Owning Mutual Funds and ETFs Is Cheaper Than Ever

Morningstar notes that several factors are driving fund fees lower:

• Greater investor awareness about the importance of minimizing investment costs
• Increasing competition among asset managers to cut fees as they vie to preserve and grow market share
• An evolving financial advice model, moving from commission- to fee-based advice, which emphasizes planning and asset allocation over investment management and increases demand for cheaper passive funds
• Growing popularity of unbundled funds, which charge only for investment management and fund operating expenses and have no embedded fees like 12b-1 fees.
• Increasing launches of strategic beta funds, which have characteristics of actively managed and passive funds but charge far less than the former, averaging 0.17% asset-weighted vs. 0.70% for active.

Investors are voting with their wallets, buying more low-cost funds and exiting more high-cost ones. The cheapest funds, which Morningstar defines as having fees in the bottom 20% of any Morningstar category, saw inflows of $605 billion last year. The remaining 80% of funds by cost experienced outflows of $478 billion.

Fund companies, in turn, continue to cut fees. Overall, 42% of mutual funds and ETFs, including both active and passive funds, reported lower expense ratios in 2018 — 32% of passive funds and 43% of active funds.

The biggest percentage fee cuts since 2011 occurred among passive index funds rather than active funds: down 10% versus 8.3% but the average active fund still charges about 1.8 times as much as the average passive fund, basically unchanged from 2017.

Vanguard remains the low-cost leader among fund companies, with an average asset-weighted expense ratio of 0.09%, compared with 0.17% for State Street and 0.30% for BlackRock, sponsor of iShares ETFs, the second- and third-lowest cost fund companies.

Vanguard also attracted more asset flows than any other competitors last year, with net inflows of $138 billion. Fidelity and BlackRock followed with net inflows of $117 billion and $77 billion, respectively. Vanguard also leads in assets under management, at $4.2 trillion, followed by BlackRock ($1.6 trillion) and American Funds and Fidelity, at about $1.4 trillion each.

— Check out A Flood of Nontransparent Active ETFs Could Be Coming — Soon  on ThinkAdvisor.