The Fund Fee War Might Be Slowing Down: Morningstar

While investors paid lower fund expenses in 2023 than ever before, saving an estimated $3.4 billion, the decline in fees slowed from 2022, Morningstar reported Tuesday in its annual U.S. Fund Fee Study.

There were more fee increases than decreases among both passive and active funds for the first time since 2019, which explains the slower overall decline, the research firm noted.

Morningstar’s report, which examines all U.S. open-end mutual funds and exchange-traded funds, highlighted the trends driving these changes in fund fees.

Among the report’s other findings:

• The asset-weighted average expense ratio across funds was 0.36% in 2023, a 3.4% decline from 2022. This is a shallower decline than the 7.8% decrease seen the previous year.
• The rise of active and alternative ETFs led to higher-priced fund launches. In 2023, new ETFs charged roughly 0.62% on average, up from 0.50% in 2022.
• Cost pressures are preventing asset managers from continuing to cut fees, indicating the “fee war” may be slowing. “Some asset managers are even quietly raising fees,” Morningstar reported. “Fees of prominent index mutual funds and ETFs are approaching a floor, with many already charging less than 0.05%.”
• Investors continue to gravitate toward low-cost funds. In 2023, the cheapest quintile of funds attracted $403 billion in net inflows, while the remaining 80% experienced $336 billion of collective net outflows (less than half the outflows seen in 2022).
• Vanguard maintains the lowest asset-weighted average expense ratio among asset managers, at 0.08% in 2023, though some of its competitors are closing the gap.

In 2023, the average expense ratio paid by fund investors was less than half of what it was two decades ago, according to Morningstar, which noted that from 2004 to 2023, the asset-weighted average fee fell to 0.36% from 0.87%.

“Evolution in the economics of advice has also played a central role,” the report said. “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,” the report said.

Investors who use fee-based advisors may not be pocketing the difference from lower fund fees but redirecting those dollars to cover the price of advice, the firm suggested.

In the last two years, passive funds attracted over $1.1 trillion in new money while active funds shed almost $1.4 trillion, Morningstar reported. “Cheap passive funds remain a crowd favorite, though. The cheapest 20% of passive funds collected 90% of all inflows over the last two years.”

Image: Shutterstock