Fueled by industry competition, average expense ratios of equity, hybrid and bond mutual funds continued a two-decade slide, according to new research from the Investment Company Institute.
Among the three key factors contributing to the long-term decline are investors shifting toward lower-cost funds or fund share classes, increased industry competition and increasing economies of scale, the ICI says in the newly released report, “Trends in the Expenses and Fees of Funds, 2018.”
“This demand [for lower cost funds] is driven by a major shift in the industry’s business model, as more investors pay directly for investment advice and assistance from investment professionals, rather than indirectly through fund fees,” notes Shelly Antoniewicz, ICI’s senior director of industry and financial analysis.
ICI analyzes fee trends using asset-weighted averages to summarize the expenses that shareholders actually pay through funds, which takes into account both the decline in funds’ expense ratios and the increasing shift of investor assets toward lower-cost funds. The report shows that when comparing 2018 expense ratios with those in 1997, investors, on average, paid:
- 44% less for equity mutual funds;
- 34% less for bond mutual funds; and
- 26% less for hybrid mutual funds.
More specifically, equity mutual fund expense ratios in 1997 averaged 0.99%, falling to 0.55% in 2018. Bond mutual fund expense ratios averaged 0.82% in 1997, compared with 0.48% in 2018. Hybrid mutual fund expense ratios averaged 0.92% in 1997, falling to 0.66% in 2018.
Actively Managed Mutual Funds
ICI’s data further reveals an overall decline in the average expense ratios for both actively managed and index equity and bond mutual funds. It notes, for example, that from 1997 to 2018 the average expense ratio of actively managed and index equity mutual funds fell by 27% and 70%, respectively.
Similarly, the average expense ratio of actively managed bond mutual funds decreased by 34% from 1997 to 2018, while the average expense ratio for index bond mutual funds declined by 67% during that time. In 2018, the average expense ratio of actively managed equity mutual funds fell to 0.76%, from 0.79% in 2017. In addition, the data shows that the average expense ratio for actively managed bond mutual funds fell to 0.55% in 2018, from 0.56% in 2017. The average expense ratios for index equity and bond mutual funds over the same period, however, remained unchanged at 0.08% and 0.07%, respectively.
Target Date Mutual Funds
When looking at target date mutual funds, ICI observes that the average expense ratio has declined sharply in recent years. Typically invested through a fund-of-funds structure, investors paid, on average, 40% less for them in 2018 than they did in 2008. This is the earliest year for which ICI has data. In 2008, investors on average paid 0.67% to invest in target date mutual funds, but by 2018, the average expense ratio had fallen by 27 basis points to 0.40%, the data shows.
Index ETF Expense Ratios
ICI notes that because ETFs typically do not bundle distribution, account servicing or maintenance fees in their expense ratios, their expense ratios are typically low. In 2018, the average expense ratio of index equity ETFs fell slightly to 0.20%, from 0.21% in 2017, while the average bond ETF expense ratio was 0.16% in 2018, down from 0.18% in 2017. “The declining expense ratios in index ETFs are largely attributable to a maturing ETF industry, as competition and economies of scale continue to put downward pressure on their expense ratios,” the ICI observes.
Inflows to Actively Managed and Index Funds
Fund investors showed strong demand for lower-cost funds, in both actively managed and index funds, in 2018. For example, the report shows that the 5% of actively managed world equity funds and bond and hybrid funds with the lowest expense ratios received $26 billion and $51 billion in inflows, respectively. Meanwhile, index domestic equity funds, index world equity funds, and index bond and hybrid funds with expense ratios in the lowest quartile received inflows.