget is important. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Use SmartAsset’s no-cost investment calculator to get a quick estimate of how your investments will fare.
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